Mexico City / MX. (gb) Grupo Bimbo S.A.B. de C.V. reported its results for the three months ended June 30, 2018. «We are pleased with the second quarter and first half results, which show strong sales growth in Mexico and important progress on streamlining our North American operations, while we continue to capitalize on market opportunities and empower our teams to improve productivity», says Daniel Servitje, Chairman and CEO, in the statement. CFO Diego Gaxiola adds: «Our strategic priority of delivering sustainable growth and improving profitability is in line with our commitment to deleverage, supported by a solid financial position».
Highlights of the quarter
Net sales increased 11.2 percent on the back of strong volumes in Mexico, acquisitions completed during the last twelve months and, to a lesser extent, FX rate benefit.
Adjusted Ebitda, excluding the non-cash Voluntary Separation Program charge, increased 10 percent, benefited by Mexico, Latin America and EAA.
Adjusted net majority income increased 25.6 percent, mainly due to the strong operating performance and a lower effective tax rate.
The total debt/adjusted Ebitda ratio improved to 3.2 times from 3.5 times at December 31, 2017.
Recent developments in short
BBU successfully completed its Voluntary Separation Program (VSP), undertaken to accelerate the Company+s strategic objective of lean organizational design, and to better position BBU for profitable and sustainable growth. A USD 105 million non-cash charge was booked in the period.
Grupo Bimbo completed the acquisition of Mankattan, a leading player in the baking industry in China.
Net Sales
Second quarter net sales rose 11.2 percent, primarily on the back of strong volume performance in Mexico, acquisitions completed during the last twelve months, and, to a lesser extent, FX rate benefit.
Mexico
Net sales in Mexico rose 13 percent driven by strong volume performance across every channel, mainly the traditional, every brand, notably Sanissimo, and every category, in particular sweet baked goods, cookies and snacks. Increased client penetration in the snacks category, good performance of Suavicremas and Pingüinos Cookies and Cream, among others, as well as new product launches such as Bites, contributed to the healthy volume growth.
North America
Net sales increased 7.9 percent reflecting exchange rate benefit and a 4 percent increase in Dollar terms. This increase was attributable to a good performance in Canada, particularly the bread category; also, in growth in the U.S. reflected increasing prices, growth in strategic brands and the snacks category, as well as the integration of Bimbo QSR and Bays English Muffins. These factors were partially offset by soft volumes mainly attributable to private label volume declines.
Latin America
Second quarter net sales increased 1.2 percent, on the back of strong results in Central America, even with the national disruptions in Nicaragua. Results were also negatively affected by the change in accounting method for the Venezuelan operation implemented on June 1, 2017, as well as by the national truck strike in Brazil and a weak consumption environment in Argentina.
Europe, Asia and Africa
Sales in the second quarter increased 58.1 percent, mainly driven by acquisitions completed during the last twelve months, including Bimbo QSR, as well as increased volume and market share gains in the bread category in Iberia. However, organic growth was affected by weak performance of the sweet baked goods category in Iberia and the bagels operation in the U.K.
Gross Profit
Consolidated gross profit increased 9.9 percent, while the margin contracted 70 basis points to 53.4 percent. This was due to higher raw material costs, as well as the impact of a different business mix following the incorporation of Bimbo QSR.
Operating Income
Operating income decreased 41.5 percent from the prior year, with a 330 basis point contraction in the margin, mainly due to a USD 105 million non-cash charge in the U.S. related to the Voluntary Separation Program completed during the period and, to a much lesser extent, the integration of the bolt-on acquisitions, as well as pressure from commodity and energy inflation in North America.
Mexico
Operating income increase of 14 percent in Mexico was primarily attributed to the strong volume performance and lower raw material costs related to a favorable exchange rate. The latter was offset by incremental amortization expenses coming from the acquisition of Bimbo QSR.
North America
North American operating margin contraction was attributed to the USD 105 million non-cash charge arising from the VSP and, to a much lesser extent, the integration of the bolt-on acquisitions and pressure from commodity and energy inflation.
Latin America
Even considering the impact of the national truck strike in Brazil and the disruption in logistics in Nicaragua, Latin American operating margin expanded 400 basis points mainly on the back of lower distribution and restructuring expenses, driven by stronger market execution and penetration.
Europe, Asia and Africa
EAA operating margin expanded a notable 610 basis points primarily because of the incorporation of Bimbo QSR, partially offset by higher integration expenses in Iberia and China.
Ebitda
Ebitda declined 21.4 percent, with a margin contraction of 300 basis points to 7.4 percent, due to the noncash charge for the VSP in the U.S.
Adjusted Ebitda
Adjusted Ebitda, which excludes the VSP non-cash charge, increased 10 percent, while the margin slightly contracted 10 basis points.
Comprehensive Financial Result
Comprehensive Financial Result totalled MXN 1,825 million in the period, compared to MXN 1,485 million in the last year, an increase of MXN 340 million, which mainly reflects a higher indebtness level due to the acquisitions completed in the last twelve months and a slightly higher interest rate due to the currency mix. These effects were partially offset by an exchange rate gain.
Net Majority Income
Net majority income decreased 86.9 percent, with a 200 basis point contraction in the net margin to 0.3 percent, attributable to the above mentioned impact from the VSP and higher financing costs. Excluding this effect, adjusted net majority income increased 25.6 percent and the margin expanded 30 basis points to 2.6 percent due to the strong operating performance and a lower effective tax rate.
Financial Structure
Total debt as of June 30, 2018 was MXN 92.7 billion, compared to MXN 94.3 billion on December 31, 2017. The 1.6 percent decrease was primarily due to the prepayment of US USD 123 million outstanding from the revolver credit facility.
Average debt maturity was 11.1 years with an average cost of 6.0 percent. Long-term debt comprised 98 percent of the total; 59 percent of the debt was denominated in US Dollars, 36 percent in Mexican Pesos and 5 percent in Canadian Dollars.
The total debt to adjusted Ebitda ratio, excluding the VSP charge and with pro forma Bimbo QSR Ebitda, was 3.2 times compared to 3.5 times as of December 31, 2017, while the net debt to adjusted Ebitda ratio was 2.9 times compared to 3.2 times as of December 31, 2017.
Recent developments in detail
Bimbo Bakeries USA, Inc. (BBU), a subsidiary of Grupo Bimbo, successfully completed its Voluntary Separation Program (VSP), undertaken to accelerate the Company+s strategic objective of lean organizational design. The VSP better positions BBU for profitable and sustainable growth by enhancing operational and administrative efficiencies.
«This effort represents an important part of our transformation to drive growth, improve productivity and enhance profitability. The completion of this program will help increase cash flow and improve profitability, as it has a payback of less than two years. Furthermore, a leaner, stronger and less complex organizational structure allows us to respond to new opportunities with greater agility. We extend our gratitude to all those who have been part of the BBU family and continue to progress in our Purpose of Building a Sustainable, Highly Productive and Deeply Humane Company», said Fred Penny, BBU President.
This program, along with other initiatives, resulted in a net headcount reduction of around 600 positions at BBU. As a result, Grupo Bimbo took a non-cash charge of USD 105 million in the second quarter. This one-time charge mainly reflected associate severance and benefits related costs that will immediately benefit the Company starting in the third quarter and in the long term.
Grupo Bimbo completed the acquisition of Mankattan Group, a key player in the baking industry in China, after satisfying customary closing conditions, including the receipt of regulatory approvals.
«We are delighted to welcome Mankattan+s 1,900 associates to the Grupo Bimbo family. They have built a sizeable customer base in key urban markets and a business that complements and enhances our current product portfolio, distribution network and manufacturing facilities. Not only does the addition of Mankattan strengthen our presence in the country, it also provides us with a platform to grow the market for branded, packaged baked goods as well as the foodservice channel in China. This is a vital growth market for us and an acquisition that bolsters our global profile», said Daniel Servitje, Chairman and CEO of Grupo Bimbo.
Grupo Bimbo priced USD 500 million Perpetual Subordinated Notes offering at par to yield 5.95 percent. The Company used the proceeds from this offering for the refinancing of existing indebtedness and the financing of acquisitions and capital expenditures and other general corporate purposes.
«This is a new instrument for Grupo Bimbo making it the first hybrid bond issued by a Mexican consumer Company, aligned with our financial policies. As it supports to preserve a healthy financial position, enhances the strength, stability and flexibility of our capital structure, reinforces our commitment to deleverage and maintain our investment grade rating and bolsters liquidity. Moreover, our market leadership coupled with our diversified revenue base, geographic presence, category and distribution channels, largely contributed to attract the attention of more than 200 international investors, evidencing our growing international profile and commitment to expand our stakeholder base», said Diego Gaxiola, CFO of Grupo Bimbo. The transaction was rated Ba1/BB+/BB+ by Moody+s, S+P and Fitch.
