Flowers Foods: Reports Results for Q2 and H1/2010

Thomasville / GA. (ff) Flowers Foods Inc. reported results for its 12-week second quarter and 28-week first half ended July 17, 2010. The company also updated its sales guidance for the year. Summarizing second quarter results, Flowers Foods:

• Increased net income to 33,8 million USD; an 11,3 percent increase over last year´s second quarter of 30,3 million USD.
• Improved operating margins to 8,4 percent.
• Delivered diluted earnings per share of 0,37 USD; a 12,1 percent increase over last year´s second quarter of 0,33 USD. Last year´s results included a gain on acquisition of 0,02 USD per diluted share relating to a May 2009 acquisition.
• Reported a sales decline of 1,1 percent compared to second quarter last year.
• Achieved volume increase of 1,9 percent and one percent growth from acquisitions; offset by 3,5 percent negative pricing/mix and 0,5 percent from the deconsolidation of a variable interest entity (VIE).
• Maintained diluted earnings per share guidance of ten to 15 percent growth; revised sales guidance for fiscal 2010 to growth of 1,0 to 2,0 percent.

George E. Deese, Flowers Foods´ Chairman and CEO: «We delivered strong earnings growth in the quarter and the first half of the year despite the weak economy and continued higher than normal promotional activity in the fresh bakery category. Our earnings growth would have been even greater if you take into consideration the 3,0 million USD or 0,02 USD per share, accounting gain on acquisition that was in last year´s second quarter results. Even though sales for the quarter declined, we achieved volume increases in both operating segments. Since the beginning of the year, our sales trend has improved steadily as we executed our strategy to introduce new products and develop new business. In the most recent weeks, that trend has further improved, giving us confidence in our revised sales guidance. The underlying strength of our business model is evident in our cash flow, improved operating margin, the strength of our brands, and market share growth. Our team continues to focus on improving all aspects of the business and we are poised to take advantage of opportunities in the marketplace», Deese said.

Second Quarter Results

For the second quarter, sales decreased 1,1 percent to 607,7 million USD from the 614,4 million USD reported for last year´s second quarter. The sales decrease was attributable to negative pricing/mix of 3,5 percent and 0,5 percent due to the deconsolidation of a VIE. Partially offsetting these declines were increased volume of 1,9 percent and a 1,0 percent contribution from acquisitions. The volume increase was primarily driven by Nature´s Own soft variety bread and Nature´s Own sandwich rounds in the branded retail channel and the cake category in the store-brand retail channel. These increases in volume were partially offset by sales declines in white bread, specialty bread, and foodservice. Overall, the branded retail channel was down as a result of lower white bread sales and a shift in snack cake sales from branded retail to store-brand retail as several of our customers introduced new store-brand cake programs.

DSD Segment: During the quarter, the company´s direct store delivery (DSD) sales decreased 3,5 percent. The decrease consisted of negative pricing/mix of 3,9 percent and 0,6 percent due to the deconsolidation of the VIE. Increased volume of 1,0 percent partially offset the declines. Although total branded retail sales in the DSD segment decreased in dollars as a result of negative pricing and mix as compared to last year´s second quarter, the channel experienced volume increases due to gains in the branded soft variety and sandwich rounds categories. The increased volume in the branded retail channel was partially offset by volume declines in the store-brand retail and foodservice channels.

Warehouse Delivery Segment: Warehouse delivery sales increased 10,1 percent, reflecting a 5,9 percent contribution from acquisitions and volume increases of 4,3 percent. These positive items were partially offset by negative pricing/mix of 0,1 percent. The volume increase was the result of increases in the cake category in the store-brand retail channel and a modest increase in the foodservice category and increases in the contract manufacturing category of the non-retail channel.

Net income for the quarter was 33,8 million USD, an increase of 11,3 percent over the 30,3 million USD in the second quarter of fiscal 2009. Diluted earnings per share increased 12,1 percent to 0,37 USD as compared to 0,33 USD last year.

For the quarter, gross margin as a percent of sales was 47,6 percent; up 190 basis points as compared to 45,7 percent in last year´s second quarter. This increase was due primarily to decreases in ingredient costs, particularly flour, as a percent of sales. The decrease in ingredient costs was partially offset by higher workforce-related and packaging costs as a percent of sales.

Selling, distribution, and administrative costs as a percent of sales for the quarter were 35,9 percent compared to 35,3 percent in the prior year. This increase as a percent of sales was due primarily to higher workforce-related and advertising costs as a percent of sales. The advertising costs were incurred to support new product introductions. These increases were partially offset by a decrease in pension costs as a percent of sales.

First Half Results

Sales for the first half decreased 1,3 percent to 1,40 billion USD compared to 1,42 billion USD reported for the first half of 2009. The sales decrease consisted of negative pricing/mix of 2,9 percent and 0,3 percent due to the deconsolidation of the VIE. Partially offsetting these declines were increased volume of 0,4 percent and a 1,5 percent contribution from acquisitions. The volume increase was primarily driven by Nature´s Own soft variety bread category and sandwich rounds in the branded retail channel and the cake category in the store-brand retail channel. These increases in volume were partially offset by decreased sales in white bread and foodservice.

DSD Segment: Year-to-date, the company´s DSD sales decreased 3,4 percent. The decrease was attributable to negative pricing/mix of 3,0 percent and 0,4 percent due to the deconsolidation of the VIE. Volume was flat as compared to last year´s year-to-date. Although total branded retail sales in the DSD segment decreased in dollars due to negative pricing and mix as compared to last year, the channel experienced volume increases due to increases in the branded soft variety and sandwich rounds categories. The increased volume in the branded retail channel was partially offset by volume declines in the store-brand retail and foodservice channels.

Warehouse Delivery Segment: For the first half, warehouse delivery sales increased 8,5 percent; reflecting an 8,4 percent contribution from acquisitions and volume increases of 1,9 percent. These positive items were partially offset by negative pricing/mix of 1,8 percent. The volume growth was the result of increases in the cake category in the store-brand retail channel and contract manufacturing in the non-retail channel.

For the first half, net income was 74,4 million USD, an increase of 9,9 percent compared to 67,7 million USD in last year´s first half. Diluted earnings per share for the first half increased 11,0 percent to 0,81 USD as compared to 0,73 USD last year.

Gross margin for the first half was 47,7 percent of sales compared to 46,3 percent in the first half of 2009. This increase was due primarily to decreases in ingredient costs, particularly flour, as a percent of sales. The decrease in ingredient costs was partially offset by higher workforce-related and packaging costs as a percent of sales.

For the first half, selling, distribution, and administrative costs as a percent of sales were 36,4 percent compared to 35,9 percent last year. This increase as a percent of sales was due primarily to higher workforce-related and advertising costs as a percent of sales. These increases were partially offset by a decrease in pension costs as a percent of sales.

Depreciation and amortization expenses for the first half remained relatively stable as a percent of sales. Net interest income year-to-date was 1,4 million USD higher than last year´s first half due to lower interest expense as a result of less debt outstanding. The effective tax rate for the first half was 35,5 percent as compared to 36,6 percent last year. The full-year tax rate is expected to remain at approximately 35,5 percent.

Operating margin as a percent of sales for the first half improved to 8,1 percent compared to 7,6 percent in the first half of 2009. Ebitda as a percent of sales was 11,3 percent year-to-date compared to 10,6 percent for the first half of last year.

During the first half, the company invested 54,9 million USD in capital improvements and paid dividends of 34,3 million USD to shareholders.

Fiscal 2010 Guidance

The company maintained its earnings guidance and revised sales guidance for fiscal 2010. Deese said the company now expects sales growth of 1,0 to 2,0 percent. For 2010, the company continues to expect growth in diluted earnings per share of ten to 15 percent. Capital spending in fiscal 2010 is expected to be approximately 95 to 100 million USD. The board of directors will consider the dividend at its regularly scheduled meeting. Any action taken will be announced following that meeting.