Flowers offers peek into Hostess shutdown mayhem
by Josh Sosland
THOMASVILLE, GA. — The abrupt decision by Hostess Brands, Inc. to cease operations and liquidate “put Hostess retail and food service customers in a tailspin,” said George E. Deese, chairman and chief executive officer of Flowers Foods, Inc.
In a Feb. 7 conference call with investment analysts, Mr. Deese commented on the Hostess liquidation and how Flowers responded to the shortage of baked foods in the marketplace. The conference call was held in connection with the release of the company’s fourth-quarter and full-year financial results for 2012.
“It is an understatement to say that these are interesting times for Flowers Foods and for the baking industry,” Mr. Deese said. Still, Mr. Deese and other Flowers executives warned that for legal and competitive reasons they would be unable to comment on many developments currently unfolding for the company.
Flowers was able to benefit in the fourth quarter from the departure of Hostess in mid-November, company executives said.
“To fill the void, Flowers team members and our distribution partners did an absolutely amazing job of serving customers in the wake of this market disruption,” Mr. Deese said.
Expanding on what transpired, Allen L. Shiver, president, said the timing of the shutdown heightened the challenge facing bakers and customers.
“As a reminder, that was the Friday before Thanksgiving, the start of one of the busiest weeks in the year for our customers,” he said. “It is not a time when customers can afford to have empty bakery shelves.
“The efforts of our team members across every department and every location were simply extraordinary as we worked overnight to increase production levels and provide the additional service to take care of our customers.”
In response to a question from an analyst, Mr. Shiver said the Hostess situation has translated into new customers for Flowers.
“We did see quite a few additional new customers come on line in the fourth quarter,” he said. “I would say that continues, but not at the rate that we saw in the fourth quarter.”
Based on early 2013 data, Mr. Shiver called the company’s sales picture “encouraging” with a “rate of growth (that) is continuing, and in some areas, accelerating.”
Noting Flowers has been named the stalking horse bidder for certain Hostess assets, Mr. Deese said he was not able to shed much light on what will transpire.
“We cannot speculate on the possible outcome of the auction scheduled for Feb. 28,” he said. “It is important to remember that any transaction resulting from the auction will be subject to regulatory approval.”
While Mr. Deese and other Flowers executives restated that the company was not yet prepared to issue sales and earnings guidance for 2013, they were very willing to offer insights about the direction financial results are headed in the new year.
“We expect the year’s results to meet or exceed our long-term goals,” Mr. Deese said.
Steve Kinsey, executive vice-president and chief financial officer, said the company would be more willing to offer guidance “pending more clarity on the Hostess and B.B.U. (Bimbo Bakeries USA) transactions.”
“As he (George Deese) also said, 2013 has started strong, and we continue to see the same strong trend we saw at the end of 2012,” Mr. Kinsey continued. “We do believe we will meet or exceed our stated long-term guidance of 5% to 10% annual sales growth, with double-digit earnings increase, excluding any one-time acquisition-related costs in 2013.”
Mr. Deese and Mr. Shiver briefly addressed the Flowers pending expansion in California with the acquisition of the Sara Lee and Earthgrains brands from Grupo Bimbo S.A.B. de C.V. He noted that Bimbo has filed a motion to suspend the transaction.
“The hearing on this matter is set for Feb. 13,” he said. “Beyond that, we cannot comment.”
Without elaborating on the court proceedings, Mr. Shiver said Flowers was poised to move ahead.
“Our California team has been gearing up for the integration, which is scheduled to begin later this month,” he said. “It has taken a tremendous amount of work to reorganize our distribution system, add new team members and coordinate plans with our trade customers. The good news is that we are ready to go live when the transaction is completed, subject to the court’s decision on Feb. 13.”
Commenting on other developments in Flowers’ baking business, Mr. Shiver said the company’s branded sales continue to outperform the market while noting that scanner data continue to show overall bread sales remaining in a slow downward trend of about 1% per year.
In Pennsylvania, one of the company’s newer markets, Flowers “is making good progress,” Mr. Shiver said. The addition of Tastykake and Nature’s Own in the Northeast has generated excitement there, and Tastykake continues to “gain traction” in core Flowers market, he added.
Updating analysts on price hikes the company announced after issuing third-quarter financial results, Mr. Shiver said higher pricing has been put into effect and “had been accepted throughout the market.” He called the level of promotional spending in the market “somewhat lower.”
A new bread line is being installed at a Flowers plant in Oxford, Pa., with production expected by late spring, Mr. Shiver said.
“That additional capacity will help us serve the growing needs of our newer markets and relieve some tight capacity in our bakers currently serving those markets,” he said. “As we continue to enter new markets and introduce new products and brands, we will need more production capacity.”
Asked by an analyst how Flowers has been able to produce 10% more volume without adding production capacity, Mr. Deese said defining full capacity in baking is not simple. The company’s traditional definition of capacity for a bread or bun line is 120 hours per week, he said.
“As you know, there are 168 hours in a week, so that yields flex,” he said, adding that there is plenty of room between 120 and 168 hours and that Flowers is not at its facilities 168 hours per week. The new volume “really helps the bottom line” and margins, Mr. Deese said.