MEXICO CITY — The restructuring of the U.S. Grupo Bimbo S.A.B. de C.V. business is entering a new phase that should extend recent momentum of improving profitability, a top executive of the company said. In the wake of a strong earnings gain at Bimbo Bakeries USA in the first quarter ended March 31, Fred Penny, president of B.B.U., said the company’s supply chain was ripe with opportunities for heightened efficiency.
Mr. Penny spoke with investment analysts April 27 in connection with the company’s first-quarter financial results.
As reported, operating income of the North American baking business of Grupo Bimbo S.A.B. de C.V. was 1,163 million pesos ($67 million) in the first quarter ended March 31, up 240% from 342 million pesos in the first quarter last year. Net sales were 30,181 million pesos ($1,738 million), up 21% from 24,935 million pesos.
First-quarter B.B.U. operating margins were 3.9%, up sharply from 1.4% a year earlier. Gross margins during the quarter widened to 52.1% from 49.6%. During the call, Bimbo executives said half of the improvement may be attributed to lower commodity costs.
|Fred Penny, president of B.B.U.|
“Relative to profitability, it was a good quarter,” Mr. Penny said. “We benefited from commodity favorability, but we also benefited significantly from our productivity efforts. And I believe we’re going to continue to benefit from our productivity efforts. We have a lot more work to do to drive cost out of our business that is going to help us improve our profitability over time, going forward.”
Asked to elaborate on these productivity efforts, Mr. Penny drew a distinction between initiatives of the last few years, which included numerous plant closings, and what will transpire in the years ahead.
“If you think about us in terms of the last four years of work since the Sara Lee acquisition, we’ve had major restructuring work, including significant bakery closures, which was just mentioned, some new builds, significant work around integrating the route systems of the two legacy companies, and that was literally thousands and thousands of routes that were restructured, and a net reduction of routes when it was all said and done,” he explained. “So, I think about that as a restructuring integration period. And as we came out of that in 2015, we’re now moving into what I refer to as organizational effectiveness and efficiency timeframe. We still have a lot of productivity opportunity across our entire supply chain, which we’re going to get at through bakeries running better, routes running more efficiently, lower return rates, etc. That’s different productivity work than restructuring work that we’ve been doing in the past five years.
“But we have a lot of opportunity, in my view, to continue to drive costs out of the system and become a much more productive company. And that’s what all of our associates have been focused on, and we’re seeing evidence of it come through in our first-quarter results, and we saw evidence of that work coming through as we exited 2015. And I expect that to continue. But it’s different work.”
Asked whether the large restructuring charges that lowered B.B.U. profitability in recent years will be a significant part of the new phase of efficiency work, Mr. Penny drew a major distinction between the two phases.
“I anticipate we will, at some point in time, have some more restructuring work as we identify opportunities to change our asset footprint, as an example, but nothing of the scale that we were doing in the past five years,” he said. “It’s different work, and the best way I can describe it without going into too much detail is it’s work to try to make our supply chain more effective and efficient. And that’s not the kind of work that we did in the past with bakery closures, as an example.”
Discussing B.B.U. results in the first quarter, Grupo Bimbo chief executive officer Daniel Servitje said strong categories during the quarter included sweet baked goods, snacks, buns, flatbread and frozen bread.
“And in the latter, I can highlight the launch of the Grace Baking organic bread brands and solid growth in the retail in-store bakery business,” Mr. Servitje said. “In the United States, we’re benefiting from our efforts to invest in our strategic brands, bring innovation to the category, as well as optimize promotional spending (and) our product portfolio. The most recent data show a continued trend and improved dollar share in the branded mainstream bread category. This positive trend is a reflection of our recent product launches, as well as continued trade promotional effectiveness and s.k.u. (stock-keeping unit) optimization.
“While our premium bread category dollar share is slightly behind a year ago, brands such as Arnold, Brownberry and Eureka!, are growing. In addition, upcoming innovation and national launches for Eureka! organic and Extra Grainy bread will drive future growth both from total category and share perspectives.”
While he did not detail the Grace Baking launch further, the business was acquired by Grupo Bimbo in 2014 as part of its Canada Bread acquisition. The business had been owned by Canada Bread and its former parent Maple Leaf Foods, Inc. since 2002. At the time, Grace Baking was a leading independent producer of fresh and frozen artisan bread products. The company operates a baking plant in Richmond, Calif. Grace Baking was established in 1987 as a retail bakery and grew into a leading fresh artisan bread bakery in the San Francisco area. The company began producing frozen artisan bread in 1984, selling to national and regional grocers and restaurants. The company’s product line had included items such as Pugliese, Garlic and Potato Rosemary bread made with all natural ingredients.
Mr. Servitje noted the migration of the company’s enterprise resource planning system in the United States and Canada.
“Overall, North American operating performance benefited from lower raw material cost and significantly lower restructuring expenses in the U.S.," Mr. Servitje said. “This more than offset the integration expenses in Canada. As a result, adjusted EBITDA rose more than 75%, with a 230 basis point expansion in the margin.”
Further fleshing out B.B.U. results, Mr. Penny described revenues in the first quarter as “essentially flat.” Higher pricing and improved product mix helped offset “a bit of volume drag,” he said. Private label sales at Bimbo and industry-wide have been under pressure, he added.“The volume as a category has been down,” Mr. Penny said. “And if you adjust our numbers for just those two factors, it’s worth about a point on the top line. So, the underlying trends are more positive.”