MEXICO CITY — Behind the company’s introduction of new better-for-you varieties of bread under the Healthfull brand is a plan to fundamentally change the product profile of Bimbo Bakeries USA, top company executives said April 24.
As previously reported, operating income of the U.S. and Canada business of Grupo Bimbo S.A.B. de C.V. was 342 million pesos ($22 million) in the first quarter ended March 31, up 264% from 94 million pesos in the first quarter last year. Net sales were 24,935 million pesos ($1,628 million), up 35% from 18,415 million.
Speaking to investment analysts in connection with first-quarter financial results, Daniel Servitje, chief executive officer of Grupo Bimbo S.A. de C.V., and Fred Penny, president of B.B.U., put the recent new product introduction into perspective.
Mr. Servitje said the bread market overall remains challenging for Bimbo.
“We still see challenges in the bread category, both in terms of overall consumption, as well as the competitive dynamics in the marketplace,” he said. “This is particularly relevant in the traditional sliced and private label bread categories. That said, we’re maintaining our unit market share and making progress in driving improvements in promotional effectiveness.”
By contrast, breakfast and sweet baked goods demand remains strong, he said, highlighting a number of standout products, including Entenmann’s Little Bites, Thomas English muffins, and the introduction of Sara Lee Crisps.
Asked about the bifurcated results in the United States between sliced bread and breakfast products/sweet goods, Mr. Penny offered further detail into the size and performance of these segments.
“I would say the way to think about it is we are about 60%/40% total bread and buns versus our remaining categories in terms of our sales composition,” he said. “And the 40%, which would include all of our breakfast business and our sweet goods businesses, as it has in prior quarters, performed well in the quarter. It continues to perform well. There is softness in bread, even more so particularly in what we call traditional sliced bread, packaged bread, and to a degree we saw a bit more of an impact, maybe, in the quarter because we took pricing mid-quarter in bread, which we needed to do and wanted to do. But we took pricing in the quarter and that had a bit of an impact on volume, but we expect that to moderate going forward.”
Mr. Penny said the overall makeup of the B.B.U. portfolio changed “fairly significantly” with the acquisition in 2012 of the fresh baking business of Sara Lee Corp. Pre-Sara Lee, B.B.U. was more heavily weighted toward the premium baked foods segment. Now the company has a large presence in the private label bread market, “where the margins are not comparable to premium branded margins,” he said.
“So we are starting from a different point,” he said. “And then, obviously, a lot has happened in the category with the Hostess liquidation and then the re-emergence of their brands. I think we’re on pace over time to get back to the 10% margin range. Frankly, the long-term goal I have for the business is more north of 11%, but it’s going to take some time to get there, and a lot of that is getting all of this restructuring work behind us and driving top-line growth and seeing improvement, category improvement, in the pricing structure in the category. And that’s going to take some time as well. But I’m optimistic that we can get to those kinds of margin levels again.”
Following up on Mr. Penny’s remarks, Mr. Servitje described the new product introductions of recent weeks as “quite significant in the new direction that the company is taking.” He said the new products target health and whole grains and are aimed at “specific markets.”
He said the products mark a break from the line of bread brands offered by Sara Lee and suggest more change would be forthcoming.
“It’s no longer what we had as part of the Sara Lee business that we bought,” he said. “There was more on the mainstream side and a large percentage of it also was on the private label side. So there’s going to be changes in the U.S. We are very much focused on bringing innovation, on being more rational on our promotional spending, and therefore that’s where we will find opportunities to build a much stronger business in the future.”
The look of the B.B.U. bread portfolio in the future will change over time, Mr. Penny said.
“We are going to continue to focus on growing our higher-margin, more premium categories and bringing innovation to the category,” Mr. Penny said. “One thing that the category needs, quite frankly, is for people to eat more bread. It’s been challenged for a long time on bread consumption. And we are on an innovation side focused on trying to drive that.”
While two baking plants were closed during the quarter, in Norristown, Pa., and Fresno, Calif., and Bimbo plans to close a plant in Halifax, N.S., overall restructuring expenses in the quarter were down 50% from the first quarter of 2014. The cut helped improve operation margins by one percentage point.
Discussing the acquisition of Saputo Bakery, completed in February at a price of $103 million, Mr. Servitje said the business “further strengthens our position in the North American market by enhancing our distribution network, manufacturing base, and product portfolio.”
Highlighting the multiple of moving parts that factor into Bimbo’s efforts to improve margins, Mr. Penny said the number of brands the company owns and the portfolio makeup add to the complexity of the effort. While the company has worked to make promotional spending more efficient and effective, B.B.U. also “took frontline pricing” during the quarter, he said.
Parsing out the components of the combined U.S./Canada market, Mr. Penny said U.S. revenues during the quarter were flat, with the gains in the breakfast/sweet goods lines (nearly all brands) offset by weakness in what he called mainstream and private label bread.
“One of the major drags for us, as it was last year, has been private label volume, where we have a significant presence in the industry,” he said. “And private label volume, depending on the time period you look at, has been trending down in the, I’ll say, 6% to 8% range in tonnage. So that clearly impacts us with the size of the private label business we have. That was a drag on our bread revenues.”
Lower commodity prices have provided a benefit to Bimbo, Mr. Servitje said, adding that the company “is well covered” in terms of forward purchasing. Calling the current commodity situation “a good one for purchasers,” he said Bimbo is “doing a good job.”
“Having said that, the strength of the dollar has had an impact on all these commodities,” he said. “So on one hand, we see a lower price. On the other hand, we end up seeing in local currencies at the end of the day having an impact on these commodity purchases, given the valuations. There have been some depreciations of these local currencies that has been very strong in some currencies, specifically in Mexico. And we are starting to see this in other countries. We had also a hedge on the dollar for the commodity impact. And so we basically were not affected on this depreciation of the peso in this quarter. That’s the part that it’s going to eventually catch up to the real dollar-peso exchange rate. And that we will be seeing it a little bit on the second quarter and then fully on the rest of the year.”
During the questions and answers, Mr. Penny tried to reconcile the pricing action taken during the quarter with the lower ingredient prices.
“We took a price increase, as I mentioned earlier, for some other inflation beyond commodity and oil,” he said. “And quite frankly, also to catch up on inflation that we’ve had for the prior two years to three years, when we didn’t have pricing. I don’t want to comment on forward inflation.”
