Higher input costs slow growth at Canada Bread

by Eric Schroeder
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TORONTO — Higher wheat costs weighed on results at Canada Bread Company, Ltd. in the second quarter. Net income in the quarter ended June 30 was C$21,225,000 ($20,087,000), equal to C$0.84 per share on the common stock, down 7% from C$22,880,000, or C$0.90 per share in the second quarter of fiscal 2006.

"A 17% increase in wheat costs slowed our growth in the second quarter," said Richard Lan, president and chief executive officer. "While some of this was weather related, all agricultural commodities have been impacted by the high demand and increased prices for corn, as supply is diverted to process ethanol.

"Despite rising input costs, we achieved a modest increase in earnings and benefited from the contribution of new businesses in our growing U.K. bakery operations. We will continue to pass through pricing as necessary to manage this major shift in food production costs."

Sales for the second quarter increased 12% to C$375,723,000 ($355,493,000) from C$335,545,000 for the prior year period, primarily because of contribution from recent acquisitions.

The Fresh Bakery segment’s second-quarter sales grew by 6% to C$244,155,000, while earnings from operations fell to C$25,769,000 compared with C$26,844,000 in the second quarter last year.

"Earnings from operations in the second quarter decreased by 4% principally as a result of lower earnings in the pasta business due to a significant increase in wheat and dairy costs that were not yet reflected in higher prices," Canada Bread said. "Margins in the other Fresh Bakery operations were also pressured by higher wheat costs. In response, management anticipates price increases through the balance of the year. Growth in high margin value-added categories, improvements in operating efficiencies across a number of fresh bakery plants and pricing implemented earlier in the year helped to partially offset higher raw material costs as well as some continued industry-wide volume decline in the fresh bread segment."

Frozen Bakery sales jumped 24% to C$131,568,000, while operating earnings were up 54% to C$8,226,000 compared with the second quarter last year. The segment’s results benefited from recent acquisitions in the United Kingdom as well as another strong quarter from U.K. bakery operations.

Canada Bread said it is currently expanding its freezer capacity at its Rotherham, England, bakery to increase production capabilities.

"This expansion, together with investments to increase capacity at its croissant operations, will support ongoing growth in the U.K. specialty bakery market," Canada Bread said. "The profitability of the company’s North American frozen bakery operations also increased, reflecting price increases implemented in 2007."

The company said its Roanoke, Va., plant — its largest par-baked facility — is undergoing a major warehouse expansion "that will significantly expand its storage capacity and will reduce costs."

Canada Bread raised its capital expenditures 197% during the second quarter, reflecting the capacity expansion in U.K. croissant facilities and the construction efforts at Roanoke. In addition, during the quarter Canada Bread acquired the Interstate Bakeries Corp. assets located in Lakewood, Wash., for $10 million, including a manufacturing facility and fresh bakery equipment.

For the first six months of fiscal 2007, net income was C$39,135,000, down 7% from C$42,277,000. Sales totaled C$734,060,000, up 15% from C$637,109,000.

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