Flowers bent on more M&A

Flowers bent on more M&A

Flowers Foods, the second-largest bakery group in the US, has been an active consolidator in the industry and the group remains on the hunt. Flowers plans to drive continued growth while also expanding its geographic footprint, with a significant proportion of revenue gains to come from M&A. Katy Askew reports.

The US fresh bakery sector generates annual retail sales of around US$20bn. With sales of value products equating to 69% of the category total, bread is the biggest seller in this sector. Cake-based products are the second-largest product sub-category, accounting for 21.5% of total sales.

While the category is sizeable, it has faced flat to declining sales volumes for successive years. According to NPD Group's National Eating Trends database, the consumption of bakery products has decreased by almost 9% over the past ten years. 

Like much of the food industry, US bakers are facing myriad changes - from consumers still reeling from the downturn, to the growth in high- and low-income demographic groups at the expense of the middle class, to consumers switching to new retail channels.

Flowers Foods believes it can continue to drive top-line growth in the face of a declining category and broader macro-economic challenges. Speaking at the group's investor day in New York last week, management detailed exactly how it plans to achieve this.

M&A, Flowers' president Allen Shiver said, will be central to the group's advancement and its ability to win market share in a competitive environment.

"We are targeting 2% to 5% of our sales growth to come from acquisitions in the next five years. Industry consolidation is no secret," Shiver observed.

According to figures presented by Flowers, the number of bakeries operating in the US has shrunk by almost three-quarters in recent years. The company said that 1779 bakeries were operating in 1990. That figure dropped to 652 bakeries in 2010.

In 2000, the company said eight major bakers were competing in the US marketplace. Today, there are just four contenders, with Flowers taking the silver medal as "clear number two".

Much of the group's recent growth can be attributed to the contribution of acquisitions.

In 2011 the company acquired Tastykake, which contributed 5% to Flowers' top line growth that year. In 2012, the company took control of the Earthgrains and Sara Lee brands in California as well as north-eastern baker LePage Bakeries. While last year, the company picked up a swathe of former Hostess Brands assets after the Wonder Bread manufacturer fell into administration and was auctioned off.

Shiver stressed Flowers has built a solid history of demonstrating its skill in rapidly integrating acquired businesses, generating synergies and improving margins.

BB&T Capital Markets analyst Brett Hundley concurred Flowers is making progress integrating its recently-acquired assets.

"Over the short term, recent negative margin impacts are starting to abate... LePage improvements are expected in the latter part of Q1," he wrote in a note to investors. "Flowers plans to reopen its acquired Knoxville, Tennessee, bakery, as capacity in the region is very tight; thus, we believe this reopening has the best ability to positively impact the P&L over the short term through both top-line and margin enhancement. It is in the process of selling nine acquired bakeries and 21 depots, which has the potential to reduce carrying costs by $10m in total and $5m for 2014. Flowers plans to reopen 4-6 bakeries over the next four years."

M&A has been fundamental for Flowers recent expansion and Shiver emphasised acquisitions will remain a focus.

"Really the point here is, that growth through acquisitions, it is today just as important if not more important than any time in our company's history."

But, while Flowers is keen to develop acquisition opportunities - the company is also "disciplined" in its approach. The company intends to keep its leverage ratio in the two-to-three times EBITDA range, management revealed.

One way Flowers expects to be able to keep a lid on debt is by using its stock as a currency, chairman and CEO George Deese revealed.

"Hopefully, as time goes over the next two three years, it could be some debt, it could be some of our stock... [so] we don't get in problems in debt as we go through these opportunities. So as far as combinations that we feel like can use to take advantage of opportunities that present themselves."