Shiver emphatically upbeat about Flowers cake outlook

by Josh Sosland
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THOMASVILLE, GA. — Looking beyond current challenges in the snack cake business, the top executive of Flowers Foods, Inc. has “never been more optimistic” about growth prospects for the company’s Tastykake brand.

Allen L. Shiver, president and chief executive officer of Flowers, discussed the snack cake business and its prospects during a Nov. 12 conference call with investment analysts in connection with Flowers’ third-quarter financial results.

As previously reported, net income of Flowers Foods in the third quarter ended Oct. 4 was $44.4 million, equal to 21c per share on the common stock, up 16% from $38.4 million, or 18c per share, in the third quarter of 2013. Net sales were $849.4 million, down 3.3% from $878.5 million.

Mr. Shiver’s optimistic outlook for the cake business was offered after a quarter in which Flowers cake sales were down 8.3%, including a decline of about 7% in the company’s direct-store delivery business and 10% in the company’s warehouse business.

“Hostess cake continues to gain share, particularly in the warehouse segment,” Mr. Shiver said.

Because Hostess returned to the market in July 2013 and was staged back into the market in the months that followed, Mr. Shiver suggested associated year-to-year declines are likely to diminish as the reentry period is lapped.

Further explaining his perspective, Mr. Shiver identified a number of paths toward growth for Flowers in cake.

“We continue to invest in improved packaging,” he said. “We’re developing new items. We’re very bullish on growing our cake business over the long haul. There are areas of the United States where we do not have D.S.D. distribution that offer opportunities for expanding our cake business.”

Additionally, Mr. Shiver said the company already has seen evidence that Flowers’ D.S.D. network offers competitive advantages producing results.

“Single-serve Tastykakes are doing exceptionally well,” he said. “It really works well with our independent distributor model, because in many cases there are incremental sales that can certainly help their business as well as ours.”

Similarly he said during the call, “Our D.S.D. network allows us to work directly with store managers to make sure our products are effectively merchandised to attract those important impulse purchases of snack cake.”

Nearer term, the company does not believe a turnaround in its sales and profit growth outlook is imminent. In connection with its earnings announcement, the company lowered sales and earnings guidance for the full 2014 year. Without offering initial guidance for 2015, the company said conditions will remain tough for a while.

“Looking ahead to 2015, we remain cautious about the competitive environment and the impact that has on sales growth,” said R. Steve Kinsey, executive vice-president and chief financial officer. “However as Allen stated, we are very focused on reducing excessive levels of promotional activity, and that should benefit Q4 and 2015.

“Input costs should be down year over year going into next year. And since we have been able to sell some of the Hostess facilities, carrying costs related to the acquired facilities will be lower next year. We will provide specific guidance on our fourth-quarter call in February.”

Mr. Kinsey said Flowers, after the quarter ended Oct. 4, completed the sale of additional Hostess facilities.

“Year-to-date we have sold 3 bakeries and 16 warehouses for roughly $18.4 million in net proceeds,” he said. “Year-to-date carrying costs were approximately $16 million, and now we expect full-year costs to be roughly $20 million to $21 million.”

While optimistic about the wheat futures cost outlook, Mr. Kinsey expressed concern about other aspects of flour costs.

“We definitely have the same view as you do when it comes to basis and freight,” he said, responding to an analyst question. “It seems that there hasn’t been any relief of those components of the flour costs. Now that we’ve actually had some winter weather hit early, and then the forecast to be for strong winter weather again in the North and Midwest, it does give me a little concern from a freight and basis perspective.”

Focusing on strengths in the company’s most recent financial results, including the double-digit gain in net income, Mr. Shiver said, “Our team focused on profitability.”

“Competitors are relying heavily on price promotion to drive volume to their brands,” he said. “Last quarter we discussed our intent to realize the more normalized level of promotions by quarter 4 of this year.”

After a period in which considerable management focus was devoted to newly acquired brands like Wonder and new geographic markets, Mr. Shiver said the company’s established brands like Nature’s Own are receiving greater management attention.

New product development in bread is led by, but not limited to, Cobblestone Bread Company, he said.

“Retailers continue to support this new brand with incremental shelf space, and we are seeing encouraging trial and repeat purchase statistics that are supported by growing sales figures,” Mr. Shiver said. “In addition to Cobblestone Bread Company, we are working on other new product opportunities within our existing bread and cake brands.”

Asked to elaborate on other new product prospects, Mr. Shiver said specific segments of the bread market appear ripe with opportunity.

“Obviously the specialty bread category is underdeveloped, and also our breakfast category is underdeveloped,” he said. “Those really underline big opportunities for Flowers…  We continue to do extensive research so that we better understand the consumer, both in the breakfast category and the specialty bread category. Those will be segments of the market that we will be looking at as far as our long-term growth.”
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