MEXICO CITY — While prepared for a more competitive environment with the return to the marketplace of bread and cake brands formerly owned by Hostess Brands, Inc., executives of Grupo Bimbo S.A.B. de C.V. said market dynamics have shifted in ways not entirely expected. In a July 23 conference call with investment analysts, Bimbo leadership offered insights into the U.S. baking market.
As previously reported, operating income of the U.S. and Canadian baking business of Grupo Bimbo was 1,033 million pesos ($80 million) in the second quarter ended June 30, flat when compared with 1,031 million pesos in the second quarter of 2013. Net sales were 21,548 million pesos ($1,668 million), up 7.8%. Net majority income of Grupo Bimbo in the second quarter was 1,617 million pesos ($125 million), up 73% from 937 million pesos in the same period last year. Consolidated sales were 45,540 million pesos ($3,525 million), up 5%.
Daniel Servitje, Bimbo’s chief executive officer, described the quarter as “showcasing the strength of our most recent acquisition just five weeks post consolidation, trending volume improvement in Mexico, meaningful progress on the transformation plan in the United States and better performance in our other operations.”
Sales growth for the U.S. and Canadian business of Bimbo largely was due to the addition of the newly acquired Canada Bread business late in May. Speaking specifically to the Canada Bread acquisition, Mr. Servitje described the integration process as proceeding “very smoothly.”
“We are extremely pleased with the quality of that operation,” he said.
Still, Bimbo faced its share of difficulties during the quarter. The return to the marketplace of bread brands formerly owned by Hostess and now mostly owned by Flowers Foods, Inc. has made the bread category “challenging,” Mr. Servitje said.
While Bimbo’s branded bread business has been stable, private label sales were down 7%, he said.
Fred Penny, president of Bimbo Bakeries USA, said the sharp drop in private label sales, reflecting diminished business with a number of retailers, has occurred only recently.
“The private label volume decline is, quite frankly, I would say a bit of a surprise in that we didn’t see those trends last year,” he said. “I think a number of things have happened. Food inflation in other segments, especially in protein, the price of meats. Higher energy costs, higher health and welfare costs that are all affecting the lower income consumers and a significant reduction in SNAP and food stamp benefits. And I think some of those economic forces are affecting the lower income consumers. That may be part of what’s playing into private label volume softness in some cases.”
Other developments related to positives in the U.S. economy may have been a factor as well, Mr. Penny said. He noted that in some cases, Bimbo has gained branded market share.
“The share data would suggest a shift, some shift from private label to branded,” he said. “Clearly, with the former Hostess brands back in the market, as I mentioned earlier, in a flat to slightly down market that is going to result in volume and share moving around. So that is just the reality of what’s taking place in sliced bread at the moment.”
Asked to elaborate on U.S volume trends, Mr. Penny said Bimbo was “very comfortable with how our brands have responded,” from the perspective of market share, volume and in the face of competitive market dynamics.
While these competitive dynamics were reflected in pressure on profitability, Mr. Penny was hopeful improvements would be forthcoming.
“I expect some performance improvement in the second half of the year going forward,” he said. “I expect there will be a bit more stability in the categories as we go forward as well.”
The breakfast category has been among the more dynamic in the bread business in recent years, and Mr. Penny was asked about Bimbo’s positioning there as well as how a shift in demand toward protein and away from carbohydrates in general has affected the company.”
“We have a fairly significant business in the breakfast segment with our Thomas brand, and breakfast is performing very well for us this year,” he said. “We feel good about that.”
Later, Mr. Penny discussed the breakfast category in the context of the entire B.B.U. business and said there was cause for general optimism as the year progresses.
“We are looking for continued strong performance in the breakfast segment,” he said. “It is a big piece of our portfolio. (We see) improvement in the back half of the year in our sweet goods business and in our premium bread segment. And we are fully cycling the California divestiture so I would look for improving volume trends, organic volume trends.”
Mr. Servitje highlighted keys necessary for volume trends at Bimbo to improve.
“We remain focused on delivering innovative new products and introducing new or acquired brands into more markets to optimize the portfolio and narrow the volume decline,” he said.
Innovation may entail taking steps further afield than usual for baking companies, Mr. Penny said.
“Relative to gluten-free and organic, they are relatively small parts of our portfolio today,” he said. “But clearly there are consumer dynamics in both of those cases that suggest that there is ongoing growth there. So we are focused on trying to expand in those categories.”
Mr. Servitje explained that restructuring costs, estimated at $47 million in the most recent quarter, resulted in near-term margin pressure but are aimed at helping drive productivity enhancement over time through an optimized distribution network and a stronger configuration of manufacturing assets.
He said 18 plants have been closed in the 2½ years since the Sara Lee baking business was acquired while two new plants have been added to the manufacturing base.
“During the quarter we closed the Vernon plant in California, and we announced the closure of another one, Bay Shore in New York,” Mr. Servitje said. “We remain on track with these initiatives and we will continue to balance driving growth and waste elimination to improve margins.”
The prospective value to Bimbo’s financial results of the Bay Shore closing was emphasized by Mr. Penny.“That was a significant project that fell into the second quarter,” he said. “And we have also taken the opportunity to accelerate some of our route integration work, which will again drive benefits as we get into the back half of this year and into 2015.”