MEXICO CITY — While Bimbo Bakeries USA has managed to keep up with unprecedented demand in 2020, surging rates of the coronavirus infection and predictions of a worsening of the pandemic has executives worried about the months ahead.
In an Oct. 21 call with investment analysts, Fred Penny, president of Bimbo Bakeries USA, expressed “concern about the spikes we’re seeing” in COVID-19.
The call was conducted in connection with extraordinary financial results of the North American business of Grupo Bimbo SAB de CV issued Oct. 21.
Operating income of the North America business of Grupo Bimbo SAB de CV was 4,651 million pesos ($221 million) in the third quarter ended Sept. 30, up 176% from 1,684 million pesos in the same quarter of 2019. Operating margin of the business widened to 10%, more than double the 4.5% margin a year earlier.
Accounting for a large part of the improvement was a multiemployer pension plan charge during the 2019 quarter. During the 2020 quarter, COVID-19-related expenses were a drag on profits.
Sales for the North American business were 46,390 million pesos ($2.2 billion), up 23% from 37,569 million pesos in the third quarter last year. Dollar sales were up 8.5%, reflecting strong volume growth. Bimbo said it gained share in the sweet baked foods, buns, rolls, bread, English muffin and snack categories. QST and foodservice business were a partial offset. Traffic in convenience stores was off because of the coronavirus pandemic.
“Our results demonstrate an exceptional quarter reaching record profit levels; we continue to experience high demand and strong performance in the retail channel where consumers are returning to reliable brands,” said Daniel Servitje, chairman and chief executive officer. “We are on the right path to end the year stronger. Now more than ever we appreciate the efforts of our frontline associates who have continued to maintain momentum and perform with excellence at the point of sale.”
Asked whether BBU has had enough production capacity to keep pace with demand, Mr. Penny said capacity is adequate but expressed concern about potential production disruptions.
“At the run rates we’ve been experiencing in Q3, I think we can manage the capacity issues,” he said. “Quite frankly, I’m more concerned, as my management team is, about the spikes we’re seeing, the discussions and the forecasts of a second wave and what that all means in terms of our ability to keep all of our associates safe and execute every day. And that’s just the reality that everybody has to deal with these days. But if the run rates and the demand stay in the ranges they’ve been in, in Q3, I think we can continue to serve the market fully.”
Over the course of the call, Mr. Penny was asked about the performance of sweet goods, bread and rolls, e-commerce, commodity costs and the post-COVID outlook. He said the company has gained market share in sweet goods with success cutting across all the company’s brands, including Entenmann’s and Marinela. Barcel salty snacks also have been performing well, he said.
“To some degree, it’s driven by some strong product innovation and expansion of some new products, but I think in large part, it’s the strength of the brands and the portfolios with really solid execution by our front line,” Mr. Penny said. “And hopefully, we’ll see that continue.”
Regarding bread, Mr. Penny was asked about the continuing category trend favoring branded product and marginalizing private label. He said the trend has continued at Bimbo and throughout the industry not only for bread but for buns and rolls as well. Sales are rising at double-digit levels across the bread category, he said.
“We’ve had some shelf space gains that have helped us, but I wouldn’t call out anything significant,” he said. “It’s just the overall lift we’ve seen across our brands essentially since the pandemic started. And I guess, I would be remiss if I didn’t take the opportunity to recognize and acknowledge really what I think has been an incredible job by our associates, in particular, our frontline. We’re now into this going on seven months, operating at elevated levels in a challenging environment as we all know we’re living in.”
Mr. Servitje commented on increased commodity prices, particularly for wheat. He said the company has maintained its standard hedging policy, giving Bimbo coverage for several months.
“So at this point in time, we’re not feeling the pressure, and we’re well covered,” he said. “But certainly, if these high prices stay where they are or get even higher, we would have to think on reflecting those costs.”
Mr. Penny said BBU has been managing promotional activities since the start of COVID-19 and into the second and third quarters “to balance capacity constraints and capacity demands with what the market was requesting.” This approach has continued, he said. In some instances, promotional activity expanded during the quarter.
“But really across almost all of the categories, it’s been a challenge to balance the capacity to the demand so that we’re not shorting any given region or any given channel or any given customer,” he said. “And that’s been what we’ve really been focused on through the last, call it six months plus now.”
Like many consumer-packaged foods companies, Mr. Penny described the Bimbo e-commerce business as small but growing rapidly.
“We’ve invested behind it,” he said. “We’re going to continue to invest behind it. And I think it’s consistent with the growth we’ve seen. I think it’s consistent with the consumer behavior, obviously, in the sense that consumers, if they can, are choosing to not go into a physical store and whether it’s click-and-collect or literally delivered to their home, that’s really accelerated, I’d say, almost dramatically in the last six months since COVID hit. So we’d expect to see that continue. One of the questions in my mind is, when we get to some semblance of post-COVID normal, whatever that looks like, to what degree of the accelerated e-com trend is going to continue or are they going to slow down. Time will tell.”
A larger question mark for Bimbo is what will happen to demand in later stages of the pandemic and then afterward. Mr. Penny said the company is monitoring various forecasts but is hesitant to offer predictions given how wide-ranging forecasts have been.
“I think we’re confident in the fact that we’ve over the last six months, we’ve gained a large number of new consumers and new households into our brands,” he said. “We’re investing incremental marketing support behind that to try to retain as many of those new consumers as possible as we get into the post-COVID or a more normal situation, which I think should serve us well in terms of our margins going forward. And we’re seeing some of the benefits of the continued investments we’ve been making to drive productivity through the organization, capex investments, etcetera. We’re continuing to look at that. And I think that’s an important part of our strategy and our thinking going forward as we work through this and get to a more normal category run rate, whatever that might be.”
Net majority income of Grupo Bimbo was 3,579 million pesos in the third quarter, up 85% from 1,930 million in the third quarter last year. Sales were 85,800 million pesos, up 15% from 74,851 million in the same period in 2019.
With the financial results, Grupo Bimbo announced it has canceled 169,441,413 shares after an extraordinary general shareholders meeting was held Oct. 19 in which a resolution was passed. The shares were acquired by the company as part of a buyback program and accounted for about 4% of the total shares outstanding. With the cancellation, the company has 4,534 million shares outstanding, of which 3,115,823 are held in treasury from buybacks. The company has an additional 8.9 billion pesos ($420 million) approved for further share buybacks.
The company said it is “proactively managing its capital structure to increase shareholder value and reinforce its commitment for sustainable long-term value.”
Also during the quarter, Bimbo acquired a majority stake in Blue Label Mexico. Bimbo already was a partner in the joint venture that owned the fintech company, which offers electronic services to small merchandisers in Mexico, including the sale of electronic airtime, bill payments, payments with cred, debit and food vouchers and cash back transactions. The business operates under the Qiubo brand. Mr. Servitje called Blue Label Mexico a “minor investment” for the company.