IBC struggles to keep its head above water

The money was raised by the company earlier this month through an issue of convertible notes at an initial convertible price of $10.1 per share. Proceeds of the issue will be used mainly to service the group's principal debt, although some will also be used to improve the group's operational systems.

The largest bakery wholesaler in the US has been caught unawares by changes in its environment and thrown into financial abyss. It is facing a mountainous debt - quoted at $845 million in May - high operating costs and declining volumes for its bread and cake products, which include Wonder bread and Hostess cakes.

The group was pushed deep into the red during the 2004 financial year as white bread sales continued to decline - and the effects of the low-carb diet fad took their toll - and had to order a debt-restructuring programme. This resulted in more flexible payment terms, albeit at the cost of a 0.5 per cent increase in interest charges.

Creditors made it a condition of the debt restructuring that IBC raise at least $95 million through issuing securities that are junior to its secured credit facilities. The group has met this condition through the $100 million issue. The convertible notes will fall due in 2014.

IBC, which employs more than 33,000 people across the US, has suffered as a result of its failure to change with the times. "The marketplace is changing, and we have not adjusted quickly enough,"​ chief executive officer James R. Elsesser, said in the company's 2003 annual report.

The main problem seems to be overcapacity. The US bakery market has been under severe pressure over the past few years as a result of changing consumer taste away from bakery products, leaving too many companies making too many products that consumers do not want.

Products such as bread and cakes, perceived as being high in carbohydrates and fat, have suffered the most from the arrival of the Atkins diet and fears over an obesity epidemic, and IBC is not alone in facing tough times. The initial response from US bakers has been to reduce prices, but this in turn put their putting margins under pressure - a factor compounded by higher raw material costs.

IBC's situation has been made worse by rising health care and pension costs. Un-audited figures for year ended May 2004 show the group providing $40 million to its worker's compensation reserves from pre-tax income.

With net sales declining 1.7 per cent to $3.4 billion, as well as increased operating costs, IBC was bound for the red. Operating profits of $83.2 million reported in 2003 were reversed in 2004 to an operating loss of $6.9 million.

These figures sit awkwardly with the company's revival strategy, called SOAR or Systems Optimisation And Re-Engineering, which has set the ambitious growth targets to be reached by 2006. The new injection of cash from the convertible bond issue could, however, get the programme back on track. SOAR's aim is to overhaul IBC's production, distribution and administrative functions, reduce its fixed operating costs and identify growth opportunities.

Adjusting the brand portfolio to follow demographic shifts and altering consumer preferences will also be a key component. Existing brands such as Wonder, Hostess, Home Pride, Dolly Madison, Merita and Drake's will be extended to include low-carb variants such as Home Pride Carb Action, while on the sweet baked goods side, the company has introduced the new Caramel HoHos nationwide in February and is giving greater emphasis to more seasonally theme-based products, as well as offering consumers added value through bonus pack promotions.

It has also discontinued certain bakery assets amounting to approximately $5 million.