Milling & Baking News - November 12, 2013 - 12

Financial Results 

Allen Shiver on Wonder sales:
'It's very early in the game'
THOMASVILLE, GA. - While confident Wonder, Home Pride and other
recently acquired brands will be a success, the brands have not been back
on the market long enough to meaningfully assess, said Allen L. Shiver,
president and chief executive officer
of Flowers Foods, Inc.
In a Nov. 7 conference call, Mr.
Shiver commented on the company's
acquisition of key bread brands and
other assets earlier this year of Hostess Brands L.L.C.
"It's very early in the game," Mr.
Shiver said. "We literally have only
been back on the market a few weeks.
We are encouraged, and each market is
a different story. We are very confident
in the long run that Wonder, Merita,
Butternut, Home Pride, those brands
are going to be very significant parts
of our overall product line. We will be
able to do a better job next quarter giving you some specific number on how
they are performing."
Net income of Flowers Foods, Inc.
in the 12 weeks ended Oct. 5 was
$33,888,000, equal to 16c per share
on the common stock, up nearly 9%
from $31,231,000, or 15c per share,
in the same period a year ago. Sales
were $878,492,000, up 22% from
$717,282,000.
Mr. Shiver explained why assessing
the reception of the Wonder reintroduction is taking some time.
"Retailers reallocate their space at
set times during the year," he said.
"Working with their schedules, we
are continuing to expand our newly
acquired brands back into the marketplace. We are pleased with what we
have seen so far."
Asked to identify markets where
the reintroduction of Hostess bread
brands was going well, Mr. Shiver
mentioned California and the Northeast before adding, "I wouldn't say
there's any region that is stronger than
others."
With pressure on gross margins,
Flowers lowered its full-year earningsper-share guidance to 90c to 93c, down
from 92c to 98c. No change was made
in the sales guidance, still up 24.5% to
25.5% from 2012.
A significant part of the conference
call was devoted to questions about
and discussion of margin pressure and
its causes. In particular, Mr. Shiver and
Steve Kinsey, executive vice-president
and chief financial officer, discussed
12 / November 12, 2013 Milling & Baking News

why gross margins have been about
three percentage points beneath the
company's 50% target. While pricing
pressure and ingredient costs were
factors in earlier quarters, integrating
the company's major recent acquisitions, particularly assets of Hostess
Brands, Inc., was a significant factor in
the third quarter.
"The (Direct-Store-Delivery) segment absorbed the carrying costs of

'We are very confident in
the long run that Wonder,
Merita, Butternut, Home
Pride, those brands
are going to be very
significant parts of our
overall product line.'
- Allen Shiver, Flowers Foods, Inc.

the Hostess assets we acquired," Mr.
Shiver said. "We also increased marketing spend to support our brands
in new markets and to support the relaunch of our acquired brands."
Spending included other costs, including an expanded organization
structure to "support our sales growth
and to prepare of the reintroduction of
Wonder, Merita, Butternut and Home
Pride."
Mr. Shiver said the elevated costs
during the quarter reflected an emphasis on customer service during
a period of transition and that target margins would be achieved once
again in the future.
"Priority one was making sure that
we took care of the marketplace, and
we've added costs to do that," he said.
"Now as things start to settle down,
we are working hard to make sure the
organization is right sized and that
our costs are in line. The good news
is, if you look historically, that's one of
our strengths. We certainly know how
to do that."
A continuing challenge for Flowers
has stemmed from higher volume at
its plants since November 2012 when
Hostess ceased operations. The problem continued in the third quarter of
2013, but Mr. Shiver said improvements
have been evident in recent weeks.
Three additional production lines
started up during the quarter, and
49 production shifts were added
across the company "to support our

sales increase," Mr. Shiver said.
Also during the quarter, a Modesto,
Calif., baking plant was acquired.
"That is now providing buns for
that state," Mr. Shiver said. "We also
announced that we will soon be producing bread at the Henderson, Nev.,
bakery." Production there should
commence before the end of the year,
Mr. Shiver said.
Commenting further on Flowers'
growth in California, Mr. Shiver said the
company's market share has grown to
12.2% from 1.8% thanks to its acquisition of the Sara Lee business there.
"We now have in place a D.S.D.
distribution network that serves all of
California," he said, adding later, "A
big part of what is happening in California has been putting the distribution system in place."
The higher D.S.D. costs did not account for all the margin pressure at
Flowers, Mr. Shiver said. A single baking plant in the company's food service segment struggled with manufacturing efficiencies.
"Our team is also addressing that
problem," he said.
The
Flowers
Direct-Store-Delivery segment had third-quarter
EBIT of $63,550,000, up 8.5% from
$58,571,000 in the third quarter last
year. Quarterly sales for the division
were $729,831,000, up 23.2% from
$592,250,000.
Meanwhile, the Warehouse Delivery segment of Flowers had thirdquarter EBIT of $7,074,000, down from
$7,566,000. Sales were $148,661,000,
up 19% from $125,032,000.
Asked about pricing, Mr. Shiver
said Flowers raised prices in the "low
single digits" in the third quarter."
"We have some additional pricing
to take as we finish out the year and
get in position for 2014," he said.
Responding to volume trends in
bread and food sales in general, Mr.
Shiver said he isn't worried about data
indicating modest declines.
"If you look at the category for the
quarter, dollars were up about 2% and
volume was down about 1%," he said.
"The way I look at the category, you
have to be very clear that it's a huge
category. It's a $31 billion, $32 billion
category. The recent trend has been
down slightly. But again, the consolidation that is taking place within the
industry far outweighs any type of
slight downtrend in the overall baked
food categories. I'm still very bullish
about the future. With the size of the
category, the slight downward tick is
not that significant." MBN
bakingbusiness.com / world-grain.com

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Milling & Baking News - November 12, 2013

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