Flowers Foods: Reports Second Quarter 2019 Results

Thomasville / GA. (ff) Flowers Foods Inc., producer of Nature’s Own, Wonder, Tastykake, Dave’s Killer Bread, and other bakery foods, reported results for the company’s 12-week second quarter ended July 13, 2019.

Second Quarter Summary

Compared to the prior year second quarter where applicable

• Sales increased 3.7 percent to USD 975.8 million; net sales increased 1.8 percent excluding the acquisition of Canyon Bakehouse.
• Diluted EPS increased USD 0.04 to USD 0.25.
• Adjusted diluted EPS(1) was unchanged at USD 0.25.

(1) Adjusted for items affecting comparability.

Cief Execitive’s Remarks

«This quarter’s results reflect our strategic priorities to focus on brands, manage costs, make smart acquisitions, and develop the team. You can see this in our continued top-line momentum and market share gains, which illustrate the benefits of our pivot to a more brand-focused organization,» said Ryals McMullian, Flowers Foods’ president and CEO. «In the quarter, we continued to successfully rollout Canyon Bakehouse across our distribution network, implemented pricing to help mitigate inflationary pressures, and delivered product innovation and marketing programs that supported the growth of Dave’s Killer Bread, Nature’s Own, and Wonder. Growth in bread brands more than offset reduced sales of cake and foodservice products, as we continue to evolve those portfolios to a more attractive margin profile.»

McMullian continued, «Improving profitability is a priority. We remain focused on the significant opportunities we see to attack complexities, improve operational efficiencies, and address inflationary pressures from commodities, labor, and transportation. By focusing on sustainable, profitable growth in our core business, and investing strategically in growing adjacencies, we intend to drive free cash flow and deliver shareholder value.»

Revised Guidance

For the 52-week fiscal 2019 the company expects

• Sales in the range of approximately USD 4.030 billion to USD 4.109 billion, representing growth of approximately 2.0 percent to 4.0 percent.
• Adjusted diluted EPS in the range of approximately USD 0.94 to USD 0.99, adjusted for items affecting comparability.

The company’s outlook includes the following assumptions:

• Canyon Bakehouse sales of approximately USD 70 million to USD 80 million
• Depreciation and amortization in the range of USD 150 million to USD 155 million
• Other pension expense in the range of USD 2.5 million to USD 3.0 million
• Net interest expense of approximately USD 12 million
• An effective tax rate of approximately 24 percent to 25 percent
• Weighted average diluted share count for the year of approximately 212 million shares
• Capital expenditures for the year in the range of USD 110 to USD 120 million

Matters Affecting Comparability

Reconciliation of Earnings per Share to Adjusted Earnings per Share

For the 12 Weeks Ended …	2019-07-13		2018-07-14
Net income per diluted common share	USD 0.25		USD 0.21
Loss on inferior ingredients	–		0.02
Restructuring and related impairment charges	0.01		Not Meaningful
Project Centennial consulting costs	–		0.01
Legal settlements (recovery)	(0.01)		0.03
Executive retirement agreement	Not Meaningful		–
Pension plan settlement loss	–		Not Meaningful
Adjustment to prior year provisional tax reform benefit	–		(0.03)
Adjusted net income per diluted common share	USD 0.25		USD 0.25

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Consolidated Second Quarter 2019 Results

Compared to the prior year second quarter where applicable

• Sales increased 3.7 percent to USD 975.8 million.
• Percentage point change in sales attributed to:
  • Pricing/mix: 1.9 percent
  • Volume: -0.1 percent
  • Acquisition: 1.9 percent
• Branded retail sales increased USD 25.8 million, or 4.6 percent, to USD 586.0 million, store branded retail sales increased USD 15.4 million, or 10.5 percent to USD 162.9 million, while non-retail and other sales decreased USD 6.8 million, or 2.9 percent, to USD 226.9 million.
• Branded retail sales increased due to the Canyon acquisition, continued growth of Dave’s Killer Bread branded products, as well as the introduction of Sun-Maid breakfast bread late in the third quarter of fiscal 2018, and more favorable price/mix. Sales of branded cake decreased quarter over quarter mainly due to softer volume resulting from product rationalization and a competitive environment.
• Store branded retail sales increased primarily due to gluten-free store-branded items produced by Canyon, volume growth from additional distribution, other store branded breads and buns, and positive price/mix, partially offset by volume declines in store branded cake.
• Foodservice and vending volume declines drove the decrease in non-retail and other sales, partly because of lost business due to the yeast disruption in fiscal 2018.
• Operating income increased 38.4 percent to USD 72.3 million. Excluding matters affecting comparability, adjusted operating income increased 7.4 percent to USD 72.5 million.
• Adjusted Ebitda increased 3.2 percent to USD 105.9 million, representing 10.8 percent of sales, a 10-basis point decrease.
• Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 52.1 percent of sales, a 20-basis point increase. These costs were higher as a percentage of sales due to rising workforce-related costs, lower production volumes and decreased manufacturing efficiencies, partially offset by improved pricing/mix and lower ingredient costs as a percent of sales.
• Selling, distribution and administrative (SD+A) expenses were 36.8 percent of sales, a 150-basis point decrease. Excluding matters affecting comparability, adjusted SD+A expenses were 37.0 percent of sales, a 20-basis point decrease. A shift in product mix resulted in lower distributor distribution fees as a percentage of sales, partially offset by higher workforce-related costs and bad debt expense.
• Depreciation and amortization (D+A) expenses were USD 33.3 million, 3.4 percent of sales, a 30-basis point decrease.

Cash Flow, Capital Allocation, and Capital Return

Year-to-date through the second quarter of fiscal 2019, cash flow from operating activities increased by USD 59.4 million to USD 208.1 million, capital expenditures decreased by USD 2.1 million to USD 47.4 million, and dividends paid increased by USD 5.3 million to USD 79.6 million. Year-to-date through the second quarter, the company has made cash debt repayments of USD 86.8 million. There remain 6.2 million shares authorized for repurchase under the company’s current share repurchase plan. The company expects to continue to make opportunistic share repurchases from time to time under this plan.