No need for litigation reserve seen presently at Flowers Foods

by Josh Sosland
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Flowers Foods products
Despite challenges, Flowers' c.e.o. said he sees plenty of growth potential for the company's portfolio.

BOSTON — In the face of numerous lawsuits the company is vigorously contesting, establishing a reserve to cover potential settlements or judgments is not appropriate at the present time, said Allen L. Shiver, president and chief executive officer, Flowers Foods, Inc., Thomasville, Ga.

Mr. Shiver touched upon the company’s legal challenges as part of a brief corporate update delivered Sept. 7 during the Barclays Global Consumer Staples Conference in Boston. Mr. Shiver said the decision over whether to establish such a reserve has not been made lightly.

Allen Shiver, Flowers Foods
Allen L. Shiver, president and c.e.o. of Flowers Foods

“Let me stress that we also consider our fiduciary duties and our financial reporting to be of the utmost importance,” Mr. Shiver said. “We have carefully evaluated the proper accounting treatment of our legal situation. Based on this review, we have determined that at this time booking a reserve is not appropriate, given the current facts and circumstances.”

Mr. Shiver told the conference there isn’t much to say about a recent investigation launched by the Department of Labor in connection with the company’s system of independent distributors. In lawsuits filed against Flowers over the last few years, plaintiffs have alleged the distributors should be treated as employees.

“Like many other companies operating independent contractor models, our model has come under recent scrutiny,” Mr. Shiver said. “To that end, we are cooperating with the Department of Labor in its review. Because that process is confidential, there is nothing more we can disclose.

Flowers Foods Nature's Own truck
Mr. Shiver said there isn’t much to say about a recent investigation launched by the Department of Labor in connection with the company’s system of independent distributors.

“Additionally, as many of you are aware, there is pending litigation. We believe that the lawsuits have no merit, and we are vigorously defending ourselves against them.”

The majority of Mr. Shiver’s presentation was devoted to offering an overview of the baking market and how the company is responding to current challenges it faces.

Flowers participates in what Mr. Shiver characterized as a vast market, estimated at $31 billion annually in retail and food service. The fact Flowers has grown to become the second largest U.S. baking company has not foreclosed the company from further expansion, he said.

“We believe we have significant opportunities in this category to grow share in underdeveloped geographies and market segments,” he said. “Of that $31 billion, retail sales of fresh packaged bread, commercial cake and tortillas are approximately $24 billion, while the food service bread and roll category is roughly $7 billion. Demand for fresh bread is stable. Sandwiches remain an important part of the American diet. For retailers, the category is key, being the third largest in grocery sales and second largest category in profit.”

Dave's Killer Bread, Flowers Foods
Dave’s Killer Bread, which Flowers acquired in 2015, is now available at 9,000 new store locations nationwide.

The organic bread market represents perhaps the most promising growth channel for Flowers, and Mr. Shiver said Dave’s Killer Bread, acquired in 2015, is now available at 9,000 new store locations nationwide.

“The early trial-and-repeat statistics have been very encouraging, as has the support we’ve received from retailers,” Mr. Shiver said.

More traditional bread lines at Flowers have not experienced growth, Mr. Shiver said. He estimated Flowers’ share of the packaged bread category at 14.9%.

“For the past three years, the fresh packaged breads category has been flat, and that has dampened our top-line growth,” he said. “Recognizing this, we are refocusing on our core markets and product lines and carefully evaluating opportunities to gain share and improve results. We are increasing share in faster-growing segments of the category, as well as building our presence in underdeveloped markets. By these actions, we are working to make our business more diversified and predictable.”

Flowers Foods bread brands - Nature's Own, Wonder, Sunbeam
More traditional bread lines at Flowers have not experienced growth.

The effects of the weak bread market on Flowers were discussed by R. Steve Kinsey, executive vice-president and chief financial officer.

R. Steve Kinsey, Flowers Foods
R. Steve Kinsey, executive vice-president and c.f.o. of Flowers

“Our core markets have been weaker than expected, which put pressure on our overall margins,” he said. As a result, year-to-date earnings are down slightly from a year ago.

“Right now, our primary objective is to grow earnings by improving operations to increase margins and cash flow,” Mr. Shiver said. “To that end, we have identified specific opportunities to reduce cost and improve productivity.”

Touching briefly on Project Centennial, an operations review and potential restructuring program aimed at helping Flowers reach its EBITDA profit margin targets, Mr. Shiver added an area drawing attention at the company.

“We are also taking a comprehensive look at our brand portfolio and other competitive strengths to identify additional growth drivers,” he said. “We are currently in the diagnostic phase, and we will provide updates as the project moves forward.”
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