Flowers makes further headway in bread market

by Josh Sosland
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THOMASVILLE, GA. — Even as difficult comparisons in the company’s cake business pressured earnings at Flowers Foods, Inc., the bread market was abounding with positives for the company, said Allen L. Shiver, president and chief executive officer.

In a conference call with investment analysts May 15, Mr. Shiver said the company has maintained much of its cake market gains from 2013, even after the return of the Hostess snack cakes to the marketplace.

That said, progress the company has made in its bread business on numerous fronts was the principal highlight of the conference call.

As previously reported, net income at Flowers Foods in the first quarter ended April 19 was $61,066,000, equal to 29c per share on the common stock, down 45% from $112,026,000, or 53c per share in the first quarter of 2013. Net sales were $1,159,760,000, up 2.6% from $1,130,810,000 a year earlier.

Excluding a $50.1 million bargain purchase price gain during the year earlier period, net income in the first quarter of 2014 was down 6%.

From a distribution perspective, Mr. Shiver said Flowers made significant progress gaining shelf space for its acquired brands after the first quarter ended.

“I am very pleased to tell you that as of the beginning of quarter two, Wonder, Home Pride, Merita, Butternut brands are available through all of our major retail customers,” he said. “Our new markets achieved growth higher than our stated goal in the quarter. As expected, our acquired brands, along with Nature’s Own and Tastykake, are steadily gaining share in new markets.”

Mr. Shiver’s comments about “all of our major retailers” became more specific when responding to an analyst’s question about how the reintroduction of Wonder and other Hostess brands at Wal-Mart would affect the Flowers business.

“Obviously the largest retailer in the country not having the brands approved until the beginning of the first quarter, that impacted our numbers in the quarter,” Mr. Shiver said. “But now that we are in place, we’re still working through final rack sets, we’re getting really good support with display activity. But because of that approval in additional space, it’s one of the reasons we have confidence in our guidance going forward.”

Despite a number of challenges encountered during the quarter, Flowers saw numerous positives in the bread market, Mr. Shiver said.

“Our market share of total bread, buns and rolls sold in the U.S., as reported by I.R.I., increased in the first quarter compared to the same period last year, gaining 1.3 share points of dollars to a 14.1 share,” he said. “At our analyst day, we told you to expect our market share for bread, buns and rolls to reach a 20 share by 2018.”

The newly acquired brands have helped Flowers as it looks to fulfill its share ambitions.

“If you look at our expansion markets, reintroducing Wonder, Butternut, Merita, the other brands, is helping us grow significantly in our new markets,” Mr. Shiver said. “A couple I’d like to call out, for just exceptional performance. If you look at the I.R.I. data for Kansas City, we’re now up to an 8.2 share; Cincinnati, we’re an 8 share; and in markets like St. Louis, we’re now up to 8.5 share. The new brands in conjunction with Nature’s Own and our Tastykake really are helping to establish our business in these new markets.”

Conceptually, the acquisition of Wonder has been a great positive as Flowers looks to enhance its relationships with customers, Mr. Shiver said.

“The conversation with retailers is very positive,” he said. “Retailers understand in this business that brands in the white bread segment are very important. Brands are important period but especially important in the white bread segment. When you’d have discussions about Wonder — which, again, if there is a national brand of white bread, it would be Wonder — they’re very positive about supporting the brand in their stores.”

He went on to say the success in new markets has continued in the second quarter and that signs are positive with regard to the company’s recently announced new product initiative — Cobblestone Bread Company’s specialty bread and rolls.

Asked about whether Flowers would consider broadening its product mix further beyond bread and cake, Mr. Shiver said the company would not rule out such expansion so long as the products were truly complementary.

“There are some adjacent product categories that lend themselves well to D.S.D. that potentially could be opportunities in the future,” he said. “Tortillas are a good example. We have got a lot to do in terms of developing our branded retail tortilla business, and we’re going to be focusing our D.S.D. team’s attention on that segment. But there are other product categories that at the right point in time that we would consider looking at.”

Yet another plus in bread identified by Mr. Shiver is an indication the category may finally be lifting itself from a lengthy trough.

“We’ve been seeing the entire category trending down for several quarters, and it was encouraging the category is actually up slightly in terms of both dollars and units this past quarter,” he said. “The category was up 1 share point in dollars; and it was up 0.8 in units. Whether it’s sustainable, I would certainly hope so. There’s a lot of activity in the category from an overall health and nutrition standpoint. But we see that as certainly a move in the right direction. Time will tell; but we’re optimistic it’s sustainable.”

One area where results were mixed during the quarter was business with restaurant customers, said Steve Kinsey, executive vice-president and chief financial officer.

“Our food service business was up in dollars during the quarter, driven primarily by pricing,” he said. “Volumes were flat, with fast-food increases offsetting institutional declines. The D.S.D. fast-food and quick-serve channels performed very well during the quarter.”

Updating analysts on the disposition of the Hostess assets, Mr. Shiver said Flowers has just restarted its baking plant in Knoxville, Tenn., bringing to two (with Henderson, Nev.) the number of Hostess baking plants that have resumed operations under Flowers ownership.

Mr. Shiver offered an even longer update on company developments in the California market.

“During the quarter, we also added a high-speed bread line in Modesto, Calif.,” he said “You may recall that we acquired that bakery in July 2013 as we sought a production solution for the Sara Lee California business we acquired from B.B.U. Modesto had an efficient bun and roll operation; now we’ve added a bread production line.”

Asked about D.S.D. routes in California, Mr. Shiver said the company has made considerable progress.

“We now have over 400 routes serving all of the major retailers in California,” he said. “And it’s exciting that now that we control our own destiny from a manufacturing standpoint. Product quality is substantially better. Product is fresher; and our cost structure, as we’re producing our own product, will be better over time. We’re encouraged about the future for California.”

A major improvement in the ingredient cost picture for Flowers may not last, Mr. Kinsey said. He offered deeper detail into the improved gross margins at Flowers during the first quarter and the “downs and ups” of commodity markets. Gross margins in the first quarter were 48.6%, versus 48.2% during the same quarter in 2013.

“This 40-basis-point improvement as a per cent of sales was driven by a 120-basis-point improvement in input costs as a percent of sales,” he said. “This improvement was negatively affected by a 40-basis-point decline as the result of $4 million of carrying costs during the quarter related to the acquired Hostess facilities and another approximately 50-basis-point decline due to higher workforce-related costs.

“What I would say here is recently we have seen a run-up in wheat due to the impact of drier weather and global political instability. We will see the most impact from this run-up in the back half, primarily in our fourth-quarter costs.

However, we are pleased overall with our ingredient coverage for 2014. But we still have a few items open that could negatively impact our results. However, this is all reflected in our 2014 guidance.”
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