Milling & Baking News - May 13, 2014 - 18

Financial Results 

Bimbo integration costs to the
fore in quarterly financials
MEXICO CITY - 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.
"Net sales in dollar terms declined
3.3%, of which approximately 2 percentage points reflected the negative
impact of the California divestiture
completed in July 2013, combined
with weak consumption under further
pressure from extreme winter weather
and a more competitive market environment," said Grupo Bimbo. "The
breakfast and snacks categories outperformed in the period."
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.
Mr. Servitje emphasized the impact
of the divestiture and changes in the
snack cake market.
"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,
18 / May 13, 2014 Milling & Baking News

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.
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 firstquarter 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 further into firstquarter 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."
Consolidated net majority income
of Grupo Bimbo in the first quarter
was 513 million pesos ($39.2 million),
down nearly 10% from 544 million pesos in the first quarter of 2013, reflecting operating performance and lower
financing costs, as well as a lower effective tax rate of 38.8% compared to
45.4% in the year ago period.
Consolidated operating income fell
in the first quarter, down 22.4% from
the first quarter last year.
"This reflects charges on the 'other
income and expenses' line, including: 1) 594 million pesos in integration
costs in the United States (equivalent
to $45 million, compared to $24 million in the year ago period) related to
the asset strategy to close certain facilities and build and upgrade new facilities, as well as efforts to optimize the
distribution network; and 2) a 49 million peso non-cash charge related to
the write-off of certain assets from the
closure of a Barcel facility in Mexico,"
Grupo Bimbo said.
Consolidated sales were 41,979
million pesos ($3,204 million), up 1%
from 41,674 million pesos. MBN
bakingbusiness.com / world-grain.com

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Milling & Baking News - May 13, 2014

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