Bimbo worker bun line
Grupo Bimbo integrated 32 plants and closed 10 in 2017.

MEXICO CITY — The integration of 32 acquired baking plants and the closing of 10 highlighted a year of “deep and meticulous industrial transformation” at Grupo Bimbo S.A.B. de C.V., said Daniel Servitje, chairman and chief executive officer. Mr. Servitje spoke Feb. 23 with investment analysts after announcing financial results a day earlier for 2017.

As previously reported, operating income of the North America business of Grupo Bimbo S.A.B. de C.V. was 7,701 million pesos ($415 million) in the year ended Dec. 31, 2017, up 8% from 7,161 million pesos in 2016. Bimbo’s North American operating margin in 2017 was 5.6%, versus 5.3% in 2016. Net sales were 137,662 million pesos ($7,411 million), up 1.8% from 135,219 million in 2016.

In remarks kicking off the call, Mr. Servitje highlighted numerous acquisitions during 2017, including Harvest Gold in India (“a very attractive market for us over the long term”), Adghal Group in Morocco, and East Balt Bakeries (“which expanded our leadership in a high-growth channel”). The East Balt business has been renamed Bimbo QSR.

The integration of the 32 plants plus the closings have created a “lean and efficient foundation for a global business,” Mr. Servitje said. The moves have added to short-term expenses but over the medium term will boost margins, he added.

In questions and answers with analysts, Mr. Servitje returned to Bimbo’s moves with its plants in 2017 when asked about prospective capital expenditures.

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

“I don’t know how many food companies there are that have basically embarked on a year of shutting down 10 plants and also integrating 32,” he said. “At least for us it’s quite significant. And the businesses that we acquired with the standards of Grupo Bimbo in terms of efficiency, safety, product safety, require us to really take a long view on these investments, because we’re basically caretakers of the business for the long run and to make the decisions that are good for our customers and consumers. So, all in all, I would say that we’re very happy, not only with the restructuring that we’re doing, but also the way we’re enhancing the capabilities of each and all of our manufacturing plants that we want to keep for the long haul.”

In addition to the acquisitions, Mr. Servitje said Bimbo increasingly has been investing in updating its plants when opportunities to enhance productivity emerge.

“Key restructuring activities during this time, such as bakery closures and system conversions, have made the business stronger,” Mr. Servitje said.

While private label remains a drag, Bimbo’s branded business in the United States grew in 2017, Mr. Servitje said.

Bimbo bread line
Bimbo increasingly has been investing in updating its plants when opportunities to enhance productivity emerge.

“In particular, contributions came from our Sara Lee, Thomas' and Ball Park bread brands,” Mr. Servitje said. “Our sweet baked goods category also did well, with notable strength in our Entenmann’s snack portfolio as well as Bimbo and Marinela.”

He said the company is “quite excited” about its acquisition of a Cicero, Ill., baking plant from Aryzta that formerly was part of the Cloverhill Bakery business.

“The acquisition will support the continued growth of our sweet baked goods products,” he said. “It also optimizes our distribution costs, increases our capacity in the country and enhances productivity, thereby increasing profitability.”

Turning to its business in Canada, Mr. Servitje said while market conditions remain highly competitive, Bimbo did well in the snacks, cakes and bread categories. He said the integration of the Canada Bread business, acquired in 2014, was completed in 2017.

Bimbo donut line
Bimbo's sweet baked goods category performed well.

Commodity prices were a net positive for Bimbo in North America in 2017, Mr. Servitje said, warning that “this will not be the case in 2018.”

“We already started to see this shift in the fourth quarter,” he said. “In this context, we are looking for opportunities to address our higher input cost. With pricing, we’re focused on growing our strategic brands. We continue to invest in innovation, and we will leverage Bimbo QSR and Bimbo Frozen to profitably expand our client reach and drive efficiency across the supply chain.”

Asked about margin prospects in the North American business in 2018, Fred Penny, president of Bimbo Bakeries USA, Horsham, Pa., took a guardedly hopeful tone.

Fred Penny, Grupo Bimbo
Fred Penny, president of Bimbo Bakeries USA

“From an operating standpoint, the North American EBITDA margins on the year (2017) and on the quarter (fourth) were positive, and there were nonrecurring charges that explain, I would say, the bulk of the decline,” he said. “So put that on a side. The market overall, I would say, remains challenging. But there are opportunities in certain categories for growth. One, I would say specifically, would be the sweet baked goods category, which as a total category, is putting up good numbers. And we’re very pleased with our performance inside of that category. Inflation will be a challenge in 2018, as we go forward, both in ingredients and in a more general sense to your point on wages, as an example. We’re taking pricing in the quarter in Q1 to address the inflation challenges. And then, I guess, lastly, I would say the other thing we continue to be very focused on, as we’ve been over the last several years, is driving productivity and cost reductions across our entire business. And we continue to look aggressively for opportunities to take more cost out and make the overall operation more efficient. And so, I think those are the key factors that would lead us to feel optimistic that we can continue to improve the results of our business.”

Mr. Servitje highlighted positive trends in Mexico, where 2017 sales rose 11%, boosted by volume growth, price increases slightly below inflation and a favorable price mix.

“The sweet baked goods, salty snacks, and bread and buns categories outperformed,” he said. “We experienced growth across all our channels, most notably the convenience and the traditional channels.“

Diego Gaxiola, chief financial officer at Grupo Bimbo, commented on the one-time charge of 706 million pesos ($38 million) taken by the company in the fourth quarter in connection with tax law changes passed in the United States.

“It is important to note that going forward, this tax reform will generate a positive effect in cash flow for the company,” he said. Mr. Gaxiola said that while the company’s indebtedness increased considerably in 2017 because of acquisitions, the company “remains committed to deleveraging our balance sheet as we go forward.”

He also alerted analysts that the acquisition of East Balt will change the profile of Bimbo’s financial results with higher cost of sales and lower expenses.

At the end, its accretive for the margin,” he said.