East Balt Bakeries burger buns
Leading East Balt customers include McDonald’s, Wendy’s, Burger King, KFC, Pizza Hut, YumChina, Subway and Nando’s.

MEXICO CITY — East Balt Bakeries represents a “compelling opportunity” for Grupo Bimbo S.A.B. de C.V. to expand geographically and diversify its range of baked foods, said Daniel Servitje, chairman and chief executive officer of Grupo Bimbo. When the acquisition of Chicago-based East Balt is completed, the number of countries in which Bimbo operates will increase by a third, to 32.

In an overview of the pending acquisition, Mr. Servitje said East Balt’s strong relationship with leaders in the quick-service restaurant industry was of great value to Bimbo. He spoke July 26 in a conference call with investment analysts following the announcement of second-quarter financial results.

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

“East Balt Bakeries provides exactly the kind of compelling opportunity we are seeking in terms of complementing and growing our current food service business and providing further geographic expansion and diversification,” he said. “The company is one of the leading global food-service focused providers of baked goods to quick-service restaurants in 11 countries around the world. East Balt Bakeries enjoys decades long relationships with some of the world’s leading Q.S.R.s such as McDonald’s, Wendy’s, Burger King and KFC, among others. It operates 21 baking plants and employs about 2,200 associates.”

He said the $650 million purchase price Bimbo will pay equates to a 9.3 EBITDA multiple and that Bimbo has no presence in most of the markets in which East Balt operates around the world.

Grupo Bimbo + East Balt map
The acquisition of East Balt will increase to 32 from 24 the number of countries in which Grupo Bimbo operates.

“While East Balt Bakeries has headquarters in Chicago, it is really an international player with a majority of its facilities and revenues located outside of the United States and in the largest and the fastest growing Q.S.R. markets in the world,” Mr. Servitje said. “The geographic footprints of the two companies intersect in only three markets: the U.S., Morocco and China, where our businesses are complementary and offer potential for synergies, scale and growth. We also gained entry to eight new countries through East Balt namely France, Italy and Switzerland in Western Europe; Ukraine and Russia in Eastern Europe; Turkey and South Africa in the Middle East; and Africa and South Korea in Asia.”

Bimbo already is a food service supplier in markets in which the company operates, Mr. Servitje said. He described the Q.S.R. segment as especially attractive.

“The industry is in a sustained period of growth, driven by tailwinds in out-of-home spending,” he said. “This is even more pronounced in emerging markets, while worldwide technology is enabling a more seamless food service experience. As a whole, the Q.S.R. industry is expected to grow at a compounded rate of almost 6% per year over the next five years. In the regions where East Balt is present, like the Middle East and Africa, that rate is actually expected to be upwards of 9%; in Asia, about 7%; and in Eastern Europe, over 6%.”

Also attractive to Bimbo were East Balt’s leadership.

East Balt Bakeries facility
East Balt has particular expertise in product innovation and high-speed dough processing.

“The top-notch management team and a big bench of industry veterans has delivered a consistently strong track record of performance,” he said. The company’s chief executive officer is Mark Bendix. Before joining East Balt in 2012, Mr. Bendix held leadership positions at The Bama Companies, Inc.; General Mills, Inc.; The Pillsbury Co.; and Quaker Oats.

East Balt has particular expertise in product innovation and high-speed dough processing, offering Bimbo the opportunity to deepen its best practices, Mr. Servitje said.

While Bimbo expects to generate synergies from the East Balt acquisitions, significant structural differences exist between the two businesses, Mr. Servitje said. No specific financial figure was offered for annual savings to be achieved through synergies.

East Balt Bakeries truck
East Balt's distribution system is different from Bimbo's, and it will remain separate.

“The distribution system of East Balt is different from the ones that we have on our system in other parts of our network, and it will remain separate,” he said. “It’s mostly frozen distribution that goes through third parties and in some cases are their own frozen solution network routes. So we will maintain it, obviously, as it is. And there are no synergies planned in that regard.” 

As previously reported, the North American business of Grupo Bimbo had second-quarter (period ended June 30) operating income of 2,272 million pesos ($127 million), up 10% from 2,063 million pesos in the second quarter of 2016. Quarterly sales were 34,024 million pesos ($1,905 million), up 1.8% from 33,613 million.

Year-to-date operating income was 3,678 million pesos ($206 million), up 14% from 3,226 million. Sales were 68,206 million pesos ($3,820 million), up 7% from 63,794 million.

During the call, Mr. Servitje was asked a series of questions about plant closings in North America — their size, timing, cost and future prospects. Since the end of the second quarter, Grupo Bimbo has announced additional plant closings, and Mr. Servitje addressed the issue at some length, noting that the guiding force for the company is optimizing production efficiency.

Bimbo Bakeries USA - Owensboro, Kentucky
Bimbo closed two U.S baking plants in the first quarter.

“This is a never-ending process,” he said. “As we streamline and improve our efficiency within our plants, we are always looking at the cost per unit effect on all of our plants. And we’re always striving to do better. When we operate at a better rate, we can bring more volume to the most efficient plants. And if there is an opportunity to have a structurally better performing company, we will take that. And we are constantly opening lines in different parts of the world and shutting down lines or plants if we can do it. Because as we’ve always said our intent here is not basically to work for a quarter or a year, we are long-term builder of a competitive advantage in our industry. And that requires us to look at the opportunities with the long-term purpose. So these closures are part of a plan that will continue to be implemented over time here and in all markets. In North America, basically the plants that are planned for closing or closed already are small plants, old plants. Most of them are one or two line plants. So we are doing this with utmost care and respect for our people. But we are very clear on our strategy of really being a very efficient producer in our field, and that requires investments and also decisions to close underperforming plants.”

Also of interest to analysts were the effects of surging commodity ingredient prices on Bimbo financial results and prospects. For the second quarter, Mr. Servitje said commodity ingredient and energy prices “provided a bit of a tailwind” in North America, citing this influence as the leading contributor to a 20-basis-point expansion in EBITDA margins (together with supply chain efficiencies and a better product mix). Looking ahead, Mr. Servitje said Bimbo remains well positioned, at least for the near term.

“On the wheat features change, yes, it has increased significantly in the past two weeks,” he said, responding to a question. “We have a long coverage of our wheat futures, so we are not being impacted in the short run. And we’re, obviously, looking at these situations with a lot of care. And we will basically adjust ourselves as we have in the past with all these commodity changes. But for the short term, we are not foreseeing any material impact to the company as we are well covered.”