MEXICO CITY — Generally upbeat overall on 2016 operating results for Bimbo Bakeries USA, Daniel Servitje said a superficial look at financial figures “masks important underlying” realities. In a Feb. 24 conference call with investment analysts, the chief executive officer of Grupo Bimbo S.A.B. de C.V. said B.B.U. in the fourth quarter and throughout 2016 made important headway in building sales of its branded bread portfolio while also widening profit margins.
As previously reported, operating income of the North American business of Grupo Bimbo was 7,161 million pesos ($363 million) in the fiscal year ended Dec. 31, 2016, up 43% from 5,024 million pesos in 2015. Sales were 135,219 million pesos ($6,860 million), up 16% from 116,399 million pesos.
Mr. Servitje said the sales gain was entirely due to the weaker peso and that sales in dollar terms actually declined 1%.
Elaborating on the underlying reality, Mr. Servitje noted that U.S. commercial bread sales are “soft industry wide” and that private label was absorbing the brunt of the decline. At the same time, he sounded a warning bell about the profitability of the company’s super-premium organic bread business.
|Daniel Servitje, c.e.o. of Grupo Bimbo|
“B.B.U. grew its branded volume and sales, primarily driven by Sara Lee, and offset by declines in our non-branded business,” he said. “Eureka, our D.S.D. (direct-store delivery) organic brand, grew significantly, although it’s quite a challenging category from a profitability perspective.”
In Canada, commercial bread sales volume was soft, too, but other categories enjoyed growth, including breakfast items, tortillas, organic baked foods and artisanal products, Mr. Servitje said.
While not without profitability headwinds, the earnings story overall was positive for B.B.U., Mr. Servitje said.
“Operating income in North America rose over 40% and adjusted EBITDA margin expanded 110 basis points, on the back of lower raw material costs, a decline in restructuring activity in the U.S. and lower distribution expenses in the region, which more than offsets the investments in Canada and the frozen bread business and a non-cash charge for pension liabilities,” he said.
In the United States, Mr. Servitje said Bimbo will drive profitable growth and productivity gains “through continued optimization of our product portfolio, greater efficiency within our supply chain and improved D.S.D. execution.” In Canada, Mr. Servitje said a “rational pricing strategy” together with an unwavering commitment to quality and brand investment “will keep our bread business on track for profitable growth.”
“We made notable progress on the ERP (enterprise resource planning) migration in Canada and across our North America frozen baking business,” he said. “It’s a complex and expensive process, which will finally be completed in 2017.
“We will continue to streamline our manufacturing footprint this year as well, following the one plant closure in 2016 and greater consolidation of our operations. In fact, we doubled the capital investment in productivity projects year on year, which helped absorb inflation and led to savings.”
Expanding on the pension issue, Mr. Servijte said Bimbo took a net $21 million charge during the year in connection with multi-employer pension plans (MEPPs) in North America.
“As disclosed over the past few years, we have been proactively working to identify and implement solutions for a number of our underfunded plans,” he said. “Solutions involve the exiting or restructuring of our participation in order to manage future risk and provide certainty. The charge included the actual or expected restructuring of three MEPPs, which was partially offset by the impact of higher discount rates.”
Responding to inquiries from analysts, Fred Penny, B.B.U. president, said he sees improved EBITDA margins ahead for B.B.U., and he “feels good” about the division’s performance in the fourth quarter and the entire 2016 year. At the same time, he expressed caution in view of the likely disappearance in 2017 of commodity tailwinds the company enjoyed the year before.
While overall unit sales declined, sales of branded products were up for the year, Mr. Penny said. He echoed Mr. Servitje’s observation that the aggregate figure was dragged lower by weakness in store brand sales, “which we have seen continue to run negative, and that cuts across numerous categories, not just in bread.”
|Fred Penny, president of Bimbo Bakeries USA|
“But our total branded business grew, and it grew on the strength of our strategic brands,” Mr. Penny said. “And I expect that that’s going to continue, going forward. That’s certainly what we’re working hard to do. So, we exited the year with some momentum, and hopefully we can continue to carry that as we go forward.”
While scanner data showed “some marginal improvement” in the fourth quarter of 2016 relative to the rest of the year, overall commercial bread volume declined in 2016 as it has for several consecutive years, Mr. Penny said. Dollar sales were flat, he said.
“So, having said all that, there are growth opportunities to be had, but it takes some work,” Mr. Penny said. “We continue to work on innovation, new products. We continue to look at potentially other alternatives in terms of categories. But we’re really heavily, as we were in 2016, focused on growing our strategic brands and our best brands.”
Commenting on the overall category, Mr. Penny said there is an industry-wide determination to see growth rather than the steady erosion that has been the norm.
“And I’m sure we’re all putting forth our best efforts to try to do that,” he said.
Pressed by an analyst over whether a reversal in bread sales trends is possible, Mr. Penny seemed uncertain.
“I suppose that’s possible,” he said. “It’s trying to figure out where the consumer is moving, because consumer preferences are shifting. Where they’re consuming is shifting, whether it’s different channels, whether it’s in the food service environment. But I believe that there’s growth opportunities out there.”
Asked about mounting trade tensions between the United States and Mexico, Mr. Servitje said the impact of tariffs on finished product sales would be minimal.
“Well, as you know, baking is mostly a local industry,” he said. “So, we don’t do a lot of exports. It’s a smaller part of our business. Although it’s a great business, and we love it and we hope it can grow, it’s not a sizable part of our business. It’s a single-digit range.
“The exports that happen from Mexico to all the markets are 5% of the revenues of our Mexican operation. That includes a big part of the U.S., and we also export from Mexico to other markets: Central America, Canada, and even Latin America.”
Ingredient inputs are a different story, he said.
“We do import a good part of our commodities, of our wheat commodities, from Canada and the U.S. and also from other countries in Latin America, (some oil) grains," he said. "But mostly the imports come from futures in the North American market.“So, if this thing that you’re referring to happened to be in effect, we certainly have, as I mentioned, other countries besides the U.S. to import from, and that's something that our suppliers do regularly. So, I think at the end of the day everybody would or could adapt to this circumstance if it really came into effect.”