Flowers Foods products
Flowers Foods will sustain charges of at least $27 million in the company’s third fiscal quarter in connection with its voluntary separation incentive program.

THOMASVILLE, GA. — Flowers Foods, Inc. will sustain charges of at least $27 million in the company’s third fiscal quarter in connection with its voluntary separation incentive program (VSIP), said R. Steve Kinsey, chief financial officer and chief administrative officer.

In a Sept. 27 presentation to investment analysts at the New York Stock Exchange, Allen L. Shiver, president and chief executive officer, and Mr. Kinsey painted the most complete picture yet of how Flowers Foods will look after a major corporate restructuring. In addition to the reduced management rolls, Mr. Kinsey noted investments the company was making in strengthening its information technology and marketing capabilities.

Mr. Shiver said the company is poised to reduce costs, invest in core brands and capitalize on strategic growth opportunities.

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

“The category is evolving, and we intend to evolve right along with it,” he said. “With Project Centennial, we are focused on driving growth in our core business, capitalizing on adjacencies, reducing costs, and making strategic investments to improve margins and profitably grow the top line over time.”

Part of the cost reduction efforts include the VSIP, first announced in July. The program just recently closed and, together with other initiatives, will result in a net overall headcount reduction of approximately 450 associates, including a 15% reduction in management positions, Mr. Kinsey said.

R. Steve Kinsey, Flowers Foods
R. Steve Kinsey, c.f.o. and chief administrative officer of Flowers Foods

“For team members who are directly impacted by these actions, we are committed to recognizing their contributions, treating them fairly and making their transitions as smooth as possible,” he said. “As the new structure goes into place, we will remove roles that were associated with our previous regional model, and we will add positions that bring new talent and expertise to the Flowers team that we need to thrive in an evolving retail and consumer landscape. For example, as we announced earlier this week we have brought on Harish Ramani, who has experience leading I.T. transformation as our new c.i.o. So, we are very excited about what he brings to our management team and look forward to the accomplishments as we continue to work on adding new technologies and capabilities to the I.T. function. As we previously announced under the new structure, there will be business units responsible for maximizing the long-term earnings power of our brands and business lines. We have created an enhanced marketing function to drive consumer insights, deliver innovation and maximize return on marketing investments. Our sales and supply chain functions will be separated to better clarify responsibilities and accountability.”

Mr. Kinsey said the Flowers decentralized regional operating model has been simplified and streamlined while the finance function will be focused on delivering shareholder value “through insights and advice grounded in data and analytics.”

A new strategy and ventures function will focus on strategic priorities and explore mergers and acquisitions as well as strategic partnerships, Mr. Kinsey said.

“We are anticipating a smooth transition and believe we have a strong management program in place to assure our team understands the magnitude of the changes and most importantly remains focused on day-to-day business,” Mr. Kinsey said.

The transition will continue through 2018, and 2019 will be the first year Flowers reports financial results based on the new operating model.

Later in the session, Mr. Kinsey discussed charges Flowers will take in connection with the VSIP. He also discussed other unusual charges the company will be taking during the third quarter and beyond. He projected VSIP charges of $27 million to $30 million as well as up to $5 million in charges related to the closing of the company’s baking plant in Winston-Salem, N.C.

He also announced a $4 million to $4.5 million settlement had been reached regarding additional independent distributor litigation lawsuits and that Project Centennial costs will total $7.5 million in the quarter.

“Finally, in the third quarter, we also had one of our facilities vote to exit a multiemployer pension plan, and because of the exit and termination of that plan, we expect to recognize a multiemployer pension withdrawal liability of $18 million to $19 million,” he said. “Those employees will be moving into the Flowers Foods 401(k) plan.”

Beyond these charges, Mr. Kinsey said the company was in the midst of trademark impairment analysis. While not yet able to quantify the prospective charges, Mr. Kinsey said the stock-keeping unit rationalization that has come from Project Centennial prompted the analysis.

“Finally, as you know, several years ago, we embarked on an effort to derisk our defined benefit pension plan, which was frozen back in the early 2000s,” Mr. Kinsey said. “Part of that strategy was to allow lump sum distributions on retirement, and there potentially will be a charge related to pension accounting in the third quarter as well. So we’re still working to quantify that.”

Turning to the long-term outlook, Mr. Kinsey said Flowers remains committed to achieving goals for 2019 and beyond.

These include sales growth of 3% to 4% with an objective of outperforming the category through the support of top brands with marketing innovation and “execution in the marketplace,” Mr. Kinsey said.

Through cost reductions and other progress against strategic priorities, the company is targeting 250 points of EBITDA margin improvement and long-term earnings-per-share growth of 8% to 10%.

Asked by an analyst how the company would generate growth of 3% to 4% per year given the difficult sales trends in the recent past, Mr. Shiver said the company will be better positioned after its s.k.u. rationalization and with increased marketing firepower behind the company’s top brands.

“There are still several regions in the company where we’re significantly underdeveloped, and in certain of those regions, there’s going to be some meaningful M.&A.,” Mr. Kinsey added. “Independents still control about a 25% share of the market, so we still believe there will be opportunities to make bolt-on acquisitions. And as we move into adjacencies, other areas of the store or maybe it’s not our expertise, you’re also going to see M.&A. opportunities as well. So that actually give us the ability to hit the 3% to 4% longer term.”

Mr. Shiver added, “In those expansion areas, we mentioned 15.5, 15.6 share overall. But if you look at some of our most mature markets, our share is up in the 25 to 30 range, and we’re making great progress in new markets. The West coast is a good example of really growing our share in markets we’re already serving. So that’s another component of sales growth.”