Flowers Foods: Reports Q4 And Full Year 2017 Results

Thomasville / GA. (ff) Flowers Foods Inc., one of the largest producer and marketer of fresh packaged bakery foods in the U.S., reported financial results for the company’s 12-week fourth quarter and 52-week full year ended December 30, 2017.

Fourth Quarter Summary:

Compared to the prior year fourth quarter where applicable

• Sales increased 0.6 percent to USD 873.6 million. Excluding sales related to a divestiture, sales increased 1.1 percent.
• Diluted EPS increased USD 0.31 to USD 0.37, including approximately USD 0.23 related to tax reform.
• Adjusted diluted EPS(1) was unchanged at USD 0.17.
• Net income increased USD 65.5 million to USD 78.5 million.
• Adjusted net income(1) decreased 2.1 percent to USD 35.8 million.
• Adjusted Ebitda(2) decreased 0.7 percent to USD 91.0 million.
• Adjusted Ebitda(2) margin decreased 10 basis points to 10.4 percent of sales.

Fiscal 2017 Summary:

Compared to the prior year where applicable

• Sales decreased 0.2 percent to USD 3.921 billion. Excluding sales related to a divestiture, sales increased 0.4 percent.
• Diluted EPS decreased USD 0.07 to USD 0.71, including approximately USD 0.23 related to tax reform.
• Adjusted diluted EPS(1) decreased USD 0.04 to USD 0.89.
• Net income decreased 8.3 percent to USD 150.1 million.
• Adjusted net income(1) decreased 3.8 percent to USD 187.2 million.
• Adjusted Ebitda(2) decreased 0.7 percent to USD 449.8 million.
• Adjusted Ebitda(2) margin was unchanged at 11.5 percent of sales.

(1) Adjusted for items affecting comparability. See reconciliations of non-GAAP measures in the financial statements following this release.
(2) Earnings before Interest, Taxes, Depreciation and Amortization, adjusted for certain items affecting comparability. See reconciliations of non-GAAP measures in the financial statements following this release.

CEO’s Remarks:

«Our team delivered solid sales growth and great products and service in the fourth quarter, with consumer demand for organic Dave’s Killer Bread driving top line growth and offsetting a challenging marketplace for traditional bakery items», said Allen Shiver, Flowers Foods president and CEO. «This was achieved in a quarter where we implemented new roles and responsibilities as part of our revamped organizational model. We also made headway in improving manufacturing efficiencies, lowering selling, distribution and administrative costs, while removing complexity from the business. These improvements, along with lower net interest expense and strong cash flow, enabled us to offset higher workforce-related expenses, reduce debt and support dividend growth».

Mr. Shiver continued, «Our priority in 2018 is to create shareholder value by improving profit margins and driving sustainable sales growth, and we believe the progress we made in 2017 has us well-positioned for a promising 2018. We enter the year with strong momentum in our key initiatives. These efforts are expected to allow us to capture additional cost savings and drive brand growth in underdeveloped segments and geographies with new, innovative products and marketing investments».

For the 52-week Fiscal 2018, the Company Expects:

• Sales in the range of approximately USD 3.921 billion to USD 3.982 billion, representing growth of approximately 0.0 percent to 1.6 percent.
• Adjusted diluted EPS in the range of approximately USD 1.04 to USD 1.16, representing growth of approximately 16.9 percent to 30.3 percent. Adjusted EPS guidance includes approximately USD 0.15 to USD 0.17 related to the impact of the lower effective tax rate described below, and excludes consulting and restructuring costs associated with Project Centennial expected to be in the range of USD 12 million to USD 15 million.

The company’s outlook includes the following assumptions:

• Sales associated with incremental brand investment relative to fiscal 2017 are expected to primarily benefit results in the second-half of fiscal 2018.
• Input cost inflation of approximately USD 40 million is expected to be offset through pricing actions taken in early first quarter fiscal 2018.
• Depreciation and amortization is forecasted to be in the range of USD 145 million to USD 150 million.
• Net interest expense is forecasted to be in the range of USD 11 million to USD 12 million.
• For the full year, the company expects an effective tax rate of approximately 25 percent to 26 percent, reflecting the effects of the new tax law. In the first quarter the tax rate will be approximately 27 percent due to the expected impact at vesting of stock-based compensation awards. The effective tax rate for the remaining quarters of the year is expected to be approximately 25 percent.
• Weighted average diluted share count for the year of approximately 211 million shares.
• Capital expenditures for the year are estimated to be in the range of USD 95 million to USD 105 million.

Update on Strategic Priorities:

The company continues to execute on its strategic priorities established under Project Centennial. During the fourth quarter, Flowers began transitioning to the new organizational model that includes enhanced focus on brand growth and operating efficiency. The company expects the organizational model to be fully implemented in fiscal 2019. The company also finalized its fiscal 2018 brand investment plans, which includes new internal capabilities intended to deliver innovative products that offer consumers a meaningful point of difference.

As part of Project Centennial, the company achieved gross cost savings of USD 32 million in fiscal 2017, primarily from reductions in spending on purchased goods and services (PG+S). The company is targeting additional gross savings in fiscal 2018 of USD 38 million to USD 48 million. This target reflects further savings through PG+S, as well as from a more efficient and productive organizational structure, continuous improvement, supply chain optimization, and improved ordering and stale reduction initiatives.

Matters Affecting Comparability:

Reconciliation of Earnings per Share to Adjusted Earnings per Share
		For the 12 Weeks Ended				For the 52 Weeks Ended
		December 30, 2017		December 31, 2016		December 30, 2017		December 31, 2016
Net income per diluted common share		USD 0.37		USD 0.06		USD 0.71		USD 0.78
Gain on divestiture		–		–		(0.09)		–
Restructuring and related impairment charges		0.01		–		0.30		–
Project Centennial consulting costs		0.02		0.01		0.11		0.02
Impairment of assets (unrelated to restructuring)		–		0.07		–		0.07
Lease terminations/legal settlement/extinguishment loss		–		0.03		0.02		0.04
Pension plan settlement loss		–		–		0.01		0.02
Multi-employer pension plan withdrawal costs		–		–		0.05		–
Impact of tax reform		(0.23)		–		(0.23)		–
Windfall tax benefit from stock option exercises		(0.01)		–		(0.01)		–
Adjusted net income per diluted common share		USD 0.17		USD 0.17		USD 0.89		USD 0.93
Certain amounts may not add due to rounding.

.

Consolidated Fourth Quarter 2017 Summary

Compared to the prior year fourth quarter where applicable

• Sales increased 0.6 percent to USD 873.6 million.
• Percentage point change in sales attributed to:
  • Pricing/mix: 1.1 percent
  • Volume: 0.0 percent
  • Divestiture: -0.5 percent
• Net income increased USD 65.5 million to USD 78.5 million. Excluding matters affecting comparability, adjusted net income decreased 2.1 percent to USD 35.8 million.
• As a result of the Tax Cuts and Jobs Act, the company recorded an estimated tax benefit of USD 48.2 million related to the revaluation of the company’s net deferred tax liability.
• Operating income increased USD 25.2 million to USD 46.4 million. Excluding matters affecting comparability, adjusted operating income decreased 1.3 percent to USD 58.5 million.
• Adjusted Ebitda decreased 0.7 percent to USD 91.0 million, or 10.4 percent of sales, a 10 basis point decrease.
• Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 52.3 percent of sales, up 40 basis points, primarily driven by workforce-related costs, partially offset by improved manufacturing efficiencies.
• Selling, distribution and administrative (SD+A) expenses were 38.1 percent of sales, a 100 basis point decrease, driven primarily by lower workforce-related costs, and reduced legal settlement charges, partially offset by higher distributor distribution fees due to a larger portion of sales being sold by independent distributors, and incremental Project Centennial consulting costs.
• Restructuring charges of USD 3.6 million and a pension plan settlement loss of USD 1.6 million in the current quarter, compared to USD 24.9 million of asset impairments and a USD 0.2 million pension plan settlement loss in in the prior year quarter.
• Depreciation and amortization (D+A) expenses were USD 32.4 million, 3.7 percent of sales, flat when compared to the prior year quarter.

Continued sales growth from branded organic products and expansion markets, resulted in the sales increase, partially offset by the divestiture of a mix manufacturing business in January 2017 and by a competitive marketplace and cycling of certain promotions in the prior year quarter. Sales of Dave’s Killer Bread (DKB) branded products continue to increase, in part due to the introduction of breakfast items in the second quarter of fiscal 2017.

On a consolidated basis, branded retail sales increased 1.4 percent to USD 507.0 million and store branded retail sales decreased 0.6 percent to USD 127.4 million, while non-retail and other sales decreased 0.5 percent to USD 239.2 million. The sales increase in the branded retail category resulted primarily from increased sales of branded organic products, partially offset by volume declines in branded loaf breads, snack cakes, and buns and rolls. Store branded retail sales decreased primarily as a result of volume declines in loaf breads, offset partially by increased sales of buns and rolls. The impact of the mix manufacturing divestiture in the first quarter of fiscal 2017 somewhat offset by volume growth in vending and foodservice sales, principally resulted in the decrease of non-retail and other sales, which includes contract manufacturing, vending and foodservice.

DSD Segment Fourth Quarter Summary

Compared to the prior year fourth quarter where applicable

• Sales increased 1.1 percent to USD 738.6 million.
• Percentage point change in sales attributed to:
  • Pricing/mix: 3.4 percent
  • Volume: -2.3 percent
• Operating income increased USD 33.9 million to USD 56.0 million. Excluding matters affecting comparability, adjusted operating income increased 8.2 percent to USD 60.8 million.
• Adjusted Ebitda increased 6.4 percent to USD 88.6 million, or 12.0 percent of sales, a 60 basis point increase.
• Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 48.4 percent of segment sales, up 20 basis points, primarily driven by higher workforce-related costs, partially offset by improved price/mix.
• SD+A expenses were 39.6 percent of segment sales, an 80 basis point decrease. This decrease was driven primarily by lower workforce-related costs, and reduced legal settlement charges, partially offset by higher distribution fees due to a larger portion of sales being sold by independent distributors.
• Restructuring charges were USD 3.4 million. Prior year asset impairment charges were USD 24.9 million.
• D+A expenses were USD 27.8 million, 3.8 percent of sales, a 10 basis point increase.

DSD segment branded retail sales increased 1.6 percent to USD 474.7 million and store branded retail sales decreased 1.6 percent to USD 102.7 million, while non-retail and other sales increased 1.5 percent to USD 161.2 million.

Branded retail sales increased due to significant sales growth for branded organic products, partially offset by volume declines in branded loaf breads, snack cakes, and buns and rolls. Sales of DKB branded products continue to increase, driven by volume gains and the addition of DKB breakfast items in the second quarter of fiscal 2017. A competitive marketplace and the cycling of certain promotions in the prior year drove the declines in other branded products. Store branded retail sales were down primarily due to soft volumes for loaf breads. Increased sales to fast food and institutional customers drove the increase in non-retail and other sales.

Warehouse Segment Fourth Quarter Summary

Compared to the prior year fourth quarter where applicable

• Sales decreased 2.3 percent to USD 135.1 million.
• Percentage point change in sales attributed to:
  • Pricing/mix: -5.6 percent
  • Volume: 6.5 percent
  • Divestiture: -3.2 percent
• Operating income decreased USD 4.2 million to USD 7.5 million. Excluding matters affecting comparability, adjusted operating income decreased USD 4.1 million to USD 7.6 million.
• Adjusted Ebitda decreased 24.5 percent to USD 12.4 million, or 9.2 percent of sales, a 260 basis point decline.
• Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 73.5 percent of segment sales, up 240 basis points, primarily driven by increased production for the DSD segment, higher workforce-related costs, and higher freight costs.
• SD+A expenses were 17.3 percent of segment sales, a 20 basis point increase. This increase was primarily driven by significantly lower sales that spread the costs over a smaller sales base, and higher bad debt expense, partially offset by lower marketing expenses.
• D+A expenses were USD 4.8 million, 3.6 percent of sales, a 20 basis point increase.

Branded retail sales declined 1.4 percent to USD 32.3 million and store branded retail sales increased 3.9 percent to USD 24.7 million, while non-retail and other sales decreased 4.5 percent to USD 78.0 million. Branded retail sales decreased largely due to a decline in warehouse-delivered branded organic bread, which was partially offset by increased sales of branded snack cakes. Volume increases in store branded items due to a new customer resulted in the increase in store branded retail sales. The decrease in non-retail and other sales, which include contract manufacturing, vending and foodservice, was due primarily to the impact of the mix manufacturing divestiture, and to a lesser extent, lost contract manufacturing business, partially offset by growth in vending volume.

Unallocated Corporate Expense Fourth Quarter Summary

Note: Comparisons are to consolidated sales

• SD+A expenses increased 40 basis points to 1.8 percent of consolidated sales, including incremental Project Centennial consulting costs and pension settlement losses totaling USD 3.1 million, or 30 basis points as a percent of sales.
• Restructuring charges and a pension plan settlement loss were USD 1.8 million in the current quarter compared to a USD 0.2 million pension plan settlement loss in the prior year quarter.

Cash Flow, Capital Allocation, and Capital Return

In the fourth quarter of fiscal 2017, cash flow from operating activities was USD 73.4 million, capital expenditures were USD 24.0 million, and dividends paid were USD 35.8 million. During the quarter, the company had a net decrease in debt and capital lease obligations of USD 22.8 million.

The company did not repurchase any shares of its common stock during the quarter. There are 6.6 million shares remaining under the company’s current share repurchase plan. As in the past, the company expects to continue to make opportunistic share repurchases under this plan.