Bimbo Bakeries products
B.B.U. is navigating numerous demand headwinds.

MEXICO CITY — Even with a steep decline in private label sales and a gradual general shift of baked foods sales away from the commercial bread aisle, Bimbo Bakeries USA is performing well, the company’s executives said.

Daniel Servitje, chief executive officer of Grupo Bimbo S.A.B. de C.V. (B.B.U.’s parent company), and Fred Penny, president of B.B.U., offered an upbeat assessment of the performance of the North American division of Grupo Bimbo’s business in an Oct. 28 conference call with investment analysts.

As previously reported, operating income of the North American business of Grupo Bimbo S.A.B. de C.V. was 2,429 million pesos ($130 million) in the third quarter ended Sept. 30, up 34% from 1,806 million pesos in the third quarter of 2015. Quarterly sales were 34,459 million pesos ($1,840 million), up 13% from 30,361 million.

Mr. Servitje said the gain in sales could be attributed entirely to swings in foreign exchange rates. Measured in dollars, sales were flat. Still, he said the company enjoyed a number of “bright spots” with regard to sales of key brands, including Sara Lee, Thomas' and Little Bites. The company also enjoyed a “nice uptick” in its U.S. organic bread business “both in terms of sales and market share.” He credited investments Bimbo has made in its Eureka! brand. In July, Bimbo said it was expanding distribution of Eureka! nationally.

Overhanging results in the United States has been a difficult environment in the bread business, Mr. Servitje said.

Daniel Servitje, Bimbo
Daniel Servitje, c.e.o. of Grupo Bimbo

“Bread category consumption remains weak,” he said. “This has been led by an important decline in the private label category. However, our dollar share of the bread category continues to improve year-over-year. This is attributable to the s.k.u. (stock-keeping unit) rationalization over the last year and a more targeted promotional strategy.”

Turning to steps B.B.U. has taken to improve efficiencies, Mr. Servitje noted the closing of the company’s Hastings, Neb., baking plant and its continuing search for “additional efficiencies across the value chain.”

“Our key strategies at this point are focused on flexible and efficient manufacturing, improving our D.S.D. (direct-store delivery) network, zero-base budgeting and product portfolio optimization,” he said.

In Canada, where Bimbo has made major investments over the last two years, a challenging environment persists, Mr. Servitje said.

“Volumes remain soft in the commercial bread category, while we saw positive growth in the breakfast, sweet baked goods and snack categories, and the successful launch of organic bread under the Grace Baking brand in our frozen business,” he said. “Ongoing restructuring efforts include the closure of the North Bay plant, as previously announced, and benchmarking across the whole supply chain to support productivity. These year-over-year efficiency gains helped offset volume challenges. We also continue to advance the system integration and ERP (enterprise resource planning) migration process.”

Commenting on a 150-basis-point improvement in EBITDA margins versus the same quarter last year, Mr. Servitje cited lower U.S. restructuring and distribution expenses, more than offsetting investments the company has made to update its business in Canada.

Responding to questions from analysts, Fred Penny, president of B.B.U., said “commodity favorability” has helped B.B.U. results as have “meaningful productivity and mix favorability in our business.” He said these growth catalysts should continue to lift results going forward.

Fleshing out Mr. Servitje’s comments on B.B.U. results, Mr. Penny said branded sales were flat during the third quarter while strategic brands grew 2% to 3%.

Fred Penny, Grupo Bimbo
Fred Penny, president of B.B.U.

“Our non-branded business, private label food service and typically private label, declined in the quarter as it’s been declining really for over a year now,” he said. “And I’d also note the private label phenomenon is not limited to our category. Private label is declining in over 50% of all food categories. So it’s not strictly a bakery category issue.”

Given that B.B.U. has eliminated about 300 s.k.u.s over the past year, Mr. Penny said he “feels good about our top-line performance on branded.”

“Total category consumption, to your point, continues to be pressured," Mr. Penny said. "I think it’s in the 2% range on tonnage, more like flat to slightly down on sales. And that’s a challenge, but I also believe that overall consumption isn’t necessarily down as much as what commercial bread consumption might be and that it is moving to other categories and other channels, in-store bake and other channels that may not be getting captured in commercial bread category and I.R.I., for example.”

Amid declining category sales, pressure to keep prices down has not abated, Mr. Penny said.

“The competitive environment, I think is competitive,” he said. “And I said in prior comments on this topic that at the end of the day, the consumers and the customers are going to determine the level of competitiveness with how they perceive prices and what they’re willing to pay. So we’re working, as we have been, on improving our price realization where we can. It is challenging to do that in the bread business. But for our business, our total bread business, we’ve improved our price realization quarter-on-quarter, quarter three to quarter two, and we continue to look for more opportunities to do that.”