Grupo Bimbo: reports third quarter results 2012

Mexico City / MX. (gb) Grupo Bimbo S.A.B. de C.V. reported results for the third quarter ended September 30, 2012. All figures, including those for prior periods, are expressed in accordance with International Financial Reporting Standards (IFRS). The principal effects on the profit and loss statement are: i) the line items «Employee Profit Sharing» and «Other Income + Expenses» are registered above the operating line; ii) higher depreciation costs reflecting updated asset valuations; and iii) different accounting treatment for employee benefits.

As of the second quarter of 2012, the Company discloses: i) Profit Before Other Income + Expenses; and ii) Operating Income, which under IFRS includes «Other Income + Expenses» as an operating item in which non-recurring items are registered such as integration expenses for new acquisitions.

Sales in the third quarter of 2012 rose 34,7 percent from the year ago period to 43,4 billion MXN, with solid organic growth of 7,2 percent reflecting good performance in Mexico and Latin America as well as the beneficial Dollar/Peso exchange rate in the US. The integration of the Sara Lee operations in the United States and Iberia, as well as Fargo in Argentina, represented 27,5 percent of growth in the quarter.

The consolidated gross margin contracted 90 basis points from the year ago period, to 50,5 percent. While raw material prices were lower, this was more than offset by the impact of foreign exchange rates on dollar-linked raw materials in Mexico and Latin America.

The operating margin was 3,1 percent, a decline of 6,4 percentage points, due to: i) dilution from the Sara Lee operations; ii) integration-related expenses; and iii) two non-cash expenses: a) for Multi-employer Pension Plans (MEPPs) in the United States; and b) a provision, following a new labor law in Venezuela applicable retroactively.

Net majority income declined 5,5 percentage points to 0,9 percent, reflecting performance at the operating level which was somewhat offset by a lower effective tax rate.

Mexico

Net sales in the third quarter totalled 17,7 billion MXN, a 7,9 percent increase from the year ago period reflecting stable volume growth across all channels and categories that was supported by effective sales execution initiatives within certain channels. On a cumulative basis, sales rose 11,0 percent, continuing the positive trend seen in the first half of the year.

United States

Net sales totalled 19,9 billion MXN in the quarter, a 65,3 percent rise over the year ago period, reflecting the integration of Sara Lee operations (58,8 percent) and a more favourable Dollar/Peso exchange rate. Consumption remained soft, leading to weak volume recovery and lower average prices; nonetheless, the sweet baked goods and breakfast categories generated growth in the period. Net sales in the first nine months of 2012 rose 69,2 percent.

Latin America

Net sales rose 20,4 percent over the same quarter of last year, to 5,5 billion MXN; organic growth of 6,9 percent reflected a deceleration in volumes, primarily in Brazil where the consumption environment was weaker. Chile and Colombia outperformed in the period. Cumulative net sales rose 30,3 percent.

Iberia

Sales were in line with expectations.

Gross Profit

Consolidated gross profit in the quarter rose 32,4 percent from the year ago period, while gross margin declined 90 basis points to 50,5 percent.

On a regional basis, in Mexico and Latin America the impact of the FX rates on raw materials completely offset the benefit of lower input costs, with additional margin pressure in Latin America due to the higher labor costs reflecting the new labor law in Venezuela, for which nine months of costs were recorded in the third quarter.

In the US, lower input costs and certain efficiencies including waste reduction initiatives undertaken since the start of the year offset lower average prices and the slow volume recovery.

Performance in Iberia, while having the lowest margin among the Company´s regions due primarily to a higher cost structure and the industry´s challenging price environment, was nonetheless in line with expectations.

On a cumulative basis, consolidated gross margin declined 70 basis points to 50,5 percent.

Operating Expenses

Operating expenses as a percentage of sales increased 180 basis points compared to the year ago period, to 43,6 percent. This primarily reflected the higher expense structure of the Sara Lee operations in the United States, particularly in the distribution network. In the first nine months of 2012, operating expenses represented 44,7 percent of net sales, compared to 43,1 percent in the same period of 2011.

Profit before Other Income + Expenses

On a consolidated basis, third quarter profit before other income + expenses declined 1,9 percent to 3,0 billion MXN, while the margin contracted 2,5 percentage points to 7,0 percent, mainly as a result of the aforementioned dilution effect of the Sara Lee acquisitions in the United States. For the first nine months of the year, profit before other income + expenses was nearly unchanged at 7,4 billion MXN.

On a regional basis, in Mexico greater efficiencies and better absorption of operating expenses at Bimbo and Barcel helped offset gross margin pressure, but the conversion plans in manufacturing and POS at El Globo have taken longer than expected to generate the intended benefit, resulting in a 90 basis point contraction in the margin.

In the United States, the 2,7 percentage point contraction in margin reflected the expected dilution from the Sara Lee operations and ongoing investments in modernizing the production platform.

In Latin America, lower absorption of fixed costs due to volume deceleration, as well as ongoing investments in the distribution network, mainly in Brazil, have not gained sufficient scale to improve profitability and contributed to the 1,8 percentage point decline in the margin. In Iberia, results reflected performance at the gross margin level.

Operating Income

Operating income in the third quarter reflected the aforementioned performance as well as the 1’669 million MXN expense on the Other Income + Expenses line, resulting in a 56,1 percent decline to 1,4 billion MXN and a 6,4 percentage point reduction in the margin to 3,1 percent. On a cumulative basis, operating income fell 29,6 percent, while the margin contracted 4,0 percentage points.

The Other Income + Expenses line in the third quarter included: i) two non-cash expenses: a) 1’037 million MXN in the United States generated by the withdrawal from two MEPPs; and b) 81 million MXN in Latin America for a labor provision to cover previous years liabilities, following a new labor law in Venezuela applicable retroactively; and ii) 372 million MXN for integration related expenses in the US (26 million USD) and Iberia (2,6 million USD), in line with plan.

Despite the impact of the non-cash charge of 1’037 million MXN (79,7 million USD) generated by the withdrawal from two MEPPs, the New England Teamsters Fund and Bakers Local 433 Fund, this decision generates an economic benefit to the Company with a present value of 887 million MXN (68,2 million USD) before tax, while safeguards the retirement benefit for associates, providing visibility into future pension liabilities and reducing potential cash flow volatility.

Comprehensive Financing Result

Comprehensive financing resulted in a 607 million MXN cost in the third quarter, compared to a 156 million MXN gain in the same period of last year. This reflected a combination of: i) an increase in interest expense due to a rise in interest rates related to the extended average life of debt; and ii) a 55 million MXN exchange loss compared to a 562 million MXN gain in the previous period arising from Dollar-denominated cash holdings used to pay for the Sara Lee North American Fresh Bakery business.

Net Majority Income

Net majority income in the third quarter fell 82,0 percent compared to the third quarter of last year, to 369 million MXN, while the net majority margin contracted 5,5 percentage points to 0,9 percent. Operating performance and higher financing costs were somewhat offset by a lower effective tax rate in the period, 31,9 percent compared to 34,8 percent last year. On a cumulative basis, net majority income declined 55,6 percent, while the margin contracted 3,1 percentage points to 1,5 percent.

Operating Income plus Depreciation and Amortization (Ebitda)

As the majority of Other Income + Expenses impacting the operating level were non-cash items, Ebitda in the quarter fell to lesser extent, by 6,5 percent, to 3,8 billion MXN, while the margin contracted 3,9 percentage points to 8,6 percent.

Financial Structure

The Company´s cash position as of September 30, 2012 totaled 4,2 billion MXN, compared to 3,9 billion MXN in December 2011. Total debt at September 30, 2012 was 41,8 billion MXN, compared to 47,1 billion MXN in December 2011. This reflected payments over the first nine months of the year of 2,9 billion MXN and the effect of a stronger Peso. The average maturity is 6,1 years with an average cost of debt of 4,5 percent. The total debt to Ebitda ratio was 2,8 times compared to 3,1 times at December 2011. Long-term debt comprised 96 percent of the total; separately, 95 percent of the debt was denominated in U.S. Dollars, maintaining a natural economic and accounting hedge on total debt and in alignment with the Company´s strong cash flow in Dollars.

MEPPs Executive Summary

Multiemployer pension plans (MEPPs) are collective retirement plans created by the Labor Management Relations Act of 1947, known as the Taft-Hartley Act. MEPPs are designed for workers in industries where it is common to move from one employer to another constantly.

According to the Pension Benefit Guaranty Corporation (PBGC), in the US there are currently more than 1’500 active MEPPs, covering approximately 10,1 million participants.

All types of pension plans today face structural problems leading to funding status concerns and particularly MEPPs. The financial health of MEPPs has been stressed by poor investment returns, low interest rates, a reduction in the contributor base and, in some cases, retirees that greatly outnumber active participants.

Bimbo Bakeries USA (BBU) currently participates in 34 Multi-employer Plans covering approximately 15’100 associates. To safeguard pensions already earned by its employees and to substantially mitigate risks to the Company´s future pension liabilities, BBU recently took a proactive stance to address funding concerns for two of the MEPPs in which it participates, The New England Teamsters Pension Fund and the Bakers Local 433 Fund.

While there is a negative one-time accounting impact of 1’037 million MXN (79,7 million USD), withdrawing from the Plans enhances the Company´s long term financial health and generates a positive financial effect with a present value of 876 million MXN (67,4 million USD) before tax.

These actions undertaken and embraced by BBU, offer a unique opportunity to fund our associates´ retirement benefits and substantially mitigate future risks associated with the financial health of the Plans.

Both of these actions provide certainty for the interests of all stakeholders, including unions, associates, the Company and shareholders.

BBU is committed to being part of the problem-solving process and resolved to take the responsible steps with respect to its MEPP liabilities and its associates´ retirement benefits. Going forward, BBU will be vigilant and opportunistic in this regard and will seek to capture certainty and reduce volatility and exposure within the MEPP landscape.

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