I.B.C. closing bread plants; seeks union concessions

by Josh Sosland
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KANSAS CITY — Warning that the opportunity to successfully emerge from bankruptcy could quickly slip away, Interstate Bakeries Corp. announced Tuesday that it would close four bread, bun and roll bakeries in Southern California and would exit the bread market in the region.

Pending bankruptcy court approval and the amendment of its debtor-in-possession financing facility, I.B.C. said customers in Southern California could see an end to bread product deliveries as early as Oct. 20.

As part of the move, Interstate routes and distribution centers in the region will be consolidated, allowing the company to continue to sell Hostess and Dolly Madison snack cakes and donuts in Southern California.

Craig Jung, I.B.C. chief executive officer, said the moves reflect both the company’s inability to regain profitability in the region and comes in a period in which Interstate must move speedily if it is to emerge successfully from bankruptcy.

The closings were the first announced by the company since October 2005 when a flurry of such announcements was capped with the shuttering of its Lakeland, Wash., plant. In a series of moves targeting geographic profit centers, I.B.C. in 2005 closed nine baking plants, 200 distribution centers and 300 bakery outlets.

During this period, the company closed two baking plants in San Francisco. While it consolidated sales operations in Southern California, the company decided in July 2005 to leave its six baking plants open.

With last week’s announcement, the company appears to have concluded that the earlier actions were insufficient.

"While I.B.C. has made marked progress in several problem markets over the past six months, bread operations in Southern California continue to be unprofitable," the company said.

Mr. Jung listed a litany of woes in the region, including lower-cost, non-union competition; an "irrational" competitive pricing environment; changing market and customer demands; a high fixed-cost structure; excessive workers’ compensation costs; and a "confrontational relationship with one of the company’s major unions."

He continued, "We must stop reinforcing failure and press harder where there is success. This means allocating our resources to those markets that are profitable, have positive cash flow and can earn their cost of capital."

Making meaningful progress in its union negotiations is crucial for the company, I.B.C. said. It warned that its creditors "are running out of patience with I.B.C.’s inability to develop a consensual plan of reorganization."

I.B.C. filed for Chapter 11 bankruptcy protection in September 2004. It was the largest bankruptcy filing in the history of commercial baking.

The company disclosed that a business plan was presented to constituents in June, identifying two "core platforms" for change.

First, the company seeks to change what it called a "one-size-fits-all" traditional route delivery structure that has been in place for decades into an "advanced path-to-market structure" it said would bolster sales and delivery productivity while creating better jobs for sales employees.

"This involves flexibility in the company’s ability to meet changing market demands," I.B.C. said. "Currently, work rules under I.B.C.’s collective bargaining agreements are prohibitively restrictive in how it can operate the business."

Also related to worker relations, the second platform of the business plan seeks concessions the company said are needed to "achieve meaningful productivity savings in health and welfare plans." The company said it has not asked unions for concessions on pension plans to date.

"We have weeks, not months or years, to act," Mr. Jung said. "Union agreement to path-to-market and the health and welfare concession in our business plan are crucial."

Since declaring bankruptcy, the company has issued skeletal financial reports every four weeks, consistently reporting losses. In total, the company has sustained losses of more than $331 million.

In over-the-count trading Aug. 28, shares of I.B.C. declined as much as 7%, falling to $1.02 per share, 2c above the all-time low of $1 hit the previous week. The share price is down 92% from the bankruptcy period high of $13 per share reached in August 2005.

Plants to be closed are located in Glendale, Pomona, San Diego and Los Angeles. The company plans to eliminate 325 routes and close 17 distribution centers and 19 outlet stores by Oct. 29. Affected by the closing will be about 1,300 employees.

To remain open in California are two L.A. plants that bake sweet goods.

A spokesman for the company told Food Business News that its new plant in Henderson, Nev., which was built in part to supply Southern California, would continue operating, serving markets in Nevada and Arizona.

Known charges the company said would be incurred in connection with the closings and consolidations are $29.2 million, including about $12.8 million of employee-related cash charges, $13.8 million of non-cash asset impairment changes and about $2.6 million in other cash charges. The company said it plans to spend about $1.8 million for accrued expenses to effect the consolidation.

Additionally, I.B.C. said impairment charges will need to be recognized related to trademarks and trade names that may be impaired because of the consolidation. I.B.C. said it was unable to estimate the charges.

As it seeks to put its new business plan into effect, Interstate Bakeries is unlikely to win organized labor cooperation easily.

In an Aug. 28 article in the Kansas City Star, a letter by Richard Volpe, international director of the Teamsters, was quoted as challenging the nascent plan. "We do not share I.B.C.’s view that its business plan will allow the company to emerge from bankruptcy; nor do we agree that I.B.C.’s untested path-to-market delivery system is the only way for the company to survive," Mr. Volpe said.

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