In call, Servitje updates on B.B.U. integration
July 30, 2012
by Josh Sosland
MEXICO CITY — Various steps to reduce unit costs and formalized benchmarking of the company’s 71 U.S. baking plants were among integration elements described by Daniel Servitje, chief executive officer of Grupo Bimbo S.A.B. de C.V.
Both in prepared remarks and in response to questions from investment analysts, Mr. Servitje in a July 26 conference call discussed the integration of the North American fresh baking business of Sara Lee Corp.
“What we’re doing is shutting down some inefficient lines or plants and transferring that volume to expand the volume of high-efficient lines and plants and thereby reducing the cost per unit produced,” Mr. Servitje said. “We are also reviewing our formulas to see which are the best ones and can provide the best value and performance for customers.”
He said Bimbo is benchmarking the baking facilities “to try to get the best performance and the best practices to be shared among all plants.”
Beyond efficiencies within the company’s plants, Bimbo is exploring opportunities for transportation efficiencies, Mr. Servitje said.
“We’re also looking at opportunities of reducing mileage in our plants as we have many more plants in the territory,” he said. “We’re transferring the volume of some plants to the markets that are closer to them, and thereby reducing our logistical costs. We are also trying to improve our distribution efficiencies through distribution centers that can improve our mileage overall and reduce our cost per miles delivered.”
More generally, Mr. Servitje said Bimbo believes there is “a full gamut of opportunities” to capture during the next 3½ years as Bimbo works through the integration.
“It certainly is going to pay a lot of dividends after it is finished,” he said.
Asked whether further plant closings will be forthcoming, Mr. Servitje declined to offer specifics. He said four plants already have been closed, and a fifth closing has been announced. Beyond that, further actions would be announced on a “one-by-one basis.”
“I can tell you that we’re doing a very thorough analysis, and we will be announcing (any further) decisions as they are made,” he said.
To a question about rising commodity costs, Mr. Servitje said the balance of 2012 looked promising but expressed concern for next year.
“For most of our operations we are already covered through the remainder of the year with hedges, so we have clear visibility on our costs for this year,” he said.
Coverage extends into 2013 for certain, unspecified commodities, he added.
“Nevertheless, the impact on the wheat costs, if they remain like they are right now, certainly will require us to buy at higher prices, and we’ll have to manage all our revenues through either different ways of promoting our products and/or raising our prices, or both,” he said.
Commenting on the quarterly results, Mr. Servitje said “dilution” of profits because of acquisitions had been anticipated and said Bimbo was “pleased with the progress to date” on the integrations. While not yet saying U.S. demand has “recovered” from a slump in 2011, Mr. Servitje said sequential improvements continue from one quarter to the next.
“The consumption environment remains quite soft, with weaker volumes in general than a year-ago period but continuing to trend positivity quarter to quarter,” he said.
He said B.B.U. has seen success in certain brands in each category, including bread (Bimbo brand), snack cakes (Marinela) and donuts/cakes/pies (Entenmann’s) as well as the breakfast category (Thomas).
“We have expanded the Sara Lee brand into the Northeast and the Southeast, and the Ballpark brand in buns and rolls is now national,” Mr. Servitje said. “We continue to work hard to grow volume, expand the market and engage our consumers through value and product innovation. Although raw material costs were higher this quarter, we were able to almost fully offset these with weight reduction initiatives across the entire (site-to-store) value chain, including several initiatives such as material efficiency, better capacity utilization, s.k.u. optimization and greater customer efficiencies among others.”
He said B.B.U. currently is fully integrated from a sales and marketing perspective, “operating with one face to the market.”
Grupo Bimbo took $25 million in integration related expenses during the second quarter, primarily allocated to information technology migration and productivity initiatives, Mr. Servitje said. He also mentioned completion of divestitures in Omaha and Pennsylvania in keeping with agreements reached with the Department of Justice.
While the U.S. business has been challenging, Mr. Servitje said performance in Mexico has been “quite strong.” The strong results there have helped the company progress in its “aggressive pursuit” of balance sheet strengthening objectives, Mr. Servitje said.
In the first six months of 2012, the company has paid off 3 billion pesos of liabilities, bringing the company’s debt-to-EBITDA ratio to 2.9 times in June, versus 4.1 in December 2011.
Looking forward, Mr. Servitje was cautious about the consumer environment, especially in the United States.
“However, we believe growth trends are still moving in the right direction,” he said.
Offering an update on the company’s major wind power initiative, Mr. Servitje said construction of 45 tower generators at the Piedra Larga wind farm is completed “with functional testing under way.”
“We will be formally inaugurating the facility at the end of this quarter and sourcing renewable energy for the facility shortly afterward to almost all operations in Mexico,” he said.