‘Inferior yeast’ supply hits Flowers Foods Q2, but branded business helps maintain growth

By Stephen Daniells

- Last updated on GMT

‘Inferior yeast’ supply hits Flowers Foods Q2, but branded business helps maintain growth

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Flowers Foods – producers of Nature’s Own, Wonder, and Dave's Killer Bread – experienced widespread operational disruption in its second quarter due to ‘inferior yeast’, which needed an “extraordinary effort” to restore operations to normal.

The disruption hit the company’s margins for the quarter, but solid growth from its branded business – Dave’s  Killer Bread, Wonder, and Nature’s Own – helped the company to post revenues of $941 million, representing growth of  1.6% year-over-year.

“Our branded retail business contributed more than half of this growth, driven by share gains from Dave's Killer Bread, Wonder and Nature's Own,” ​said CEO Allen Shiver.

“For the eighth quarter in a row, our market share increased, driven by healthy growth in our base sales. Overall, consumer trends in the fresh packaged bread category are encouraging. Branded products continue to gain share within the category, with consumers showing a growing preference for organic products and indulgent white breads.”

Inferior yeast

But it was the impact of the ‘inferior’ yeast that interested some of the analysts on the call. The supplier of the problematic yeast was not named, but Shiver noted that the disruption occurred right before the July 4 holiday, a holiday that traditionally drives a significant portion of its annual bun sales.

“Once we determined the issue with the ingredient, our team worked around the clock to resolve the problem as quickly as possible,”​ said Shiver. “Affected product was removed from retail and foodservice accounts and replaced with product made with alternative yeast.

“This response required an extraordinary effort from manufacturing, distribution, sales and procurement […] That said, we are continuing to evaluate the financial impact of the yeast event and our options with regards to being made whole by the supplier.”

The majority of the cost impact associated with the disruption would be confined to the current quarter, added Shiver, but the company would remain vigilant to any effects carrying forward.

Supply chain initiatives

A number of supply chain initiatives are also underway to improve efficiencies, lower costs, and drive margins, said the company, and it recently appointed a new COO, Ryals McMullian, to improve operating functions and enhance execution and accountability.

“We've been operating under our new organizational structure for seven months now and are fundamentally changing the way in which we work,” ​said Shiver. “Through our transformation, I am confident we can overcome the current challenges and successfully position Flowers Foods to drive enhanced value for shareholders.”

Higher wheat prices expected

The company’s executives were also quizzed by investors on the impact of the trade tariffs that could potentially impact supply and costs. Steve Kinsey, the company’s CFO, noted that the company “feels good about the costs​” for 2018. However, for 2019 they are anticipating higher prices.

“Typically, higher prices will bring more planting acres. So that will remain to be seen in the U.S. as well. But right now, our expectations are that for 2019, you will see higher overall wheat prices.”

The Georgia-based company is one of the largest fresh packaged bakery foods in the country with sales in 2017 of $3.9 billion. For 2018, the company is predicting sales in the range of $3.92 billion to $3.98 billion.

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