MANAGEMENT’S DISCUSSION
AND ANALYSIS OF RESULTS

Unless otherwise stated, all figures herein, including those for prior periods, are expressed in millions of nominal Mexican pesos and are prepared in accordance with International Financial Reporting Standards (IFRS), which the Company adopted in 2012. 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. The Company now also discloses “Profit Before Other Income & Expenses” in addition to “Operating Income”, as under IFRS the latter includes non-recurring other income and expenses, including integration expenses.

Overview

Grupo Bimbo’s results in 2012 reflected solid sales growth from the integration of new operations as well as organic improvements across multiple markets. Nonetheless, there was pressure on operating results that was mainly explained by higher commodity prices at the beginning of the year and the unfavorable impact of foreign exchange rates on dollarlinked raw materials, the higher cost structure of Sara Lee operation in the United States and Iberia, integration-related expenses and ongoing investments in the Company’s distribution network and manufacturing facilities. Net sales rose 29.7% to Ps. 173.1 billion, while operating income declined 22.5% to Ps. 7.4 billion, with a 2.8 percentage point contraction in the margin to 4.3%. Net majority income fell 58.4% to Ps. 2 billion, while net margin was 1.2%, a decline of 2.5 percentage points from the previous year.




MANAGEMENT’S DISCUSSION
AND ANALYSIS OF RESULTS

Factors Affecting Performance

The key factors and trends that impacted the Company’s operating and financial performance in 2012 included:

  • The first full year of operations for three major acquisitions: Sara Lee Corporation’s fresh bakery businesses in the United States and Iberian peninsula, and Fargo in Argentina.
  • A continued recovery in the consumption environment in most of the Company’s markets, with the exception of Brazil and Iberia; in the United States, despite sequential quarterly improvements, total volumes were still weak on a comparative basis.
  • Average input costs in dollars were lower in the second half of the year; however, this was not sufficient to mitigate the impact of the devaluation of the Mexican peso against the US dollar in the first nine months of the year, putting pressure on gross margins.
  • We continued to invest in the expansion and penetration of our US and Latin American markets, with expenses allocated to the manufacturing base, client and route development and distribution logistics.
  • As expected, operating profitability was diluted by the integration of the acquisitions made in the United States and Iberia due to their higher cost structure, as well as integration-related expenses for all the acquired businesses.
  • We registered a non-cash charge in the United States related to the withdrawal from two Multiemployer Pension Plans; this decision generates an economic benefit to the Company while safeguarding the retirement benefit for associates, provides visibility into future pension liabilities and reduces potential cash flow volatility.
  • A higher effective tax rate for 2012 largely reflecting a tax charge related to the partial cancellation of deferred income tax benefits from previous fiscal losses in Brazil, reflecting a more conservative approach towards the expected recovery of those losses in the short term.
  • Issuance of US$800 million in senior unsecured notes and Ps. 5.0 billion in Certificados Bursátiles to refinance existing indebtedness used in part to fund the Sara Lee acquisitions; these issues increased average maturity and brought the average cost of debt to 4.5%.

Net Sales

Consolidated net sales totaled Ps. 173.1 billion in 2012, a 29.7% increase over 2011 reflecting the integration of acquisitions and solid organic growth in Mexico and Latin America. By region, net sales increased as detailed below:

  • In Mexico, sales rose 9.5% to Ps. 70.5 billion, reflecting stable volume growth across all channels and categories supported by ongoing sales execution initiatives to improve performance at the point of sale.
  • In the United States, net sales rose 46.7% to Ps. 79 billion as a result of the Sara Lee acquisition and to a lesser extent favorable FX rates in the first nine months of the year, which helped offset the weak volume recovery.
  • In Latin America, net sales rose 23.5% to Ps. 23 billion reflecting market penetration efforts across the region, particularly in the mom & pop channel, and from the Fargo integration in Argentina. These factors were partially offset by the weaker consumption in Brazil.
  • In Iberia, net sales totaled Ps. 5,182 in 2012 in line with expectations; this figure is not comparable to performance in 2011 which included only 28 days of results.




MANAGEMENT’S DISCUSSION
AND ANALYSIS OF RESULTS

Gross Profit

Consolidated gross profit in the year totaled Ps. 88 billion, a 28.9% rise over 2011, while gross margin contracted 30 basis points to 50.7%. Despite lower average raw material costs in the second half of the year, this performance reflects the unfavorable impact of FX rates during most of the year, mainly in Mexico.

Operating Expenses

Operating expenses totaled Ps. 77.2 billion and represented 44.6% of net sales in 2012, compared to 43.3% in 2011. This reflected a combination of: i) the higher expense structure of the Sara Lee operations in the United States and Spain; ii) investments in expansion in Latin America and the United States; and iii) one-time non-cash charges related to a restructuring process in Brazil in distribution and IT.

These effects were partially offset by the benefits obtained from synergies and waste reduction initiatives in the United States totaling approximately US$120 million during the year. Additionally, as a result of IFRS compliance, pension funds financial expenses in Mexico and the United States, which had previously been expensed as an operating item, were reclassified as a financial expense (thus impacting the Comprehensive Financing Result).



MANAGEMENT’S DISCUSSION
AND ANALYSIS OF RESULTS

Operating Income

On a consolidated basis, operating income declined 22.5% to Ps. 7.4 billion. The before mentioned operating performance was further impacted by Other Income & Expenses during the year, which included: i) integration expenses in the United States (Ps. 1.6 billion), Iberia (Ps. 213 million) and Latin America (Ps. 121 million); ii) a non-cash expense in the United States generated by the withdrawal from two Multiemployer Pension Plans (MEPPs)(Ps. 1.1 billion); iii) a non-cash labor provision to cover previous years’ liabilities following a new labor law in Venezuela applicable retroactively (Ps. 88 million). This led to a 2.8 percentage points decline in the consolidated margin to 4.3%.

Comprehensive Financing Result

Comprehensive financing resulted in a Ps. 2,810 cost in 2012, compared to Ps. 1,550 in 2011. This is attributable to a combination of: i) an increase in interest expense from the rise in interest rates related to the extended average life of debt; ii) the reclassification of pension fund financial expenses in Mexico and the United States, which had previously been expensed as an operating item; and iii) a Ps. 91 exchange loss compared to a Ps. 651 gain in the previous period, arising mainly from dollar-denominated cash holdings used to pay for the Sara Lee North American Fresh Bakery business.

Taxes

The effective income tax rate for 2012 was 47.4%, compared to 35.2% in 2011. This reflects mainly a more conservative approach towards the expected recovery of previous fiscal losses in Brazil, in accordance with IFRS, which suggests that the amortization of previously registered losses may take longer than initially expected. To reflect this, a tax charge was registered to partially cancel deferred income tax benefits.

Net Majority Income

Net majority income fell 58.4% to Ps. 2 billion, while the margin contracted 2.5 percentage points to 1.2%. This result is explained by operating performance, higher financing costs and an increase in the effective tax rate.



MANAGEMENT’S DISCUSSION
AND ANALYSIS OF RESULTS

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

Consolidated EBITDA totaled Ps. 14.1 billion, a decrease of 4.4% compared to 2011. EBITDA margin contracted 2.9 percentage points to 8.1%.

Financial Structure

The Company’s cash position as of December 31, 2012 totaled Ps. 4.3 billion, compared to Ps. 4.0 billion in December 2011. Total debt at December 31, 2012 was Ps. 42.0 billion, compared to Ps. 46.0 billion in December 2011. This reflected payments of Ps. 2.9 billion during the course of the year.

Long-term debt comprised 96% of the total; 95% of the total was denominated in U.S. dollars, maintaining a natural economic and accounting hedge in alignment with the Company’s strong cash flow in dollars. The average maturity was 5.9 years with an average cost of 4.5%.

The total debt to EBITDA ratio was 3.0 times compared to 3.1 times at December 2011.