Flowers Foods: Reports Growth In 3rd Quarter Profit

Thomasville / GA. (ff) Flowers Foods Inc. reported results for the twelve and 40 weeks ended October 10, 2009. The company also updated its guidance for 2009 and provided preliminary guidance for 2010. Highlights:

• Increased third quarter sales 4,6 percent year-over-year
• Improved operating margin to 8,5 percent of sales; a 20,5 percent year-over-year increase
• Delivered diluted earnings per share of 0,34 USD for the quarter; a 17,2 percent increase year-over-year
• Generated net cash from operating activities of 49,9 million
• Increased year-over-year branded retail sales by 3,9 percent
• Anticipates sales growth of 7,5 percent to 8,0 percent and an increase of 7,0 percent to 9,4 percent in diluted earnings per share for the 52-week fiscal 2009 (excluding the gain on acquisition)
• Provided preliminary 2010 guidance for 2,5 percent to 4,5 percent sales growth and diluted earnings per share growth of ten percent to 15 percent

George E. Deese, Flowers Foods´ Chairman, CEO, and President said, «I am pleased with the sales, operating margins, and earnings results we delivered in the face of continued pressures from the overall economy, the competitive landscape, and higher promotional activity in the bakery category. Our sales results were mixed as our direct-store-delivery (DSD) business took action to protect our market share through promotions while our warehouse business achieved higher snack cake sales, improved pricing/mix, and benefited from acquisitions. Going forward, our team remains focused on managing and investing in our businesses to ensure our ability to deliver strong results over the long term while taking the necessary actions to maintain our competitive market position in the near term».

Third Quarter Results

For the third quarter, sales increased 4,6 percent to 602,6 million USD over the 575,9 million USD reported for last year´s third quarter. Net income attributable to Flowers Foods was 31,9 million USD, or 0,34 USD per diluted share, an increase of 16,5 percent over the 27,4 million USD, or 0,29 USD per diluted share, reported for the 2008 third quarter. The quarter´s sales increase of 4,6 percent was achieved through a favorable pricing/mix of 1,4 percent and contributions from acquisitions of 4,2 percent, partially offset by 1,0 percent volume declines. Overall, the volume declines occurred primarily in the non-retail channel, specifically in the foodservice, vending, and institutional categories. In addition, heavy promotional activity within the retail channel negatively affected volumes in the branded white bread category. Partially offsetting these declines were increases in the branded breakfast bread, the branded multi-pack cake, and the branded soft variety bread categories. During the quarter, the company´s DSD sales grew at 1,6 percent due to a favorable pricing/mix of 1,8 percent, contribution from acquisitions of 3,5 percent, and a volume decline of 3,7 percent. Sales through warehouse delivery increased 20,0 percent reflecting positive pricing/mix of 5,6 percent, volume increases of 6,5 percent, and a contribution of 7,9 percent from the acquisition of a bakery mix plant during the second quarter of this year.

For the quarter, gross margin as a percent of sales was 46,5 percent compared to 48,1 percent in the third quarter of 2008. This decrease was due to increased ingredient costs as a percent of sales, partially offset by decreases in packaging and utility costs as a percent of sales, and improved manufacturing efficiencies.

Selling, marketing, and administrative costs as a percent of sales for the quarter were 34,9 percent compared to 37,7 percent in the prior year. This improvement as a percent of sales was due primarily to lower employee-related costs as a percent of sales and continuing efforts to reduce costs company-wide.

Depreciation and amortization expenses for the third quarter remained relatively stable as a percent of sales compared to the prior year despite increases in both depreciation and amortization resulting from acquisitions. Net interest income for the quarter decreased as a result of increased interest expense due to acquisition-related debt incurred in connection with acquisitions made in the second half of last year. The effective tax rate for the quarter was 35,5 percent as compared to 35,8 percent last year.

Operating margin for the third quarter was 51,1 million USD, or 8,5 percent of sales, an increase of 20,5 percent over the operating margin for the third quarter of 2008. EBITDA for the quarter was 70,1 million USD, or 11,6 percent of sales, an increase of 17,4 percent over last year´s third quarter.

During the third quarter, the company invested 19,1 million USD in capital improvements and paid dividends of 16,1 million USD to shareholders. This was the 28(th) consecutive quarterly dividend paid by Flowers Foods. During the third quarter, no shares were purchased under the share repurchase plan. During the first two quarters of 2009, the company repurchased a total of 1’230’391 shares at a cost of 27,6 million USD, an average of 22,45 USD per share. Since the inception of the share repurchase plan in 2002, the company has acquired 22,1 million USD shares of its common stock for 352,1 million USD, an average of 15,94 USD per share. The plan authorizes the company to repurchase up to 30,0 million USD shares of common stock.

Year-to-Date Results

Sales for the 40 weeks of 2009 increased 12,9 percent to 2,02 billion USD over the 1,79 billion USD reported for the 40 weeks of 2008. Net income attributable to Flowers Foods was 99,6 million USD, or 1,07 USD per diluted share, an increase of 14,3 percent over the 87,1 million USD, or 0,94 USD per diluted share, reported for the 2008 40-week period. The sales increase of 12,9 percent was achieved through a favorable pricing/mix of 4,3 percent and a contribution of 9,1 percent from acquisitions, which were partially offset by a volume decrease of 0,5 percent. Overall, the volume declines occurred primarily in the non-retail channel, specifically in the foodservice, vending, institutional, and contract manufacturing categories. In the retail channel, the branded white bread category also experienced volume declines. Partially offsetting these declines were increases in the branded breakfast bread, the branded multi-pack cake, and the branded soft variety bread categories. Year-to-date, the company´s DSD sales grew at 12,8 percent due to a favorable pricing/mix of 3,3 percent, a contribution from acquisitions of 10,2 percent, and a volume decline of 0,7 percent. Sales through warehouse delivery increased 13,2 percent, reflecting positive pricing/mix of 9,9 percent, volume declines of 0,3 percent, and a 3,6 percent contribution from the bakery mix business acquired in the second quarter.

Gross margin for the 40-week period was 46,4 percent of sales compared to 47,5 percent for the 40-week period of 2008. This decrease was the result of higher ingredient costs as a percent of sales, partially offset by lower labor and packaging costs as a percent of sales and improved manufacturing efficiencies.

For the 40 weeks, selling, marketing, and administrative costs as a percent of sales were 35,6 percent compared to 37,2 percent last year. This improvement was due primarily to lower employee-related costs as a percent of sales and the continuing effort to reduce costs throughout the company. This decrease was achieved despite a significant increase in pension expense this year as compared to last year.

Depreciation and amortization expenses for the 40 weeks remained relatively stable as a percent of sales compared to the prior year despite increases in both depreciation and amortization resulting from acquisitions. Net interest income year-to-date decreased as a result of increased interest expense due to debt incurred in connection with the acquisitions made in the second half of last year. The effective tax rate for the year-to-date was 36,2 percent compared to 35,7 percent last year. This increase was the result of higher state tax benefits recorded last year and lower earnings of the company´s variable interest entity this year as compared to last year. The full-year tax rate is expected to be approximately 36,5 percent.

Year to date, operating margin was 159,2 million USD or 7,9 percent of sales, an increase of 19,8 percent compared to last year´s 40-week period. EBITDA for the 40 weeks was 221,2 million USD or 10,9 percent of sales, an increase of 18,1 percent over EBITDA for the 40-week period of 2008.

Guidance for Fiscal 2009 and Preliminary Guidance for Fiscal 2010

The company´s fiscal 2009 will be a 52-week year compared to 53 weeks in fiscal 2008. Deese said the company now expects sales growth of 7,5 percent to 8,0 percent, with acquisitions accounting for 6,8 percent to 7,2 percent of the increase. (The 53(rd) week of fiscal 2008 accounted for approximately 2,0 percent of sales for fiscal 2008, therefore, on a 52-week to 52-week comparison the 2009 sales growth would be 9,5 percent to 10,0 percent.) Sales for fiscal 2009 are expected to be 2,59 billion USD to 2,61 billion USD. For 2009, excluding the gain on acquisition recorded in the second quarter, net income is expected to be 4,9 percent to 5,0 percent of sales, or 127,1 million USD to 129,9 million USD. With approximately 92,8 million USD average shares outstanding, earnings per diluted share excluding the gain on acquisition of 0,02 USD are expected to be 1,37 USD to 1,40 USD, an increase of 7,0 percent to 9,4 percent over fiscal 2008. (The 53(rd) week of fiscal 2008 accounted for 0,02 USD of diluted earnings per share, therefore, on a 52-week to 52-week comparison the 2009 earnings per share growth would be 8,7 percent to 11,1 percent.)

Capital spending in fiscal 2009 is expected to be approximately 70,0 million USD, including the company´s new bakery in Kentucky as well as costs for capital maintenance and efficiency improvements in the company´s other bakeries.

For fiscal 2010, the company preliminarily expects sales growth of 2,5 percent to 4,5 percent, excluding future acquisitions, and diluted earnings per share growth of 10 percent to 15 percent. Capital expenditures for fiscal 2010 are expected to be 85 million USD to 95 million USD.