Flowers Foods blossoming

by Josh Sosland
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Having acquired most of the bread assets of Hostess Brands in 2013, Flowers Foods, Inc. is well positioned for profitable growth in the future, top executives of the company recently said. At the same time, they cautioned that it may be late in 2014 when the benefits of its dramatic recent expansion become more fully evident in the company’s financial results.

A thorough look at Flowers and its prospects was presented March 20 at the company’s annual analysts event at the New York Stock Exchange. The presentation came not long after Flowers released results for 2013, a period that ended on a soft note. The company’s earnings were flat in the fourth quarter. Factors pressuring earnings included challenges with the company’s tortilla business and millions of dollars of carrying costs associated with idle Hostess plants Flowers had acquired but had yet to begin operating.

Questions about prospects for profitability at the company have weighed on Flowers’ shares. While Flowers’ stock has delivered a total return of 107% since 2009, shares have lagged more recently. As of April 1, Flowers shares were trading about 17% beneath the company’s 52-week high, compared with the S.&P.500, trading within 1% of its high.

Allen L. Shiver, president and chief executive officer, told the analysts that while the company has moved toward normalcy after scrambling to meet an unprecedented surge in demand last year, patience will be required in the coming months. Overall, the company is projecting earnings per share of 98c to $1.05 in 2014, up from an adjusted 91c in 2013.

“Looking at the short term, I’m pleased to report that the issues that impacted the back half of results in 2013 are improving,” Mr. Shiver told the analysts. “From the medium term view, we provided 2014 guidance in our February call. It’s important to realize that our first half last year was incredibly strong from a sales and an earnings standpoint. Remember, we were not carrying any of the costs of the Hostess assets at that point. Actually, we gained volume and benefited before the actual purchase of Hostess in mid-2013. Our first half comps are challenging. We believe the back half of 2014 will be strong, driven by improved fundamentals and the momentum we are generating in our new markets.”

Mr. Shiver said the company was making progress in restoring its tortilla operation to profitability. Flowers acquired the Fort Worth, Texas-based tortilla business, Leo’s Foods, in 2009. Problems with the business cost the company 2c a share in the second half of 2013, a drag Mr. Shiver said should be eliminated going forward.

He also cited steps the company was taking to integrate systems of Lepage Bakeries, acquired in 2012.

“We’ve been working to integrate the best attributes of their order forecast system into our SAP system,” he said. “We are making progress with this integration and expect continued improvements in the latter part of Q1.”

Nuts and bolts

Much of the discussion during the two-hour analysts meeting related to efforts to restore manufacturing efficiencies to optimal levels at the Flowers plants.

“Our significant volume increase in 2013 caused efficiency levels to drop from our historic highs with the most significant drop coming in the back half,” Mr. Shiver said. “Our team has been focused on every aspect of this, and I can tell you that their experience and expertise has resulted in efficiency year to date in 2014 of 92.1%, or almost a 300 basis point improvement from the third quarter of 2013. We’re well on our way of regaining our high of 94%.”

He noted that bread lines have been added in the past year in Oxford, Pa., and Modesto, Calif. The reopening of a Henderson, Nev., baking plant acquired from Hostess also was to handle increased volume “we were dealing with last year.”

The increased volume was not just about the Hostess business. Months before bidding on the Hostess bread assets, Flowers in October 2012 agreed to acquire baking assets in California from Grupo Bimbo S.A.B. de C.V., giving Flowers the Sara Lee brand in the nation’s largest state by population.

Growth experienced by the company has not been limited to new markets, said Bradley K. Alexander, president of Flowers Bakeries.

“One of the reasons for (reopening the Hostess plant at) Knoxville (Tenn.) is that we have been very tight on capacity in that part of the country,” Mr. Alexander said. “Our share, which is a core market for us, grew tremendously. Merita brand in that market was a very, very strong brand. To get to the efficiencies we want of 93, 94, 95 we need to take some pressure off four or five plants in that area that have been baking product and shipping it in.

“We will reduce costs of shipping and have fresher product in the market as well as gain some efficiencies all over. It was a great plant, one of the better plants. We’re busy behind the scenes getting the plant ready.“

Changing market dynamics

More broadly in the marketplace, Flowers is positioned much more strongly in early 2014 than before the November 2012 Hostess bankruptcy, Mr. Shiver said. Since that time, the company’s share of the bread market has climbed to 14% from 10.7%.

“That positions Flowers Foods as a strong No. 2,” Mr. Shiver said.

The company has reached its position following a decade of dramatic consolidation across the wholesale baking industry, he said.

“As is the case with other consumer goods companies, consolidation of a number of the larger players has also taken place,” he said. “Mostly in the last decade. Today there are three large
baking companies. There are 10 to 12 large regional baking companies, and there are more than 70 or so specialty bakers.”

He said the company’s share of the cake market also ranks it at second. Its share has grown to 7% in 2014, Mr. Shiver said.

Having already achieved many long-term goals established by the company for sales growth (5% to 10% per year), EBITDA margins (11% to 13%) and geographic reach (75% of the U.S. population), Mr. Shiver said new goals were being set for the company’s direct-store delivery business, adding additional benchmarks for success.

“We are setting long-term goals for market share in bread and cake and the total market captured by I.R.I. (Information Resources, Inc.) for Flowers to reach a 20 share of bread and rolls and a 12 share of snack cake in the total U.S.,” he said. “Our market share growth will be enhanced by growth in market share channels not captured by I.R.I. as well as growth in food service and through acquisitions. Today we are keeping our goal for EBITDA margins of at least 11% to 13%. In the future, as we reduce carrying cost of acquisition and we see improvement in the economy, we believe we can achieve even higher margin with time. Our goal to deliver double-digit earnings-per-share growth over the long term remains in place.”

Commenting on the commodity outlook and its impact on financial results, R. Steve Kinsey, executive vice-president and chief financial officer, was upbeat.

“As we look at the year, we are sticking to our strategy of four to seven months (of coverage),” he said. “We are on the long end of that slightly. We feel good about our coverage for this year. There are still a few things open.

“If you watch the markets closely, the (wheat) basis is pretty elevated. We are starting to see that move slightly, but as we look out to the back half, we are still working on that coverage. There is some risk there, but we actually feel pretty good about seeing it pull back slightly.“
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