Milling & Baking News - October 10, 2017 - 12

Business X

Summary of special
X charges at Flowers Foods
(mostly in third quarter of fiscal 2017)
Voluntary separation incentive
program and related actions
............................................. $27 million to $30 million.
Other Project Centennial costs
...................................................................$7.5 million.
Settlement of additional independent
distributor litigation lawsuits
...................................................................$7.5 million.
Termination of multiemployer pension
plan at a Flowers plant
............................................. $18 million to $19 million.
Trademark impairment
................................................................cost unknown.
Pension accounting charge
................................................................cost unknown.

differentiation that our brands offer.
"Our research in the fresh packaged bread space also found that
incremental brand investment can
deliver innovation, drive additional sales and provide an attractive
R.O.I. We are using a disciplined
strategy that distinguishes between
what we call established and highpotential brands. This strategy will
guide marketing investments as we
move forward. It will also impact
how we allocate resources and maximize the long-term value of our
brand portfolio."
Mr. Shiver said this distinction does
not mean "established brands" do not
bring value to the company.
"Our established brands, they provide scale to our operations, they
strengthen our product assortment,
and they contribute consistent cash
flows," he said. "Store brands, some
of our regional name brands in our
commodity food service business fit
squarely in this role. Today, we're
leveraging these established brands
to support the growth of our highpotential brands. Our high-potential
brands have strong consumer appeal, products with a point of difference, and opportunities to grow
market share. Dave's Killer Bread,
Nature's Own, Wonder and Tastykake are all high-potential brands, and
we'll support them with increased
innovation and increased marketing investment. We're significantly
upgrading our internal marketing
capabilities. In 2018, we will make
meaningful incremental investment
12 / October 10, 2017 XMilling & Baking News

in our top brands. We'll be putting more dollars into advertising
and new products. We'll carefully
track the R.O.I. on these investment
dollars."
Asked by an analyst how much
marketing spending may increase at
Flowers, Mr. Kinsey suggested the upside was considerable.
"Today we spend less than 1% in
sales on marketing," Mr. Kinsey said.
"Traditional C.P.G. companies are
probably north of 5% or higher. We're
not looking to become a bleeding edge
company, but we are expecting to have
a significant increase next year."
Later in the session, Mr. Kinsey discussed charges Flowers will take in
connection with the VSIP and other
actions. 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.
He also announced a $4 million
to $4.5 million settlement had been
reached regarding additional independent distributor litigation lawsuits

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

'Today we spend less than 1% in sales on
marketing. Traditional C.P.G. companies are
probably north of 5% or higher.'
- R. Steve Kinsey,
Flowers Foods, Inc.

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

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." MBN
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Milling & Baking News - October 10, 2017

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