THOMASVILLE, GA. — With recent acquisitions, Flowers Foods, Inc. has both the leading brand and considerable production capacity in the organic bread space, giving the company confidence in its potential to capture growth opportunities ahead, said Allen L. Shiver, president and chief executive officer of Flowers.
In a special Oct. 7 conference call with investment analysts, Mr. Shiver and other Flowers executives discussed the company’s recent acquisitions of organic baking companies.
Flowers announced on Aug. 13 it had agreed to acquire Dave’s Killer Bread and four weeks later said it had reached an agreement to acquire Alpine Valley Bread. The Dave’s acquisition closed Sept. 13, and the Alpine deal is expected to close before the end of 2015.
The ground for growth in organic foods is fertile, especially so for organic bread, Mr. Shiver said.
“Over 80% of American families include some organic foods in their shopping carts,” he said. “And the interest in organic breads in particular is broad, appealing to a wide variety of household from millennials to boomers.”
He said industry experts expect solid low double-digit growth rates for organic bread going forward.
“One factor that supports the robust growth outlook for organic breads is that household penetration of organic breads is low when compared to other food staples such as produce and milk,” Mr. Shiver said. “We believe one of the limiting factors has been distribution. For the most part, organic breads have not been made available through an extensive and service-oriented distribution system. We will leverage Flowers’ distribution strengths in D.S.D. and warehouse to reach more retailers and additional consumers in new geographies.”
While encouraged by macro signs pointing to category growth ahead, Mr. Shiver said it is the specific strengths of the businesses acquired by Flowers that give the company confidence.
“According to I.R.I. (Information Resources, Inc.), Dave’s Killer Bread is America’s No. 1 organic bread brand, outselling the No. 2 brand three to one,” he said. “This fact is not lost on retailers who have expressed strong interest in helping Flowers extend its distribution.”
To capture that opportunity, Mr. Shiver said Flowers will need to take care to preserve “the trust that these brands have earned with consumers,” a theme the recurred throughout the call.
Mr. Shiver placed the organic bread segment within the specialty premium loaf category — estimated as a $2.1 billion market at retail, based on I.R.I. figures.
“It is important to note that D.K.B. and Alpine enhance Flowers’ presence in natural food retail and club stores where organic breads have a strong position,” he said. “Those channels are not captured by our I.R.I. data.”
Mr. Shiver said Flowers is not a novice when it comes to baking organic bread. For a time several years ago, the company offered Nature’s Own bread baked with organic flour. More recently, the company has been selling organic bread in the Northeast under the Barowsky brand, part of its Lepage Bakeries acquisition in 2012.
He offered brief histories of each of the acquired brands, beginning with Dave’s Killer Bread, which was introduced in 2005 and grew rapidly thanks to a devoted following of consumers called “BreadHeads.”
This success stems from a unique culture and passion that Mr. Shiver pledged to preserve.
“We will work to ensure that the company’s unique culture and production techniques remain, while we focus on making this great brand more widely available,” he said.
Toward that end, the D.K.B. business will remain headquartered near Portland, Ore., and Flowers will continue to bake there. The management team will continue to be led by John Tucker, and the company will continue to offer employment opportunities under the Second Chance Program, an initiative devoted to giving those with criminal histories the chance to secure a job.
Alpine Valley Bread’s history dates back 18 years when Todd Wood and his wife Andrea opened a small bakery in a strip mall in Mesa, Ariz. They baked bread, rolls and buns made from certified organic, non-bioengineered ingredients.
“After first serving retail and food service customers and expanding to two bakeries, Alpine today focuses on wholesale production for retail grocers and leverages warehouse distribution to major club and retail stores,” Mr. Shiver said.
In addition to the appeal of the Alpine Bakery products, brand and employees, Mr. Shiver said Flowers is “excited by the production capacity Alpine brings to our business.”
Mr. Shiver said Flowers views the D.K.B. and Alpine Bakery businesses as distinct and said Dave’s Killer Bread’s future growth will be driven by direct-store delivery distribution. The Alpine Bakery business will operate differently.
“Alpine’s operating model is well seasoned with a proven warehouse distribution platform supporting strong sales growth of Alpine’s organic breads,” he said.
The move to D.S.D. will not be immediate for Dave’s, Mr. Shiver said.
“The sales will begin to accrete to D.S.D., will begin to flow through D.S.D.,” he said. “So, initially I would think I would model the majority of it in warehouse.”
The organic baking business at Flowers will be headed by David Roach, senior vice-president.
Financial details of the transactions were shared by R. Steve Kinsey, executive vice-president and chief financial officer. D.K.B. was purchased for $275 million in a cash transaction while Alpine was acquired for $120 million — a 90% cash, 10% Flowers common stock deal. The combined purchase price of $395 million is 1.5 to 1.6 times projected 2016 sales of $245 million to $265 million.
The deals will leave Flowers with aggregate debt totaling $1 billion. Mr. Kinsey said the acquisitions will contribute up to $65 million in sales in 2015 and will be neutral to earnings, excluding acquisition costs.
“Initial EBITDA margin should be in line with the company average,” he said. “In the near term, margin expansion in our organic business will be muted as we streamline operations and work to expand production and distribution. Once accomplished we do expect above-average margin potential for our organic brands. Initially the organic business will be part of our warehouse segment.”
Going forward the objective will be to scale up production in a way that maintains product quality and consistency, Mr. Kinsey said.
“Since the team at Alpine has excess capacity and organic baking expertise, we are confident production can be scaled to meet ever-growing demand for both the Alpine Valley and D.K.B. brands,” Mr. Kinsey said. “In the near term, leveraging D.K.B.’s current production at its bakery and through existing co-pack arrangements, we intend to begin expanding distribution of Dave’s Killer Bread in other geographic territories.”
Confident in the acquired brands growth potential, Mr. Kinsey said a successful integration will be followed by efforts to leverage interest from retailers across the Flowers geographic footprint.
In questions and answers, an analyst suggested one reason organic bread has not grown more quickly is the price gap with conventional bread. Asked whether there were opportunities to narrow that gap, Mr. Shiver said some part of that price gap was intrinsic to the difference between the brands Flowers has acquired and mainstream commercial bread.
“In addition to having the organic positioning, one of the unique things about both Dave’s and Alpine is it is excellent product quality,” he said. “There are some very unique things that they do from a production standpoint that enhances that quality. Our first step is to make sure that we maintain that level of product quality. And to do that it is the nature of the ingredients. Your cost structure is higher. But what we’re seeing across the country is the consumer understands that organics are going to demand a higher retail price point. Both Dave’s and Alpine have been successful growing at higher price points than the more traditional bread items.”
Expanding production of organic bread is not as simple as adding an additional line to an existing bakery because of the needs for complete separation from non-organic products.
“It does require you to segregate production because of the contamination issue,” Mr. Shiver said. “So, you want to make sure that you keep your organic facilities totally separate from one that is not organic.”
Over time, reopening a closed Hostess plant may be a way to increase production of the organic brands, but other approaches are under consideration, Mr. Shiver said.“We are currently exploring several options and that would be one of those options, potentially do that or potentially repurpose a current facility,” he said. “We do have several options from that perspective.”