BOSTON — For many years, Flowers Foods, Inc. has described the importance of gradually adding production capacity to enable the company’s strategy of geographic expansion.
In a presentation this week at the Barclays Back to School Conference in Boston, top Flowers executives said the company’s acquisition of 20 Hostess Brands plants at bargain basement prices will provide extraordinary advantages as the company moves into new geography.
While continuing to acknowledge that ownership of nearly two dozen shuttered plants remains a drag on earnings, Allen L. Shiver, Flowers chief executive officer, highlighted another perspective.
“These acquired facilities also give us a cost advantage as we need capacity,” Mr. Shiver said. “A new greenfield bakery would cost in excess of $65 million. With the acquired facilities, we can bring on additional capacity with less capital at risk. For example, the two most recently opened bakeries, Henderson, Nev., and Knoxville, Tenn., cost approximately one-third of their new build replacement value, including initial investment.”
Mr. Shiver said the Flowers direct-store delivery network currently reaches 81% of the U.S. population, versus a three- to five-year objective of 90%. He said the company is hopeful to achieve share gains in its newer markets.
“While we now serve about 81% of the population, our brands hold a single-digit share in about half of those market areas,” he said. “That offers a really good platform for growth as we execute our proven strategy for our expansion markets.”
In a discussion focused principally on how the company will elevate profit margins toward a long-term target of 13% (EBITDA as a percentage of sales), R. Steve Kinsey, executive vice-president and chief financial officer, also highlighted the role the Hostess plants will play. In the near term, he said 25 basis points of margin are lost to carrying costs of the acquired facility — an annual cost of $25million to $27 million. He said about 10 points of margin will be regained when the sale of nine plants, currently listed, is completed.
Hostess plants to be sold include one in Biddeford, Maine.
Like Mr. Shiver, Mr. Kinsey did not restrict his comments to the negatives from the Hostess plant ownership.
“We expect capex for 2014 to range between $95 million and $100 million,” he said. “And in the near term, we expect capex to be below our depreciation. We anticipate excellent returns on our capital expenditures in the future. Being able to bring capacity on-line as needed at a fraction of the cost of a new build makes very attractive returns.”
In the past, Flowers has cited with pride its willingness to spend significant sums on capital projects viewed as key to maintaining the company’s status as a low-cost producer in the baking industry.In 2009, the company opened a new $57 million bread and bun plant at Bardstown, Ky. Other recent plant additions include new facilities in Denton, Texas, in 2004 and in Newton, N.C., in 2006.