THOMASVILLE, GA. — While confident the recent major acquisition by Grupo Bimbo S.A.B. de C.V. would benefit the baking industry in the longer term, executives at Flowers Foods, Inc. are highly concerned enough about near-term uncertainties in ingredient markets. As a result of input cost uncertainties, the company has deferred issuing earnings guidance for 2012.

Baking industry consolidation, ingredient market volatility and the company’s earnings outlook were three of a range of issues discussed by top Flowers’ executives in a Nov. 10 conference call.

As previously reported, Flowers Foods net income in the third quarter ended Oct. 8 was $31,019,000, equal to 23c per share on the common stock, down narrowly from $31,166,000, also equal to 23c per share, in the third quarter of fiscal 2010. Sales for the quarter were $675,369,000, up 13% from $597,894,000 during the same quarter of the previous year.

On the negative side, the executives noted weakness in the company’s warehouse business and sales of white bread as well as describing steps to improve these markets. On the positive side, they said sales of the company’s top brand — Nature’s Own — were steadily approaching the $1 billion mark at the retail level.

While considerable time was spent in the conference call dealing with wide ranging challenges facing the baking industry generally and Flowers in particular, George E. Deese, chairman and chief executive officer was unequivocal in his optimism.

“While I acknowledge that this year has been challenging, you need to know I have never been more optimistic about the future,” he said.

Reinforcing the point, he noted the industry has consolidated from a point in which eight major baking companies operated in 2000, to six in 2005 to four today, together with a few regional companies. He described Flowers as a “strong No. 2 player” in the fresh baked foods category.

“Back to the industry as a whole, the players that will remain in this fresh baked foods category will be focused on innovation, productivity, research and development,” he said. “That will be very good for the industry and for the category.”

Asked specifically about Bimbo’s recent acquisition of the Sara Lee fresh baking business and its impact on merger and acquisition activity, Mr. Deese offered gracious words and looked forward to continued m.&a. activity.

“I congratulate the two parties for getting that completed,” he said. “…We think 2012 will be a good environment for future acquisitions as independent bakers, in particular, continue to look at new investments, or succession planning or look at tax rates which they might think will change.”

In comments that echoed remarks in earlier calls about the current environment for consumers, Allen L. Shiver, Flowers Foods president, said sales volume for baking companies has been adversely affected by consumer efforts to stretch their food dollars in a sluggish economy.

He cited scanner data indicating dollar sales up 3.4% for fresh baked foods in the quarter with units down 3.7%.

“Store brands did show some growth in the quarter, up 40 basis points in dollar share and 120 basis points in unit share,” he said, quickly adding that private label market share remains beneath historical averages, even following the latest move.

In the difficult environment, Flowers’ has not pulled back the reins on product innovation, Mr. Shiver said.

“We introduced several new products during the quarter, such as the Nature’s Own cinnamon raisin thin-sliced bagels, Nature’s Own whole grain sandwich rolls and Nature’s Own soft oatmeal specialty bread,” he said. “We are committed to continuing to develop products that meet consumers’ diverse needs and consumer expectations.”

Looking at bread, specifically, Mr. Shiver described strengths and weakness at the company.

“We estimate Nature’s Own fiscal 2011 retail sales at $940 million, up 5.9%,” he said. “Our regional brands, primarily in the white bread category, continue to show volume declines commensurate with category declines for white bread.

“Our regional brands, such as Sunbeam and Bunn, are very important to our company and with the added focus that we are placing on this product class, I’m very confident that we will see improved results soon.”
Asked to elaborate on prospective company action, Mr. Shiver cautioned against expecting an end to the broader trend of weakness in white bread.

“I don’t think we are going to be able to completely reverse the category trend on white bread, but I do think we can improve the internal trend,” he said. “We are doing a lot of different things, from focusing on improving quality, improving freshness in the marketplace. There are some markets where we are having to re-look at pricing from a promotional pricing standpoint. We are looking at some additional times that are not white bread but would be additional items introduced under those regional brands.”

Looking at the Tasty Baking integration, Mr. Deese and Mr. Shiver each offered upbeat comments.
Mr. Shiver said synergies from the acquisitions have equaled or bested the company’s estimates.

Currently, Tastykake has been added into 2,200 Flowers territories. By the end of 2012, the product will be distributed on more than 3,500 Flowers and Tastykake distributor routes.

“We area also making progress on our plans to introduce Nature’s Own and other bread products into Tasty’s core D.S.D. market,” Mr. Shiver said. “As we have mentioned before, we plan to leverage Tasty’s excellent relationship with key trade customers as well introduce our Nature’s Own brand to millions of new consumers in the Northeast.”

He also repeated the expectation the company will need to add oven capacity as it expands sales into the Northeast.

Looking at the Warehouse business, Mr. Shiver said sales were flat during the quarter.

Describing the Warehouse team as “tightly focused,” Mr. Shiver said results fell shy of expectations in part because of a new sales account that came on line more slowly than expected. He predicted better results ahead, bolstered in part by higher pricing.

Looking at the company’s prospects for the balance of the year, Steve Kinsey, executive vice-president and chief financial officer, said the D.S.D. business enjoys robust sales, meeting the company’s expectations.
On an operating income basis, he said the segment will see profits that are flat to up 5%, though with real challenges in the final quarter.

“Fourth-quarter input costs will be up the most, quarter over quarter, as compared to the other quarters this year,” he said. “Though we have taken some pricing actions, gross margin continues to be under pressure and is forecast to be down on an annual basis.”

As a result, he said full-year earnings will be toward the lower end of the company’s guidance range.
For 2012, the D.S.D. business should hit long-term revenue targets and the Tasty business is “well within reach” of goals established at the time of the acquisition.

Mr. Kinsey said input from investment analysts together with the role ingredients play driving the company’s results led Flowers to defer its initial earnings forecast for 2012 and instead offer a preliminary cost outlook.

He said “cost headwinds” are anticipated during the first half of 2012 “making for some difficult year-over-year comparisons.”

“Market volatility adds a degree of uncertainty to the back half at this point,” he said. “Therefore, we believe it’s more productive to continue to assess our coverage opportunity and offer firmer guidance with our year-end call in early February.”

Based on ingredient coverage as it currently stands, the company forecast input cost increases of 4% to 8% in 2012.

Asked about the company’s approach to ingredient hedging, Mr. Deese suggested some rethinking may be in order if volatility persists.

“I would say that our strategy has been six to nine months (coverage) for many, many seasons and years,” he said. “That is still true. Over the long pull that has worked, but as we are keenly aware, though, if this volatility does persist, that strategy will have to change probably, or be tweaked or looked at more closely.”