The good news for Canadian-based George Weston Limited is that its U.S. baking operations recorded volume increases for the second quarter ended June 19. The bad news is that weaknesses in cookies and sweet goods, as well as inflationary cost pressures, have bogged down the division's operating income.

For the second quarter, the company reported operating income of $44 million, a 62.4% decrease compared to last year. The company's operating margin also suffered, falling to 4.3% from 10.9% in 2003.

Although the negative impacts of foreign currency translation and higher stock-based compensation costs weighed heavily on the company's operating income, the most significant impact came from rising costs.

According to the company, new product launches in the first half of 2004 have led to higher ingredient, production, waste and promotional costs. Compounding these rising costs is the lack of success for some of these new product launches. For example, out of the company's six new lower-carbohydrate Entenmann's products, only two remain on store shelves.

To reduce costs across its business, the company is enacting price increases where applicable, and taking aggressive steps to reduce costs and better align capacity. As part of this strategy, the company closed its Northlake, Ill., facility, which produced Entenmann's products.

Moving forward, Gary Prince, Weston Foods U.S.'s president, said the company continues to analyze each facility and its competitive advantages. Prince also said that the plan to build three plants was being put on hold. "We are adjusting capacity to our core business and will continue to do that," Prince said. "We are delaying new bakeries until we have clear visibility over the next six to eight months."

Surprisingly, strong bread results were the main positive for Weston Foods U.S. in the second quarter. The company's bread sales increased 8%, led by a 17% increase in premium products. However, these gains were overshadowed by the company's cookie and sweet good business. Besides the failure of lower-carbohydrate Entenmann's products, the company said it also has seen weakening in its "knife and fork" sweet goods, which includes Entenmann's products designed to eat at home.

Although this aspect of the sweet goods business is down, the company said its single-serve cake items were performing very strongly.