MEXICO CITY — After encountering numerous difficulties in 2014 in its U.S. business, prospects for Grupo Bimbo S.A.B. de C.V. in the United States have improved considerably, said Daniel J. Servitje, president and chief executive officer.
Speaking to investment analysts Feb. 27, Mr. Servitje was hopeful both because of external market conditions and because of steps the company has taken to better position the business for improved performance.
“In the U.S. we see solid improvements for 2015,” he said. “From the macro perspective, the economy is better in terms of unemployment and potential G.D.P. growth benefiting the consumer. We had laid out plans to revamp trade marketing initiatives to curb inefficient trade spending. Combine that with new product launches, line extensions and seasonal specialties and various initiatives to truly leverage the Sara Lee brand. We will also be focused on growing our premium categories and transforming the mainstream bread and bun business into a more efficient and profitable operation.”
As previously reported, the U.S. and Canada operations of Grupo Bimbo S.A.B. de C.V. sustained an operating loss of 1,881 million pesos ($126 million) in the fourth quarter ended Dec. 31, 2014, compared with modest profits of 9 million pesos in the final quarter of 2013. The loss was caused by a charge taken by the company because of the effects of depressed interest rates on multi-employer pension plan (MEPPS) liabilities. For the entire year, the division had operating income of 392 million pesos ($26 million) in 2014, down 85% from 2,615 million in 2013.
Sales in the United States and Canada in the fourth quarter were 25,672 million pesos ($1,720 million), up 21% from the fourth quarter of 2013. For the year, sales were 90,375 million pesos ($6,055 million), up 13%.
The operating loss sustained by Bimbo Bakeries USA made the U.S. business an outlier within the universe of Grupo Bimbo’s businesses in 2014.
“We now cover 22 countries, and I find encouraging that with the exception of the United States and our small business in Paraguay, the rest of the countries posted positive operating results,” Mr. Servitje said.
Bimbo executives offered different perspectives on the results for the year.
“In the United States, even though we went through a massive restructuring, we are not satisfied with our results,” Mr. Servitje said.
Responding to an analyst seeking clarity on the performance in 2014, Fred Penny, president of B.B.U., was more upbeat.
“Overall relative to B.B.U., I feel good about 2014 given all the competitive dynamics of the brands that were not in the market at all in 2013, coming back in 2014,” he said. “That’s clearly a very big change. I mentioned that last time — in a flat category for brands to go away, and then reenter, that’s going to be disruptive.”
Messages from the executives were in sync regarding where Bimbo stands in its progress toward integration of its Sara Lee business.
“We have substantially completed the three-year integration of Sara Lee, a very complex effort, which has taken place at a time of unprecedented change in the U.S. baking industry,” Mr. Servitje said. “We have had to drill deep down the business, a very granular effort, extremely meticulous, restructuring and optimizing plant by plant, line by line and route by route all across the U.S. We shall bear in mind that we have closed 19 bakeries and restructured almost 1,500 routes. We combined two businesses into one much more solid and dynamic company whose broad national footprint and robust portfolio we’re now starting to leverage.”
The degree of change with which Bimbo has grappled with in the integration was emphasized by Mr. Penny. In addition to the plant closings, the company has opened two new baking plants, he said. The company has eliminated about 17% of its delivery routes which Mr. Penny said “actually doesn’t reflect the amount of work, because we’ve literally touched or restructured thousands and thousands of routes across the entire U.S., and we’ve reduced our total associate base, all of which is difficult work. I’m not so sure that there is a precedent for that level of work in other acquisitions.”
In addition to the challenge created by the scale of the integration, Bimbo’s playbook for execution was disrupted by industry developments subsequent to the November 2011 acquisition of the Sara Lee fresh baking business.
“We lost some time, quite frankly, in 2013 with the liquidation” of Hostess Brands, Mr. Penny said. With a major U.S. baker suddenly absent from the market, “we simply had to respond to the market needs.”
He continued, “We picked up the pace in 2014 and made a lot of progress, I believe, in the restructure, and we’re largely — we’re now at a point where it’s going to be winding down,” he said.
While additional opportunities for cost savings will be explored, including further, Mr. Servitje said Bimbo reaped $130 million in cost savings in 2014 from the restructuring and was well positioned for improved performance in the United States in 2015.
“I am confident that we’re on solid footing and well positioned to deliver profitable growth going forward,” he said. “The focus for 2014 in the United States was to complete that process and then 2015, begin to truly unlock the potential of the new entity through everything from integrated systems to a renewed and reconfigured asset base and a restructured and optimized distribution network.”
Drilling deeper into the results of the U.S. business in 2014, Mr. Servitje noted both areas of difficulty and bright spots.
In the former category was a “high single-digit decline” in private label business while the breadth of the company’s products proved to be a valuable strength.
“Grupo Bimbo is now a more balanced and diversified company in terms of geographies, cash flows and product portfolio,” Mr. Servitje said. “The diversity of our portfolio was particularly relevant this year. For example, in the U.S., while the bread category faced strong competitive pressure, the sweet baked goods and breakfast lines did well, in fact with some brands growing at double-digit rates. We strive to have a baking portfolio that includes options for every consumer and for every — and for any meeting or occasion.”
Elaborating on the diversity of its product portfolio, Mr. Servitje said Bimbo is making a global push in increasing the number of healthier products it offers to customers.
“It was an important year for health and wellness initiatives,” he said. “We launched numerous better-for-you and functional products across our 22 markets.”
He described better-for-you as a rapidly growing segment for Bimbo to address.
“Everything from whole grains, natural ingredients and high fiber, to low fat and less sodium and sugar,” he said. “It’s about new formulas, newer ingredients and alternative portion size all leveraging our brand equity. Our portfolio innovations started its transformations in this sense, and we are at an important milestone toward a bright future in this huge market.”
Toward the development and introduction of these products, Mr. Servitje described how Bimbo balances its global capabilities with a “highly localized” aspect to its research and development.
“Technologies, trends, guidelines, our new products benefit from our global scale and cross-market know-how,” he said. “But local flavors and preferences and obviously local marketing and advertising are critical to meeting the unique needs of our customers and consumers in all the markets we operate.”
Echoing remarks by another major baking company, Mr. Servitje said enhanced “quality and freshness” have been areas of focus for Bimbo globally. In the United States, these efforts have been taken in the form of an “improved and tuned up” distribution system, he said.
During the Q.&A., Mr. Penny repeatedly was asked about the competitive landscape in the United States. He suggested pricing pressure may be lifting in some markets.
“(Regarding) price in the U.S., I do believe there is some more stability in the market,” he said. “Now that the former Hostess Brands have kind of fully reentered, we’re evaluating and I believe there are some opportunities for some selective pricing. But really more importantly than that, and I mentioned this in our last call, we’re really focused — I’d say laser focused at this point — on optimizing our trade spend efficiency.”
Later, he explained Bimbo is looking both at the frequency and “depth” of promotions. Additionally, he suggested further stock-keeping unit reductions would be needed, an issue that has been on the minds of Sara Lee managers for many years.“I mentioned this last time, the complexity of the portfolio that we’ve acquired through these acquisitions over the years,” he said. “It’s something that we’re very, very focused on to try to streamline and simplify the portfolio which is going to help us in terms of being more effective.”