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Daniel Servitje in Milling and Baking News Part 3

01 Aug 2012

If we want to be an international company, it is important for us to be in Europe.

Daniel Servitje, Chief Executive Officer of Grupo Bimbo

Daniel Servitje Interview Part 3
Source: Milling & Baking News

Cost cutting effort, c.e.o. passion drive Bimbo sustainability focus

Advocates often assert that the embrace of sustainability helps lower rather than add costs. At Grupo Bimbo S.A.B. de C.V., it was an urgent need to cut costs that led to the discovery that sustainability done properly makes significant contributions to a company’s bottom line.
Daniel Servitje, the chief executive officer at Grupo Bimbo, in an interview with Milling & Baking News, reviewed the evolution of sustainability at the world’s largest whole-sale baking company. He said Bimbo is regularly recognized as a sus-tainability leader in the Mexican business community. Late in 2011, the Bolsa Mexicana de Valores (the Mexican Stock Exchange) chose Bimbo for inclusion in a new Sustainability Index, which helps investors identify companies that stand out on the basis of their environmental stewardship, social responsibility and corporate governance.

Mr. Servitje said his own background and interest in the subject first readied the company to support the issue.“My first entrepreneurial initiative was a solar energy company when I was 18,” he said. “It floundered, but I had a real interest in renewable energy and energy conservation that I have never lost. I also enjoy the forests and hiking and as a company we’ve worked on a reforestation initiative in Mexico.” The chance to turn this interest into action for Grupo Bimbo occurred at a time 10 years ago when the company was struggling financially.

“We had an economic crisis in the country and needed to reduce our engineering staffing or move many of them to new areas,” he said. “We asked some engineers to try to find some energy savings, which they did. Their discovery quickly proved profitable and showed high payback ratios. “Since then, we’ve had a small team of engineers developing and testing ways for us to be more efficient in our energy gas and electricity usage, and to improve efficiency in our distribution routes. It has been a very profitable initiative and we are expanding globally with different divisions in various stages of the process.” Mr. Servitje said U.S. sustainability efforts may be different from those being pursued in Mexico, as an example.

“We are happy with the process in the United States,” Mr. Servitje said. “For example, they have installed efficient lighting, significantly reduced landfill waste and decreased electricity by increasing energy efficient equipment in some plants. These actions make sense from an economic standpoint, and we believe we have a role as manufacturers and distributors to reduce our environmental footprint.”

Grupo Bimbo sustainability progress is carefully measured around three principal areas: carbon footprint, water footprint and waste management. Longtime Grupo Bimbo executive Rosalio Rodriguez has overall oversight. Some examples of the results in these areas over the last three years include decreasing carbon dioxide generation from the company’s plants and vehicles 6.2% and reducing the company’s water use by 3.9%. Additionally, in Mexico and Central America Grupo Bimbo was able to recycle 71% of its total waste (hazardous and non-hazardous). Making sure progress toward sustainability is real and continues is crucial, Mr. Rodriguez said.

“We are working on the entire value chain, and we are going to be audited,” he said. “Our suppliers will too.” Perhaps the most visible move by Grupo Bimbo on the sustainability front is an initiative announced in December 2010. The company is partnering in the construction of a wind farm in Union Hidalgo, in the southern coastal region state of Oaxaca, not far from Mexico’s border with Guatemala.

Called “Piedra Larga,” the wind farm is expected to be the global food industry’s largest, generating nearly 100% of the electrical power used by Grupo Bimbo in Mexico. The installed power of the plant will be 90 megawatts, derived from 45 turbines of 2 megawatts each.

The initiative will allow the company to diminish gas emissions, equating to 17 million gallons of diesel and 180,000 tonnes of carbon dioxide (roughly 15% of current emissions excluding the Sara Lee acquisition). While firmly committed to the initiative, Mr. Servitje was careful to point out Grupo Bimbo is not entering into the wind energy business.

“It will be a profitable commitment, but we are not investing,” he explained. “We are committing to buy the wind energy at least 18 and up to 28 years. This should have a financial benefit while producing clean energy in all our plants in Mexico. It will be the largest conversion of non-renewable to renewables in the world in the food industry, as far as we know. There is some associated risk — if electric costs decline significantly, we may pay more than market prices — but we are optimistic about the results. It has been eight years from conception to realization. We’re almost there.” (The farm is expected to go on line in the final months of 2012.)

The embrace of sustainability at Grupo Bimbo also may be seen as consistent with broader values embraced by the company, Mr. Servitje said. It underscores that to whatever degree Bimbo has cut costs through sustainability, other motivations are at play, several of which date back decades. “We also believed in our social responsibility many years before it became mainstream,” he said. “It’s nothing I invented. It’s part of the DNA of our company. Our leaders and founders always believed business could make society better.” In fact, today, the company’s vision looking to the year 2015 calls for Bimbo to be “a model to be followed with worldwide recognition in terms of sustainability.” The vision continues, “We bring together our economic and social goals with awareness and commitment to reduce our environmental foot-print.” “We’ve focused on playing our part on many fronts, not just environmental, but also on developing better citizens for our countries,” Mr. Servitje said. “The image of the company I think is a positive one. If we make mistakes, we need to correct them. We don’t only want to grow but also to make society a little better. It’s in our blood. Ultimately, we do it not to make money, but because it’s our role in business.”MBN — L. Joshua Sosland

Food security, obesity key issues in both U.S. and Mexico

While the economic profiles of the United States and Mexico differ considerably, food insecurity and obesity are major issues in both countries. Daniel Servitje, chief executive officer of Grupo Bimbo S.A.B. de C.V., said that obesity has recently gained greater attention in both countries.

According to data from the Central Intelligence Agency, per capita gross domestic product in Mexico totaled $15,100 in 2011, versus $48,100 in the United States. The per capita figure puts Mexico ahead of Turkey ($14,600), Panama ($13,600), Venezuela ($12,400) and Iran ($12,200). The poverty rate was estimated at 18% in Mexico (versus 15% for the United States), though the figure in Mexico ballooned to 47% using a “food-based definition” of poverty, or the point at which income is insufficient to buy food to “physically sustain its members.”

“In our business, we have a responsibility to recognize the hunger relief, obesity and overall nutrition issues,” Mr. Servitje said. “Most of our products in Mexico are fortified beyond what we do in other countries to help address malnutrition. In Mexico, we also have an obesity problem. We have embarked on programs to help solve our common issue.” On the broader question of food insecurity, Mr. Servitje has become a prominent world figure, in part because Mexico’s president Felipe Calderon was chair of the G20 summit, which met in June in Los Cabos. In addition to government representatives, private sector G20 engagement has grown. Among seven private sector task forces created is one on food security, which is chaired by Mr. Servitje together with Paul Polman, c.e.o. of Unilever.

“We are drafting a document focusing on the role of business in this critical situation,” Mr. Servitje said. “The world must feed 2 billion more people in the coming years with the same amount of land and the same amount of water. We must be more productive.” Without directly addressing the issue of bioengineered wheat, Mr. Servitje said his G20 work has given him a big picture understanding of the stakes involved in producing an adequate food supply worldwide. He said Grupo Bimbo shares the view of the American Bakers Association membership, which calls for the introduction of bioengineered wheat contingent on consumer acceptance and choice.

“My involvement on food security has taught me we need technology to solve the issues of hunger,” he said. “For instance, how can we take advantage of technology to improve seeds or to use less water. We stick with the A.B.A. views on wheat biotechnology, but we believe technology must play a role in solving the food needs of the population.” The image of bread and other grain-based foods as healthful is an issue of concern in several of the markets where Grupo Bimbo operates, Mr. Servitje said.

“There are some perceptions that you consume a lot of calories by eating bread,” he said. “However, the case is that our products, as part of a balanced diet, are a good source of nutrition. In Mexico, we’ve strengthened the case for bread in a new ‘360 degree’ campaign for whole grains that includes television ads and store merchandising. We have published a book about whole grains and their role in health. We have invited people from the Whole Grains Council and our involvement with their seal has been recognized. I believe we are now the largest user of the seal in the world.” For all that, Mr. Servitje described whole grains as an “emerging trend” in Mexico in which a principal objective remains education of consumers. MBN

Governance seen advancing under Daniel Servitje

In the first installment of this series, Daniel Servitje, chief executive officer of Grupo Bimbo S.A.B. de C.V., drew a distinction that probably would not be interpreted as “politically correct” in activist shareholder circles. Mr. Servitje explained that at Grupo Bimbo, “shareholders take a back seat in terms of allocation of funds.” He went on to explain that rather than paying shareholders a large dividend, extremely common among packaged foods companies, profits at Bimbo are nearly all poured back into the company. Ultimately, the approach accrues to the benefit of shareholders, he said. For instance, based on recent market prices, the dividend yields were 2.8% at Flowers Foods, Inc. and 3.2% at General Mills, Inc., versus 0.48% at Bimbo.

Armando Giner, a corporate vice-president who is in charge of investor relations at Grupo Bimbo, said the comment belies significant change at Bimbo in recent years. “Since Daniel became c.e.o., he has been trying to institutionalize Grupo Bimbo with a greater emphasis on corporate governance,” he said. Shares of Grupo Bimbo trade on the Mexican Stock Exchange (Bolsa Mexicana de Valores), and at a June 15 close of $30.99 per share, the company had a market capitalization of $10.4 billion. Members of the five founding families of Grupo Bimbo currently own 76% of the company’s outstanding shares, with a 24% float.

Performance of the shares in recent years would appear to validate Mr. Servitje’s assertion that Bimbo shareholders are being anything but neglected. Since the beginning of 2006, Grupo Bimbo shares were up around 138% (based on the mid-June price). Over the same period, the Grain-Based Foods Share index (calculated by Milling & Baking News) was up 26%. The S&P 500 was up 21%.

Mr. Giner traces an updated attitude toward governance and transparency to the beginning of the last decade. “Some investors said that before 2002, we were an entirely closed company,” he said. “We conducted an earnings conference call for the first time after the second quarter of that year with Guillermo Quiroz, who is chief financial officer of Grupo Bimbo, on the call. That marked a change, not only for shareholders but for the investment community. We have calls every quarter, in good times and bad.” Mr. Giner said what occurred in 2002 should not be construed as an increase in shareholder importance. “The importance has always been the same,” he said. “The treatment is different in terms of communication. We have three or four investment community road shows per year.”

Mr. Giner said the increased transparency and the adoption of a new International Financial Reporting Standards bore fruit recently when the company issued new debt, including $800 million in U.S. denominated bonds. The 10-year bonds carry a 4.5% interest rate, and the offering was “over-committed,” Mr. Giner said. Asked how the company balances long-term objectives versus a need for short-term profitability, Mr. Giner said Bimbo is mindful of near-term results but has and will continue to keep its eye squarely focused on the long-term.

In the first quarter of 2012, group majority income of Grupo Bimbo was 601 million pesos ($45.6 million), down 47% from 1,141million pesos in the first quarter of 2011. Operating income of Bimbo’s business in the United States was down 73% from the year before. “We said this will be a transitional year, and it will be,” Mr. Giner said. “We know we won’t have the type of results we are used to achieving and that margins would be significantly reduced. The combination of the integrations of Sara Lee and Fargo (Argentina) with the commodity and cost pressures facing all bakers will impact our short-term results. But, we believe we can achieve margins that we achieved in 2010 as we expand the base of the business in the U.S. and other countries. We are patient as we prefer to maintain a long-term strategy versus simply focusing on the next quarter.”

While recognizing a clear strategy at Grupo Bimbo to expand internationally, Mr. Giner stressed the move should not be misinterpreted as a sign that opportunities for growth in Mexico have been tapped out. “In 2011, sales growth in Mexico was 11.2%, with almost half of the gain explained by volume growth,” Mr. Giner said. “Bimbo in Mexico is not a mature company. It leads in innovation.” Mr. Giner also oversees risk man-agement at Grupo Bimbo and offered insights into how the company is dealing with ingredient and other markets that have become increasingly volatile in recent years.

“We have set a policy that every organization should have a strategy of four to nine months of coverage, not less than four,” Mr. Giner said. “Local managers may have various opinions” about market conditions, “but at the end of the day we’re bakers, not traders.” Other Grupo Bimbo guidelines include a prohibition against the use of “exotic instruments” for hedging. When options are sold,the net position must result in a net payment to Grupo Bimbo and the trade must be related to the primary hedged positions, Mr. Giner said. He said Grupo Bimbo hedges ingredients, energy and foreign exchange exposures. MBN