Grupo Bimbo: reports solid results for Q3/2011

Mexico City / MX. (gb) Grupo Bimbo S.A.B. de C.V. reported results for the third quarter ended September 30, 2011. Performance in the period reflected solid volume and sales growth in Mexico and Latin America, higher commodity prices, and better financing results reflecting the appreciation of the US Dollar and the lower cost of debt.

Net sales rose 9,0 percent over the year ago quarter to 32,2 billion MXN, with increases of 14,0 percent in Mexico and 24,1 percent in Latin America. In the United States lower average FX rates led to a 1,0 percent decline in Peso terms, while sales in Dollar terms rose 3,4 percent. The Company continued reflecting the effect of the pricing initiatives taken during the first half of the year.

The expected rise in raw material costs and the tough basis of comparison from the year ago period resulted in a 1,8 percentage point decline in the gross margin. This was partially offset by operating expenses that declined as a percentage of sales, despite higher fuel costs and greater investment in new route expansion. This resulted in a 1,2 and 1,5 percentage point decline in the operating and Ebitda margins, respectively.

Net majority income benefited from a gain in the comprehensive financing result during the period, compared to a cost in the third quarter of last year, and totalled 2,1 billion MXN. Net margin expanded by 1,4 percentage points to 6,5 percent.

3Q/2011	3Q/2010	Change	Net Sales	9M/2011	9M/2010	Change
16’461	14’433	14,0%	Mexico	47’112	42’795	10,1%
12’045	12’163	( 01,0% )	United States	34’555	35’800	( 03,5% )
04’555	03’672	24,1%	Latin America	12’547	10’209	22,9%
32’230	29’571	09,0%	Consolidated	91’871	86’732	05,9%
Note: Figures expressed in millions of Mexican Pesos (MXN). Consolidated results exclude inter-company transactions.

Net Sales Mexico

Net sales in the third quarter totalled 16,5 billion MXN, a 14,0 percent increase from the year ago period reflecting a combination of i) healthy volume growth across the portfolio, with out-performance in the cookies, sweet baked goods, salted snacks and confectionery categories; and ii) pricing initiatives, including the most recent one in May. All channels registered double-digit sales growth over the year ago period, and in particular the modern channel. Sales in the first nine months of the year rose 10,1 percent to 47,1 billion MXN.

Net Sales United States

Net sales declined 1,0 percent in Peso terms to 12,0 billion MXN, while in Dollar terms sales rose 3,4 percent. This primarily reflected the benefit of better pricing, as sales in almost every category and channel rose in the third quarter. Overall volumes were lower although certain segments, such as Bimbo and Marinela sweet baked goods, registered healthy volume growth in the period. On a cumulative basis, sales in pesos declined 3,5 percent to 34,6 billion MXN.

Net Sales Latin America

Net sales rose a strong 24,1 percent from the same quarter of last year, to 4,6 billion MXN, as a result of better prices and higher volumes across the region, reflecting the Company´s market penetration efforts. Brazil, Colombia and Chile all registered double digit growth in the period. Sales in the first nine months of the year totalled 12,5 billion MXN, a 22,9 percent rise over 2010.

Gross Profit

While consolidated gross profit in the third quarter rose 5,3 percent from the year ago period, the gross margin contracted by 1,8 percentage points, to 51,6 percent. This reflected a combination of i) commodity pressures across all regions; and ii) in the United States, costs associated with the start-up of the new plant in Topeka, Kansas. In the first nine months of the year, the consolidated gross margin fell by 1,7 percentage points as a result of the aforementioned rise in commodity costs and the difficult basis of comparison.

Operating Expenses

Operating expenses comprised 41,3 percent of sales, a 60 basis point decline from the year ago period; greater efficiencies in Mexico and the United States helped offset the rise in expenses associated with the expansion of new routes in Latin America, and higher inflation for other costs such as fuel in the United States.

Operating Income

Operating income in the third quarter of 2011 fell 2,2 percent, reflecting higher raw material costs overall and the increase in sales and distribution expenses in Latin America. The consolidated operating margin contracted 1,2 percentage points from the year ago period. It should be noted that pressure on operating income has slowed from the first half of the year due to improving volume and sales performance and more efficient expense structure. In the first nine months of the year, operating income fell 8,8 percent while the margin declined by 1,4 percentage points.

On a regional basis, strong sales growth in Mexico and greater distribution efficiencies helped offset gross margin pressure. Operating income rose 4,6 percent, while the margin registered a 1,3 percentage point decline, to 14,5 percent.

In the United States, more efficient sales and distribution expenses helped limit the impact of gross margin pressure and higher fuel costs in the period. Operating income declined 3,8 percent in the third quarter, with a slight decrease of 0,1 percent in Dollar terms. The margin remained relatively stable at 8,4 percent, a 20 basis point reduction from the year ago period.

In Latin America, the 3,2 percentage point decrease in the margin was attributable to gross margin pressure and higher distribution expenses associated with opening new routes and distribution centers, particularly in Brazil, as well as pre-operating expenses for a new plant in that market being built to support growth in the region.

Comprehensive Financing Result

Comprehensive financing resulted in a 156 million MXN gain in the third quarter, compared to a 807 million MXN cost in the same period of last year. This was attributable to i) a lower interest expense due to the refinancing of the Company´s debt and conversion to a 100 percent Dollar-denominated debt, resulting in an average 3,6 percent financing cost in the current period compared to 6,5 percent last year; and ii) an exchange gain of 562 million MXN, compared to a 83 million MXN exchange loss last year, as a result of the cash holdings in Dollar-denominated to pay for the Sara Lee North American Fresh Bakery business.

Net Majority Income

As a result of a gain in the comprehensive financing result, net majority income in the third quarter rose 40,3 percent from the year ago period to 2,1 billion MXN, while the margin expanded 1,4 percentage points to 6,5 percent. In the first nine months of the year, net majority income rose 7,6 percent, while the margin expanded by 10 basis points to 4,7 percent.

Operating Income plus Depreciation and Amortization (Ebitda)

Ebitda in the quarter fell 2,1 percent to 4,2 billion MXN, while the margin contracted 1,5 percentage points to 13,0 percent. It should be noted that, as with operating income, pressure has been easing from the first half of the year due to improving top line performance and a more efficient expense structure. On a cumulative basis, Ebitda declined 7,8 percent in the first nine months of the year and the margin declined by 1,7 percentage points. Results in both periods largely mirrored performance at the operating level.

Financial Structure

As of September 30, 2011, the Company´s cash position totalled 12,5 billion MXN, compared to 4,9 billion MXN in 2010. The 2011 figure includes the approximately 450 million USD in resources remaining from the 1,3 billion USD syndicated loan obtained in April, as well as the Company´s strong cash generation.

Total debt at September 30, 2011 was 40,6 billion MXN, compared to 32,7 billion MXN in the year ago period. The 2011 figure includes the 1,3 billion USD syndicated loan used to refinance existing obligations 841 million USD, with the remainder to fund in part the Sara Lee acquisition expected to close in the coming weeks. The total debt to Ebitda ratio was 2,8 times compared to 2,0 times at September 2010. Long-term debt comprised 95 percent of the total. 100 percent of the debt is denominated in U.S. Dollars, maintaining a natural economic and accounting hedge and in alignment with the Company´s strong cash flow in Dollars. Average maturity was five years.

Other Developments

On October 21, Grupo Bimbo announced that the U.S. Department of Justice (DOJ) concluded its review of Grupo Bimbo´s proposed acquisition of Sara Lee Corporation´s North American Fresh Bakery (NAFB) business. As a condition to regulatory clearance, the Company has agreed to divest certain brands and accompanying assets and routes. To reflect the revised scope of the NAFB assets being acquired and the divestitures to be undertaken, the final enterprise value has been revised to 709 million USD.

On October 10, Grupo Bimbo announced that it signed an agreement to purchase Sara Lee Corporation´s fresh bakery business in Spain and Portugal for an enterprise value of 115 million EUR, positioning the Company as the leading branded bread company on the Iberian Peninsula and providing an entry to the European market through an established bakery business. The operation includes seven production facilities, more than 800 distribution routes and 1’900 associates. The transaction has been approved by the Board of Directors of both companies and is expected to close, subject to regulatory approval, in the coming months.