Integration costs nearly double the level of a year ago were a principal factor in a sharp operating income decline for the U.S. baking business of Grupo Bimbo S.A.B. de C.V. In an April 30 conference call, expenses during the quarter and the outlook for more were the subject of considerable discussion between Bimbo executives and investment analysts.
Operating income of Bimbo Bakeries USA in the first quarter ended March 31 was 94 million pesos ($7.2 million), down 86% from 676 million pesos in the first quarter of 2013. The quarterly results included integration costs of $45 million, versus only $24 million a year earlier. The integration costs were in connection with the company’s 2012 acquisition of the North American fresh bakery operations of Sara Lee Corp.
Quarterly sales for the U.S. business of Bimbo were 18,415 million pesos ($1,405 million), up narrowly from 18,216 million pesos in the first quarter last year.
On the conference call, Daniel Servitje, chairman and chief executive officer of Grupo Bimbo, looked at the first quarter from two perspectives.
“On the one hand, we have challenging headwinds and top-line comparables in our two largest markets while at the same time we saw solid improvements in our other operations,” he said.
Flat second-quarter sales largely were attributed to the required divestiture of the Sara Lee brand in California.
“We are also cycling through the impact of the Hostess exit, and now they’re reentering (resulting in) increased competition of some of those brands,” Mr. Servitje said. “Furthermore, the exceptionally cold winter also impacted consumption in end of quarter across categories with many of our customers. Notwithstanding, we’re seeing growth in categories such as premium bread, breakfast and sweet baked goods.”
The divestiture, the Hostess reentry and the restructuring expenses contributed to what Mr. Servitje called “atypical” operating performance. In his presentation, Mr. Servitje briefly described “three key components” of the U.S. restructuring program.
He explained, “First, our asset strategy. We are on track having closed five bakeries year to date and announced two more while opening our newest bakery in Pennsylvania, serving the Northeast market.
“Two, in terms of distribution, we continue to make progress on having lower cost distribution centers, and we’re undertaking significant route restructuring expenses across all the B.B.U. regions, an effort that is expected to continue through mid-2015.
“And lastly, the implementation of our I.T. systems.”
Over time, the restructuring expenses are expected to generate annual savings of around $220 million, Mr. Servitje said in response to a question. In his answer he offered deeper insight to where the company stood in this multi-year effort.
“As you might recall, we announced that we were willing to commit to invest over $1 billion in four years,” he said. “And we’re sticking to that plan. We’re revamping our infrastructure, our manufacturing footprint, and in the first stages of this integration plan, we have to work more on building the blocks so that we could generate the synergies for the long run. And the building blocks in this case have to do a lot with our I.T. infrastructure. We’re now able to be on the same I.T. platform. We’re now able to transfer product from one system of plants — the B.B.U. plants to the Sara Lee plants and have one I.T. network linked with our distribution centers and our I.T. route systems that enable us to start closing plants and shifting product volumes from one plant to the other.
“So, it has been a complex effort and it’s now in the process of speeding up the latter part of the integration plan, which included consolidating our manufacturing footprint. Along the way, we’re also putting up new, more efficient lines and plants in place.
“So that’s part of the process that is now unfolding. We still have plans in that regard on the manufacturing side, but we’re also now moving to the last leg of the integration, which refers to the route restructuring that will enable us to also get more synergies on that end. And that means really having the optimal distribution network at each market, at each city and combining the different structures that came with the integrations into one.
“And that’s a significant work, and that’s the part that will remain until the middle of the next year, but obviously as the manufacturing work lowers its pace, the cost will not be as significant on the distribution side as they are on the manufacturing part.”
Steve Mollick, senior vice-president and chief financial officer of Bimbo Bakeries USA, also handled questions regarding restructuring expenses. For the entire year, he projected these costs would aggregate $100 million “skewed toward the first half of the year” with nearly half spent in the first quarter alone.
He estimated two thirds of first-quarter restructuring charges were attributable to plant closings and other asset related moves. The remainder of the costs concerned route enhancements I.T. integration.
“This (quarter was) the peak for the year and it will decline,” he said.
Drilling down still further into first-quarter costs was Fred Penny, president of B.B.U.
He said the charges principally related to the cessation of operations at five plants: Oakland, Calif.; Sioux City, Iowa; Easton, Pa.; Nashville, Tenn.; and Wichita, Kas.
“So that’s five bakeries plus — I believe, three additional lines that were in other facilities,” Mr. Penny said. “The Bay Shore (N.Y.) announcement was not in the first-quarter results. So that should clarify how the bakeries fell.”
In relatively brief comments on conditions in the baked foods market, Mr. Mollick was upbeat about prospects for the breakfast bread category but gave little cause for optimism about the outlook for sliced bread and traditional snack cakes. Overall, he said the latter categories appeared “relatively flat, maybe slightly down.”
“I believe there’s volume growth and share opportunities for us continuing in breakfast,” he said. “We have a very strong brand area, as you know we promised; there are volume growth opportunities in our sweet goods segment with not only the Entenmann’s business but with the newly launched last year Sara Lee cake line and our Hispanic portfolio, Bimbo and Marinella. And I think there are some better volume opportunities to innovation in what’s called the more specialty breads.
“The mainstream category, it’s competitive and certainly has become more competitive as the former Hostess Brands have reemerged. And so I think we believe that what’s important for us to do is to get our work (done) on our costs, move aggressively through all of this major restructuring work that we have and so that we’ll be able to compete effectively in what is a competitive bread category.”
Mr. Servitje wrapped up his presentation discussing Grupo Bimbo’s balance sheet and restating the company’s commitment to “rapidly delever.” Noting the company’s debt to EBITDA has declined to 2.2 times, he said the ratio will rise to 3 with the completion of the pending Canada Bread acquisition.
“Our experience in the last few years and over the past several acquisitions has shown us that leveraged ratio and that range are both reasonable and manageable,” he said. “And all the more so we like of the scale and accretive nature of the Canada bread acquisition which we expect to close during this quarter.”
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