In spite of a flurry of major acquisitions in recent years, the baking industry will not experience a lack of competition in the future, said top executives at Flowers Foods, Inc. George E. Deese, chairman and chief executive officer, and Allen L. Shiver, president, offered insights about the competitive landscape during presentations March 20 at an investor’s day meeting at the New York Stock Exchange in New York.
“There is still plenty of competition in the category,” Mr. Deese said. “More than 80 independent and specialty bakeries across the country compete in the fresh bread aisle, offering customers a wide variety of fresh bread, buns, rolls and snack cakes. Also, store brand commands a very strong position in the category, as it has for many years — 25% to 27% of sales and 40% to 50% of units.”
Calling baking a “large and vibrant” category, Mr. Shiver said that as of February 2012, Flowers held a 15% market share on a dollar basis, versus 33.8% for Bimbo Bakeries USA, 5.8% for Pepperidge Farm, 21.9% for independent and specialty bakers and 23.5% for other store brands (besides Flowers’).
Both Mr. Deese and Mr. Shiver also noted Flowers is well ahead of its geographic expansion targets. In 2011, the company said it would try to reach 75% of the U.S. population by direct-store delivery by 2016.
“We have achieved the goal three years ahead of schedule,” Mr. Deese said, noting that a combination of capital building and acquisitions always had been part of Flowers’ plans to meet the objective.
Sustaining Flowers’ profitability along the way always was part of the plan, Mr. Deese said. While at many companies aggressive expansion occurs at the cost of earnings, he noted that has not been the case at Flowers, with earnings growing 13.5% annually from 2003-12 against annual sales growth of 8.5%.
While it may have been overshadowed by subsequent developments, the July 2012 acquisition of Lepage Bakeries, Inc. for $171 million has provided Flowers with as full a range of expansion opportunities as the company expected, said Bradley K. Alexander, president of Flowers Bakeries.
Principal among these opportunities has been the introduction of Flowers products into the Lepage market area of New England, including Tastykake snack cakes in October and Nature’s Own bread and rolls the following month.
“Our timing for Tastykake and Nature’s Own introduction in the Lepage market was perfect since the brands helped fill the void when Hostess left the market,” Mr. Alexander said.
As a result, sales have been increasing and opportunities for further growth are being pursued across the Lepage footprint, he said.
“We are adding routes to serve retail and food service customers,” he said. “To support our sales growth, we’ve added shifts to Lepage bread lines and are reopening a bun line at the Brattleboro, Vt., bakery.”
Mr. Alexander said the benefits of Lepage to Flowers will not be limited exclusively to New England.
Instead, the very different product portfolio of the acquired business will find application in other markets Flowers serves, he said. He mentioned products ranging from specialty rolls to organics.
“We see opportunities to leverage these unique items in other Flowers’ markets,” he said. “Lepage also brought innovative concepts and excellent product quality, and we’re working to leverage that strength throughout our market areas as well. We still have a lot to do at Lepage as we continue the integration of our systems but we are pleased with our progress.”
Turning to the California acquisition of the Sara Lee and Earthgrains brands from Bimbo Bakeries USA, Mr. Alexander said the deal gives Flowers $134 million in new sales and a Stockton, Calif., baking plant.
While Flowers already had a route structure in Southern California to service its modest business, Mr. Alexander said the company has “reconfigured every route territory and added additional distributor routes.”
He described mounting excitement among distributors and customers in this new market.
“By mid-June we intend to serve about 4,500 stops in California,” he said. “When we are done with the roll-off, our D.S.D. segment will serve the entire state of California and will have added 15 million to the population Flowers Foods serves D.S.D.”
An ancient acquisition when measured against Lepage, Sara Lee California and the Hostess bread business, the purchase of Tasty Baking Co. two years ago has been a growth engine for Flowers, Mr. Shiver said.
“Since the acquisition in 2011, we have been expanding the reach of Tasty across the South and Southwest,” he said. “The result is Tastykake is the fastest growing cake brand in the South.“
He said the product line most recently was introduced in Arizona and Nevada and now covers the majority of the U.S. population. Sales have grown to a projected $276 million in 2013 from $170 million at the time of the acquisition, Mr. Shiver said. Of the $106 million sales increase, $16 million occurred in “core Tasty markets” with $90 added through the Flowers direct-store delivery system, he said.
While assuming higher levels of debt has been necessary to allow growth, Flowers continues to pursue an investment grade credit rating, said R. Steven Kinsey, executive vice-president and chief financial officer.
“In 2012, we did see leverage jump as we financed our Lepage acquisition,” he said.
He said the company is in advanced talks aimed at financing the Hostess transaction.
While Flowers still is not yet prepared to issue earnings guidance, Mr. Kinsey added considerable color to the outlook without offering specific figures.
He said that uncertainty around timing of the Hostess transaction remains a principal impediment to offering traditional guidance. To make up for this lack of information, Mr. Kinsey offered analysis of factors that may “materially impact the year.”
First among these is the 2012 Lepage integration.
“It is going very well,” he said. “We are on target for having the SAP integration completed during the fourth quarter. This is very important for managing our business.”
Both Lepage and the Sara Lee California acquisitions are meeting plans, Mr. Kinsey said. The Lepage business will be 8c to 12c per share accretive to earnings in 2013, he said.
While echoing other comments about “excitement” about the expansion in California, Mr. Kinsey said he is expecting the acquisition to be neutral to 2013 earnings given the prospective cost of the integration and rollout of the brands into the marketplace.
Tastykake was a strong contributor to sales and EBITDA in 2012 and also will be strong in 2013, he said.
Comparing the 2013 outlook with long-term targets, Mr. Kinsey said “strong double-digit” sales growth will eclipse the 5% to 10% annual growth target over time. Predicting that EBITDA margins will be “in line” with the long-term target of 11% to 13%, Mr. Kinsey was not as clear describing the outlook for earnings per share, which he said will be “strong” in 2013.
