Flowers Foods, Inc. (FLO) Analyst Day Call March 20, 2012 08:30 am ET Executives Mary Krier - VP, Communications George E. Deese - Chairman & CEO Allen Shiver - President Brad Alexander - President, Flowers Bakeries Group Joe Tashie - President, Cake Group Bob Hysell - President, Foodservice Group Gene Lord - EVP & COO Mike Beaty - EVP, Supply Chain Steve Kinsey EVP & CFO Analysts Akshay Jagdale - KeyBanc Capital Markets Mitch Pinheiro - Janney Montgomery Scott Bill Chappell - SunTrust Robinson Humphrey Amit Sharma - BMO Capital Markets Ann Gurkin - Davenport Eric Katzman - Deutsche Bank Presentation Mary Krier
I'm happy to be in Philadelphia, home of Tastykake and as you know in past years when we have had a new company that’s come into the company or when we build new facilities we have tried to have our Analyst Day at those locations. So it's great today to be in Philadelphia, the home of Tasty Baking. As I think back to this time last year, I think about the Analyst Day in New York. We had just came out of our strategic planning meeting with our Board of Directors and at the analyst meeting last year, we laid out after approval from our Board of Directors a new five-year plan for Flowers Foods.And it was amazing that and that was in I believe late March and by the end of May, we came back to the market and said here is evidence of our growth plan, Tasty Baking has joined our company, some $185 million-$200 million in sales and we are happy as we can be to have that iconic brand in the portfolio of stable brands with the company and that was a real evidence to our shareholders and people who have followed us that we are very serious about our five-year plan. As I stated that Tasty brought this iconic brand to state-of-the-art bakeries in Pennsylvania and access to the market in the mid-Atlantic and of course to the northeast. And so there is really two reasons why we felt like Tastykake was going to be a great addition to this company; one why is that brand iconic brand, that we felt like we could take nationwide on our distribution system to give us that big uplift in cake sales that we had been underdeveloped in all of our careers at Flowers. And I will tell you that so far we are meeting and beating those expectations that we knew could happen on the cake side. The second part of the Tastykake acquisition was we wanted to be throughout the mid-Atlantic with our Nature’s Own brand and other brands of bread, bun and rolls that were produced by Flowers Foods and not too long after that, but about the same time I guess, the acquisition of Sara Lee by Bimbo came about and we are patient and said we think there might be some opportunities out of those divestitures that would help us get to this part of the world a lot quicker.
Well that has not happened and so we are at the point and we will have an announcement sometimes in the near future about our plans on future growth of bread and rolls in this market. But today I am not prepared to say that because it will be more than likely building of a new facility or using one of our present facilities to expand, so more news coming on that later. And Tastykake discussion is all about growth and as I sat and talked to you last night and I have told everyone since that day I thought it would be a watershed in the company because I felt saying year after year, after year, that we will have continued growth on Tastykake, not particularly in Philadelphia, we already have a great share here even though I think it will be great. I think the big growth in the cake business will come in the rest of the Flowers territory where Tastykake is new and I think that will be year-after-year-after-year-after-year until we reach a mature stage in the cake business throughout the rest of the company.So two big reasons for Tasty that acquisition, one is already paying off exceeding expectations and number two being able to go to the rest of this market, well it is yet to come. But also we feel like that will also meet and beat expectations when we get there. The whole focus of our presentation today is about long-term growth. I think that Allen and his team will be looking into that, but before we get to that long-term growth, I would like to talk just briefly about the operating environment today that we see and first one I would like to mention is the input cost which we all know has been volatile for the past three or four years, stable for years. You might have a [peep] because of some crisis, but in truth and I have told you many times, the average price of wheat in most of my career has always been in that 350 to 360 neighborhood is exactly twice as the roughly $7 if you went out and bought wheat today.
That's not only true in wheat, but most commodity has spiked in 2011 for the company. So that did bring a lot of pressure to bear and we said throughout the year that we thought the fourth quarter would probably be our testing time with the commodity cost and you found out that was true and we said also the first half of the year will be pretty tough because of [theory] on hedges and Steve Kinsey will get more into that in a few minutes.So it has been about volatility and I noticed one day I guess it was last Friday we had a spike in wheat $0.25 up, yesterday I believe it was Monday, we had a $0.20 down day. Looking at overnight, the market is down in overnight on the wheat and reading the Wall Street Journal this morning basically said that there is not going to be rush years and now it is going to be export and not importing, so let's not relieve things. The weather and the crops look good in the West and the Midwest, all of you know we buy hard red winter wheat. That’s basically raised in Texas, Kansas and north of there. So things do look in my mind, a little bit better on the commodity front and you know not get into that, that’s in the guidance and all is baked in our guidance, but if we see better results than the back half of the year, because the crops are better I think that bodes well for 2013. So we are looking at it longer term as be in a better commodity situation. So volatility has been here for three or four years and it will be great to see it level out and only time will tell that we know there is more and more people in the world and we will have to feed a lot of people going forward. So over time the long pool, expect commodities will still be high.
Many of you asked in the last night and again this morning about consumer and now we would say we are still cautious about the consumer. And I can tell you the first 15 days of every month I get optimistic. Optimism always looks good in the first 15 days of the month, but then you get on to the back part of the month and all of a sudden that optimism turns a little pessimistic because the consumer gets a little more at edge and not shopping quite as heavily. But and I do say with that optimism in that first 15 days I do feel a lot of consumers are feeling a little bit better about and they do have a little more confidence than they would had over the past three years since 2008.I do believe that, now when that turns into tangible, real tangible results is really hard to say, but I think I can be a little more optimistic about the future from the consumer, than I could this time last year. I think also while we are seeing first of the month, it’s a lot more food stamps. We are seeing a lot more promotions, we are seeing some trading down, which says the consumer still have lower, they are still having some difficulties. And the only worry I would say about that optimism by the next six months could be what happens to the price of gasoline. And you see some of the big retailers say when gasoline approaches that $4 level that they see a difference in shopping patterns, people come to the supermarket less, but they do buy more when they do come and over time though they might not buy as much because of the pressure of some trading down.
We’ve not seen that on bread because as I’ve said all for many, many years now that private label has peaked and it has peaked for many years and in fact it is down slightly from three years ago, slightly at 26% 27% 28% depending on when you look at it, it is a more mature category and I believe the retailers are satisfied with the amount of private label they sell in the bread category. I'm glad I'm not in some underdeveloped brands that or private label, may be chips or some other food like orange juice or whatever that’s underdeveloped, I think that's where the retailer is looking really hard to see how do we get after, 25% to 30% private label share in this particular category. So we are much here and already there.Read the rest of this transcript for free on seekingalpha.com