Flowers Foods is working to mitigate the impact of commodity price increases

Flowers Foods is working to mitigate the impact of commodity price increases

The CEO of Flowers Foods has insisted that the US baker's falling sales in the fourth quarter of 2010 - and across the year as a whole - was a "short-term situation" that will still allow the company to continue to invest in long-term growth.

George Deese said that the company's decision to raise prices late in the fourth quarter, on the back of increased commodity and store prices, "impacted volumes more than we expected".

However, he said: "In the long run we know that the pricing action we took was appropriate, and we know that some commodity costs are doubling while other input costs are also higher."

The company reduced forecast earnings per share for 2011 today (8 February), forecasting growth of 5-10% - down from original forecasts of 8-13% growth for the year.

Deese said the new forecast "takes into consideration the factors we think are important for 2011". Flowers, Deese said, was "very aware" of "ongoing volatility in commodity costs" due to weather shocks around the world, emerging market growth and ethanol policy in the US, which, he added, will effect "the price of grains in the future".

Deese emphasised that Flowers' purchasing strategy has been effective and that there is only some uncertainty over hedging late in 2011. However, he added that the company would continue to make its purchasing decisions based on the "reality of the commodity environment" and would work to reduce "price risk for our shareholders and customers".

The CEO said that the other major factor will be managing volatility in the consumer environment, with high levels of unemployment, and pressure from the economy.

The company is now working to build volumes after the decline in the fourth quarter with what Deese described as "very targeted" promotions.

Deese said that the market remains "highly competitive" and that there are "unsettling factors among some players in the industry and that creates a degree of uncertainty in the category". However, he emphasised that Flowers has a strong strategy in place.

Additionally, company president Allen Shiver said that, despite the economic environment, Flowers has continued to invest in the company's growth, with new products contributing 5% to sales during the year.

Shiver said that he is focused on a long-term view, investing $100m in 2010 in building the company during 2010, and that it will continue to do so in 2011.

"We are among the most efficient bakeries in the country," Shiver said.

Speaking about the competive landscape, Deese said: "Flowers Foods' plan is certain and our course is charted. While the competitive landscape may shift, our team is focused on opportunities created by those shifts every day. As the baking industry undergoes the next phase of consolidation, our goal is to emerge as an even stronger player."

Deese said that during his 47 years at Flowers, the industry has become increasingly consolidated, but that the baker has "participated in that consolidation, having made more than 110 acquisitions since the mid-60s."

Additonally, the company has added around $800m in sales over the past five years through bolt-on acquisitions.

The industry veteran confirmed that he expects acquisitions to remain an "important part" of its growth, despite 2010 "not playing out" out as it had hoped in that respect.

While he would not be drawn on who its targets are, Deese said: "We have more activity today, in regards to potential acquisitions, and we look forward to the opportunities ahead".

When asked whether these acquisitions would be likely to be of a "transformative nature", Deese said that the strategy has been for bolt-on acquisitions as they offered less risk.

"Last time I looked, [through] the huge transformational-type acquisitions, people have destroyed more value than they create. So our strategy is to stay focused on bolt-on acquisitions and whatever else might come out of the industry that we think we could add to Flowers and make it a stronger operation."

Shares in Flowers were down 4% at 12:40 ET to US24.55 a share.