THOMASVILLE, GA. — Categories adjacent to the company’s core fresh baking business are where Flowers is keeping its eyes open for acquisition opportunities, said Allen L. Shiver, president and chief executive officer of Flowers Foods, Inc.
|Allen Shiver, president and c.e.o. of Flowers Foods
“There are significant opportunities for this company as we look at adjacent categories,” he said. “The perimeter of the supermarkets is where a lot of the sales action is taking place. We have the opportunity, both on the cake side and on the fresh bread and roll side, to expand into different product segments that may come through an acquisition. It may come from developing internally, but there are significant opportunities looking at adjacent categories to continue to grow this company.”
With the company’s Project Centennial restructuring program moving toward its culmination, Mr. Shiver in an Aug. 10 conference call offered a deeper glimpse into how the future Flowers Foods will be reshaped.
“The world is rapidly changing, and Flowers is changing as well,” Mr. Shiver said.
Flowers' net income in the second quarter was $44,740,000, or 21c per share on the common stock, down 13% from $51,155,000, or 24c per share, in the second quarter of 2016. Sales were $926,639,000, down 0.9% from $935,025,000. Adjusted net income was down 8%.
Struggles with the cake business were a large part of the second-quarter weakness (Flowers actually gained market share in the bread category during the quarter). While tacitly acknowledging Hostess success in building snack cake market share at the expense of competitors, Mr. Shiver said Flowers needs to invest more in its brands, something that will be made possible by cost savings from Project Centennial.
“Our cake share has been under pressure for the past several quarters,” he said. “This is due in part to competitiveness in the market. But we’ve also seen losses in commodity type products and products that lack brand strength. We’re addressing these issues by improving the manufacturing efficiency of our cake operations and developing products with clear points of difference and consumer appeal.”
The challenges Flowers faces with lagging sales of snack cake underscore the importance of generating the cost savings Project Centennial is expected to provide, Mr. Shiver said.
“If you look in the rearview mirror, we have not been positioned to invest in those brands, those levels that we needed to,” he said. “And that is one of the exciting things about Project Centennial, is that in addition to the savings that would be reinvested back into the business, we’re also investing in our primary brands, and Tastykake is one of our primary brands, at a much higher level than we’ve ever done in the past and through all different forms of media.”
For now, he said Flowers is looking to generate excitement around the Tastykake brand with marketing partnerships and new varieties.
Discussing persistent challenges facing the Alpine Valley organic brand, R. Steve Kinsey, executive vice-president and chief financial officer, said Flowers continues to work to make inroads in the market Alpine seeks to address. He also said the struggles of Alpine don’t nearly negate the successes achieved to date with the company’s other main organic brand — Dave’s Killer Bread.
|R. Steve Kinsey, executive vice-president and c.f.o. of Flowers Foods
“Alpine is still an important long-term portfolio role and allowing Flowers to reach consumers taking organic bread outside the traditional bread aisle, on the perimeter, the store bakery and the freezer case,” he said. “At the bottom line, our organic business is performing above expectations. The investments we’ve made at organic production capacity have yielded very strong returns.”
Mr. Shiver, too, spoke to the continuing success of Dave’s Killer Bread, citing it as a case study for the potential of adjacencies for Flowers.
“Consumer interest in fresh organic bread is strong, and D.K.B. is a growth driver in our portfolio,” he said. “It’s been a year since we introduced D.K.B. to our direct-store delivery network, and we continue to see growing units per store and steady distribution gains.”
He noted the introduction during the quarter of new D.K.B. products targeted for breakfast — three bagel varieties and a cinnamon raisin bread. The move shows significant areas of still untapped potential for Flowers, Mr. Shiver said. At the same time, he said, these opportunities do not necessarily fully negate the continuing weakness in the bread category.
“With this introduction, we’re focused on growing our share of the almost $2 billion breakfast segment, which for us, is an undeveloped area of the category,” he said. “This underlines the potential to expand into other segments for the category with the D.K.B. brand. Still, we are realistic about the current marketplace as we’re seeing across the packaged foods category, overall consumption in the bakery category is down. This is putting pressure on volumes, and our revised guidance reflects this reality. As a result, we are increasing the urgency of our cost-cutting efforts and our focus on product innovation. Our target is to deliver net EBITDA margin expansion of at least 250 basis points by 2021.”
Built on the company’s 2016 sales base of about $3.9 billion, Mr. Shiver said Flowers is targeting $100 million of annualized savings.
While Flowers has yet to unveil its post-Project Centennial business structure, Mr. Shiver identified elements that will be changing. He described a siloed approach to the snack cake market that will be eliminated.
“The way we go to market with cake was basically by distribution method — warehouse and D.S.D.," he said. “I think one important aspect of the new structure is moving to the business unit structure. It will allow us to combine how we look at our cake business. So that focus will change dramatically, and we’ll talk more about that in September at the Investor Day.”
In May, the company said it would be transitioning from its D.S.D./Warehouse structure into two business units: Fresh Bakery and Specialty/Snacking.
Asked by an analyst about the pace at which change is being implemented at Flowers, Mr. Shiver said he too is anxious to move forward. In responding, he offered perhaps the strongest signal yet that Flowers will be moving away from its regional management structure.
“I’m also very impatient,” he said. “But I also realize the magnitude and the scope of the changes that we’re about to implement. This company is almost 100 years old. We’ve had a regional structure in place for a long time. And for example, the organizational changes that we’re making, they affect many individuals. And we’ve got to make sure that we make the right decisions, and we don’t get in a hurry with really important decisions like organizational structures as well as many others. But at the same time, I do feel an urgency with a soft marketplace. I do feel significant urgency to accelerate our cost reduction schedule.”
He said Project Centennial could be viewed as a two-sided initiative.
“The first side is cost reduction, and the other side is reinvesting in our brands and the business,” he said. “Today, at this point in time, our team has a laser-focus on cost reduction. That is absolutely first. That is our priority, and we are going to make sure that we do a great job there and accomplish the targets that we have set forth. The other side is, again, just as important. But from a timing standpoint, will be slightly later as our marketing reinvestment that we have been talking about.”
At several points during the call, Mr. Shiver stepped back from robustly offering details about Project Centennial, ahead of the presentation set for late September.
“But from an overall focus standpoint, everything that we can accelerate without jeopardizing the decisions that would impact this company for the long term, we’re focused on accelerating those decisions. There’s a tremendous feel of urgency. But at the same time, we want to make decisions that prepare this company for the next hundred years.”
Despite a spike during the summer in wheat prices, bread prices have not moved much, Mr. Kinsey said. In the past, prices moved higher with wheat prices, he said.
Asked later in the call about pricing, Mr. Kinsey reiterated that “We’re not seeing much change in the market at this point.”
He continued, “But if you look at our history, Flowers has been the price leader, and in markets where our brands are strong and we have the right to price, we will continue to be the price leader. And again, we talked earlier about brands with a real meaningful point of difference, and that also helps you get the overall pricing and margins where they need to be.”
While supportive of Mr. Kinsey’s remarks, Mr. Shiver noted that Flowers’ ability to adjust prices varies considerably from market to market, especially in areas where pricing is more competitive.
“We understand that we must be competitive certainly in those markets that are expansion in nature,” he said. “We are focused on pricing. But to me, the long-term solution in this category is, again, developing brands like Dave’s Killer Bread, that has a meaningful point of difference with the consumer that can generate and demand a better price. That’s exactly what we’re focused on with other segments.”
Part of spending more wisely will include more effective promotional expenditure, Mr. Kinsey said.
“We’re implementing new technologies to help us manage trade spend better within the category,” he said. “The goal is to have that up and running for 2018. So we’re all working pretty diligently on that. And the project is moving forward.”
Mr. Kinsey discussed expenses associated with Project Centennial, projecting 2017 expenses to be in the range of $35 million to $40 million, $10 million more than projected earlier.“The higher cost is primarily attributable to investments and overall capabilities, including technology investments for several initiatives,” he said. “We expect the level of support to drop as we move to the back half of 2017 and fall off substantially in 2018. Year-to-date, we have spent approximately $25 million with regard to the project.”