AdvancePierre: Sandwich star

by Josh Sosland
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Sandwich star, AdvancePierre Foods
At AdvancePierre Foods, a publicly traded $1.6 billion business, sandwiches hold center stage.

CINCINNATI — Over the last several years, AdvancePierre Foods gradually and quietly has grown to become a major player in the frozen sandwich market. Now producing more than 600 million sandwiches each year, highly profitable and having completed an initial public offering, the company has stepped into the spotlight.

Shares of AdvancePierre have clung tight to gains scored after a July 15 i.p.o. initially was priced at $21 per share. In New York Stock Exchange trading, the company’s stock price has hovered between $23 and $24 per share, about 15% above the offering price.

The positive investor reception marks a dramatic turnaround for the company. Oaktree Capital Management L.P. acquired Pierre Foods during the 2008 recession out of bankruptcy. Two years later, Oaktree merged Pierre with Advance Foods Co. and Advance Brands L.L.C. to form AdvancePierre.

Included in the stock offering were 18,600,000 shares of common stock, sizing the offering at $390 million. The offering included 11,090,000 shares sold by the company and 7,510,000 shares sold by existing shareholders. The latter group granted underwriters a 30-day option to purchase 2,790,000 additional shares of stock. Proceeds from the offering are to be used to repay debt.

With the i.p.o. completed, funds managed by Oaktree Capital Management, L.P., continue to own a majority of the AdvancePierre common stock. Of 78,586,202 shares to be outstanding after the offering, 60% will be owned by Oaktree funds (57% if underwriters exercise their full option).

Details about the company’s business were offered in a prospectus filed with the Securities and Exchange Commission in advance of the i.p.o. 
AdvancePierre is a maker and distributor of ready-to-eat sandwiches, sandwich components and other entrees and snacks. The company holds the No. 1 or No. 2 market share positions in nearly all its product categories. It sells about 2,600 stock-keeping units targeted toward all day parts in three principal product categories:

1. Ready-to-eat sandwiches, including breakfast sandwiches, peanut butter and jelly sandwiches and hamburgers

2. Sandwich components, such as fully-cooked hamburger and chicken patties and Philly steaks

3. Other entrees and snacks, including country fried steak, stuffed entrees, chicken tenders and cinnamon dough bites.

Products are shipped frozen to customers and sold under the company’s brands as well as private label.

In its prospectus, the company promoted its vertical integration as a competitive advantage, allowing the company to add value and bolster margins.

“Our value-added processes include recipe formulation, pre-preparation by chopping, breading, seasoning and marinating, food preparation by baking, charring, frying and grilling, assembly and packaging,” the company said.

A measure of stability of the AdvancePierre business, the company sells to more than 3,000 customers with an average relationship tenure of 20 years with its largest 20 customers. The company described its business model as a “customer-centric” approach, rooted in research and development.

The company’s three core customer groups are food service, retail and convenience. Historically, the industrial channel was a target as well, but AdvancePierre has been winding down this business, which had been less profitable.

The Foodservice segment is the company’s largest, accounting for 55% of sales.

While the company has undergone great change in recent years, the companies forming AdvancePierre Foods in 2010 — Pierre Foods, Inc.; Advance Food Company, Inc.; and Advance Brands, L.L.C. — have roots dating back considerably further. The oldest of the three, Pierre Foods, Inc., was established in 1946 in Cincinnati and was a leading player in the market for handheld sandwiches and other value-added meals and snacks supplied to food service, retail and convenience channels. Advance Foods was established in 1973 in Enid, Okla., and produced and marketed a range of value-added, portion controlled and ready-to-service products to food service customers. Advance Brands, L.L.C. was formed in 2001 and produced chicken and beef products for the retail channel.

AdvancePierre has grown in recent years in part through acquisitions — Barber Foods, L.L.C., in June 2011, a maker of stuffed entrees, specializing in chicken-based products; Landshire, Inc., in January 2015, which gave AdvancePierre a presence in sliced meat sandwiches and added baking and assembly capabilities; and Better Bakery, L.L.C., in April 2015, expanding the company into stuffed sandwiches. The company called the latter market “one of the largest ready-to-eat sandwich categories.” The three companies contributed $166 million to fiscal 2015 net sales.

AdvancePierre’s prospectus describes the hiring in 2013 of John Simons as president and chief executive officer as transformational for the management structure of the business. Nearly all of the company’s executive management have been with AdvancePierre for four years or fewer.

“This new team has revamped our cost structure, budgeting tools and pricing methodology by implementing a continuous improvement program that we call the ‘APF Way,’” the company said.

The APF Way is defined using a data-driven analytical framework to drive growth and profits through better decision making, excellence in sales and marketing and productivity in procurement, logistics and production.

The prospectus credits the APF Way with reducing the company’s cost structure by “executing on productivity initiatives and re-aligning trade promotion allowances,” resulting in major cost savings. The company has invested in new systems and processes that help generate productivity savings and helping manage margins and profitability.

Demonstrating the benefits, the prospectus noted the company’s EBITDA margin widened to 16.1% in fiscal 2015 from 10.9% two years earlier, despite significantly higher raw material costs.

Profits at AdvancePierre have been growing rapidly. Net income in the first quarter ended April 2 totaled $16.6 million, up 58% from $10.5 million in the first quarter of 2015. In the year ended Dec. 31, 2015, net income was $37.1 million, versus a loss of $37.9 million in 2015. Adjusted EBITDA was $213.3 million in 2015, $134.1 million in 2014 and $111.2 million in 2013. Net sales were $1,611.6 million in fiscal 2015, up from $1,577.6 million in 2014 and $1,492 million in 2013.

Dean Hollis is chairman of the AdvancePierre Board. A senior adviser for Oaktree, Mr. Hollis spent 21 years at ConAgra Foods, Inc., most recently as president and chief operating officer of the Consumer Foods Division.

Sales in food service, estimated to be a $232 billion annual business, are made to leading national and regional distributors, who sell AdvancePierre products to restaurants, schools, health care providers, the U.S. military, hospitality providers and grocery deli counters. The company also sells directly to 89 of the largest 100 school districts in the United States and many national restaurant chains.

AdvancePierre’s two largest customers both are distributors.

“Our top 10 customers accounted for 53.4% of our net sales (in 2015), with our two largest customers, Sysco Corp. and US Foods, Inc., accounting for 13.6% and 12%, respectively, of our net sales in fiscal 2015,” AdvancePierre said. The two companies source more than 1,800 s.k.u.s from the company’s portfolio, the prospectus said.

The retail market for ready-to-eat sandwiches, estimated at $4.1 billion in 2015 with a 5.3% annual growth rate since 2010, is focused on frozen and refrigerated handheld sandwiches. Customers include national and regional grocery chains, warehouse club stores, mass retailers and dollar stores. Branded products, sold under the Barber, Pierre and Fast Fixin’ retail brands, account for 69% of retail sales, with private label and licensed brands accounting for the balance.

For convenience stores, a $42 billion market (food sales) with an 8% annual growth rate, ready-to-eat sandwiches dominate the business. The company sells products under brands such as Big AZ. Branded sales account for 78% of Convenience sales, which extend to vending customers as well.

While consumer tastes and preferences may be rapidly changing, AdvancePierre said it is well situated.

“The food industry today is characterized by rapidly changing menus and evolving consumer taste profiles,” the prospectus said. “In this environment, our customers value our ability to co-create new products with flavor profiles that differentiate their offerings and successfully commercialize new products with speed and efficiency. We launched 543 new s.k.u.s in the last three years, accounting for 12.7% of our net sales in fiscal 2015.”

The company operates 10 production facilities around the United States, including two integrated baking facilities that allow the company to source about 60% of its bread in-house (excluding the bread used for its peanut butter and jelly sandwiches), enhancing margins, AdvancePierre said.

The two baking and sandwich assembly plants are located in Caseyville, Ill., and Easley, S.C. Four food processing plants are in Enid, Okla., one is in West Chester, Ohio, and one is in Portland, Maine. The company’s two remaining plants are sandwich assembly facilities in Amherst, Ohio, and Claremont, N.C. AdvancePierre has about 4,000 employees.

Among risk factors identified in the filing for prospective shareholders, the company noted that even after the i.p.o, Oaktree funds will own 57% to 60% of the AdvancePierre outstanding stock, down from 80%.

“Oaktree may have interests that do not align with the interests of our other stockholders, including with regard to pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to our other shareholders,” the filing said. The company said Oaktree will have effective control over AdvancePierre decisions to enter into corporate transactions, “regardless of whether others believe that the transaction is in the company’s best interests.”

In the prospectus, the company estimated post-i.p.o. debt at $1,092.1 million, down from $1,271.5 million before the offering.

Going forward, the company believes it is well positioned for growth, holding a 64% market share in the c-store breakfast sandwich market and as the largest private label breakfast sandwich supplier in the retail channel, with a 56% share.

“We believe we have multiple growth opportunities across our core segments,” the company said. “In Foodservice, we plan to expand distribution of our products to new customers, such as coffee shops, theaters, grocery deli counters and hospitality providers. In Retail, in addition to growing our sandwich business, we are launching product extensions for Barber Foods and Better Bakery and expanding distribution within rapidly growing dollar stores. In Convenience, we are expanding our breakfast product portfolio and launching Better Bakery products.

“We are expanding our lineup of products to take advantage of recent consumer trends. We have successfully launched snacking-oriented products, such as crispy sausage snacks, peanut butter and jelly snack bars and cinnamon dough bites and better-for-you products, such as antibiotic, hormone-free fully-cooked burgers.”

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