MEXICO CITY — Net sales in the North American division of Grupo Bimbo S.A.B. de C.V. were under pressure in the second quarter ended June 30. Higher prices were cited by the company as a contributor to the sales weakness.
Operating income of Bimbo Bakeries USA in the second quarter was 1,276 million pesos ($66.7 million), compared with a loss of 213 million pesos during the second quarter last year. Previous-year results included a loss of 1,960 million pesos in connection with a voluntary separation program and an organizational restructuring in Canada. In the current year, the company took a $55 million non-cash charge related to the adjustment of the company’s multi-employer pension plan liability, reflecting current interest rate levels. Bimbo’s 1,276-million-peso profit this year was down sharply from 2,272 million pesos in the second quarter of 2017.
Adjusted EBITDA for the North American division in the second quarter was 3,556 million pesos ($186 million), up 11% from 3,203 million pesos in 2018. The adjusted EBITDA margin for North America widened 110 basis points to 9.8%, versus 8.7% in the second quarter last year. Profitability was boosted in part from productivity gains related to the voluntary separation program in the United States, the organizational restructuring in Canada and “the commercial strategy between subsidiaries of Mexico and the United States,” Bimbo said. Dragging on margins were restructuring investments in the United States, a temporary business interruption at a plant in Canada and the pension charges.
Second-quarter North American sales were 36,235 million pesos ($1,842 million), down 1.9% from 36,920 million pesos in the same period a year earlier. A significant part of the sales decline was attributed to foreign exchange rate pressure. Dollar denominated sales fell by less than 1%.
Volumes were soft because of “the implementation of price increases, portfolio optimization initiatives, continued compression of the private label category, exit of a license agreement in the U.S. and business interruption in a plant in Canada,” the company said. On the plus side during the quarter was strong performance of the company’s sweet baked foods and snack products in the United States. Additionally, the company gained market share in Canada.
During a July 23 conference call with investment analysts, Fred Penny, president of Bimbo Bakeries USA, addressed Bimbo’s price moves to date this year.
“We’ve had fairly significant inflation headwinds, which were actually greater this year than they were last year,” he said. “And we made the decision last year to address the inflation headwinds that we knew were coming. We’ve actually priced, I would say, well ahead of the total category. And as a result, we’ve seen some volume softness, particularly in traditional sliced bread where the price sensitivity is higher than in some other categories where we haven’t seen the same level of impact.”
Mr. Penny said further price adjustments may be forthcoming in response to the soft volume trends.
“We’re working our way through whether there are adjustments needed,” he said. “In the quarter, we also had some volume impact from some private label business that we exited and from the termination of a Sunbeam licensing agreement. And then thirdly, we made a decision, and I think is the right one, to execute some relatively aggressive portfolio optimization to drive efficiencies through our supply chain and to better position our core brands and our core products, our most important brands and products to grow in the marketplace. So you take those three dynamics that impacted our top line. I’ll tell you without obviously specifics that we’re going to continue to work on trade optimization going forward, and we will adjust that as necessary to ensure that our core brands and our core products are going and responding to what we see in the marketplace from a pricing standpoint.”
Later in the call, Mr. Penny said further pricing moves will be selective.
“We’re going to make some adjustments where we believe we need to,” he said. “Having said that, I think it’s important to understand it’s a fairly diversified portfolio we have, and there are complexities in terms of where the elasticity shakes out. We’re in muffins. We’re in bagels. We’re in sliced bread. We’re in premium bread. We’re in buns and rolls. We’re in sweet baked goods with three different brands, and all of them respond differently in terms of the category and our specific brands. So it’s been a big focus for us in terms of revenue growth management, and it will continue to be. And we’ll adjust if we need to and where we need to.”
Net majority income of Grupo Bimbo during the quarter was 1,222 million pesos ($64 million), up sharply from 195 million pesos in the second quarter last year. Aggregate sales were 72,324 million pesos ($3,780 million), down 0.6% from 72,794 million pesos a year earlier.
In trading on the Mexican Bolsa July 23, Bimbo shares traded as low as 37.8 pesos, down 4.9% from the July 22 closing price of 39.74.
The company said its total debt was 89.1 billion pesos on June 30, versus 89.8 billion six months earlier. The company’s average debt maturity was 10.1 years with an average interest rate of 6%. Of the total, 58% was denominated in U.S. dollars, 37% in pesos and 5% in Canadian dollars.
In the earnings announcement, Bimbo said it was honored as the company with the “greatest commitment to the use of renewable energies” during Mexico’s Commercial and Industrial Energy Congress MIREC 2019. Additionally, Grupo Bimbo was named one of the five most reputable companies in Mexico in the Reputation Institute annual Reptrak Mexico 2019. The company earned a first-place designation for best work environment and also stood out in the corporate social responsibility category.