Despite margin pressure, Bimbo profited strongly in the quarter

MEXICO CITY — While Grupo Bimbo SAB de CV posted record financial results in its most recent quarter, margins remained squeezed with no sign of abating on the immediate horizon, the company’s top executives said. Additionally, high prices have prompted consumers to switch to cheaper options.

“Despite the significant inflationary pressures affecting every aspect of our business, we have improved our profitability,” said Daniel Servitje, Grupo Bimbo’s chief executive officer, in a conference call with investment analysts on Oct. 27. “However, as expected, the adjusted EBITDA margin declined by 120 basis points. As inflationary pressures persist, we are seeing improved trends in private label and some branded volume elasticity. We continue to innovate, invest in our brands and are confident that the breadth of our portfolio positions us well to navigate macroeconomic uncertainties.”

As part of the earnings announcement, Bimbo announced that it has acquired the St Pierre Group, a UK-based baker of premium brioche products.

Earnings from Bimbo’s North American business were solidly higher in the third quarter ended September 30, despite lower margins. Sales were higher in the quarter. Operating income for the quarter was 5,159 million pesos ($260 million), up 63% from 3,162 million in the same period last year. Results were boosted by a $66 million pecuniary benefit related to an adjustment to Bimbo’s Multi-Employer Pension Plan (MEPP) due to higher interest rates. Adjusted EBITDA for the North American business, which excludes the impact of the MEPP adjustment, was 6,213 million pesos ($313 million), up 10% from 5,661 million a year earlier. Adjusted EBITDA margins for the quarter were 11.7%, down 120 basis points from Q3 2021, but significantly better than the 10.8% EBITDA margin in Q2 of the current year.

Fred Penny Fred Penny, President of Bimbo Bakeries USA.

Net sales for the third quarter were 52,955 million pesos ($2.67 billion), up 20% from 44,028 million a year earlier. Revenue rose 19% in US dollars, which the company attributed to “successful execution of pricing strategy across categories and channels while increasing market share across categories.”

Mr Servitje said higher prices in the United States and Canada have started to cause a modest “volume drop”. He said Bimbo is cautious about raising prices and is using “revenue and growth management practices to help our consumers navigate this environment.”

Mr Gaxiola said the prices have also prompted consumers to turn to cheaper options.

“If you will, we’ve started to see some downward trading, which I don’t think is unexpected given the inflation consumers are facing and the level of prices they’ve had to bear,” he said.

Later in the conference call, Fred Penny, President of Bimbo Bakeries USA, was asked if the current inflationary environment would slow a shift towards premiumization. He noted that Bimbo Bakeries USA is well-positioned in several categories, ranging from “mainstream breads and buns” to premium brands like Arnold, Brownberry, and Oroweat. He’s been following Bimbo’s price action over the past two years.

“Despite three price increases, our brands have consistently held up well,” said Penny. “What we’ve done to support that is invest more and more into brand marketing and brand support, and we continue to refine how we do that and make our dollars work harder, if you will. And I think that paid off in an environment where we had to take on awards. We continue to innovate and will continue to do so in the future.

“I think the issue of down-trading and price elasticity, frankly, what we’re starting to see is evidence given how much pricing the industry and others have brought to market out of necessity. But I’m pretty confident in the strength of our brands and the resilience of our brands. Now, it’s difficult to predict the future here because we’re in uncharted territory in terms of the sheer inflation we’re dealing with and the pricing imperatives we’ve met. But overall I think we’re — I’d say we’re pretty positive about the strength of our brands and the resilience and consumer acceptance of our brands. We really cover the whole range of values ​​in our portfolio, if you will, which is a key strength that we have.”

Additional rate increases will be necessary, Mr. Penny said. He added that this must be coupled with even greater attention to managing costs and increasing productivity across the organization.

“Whether transportation or labor is one of the biggest issues we deal with temping, I can go down the list,” he said. “And we need to be more aggressive in managing those costs to take costs out of our business while doing what we need to do from a market standpoint in pricing. But pricing isn’t the only lever we need to pull, and we will be much more aggressive in our focus on cost reduction going forward.”

The 120-point decline in margins from a year earlier was attributed to a highly inflationary environment, including in raw materials and labor costs. “Challenges and bottlenecks throughout the supply chain” also squeezed margins, Bimbo said.

“This will continue for the remainder of the year, even with our successful pricing strategy and initiatives to manage revenue growth, stable volumes and supply chain efficiencies,” said Diego Gaxiola, Chief Financial Officer of Margin Pressures. “In particular, we will feel more pressure in the fourth quarter due to the commodity hedges we put in place at the start of the Russia-Ukraine war, but we remain confident that we will meet our expectations for the year. We have also realized productivity savings attributable to capital and restructuring investments we have made that enable sales efficiencies, automation improvements and integrated systems solutions.”

Commodity prices are expected to remain volatile in 2023, Mr. Gaxiola said.

“We are hedged for an important part of the first half of the year and we will continue to hedge in line with our policy,” he said. “Despite the uncertainty surrounding the economic environment, we are optimistic that 2023 will be a year in which we continue to realize the benefits of our growth strategy and productivity initiative.”

Grupo Bimbo’s net income was 6,062 million pesos (US$306 million) for the third quarter, up 51% from 4,021 million pesos in the third quarter of 2021. Net sales were 102,821 million pesos (US$5.2 billion), a 20% increase from 85,659 million.

The quarter was the first ever in which bimbo sales topped 100 billion pesos, Mr Gaxiola said.

Adjusted EBITDA was 14,505 million pesos ($732 million), up 20% from 85,659 million in the third quarter last year. Bimbo attributed the sales increase to strong price/mix performance and volume growth.

Amid rising interest rates, Mr. Gaxiola said Bimbo’s funding costs rose nearly 24% in the quarter. A slight increase in the company’s debt also contributed to this.

“The peak performance was exceptional in this third quarter,” said Mr. Servitje. “We have reached record levels of sales and profits, our volumes have continued to grow despite price increases and our sales growth initiatives are increasingly reflected in our results. The inflationary environment we are currently living in has been very challenging, but we have been able to weather it thanks to the resilience of our categories and the high demand for them, the hard work of our employees and the trust of our consumers and customers, and the strength of our brands that continue to resonate globally.”

Mr. Gaxiola said that despite the many challenges the company is facing, Bimbo’s volume and revenue exceeded the company’s expectations.

“We are optimistic that 2023 will be a year where we continue to realize the benefits of our growth strategy and productivity initiatives,” he said.

source

Leave a Reply

Your email address will not be published. Required fields are marked *