NEW YORK — The baking industry remains rich in acquisition candidates for Flowers Foods, Inc., said Allen L. Shiver, president and chief executive officer. Less than a month after the company announced one acquisition and the same day as it announced a second, Mr. Shiver gave investment analysts several reasons to expect further such moves ahead.
Mr. Shiver spoke Sept. 9 at the Barclays Global Consumer Staples Conference. Earlier that day, the company announced it had agreed to acquire Alpine Valley Bread Co., a Mesa, Ariz.-based baker of organic bread. On Aug. 12, Flowers said it was acquiring Dave’s Killer Bread, the largest baker of organic bread in the United States.
Over the course of the presentation, which also featured remarks from R. Steve Kinsey, executive vice-president and chief financial officer, Flowers’ executives touched on numerous issues germane to takeovers. These included the company’s current market share, its balance sheet and the challenges experienced with regard to its 2012 acquisition of Lepage Bakeries, Inc., of Auburn, Maine.
While he said the successful integration of the company’s latest acquisitions is Flowers’ first priority, Mr. Shiver suggested the company always is on the lookout for what may be next.
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| Allen L. Shiver, president and c.e.o. of Flowers Foods |
“There will be opportunities to make bolt-on acquisitions to support our growth,” he said. “Independent bakers still control $2 billion of our category’s revenues so we see further opportunities for category consolidation. In the near term we remain focused on integrating the acquisitions in the organic category and executing our growth strategies.”
Asked whether the baking industry had consolidated to the point that the largest companies may be constrained when pursuing acquisitions, Mr. Shiver said Flowers still has plenty of runway to gain U.S. market share.
“I’ll remind you that in our core markets where Flowers has had a presence for many years, our market share is between 28% to 32% depending on the market,” he said. “And as I mentioned earlier, nationally we’re a 14% share. So in terms of opportunity for growth, the gap between 14% and 30%, in my opinion, is really the opportunity ahead of us.
“And also as exciting, when we look at our product lines in the specialty bread, the premium specialty bread segment, we’re really underdeveloped.”
Regarding that segment, Mr. Shiver also mentioned the recent decision to add small loaves to its line of Cobblestone Bread Co. selections.
“With the heel off, this loaf stands out on the shelf,” he said. “With fewer slices and an attractive price point, this loaf better suits smaller households and allows consumers to try different varieties. C.B.C. is gaining share in the premium specialty category demonstrating that innovation and differentiation drive sales.”
A steady repayment of debt since Flowers’ acquisition of bread baking facilities from Hostess Brands, Inc. in 2013 also has helped position the company to remain active in the merger and acquisitions sphere.
“For 2015, debt reduction remained a priority,” Mr. Kinsey said. “At the end of the second quarter our net debt to trailing 12-month adjusted EBITDA was 1.5 times. As long as there are potential acquisition opportunities we think a leverage target of 1.5 times provides us great flexibility as opportunities come about. We also intend to maintain our investment grade rating; therefore, you can expect to see debt reduction as one of our key capital allocations.”
The Flowers executives offered examples of geographic expansion moves that have been successful and others that, at least for a time, were more challenging.
“Entering new markets is a delicate balance, and having a team with experience is a huge benefit,” Mr. Shiver said. “Over time we’ve found that if we deliver value to the consumer, not just low prices, we will be successful growing share.”
As an example, he pointed to the company’s Denton, Texas, bakery, opened in 2005 to allow growth in the Dallas/Fort Worth market and expansion into northern Texas and Oklahoma. Nine years in, the baking plant has enjoyed 10.9% compounded annual sales growth, he said. More recently, the Bardstown, Ky., plant, opened in 2010 to achieve growth in the Louisville, Indianapolis and Cincinnati markets, has generated compounded growth of 8.7%.
Asked directly about challenges with the Lepage integration, Mr. Shiver and Mr. Kinsey said Flowers tried to do too much too quickly. While not offering extensive detail, Flowers executives in 2014 cited the Lepage business as a drag on margins. Enterprise resource planning systems were specifically mentioned as creating challenges.
“I think that the biggest learnings out of Lepage is making sure that once an acquisition is in place that the changes that you make are not too fast,” Mr. Shiver said. “Looking back on Lepage, we probably tried to do too much too quick in terms of integration activity, and our team learned a tremendous amount from that. So, pacing and making sure that things are done in an orderly fashion I think is a key learning out of Lepage.”
Mr. Kinsey continued, “Yes. I think as Allen mentioned, when you look at Lepage there were actually three bakeries there that we tried to bring on-line at one time, and I think we probably forced too much change on the employee there from a learning perspective. So really, it gets back to understanding how they operate as you integrate in the Flowers process. And I think the key thing about the upcoming integrations once they close is they’re both single factory operations. One is warehouse. One currently has limited D.S.D. So from that perspective, the change process will not be as complicated because they’ll be learning Flowers’ system and not really having to support an older system from a D.S.D. perspective.”
While the company’s most recent acquisitions were not the subject of extensive discussion, Mr. Shiver expressed confidence in Flowers’ capacity to scale up in the organic bread market and facilitate growth of Dave’s and Alpine bread.
“Sourcing of organic ingredients is at a higher price,” he said. “We’re confident that we will be able to source the ingredients to fuel the growth that we’ve projected, but it is a higher cost structure on the ingredient side. But fortunately, the consumer understands that they’re expected to pay a higher price for those organic products. So, it’s higher cost structure but you’re also a higher retail so the margins are very acceptable.”
