MEXICO CITY — Reflecting disappointing “price realization,” Bimbo Bakeries USA has initiated price increases, effective in November.
The price hike was discussed by Gary Prince, president of B.B.U., in an Oct. 26 conference call following the release of quarterly financial results by Grupo Bimbo S.A.B. de C.V. (see related story).
Elaborating on the price increase, Mr. Prince said it was aimed “particularly to cover the commodity increases we see coming.”
In his prepared comments, Daniel Servitje, chief executive officer of Grupo Bimbo, identified the U.S. bread business as an area of concern.
“We’re not seeing a true recovery in our bread business,” Mr. Servitje said. “Volumes are continuing to trend positively quarter to quarter, with sweet baked goods and breakfast categories outperforming this period.”
Mr. Servitje commented on synergy realization from the Sara Lee acquisition, and Mr. Prince discussed this in even greater depth. Additionally, Mr. Servitje noted Bimbo has closed four plants to date in 2012 and is building a new “state-of-the-art” baking plant in Texas.
Looking to the final months of the year, Mr. Servitje said in the face of what is still “an uncertain consumer environment,” Bimbo will have three principal areas of focus — profit (and cash generation) maximization, completing the B.B.U. divestitures and “making the right investment to advance our long-term goal of becoming a low-cost producer.”
Mr. Prince commented on pricing in response to a question from an investment analyst about “apples to apples” underlying trends in the U.S. baking business.
“Our volume trends are improving across our portfolio, and we like our breakfast and sweet goods businesses very much,” Mr. Prince said. “Our volume is improving in our bread and bun category. Where we have been disappointed is in our price realization. And, to that extent, we’ve initiated price increases effective November, particularly to cover the commodity increases we see coming.
“So, on balance, our tonnage is improving, although our tonnage will be affected by some product assortment changes, some rationalization that we’ll be doing in certain markets, particularly in the bread and bun business, as we look to make it much more efficient. So, I don’t expect dynamic tonnage growth, in the bread and bun business, but I do expect it to be much more efficient than it is today. I do expect growth across the rest of our platform.”
Mr. Prince said market share trends are “basically constant.”
During the call Mr. Prince was asked to elaborate on trends across different categories of the B.B.U. portfolio. In response, he offered a highly upbeat outlook based on the company’s new product pipeline and what has been achieved in recent years.
“I think our portfolio is one of our greatest strengths, and we want an efficient portfolio,” Mr. Prince said. “Our sweet goods business has tremendous growth opportunity, both in single-serve, family pack products, right across the country. It’s a large business. It continues to grow. And, we see putting a lot of effort behind that category in the next few years. Equally important is our breakfast business, our premium bread business. And, those businesses also have tremendous potential.
“And, our concentration really is on better-for-you products. Whole grain would be an example of that. It’s where all the growth is. And, equally important in our mainstream products is putting more value into the market price, and it’s why we’re working on our cost structure, right across the business.
“We also have a pipeline of innovation across all of the businesses. And, I’m mindful that one of our latest new products that we put into the market a couple of years ago, sandwich thins and bagel thins, are just two great examples of innovation that have served us well, and continue to. And, they were in the health arena. They were whole grain, better-for-you, lower calorie products. And, that’s where the majority of our efforts are focused.”
Mr. Prince identified the bun business this past summer as “one of the disappointments” the company experienced in the third quarter.
He attributed the weakness to a “tough comp” in 2011 and the timing of July 4 in the middle of the week “did not help us.”
“But our bun business also has great potential, and our first focus is to make it more efficient,” he said.
Commenting on the Sara Lee brand, Mr. Prince noted B.B.U. has expanded it into the Northeast and is focused on making it a national brand.
In the considerable discussion about synergy realization from the Sara Lee acquisition, Mr. Prince said prospects are as strong as ever but the timetable has been drawn out because of the slow pace at which the Department of Justice approved required divestitures.
Another factor has been the pace at which information technology initiatives have been unrolled across the Sara Lee business.
The current expectation is that the I.T. effort will be finished by March 2013, which he said will allow the company to “move pretty clearly on our supply chain side, to capture the bulk of the synergies.”
He went on to say “we’re more optimistic about our synergy capture over 2013 and 2014 than we were when we went into this.”
Looking into 2013, Mr. Prince said there would be more plant closings. Additionally, he said, “California will go through significant change once we start to execute the divestiture plan.”
The question of synergies came up again late in the call when Mr. Servitje was asked when the Sara Lee transaction would be accretive on an earnings per share basis. Mr. Servitje passed the question to Mr. Prince, who assured the analyst B.B.U. will “exit 2013 a much more productive company than when we started.”
“When we entered into the Sara Lee transaction, we communicated we have about three years of work and the first two years were really important,” Mr. Prince said. “This year, 2013, is full of opportunity, and all of our efforts are going to be focused on creating a new B.B.U., a new platform in the U.S. “
The extent of the effort needed to create this new platform was not a surprise, Mr. Prince said.
“Frankly, that was the thesis on this all along,” he said. “We acquired a $2 billion baked goods business, largely bread and bun business, that wasn’t very efficient. And, it does take time to create the efficient platform that’s needed. And, next year will move us forward substantially in creating that efficient platform.”
Asked by an analyst about “wheat flour inventories,” Mr. Prince said B.B.U. has remained covered within the Grupo Bimbo guidelines of four to nine months.
“The dynamics around the wheat market have been quite volatile,” Mr. Prince continued. “Obviously, and it goes back to 2008 and 2009, we’ve been operating in a very volatile environment, wheat trading at one time of $7.50 and very quickly moving to $9.50. And, so, the back half of next year is — the world markets are changing and, while we’re sitting at $9.50 wheat today, we don't know, we might be sitting at $10, $11 wheat in four to five months’ time. So, it’s a very important question for us to stay on top of. And, here in the U.S., we’re pricing into it, in to $9.50 wheat, and in the back half of next year, we could be faced with $10, $11 wheat. We don’t know that.”