Flowers Foods: Reports Q4 And Full Year 2018 Results

Thomasville / GA. (ff) Flowers Foods Inc., producer of Nature’s Own, Wonder, Tastykake, Dave’s Killer Bread, and other bakery foods, reported financial results for the company’s 12-week fourth quarter and 52-week full year ended December 29, 2018.

Fiscal 2018 Summary

Compared to the prior year where applicable

• Sales increased 0.8 percent to USD 3.952 billion.
• Diluted EPS increased USD 0.03 to USD 0.74.
• Adjusted diluted EPS(1) increased USD 0.05 to USD 0.94.
• Net income increased 4.7 percent to USD 157.2 million.
• Adjusted net income(1) increased 5.8 percent to USD 198.1 million.
• Adjusted Ebitda(2) decreased 8.5 percent to USD 411.5 million.
• Adjusted Ebitda(2) margin decreased 110 basis points to 10.4 percent of sales.

Fourth Quarter Summary

Compared to the prior year fourth quarter where applicable

• Sales increased 0.8 percent to USD 880.7 million.
• Diluted EPS decreased USD 0.27 to USD 0.10.
• Adjusted diluted EPS(1) decreased USD 0.01 to USD 0.16.
• Net income decreased USD 57.7 million to USD 20.8 million.
• Adjusted net income(1) decreased 4.6 percent to USD 34.1 million.
• Adjusted Ebitda(2) decreased 14.1 percent to USD 78.1 million.
• Adjusted Ebitda(2) margin decreased 150 basis points to 8.9 percent of sales.

(1)Adjusted for items affecting comparability.

(2)Earnings before Interest, Taxes, Depreciation and Amortization, adjusted for certain items affecting comparability.

CEO’s Remarks

«We finished 2018 with solid top-line momentum. Our brand portfolio once again achieved record market share in the fourth quarter, driven by growth from Dave’s Killer Bread, Nature’s Own, and Wonder,» said Allen Shiver, Flowers Foods president and CEO. «Despite taking pricing actions and realizing cost savings under Project Centennial, we were not immune to the inflationary pressures from commodities, transportation and other sector headwinds, which negatively impacted our results for the quarter.»

Shiver continued, «In 2019, we expect Dave’s Killer Bread, Nature’s Own, and Wonder to drive sales growth, along with the rollout of Canyon Bakehouse across our distribution network. We are continuing to urgently address inflationary pressures through revenue management and productivity initiatives. We also are accelerating key supply chain optimization initiatives intended to drive productivity and reduce fixed costs. Our financial position is strong, and we remain confident that we will be able to grow shareholder value by profitably growing differentiated brands, improving manufacturing efficiencies, and providing excellent service to the marketplace.»

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.
• Diluted EPS in the range of approximately USD 0.94 to USD 1.02.

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 is forecasted to be in the range of USD 2.5 million to USD 3.0 million
• Net interest expense is forecasted to be 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.

Update on Project Centennial Strategic Priorities

The company is executing on its strategic priorities under Project Centennial and continues to implement initiatives to reinvigorate the core business, capitalize on product adjacencies, reduce costs to fuel growth, and develop leading capabilities.

Highlights of the company’s progress in 2018 include

• Realized continued growth from new product introductions: Nature’s Own Perfectly Crafted, a line of artisan-inspired, thick-sliced bakery breads, and Dave’s Killer Bread bagels and English muffins.
• Acquired Canyon Bakehouse, a leading producer of gluten-free bakery foods.
• Conducted a foundational consumer research study to inform and accelerate product innovation and engaged a leading consumer-focused advertising agency.
• Appointed a chief operating officer to enhance execution and accountability.
• Refined its organizational structure to better align operating functions.
• Activated a trade promotion management system to increase promotional effectiveness, enhance price realizations, and improve profitability.
• Realized total gross savings above the upper end of the USD 38-million to USD 48-million target, primarily through a more efficient organizational structure and reduced spending on purchased goods and services.
• Added a high-speed bun line to a Pennsylvania bakery and closed an inefficient bakery in Vermont.
• Implemented working capital policies that improved the cash conversion cycle and generated incremental cash flow.

Consolidated Fourth Quarter 2018 Summary

Compared to the prior year fourth quarter where applicable

• Sales increased 0.8 percent to USD 880.7 million.
• Percentage point change in sales attributed to:
  • Pricing/mix: 2.6 percent
  • Volume: -1.8 percent
• Operating income decreased 34.9 percent to USD 30.0 million. Excluding matters affecting comparability, adjusted operating income decreased 17.7 percent to USD 46.6 million.
• Adjusted Ebitda decreased 14.1 percent to USD 78.1 million, or 8.9 percent of sales, a 150-basis point decrease.
• Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 53.0 percent of sales, a 70-basis point increase. These costs were higher as a percentage of sales due to higher ingredient costs, increased outside purchases of product, and lower manufacturing efficiencies, partially offset by lower workforce-related costs.
• Selling, distribution and administrative (SD+A) expenses were 38.5 percent of sales, a 20-basis point increase. Lower workforce-related costs, as a percentage of sales, were offset by higher distributor distribution fees due to a larger portion of sales being sold by independent distributors.
• SD+A expenses were also impacted by Canyon Bakehouse acquisition costs partially offset by lower Project Centennial-related consulting costs and legal settlements.
• Depreciation and amortization (D+A) expenses were USD 32.2 million, 3.7 percent of sales, flat when compared to the prior year quarter.

On a consolidated basis, branded retail sales increased 2.3 percent to USD 519.0 million, store branded retail sales increased 5.2 percent to USD 134.0 million, while non-retail and other sales decreased 4.7 percent to USD 227.6 million. Continued sales growth from DKBorganic products, growth in our expansion markets, the contribution from Nature’s Own Perfectly Crafted breads, and more favorable price/mix drove the increase in branded retail sales. Partially offsetting the increase were volume declines in white breads, specialty breads, and sandwich buns and rolls. Store branded retail sales increased primarily due to positive price/mix and to a lesser extent increased volumes. Foodservice and vending volume declines primarily drove the decrease in non-retail and other sales, partially offset by positive price/mix.

DSD Segment Fourth Quarter Summary

Compared to the prior year fourth quarter where applicable

• Sales increased 1.2 percent to USD 747.7 million
• Percentage point change in sales attributed to:
  • Pricing/mix: 2.0 percent
  • Volume: -0.8 percent
• Operating income decreased 25.2 percent to USD 41.8 million. Excluding matters affecting comparability, adjusted operating income decreased 20.4 percent to USD 48.3 million.
• Adjusted Ebitda decreased 14.9 percent to USD 75.4 million, or 10.1 percent of sales, a 190-basis point decrease.

DSD Segment branded retail sales increased 2.8 percent to USD 488.0 million, store branded retail sales increased 7.2 percent to USD 110.2 million, while non-retail and other sales decreased 7.3 percent to USD 149.4 million. Positive price/mix drove the increase in branded retail sales while volume was flat. Sales of DKB products continued to increase along with Nature’s Own Perfectly Crafted breads introduced in the second quarter of fiscal 2018. Store branded retail sales increased quarter over quarter due to positive price/mix and volume growth. Significant volume declines in foodservice primarily resulted in the decrease in non-retail and other sales. Foodservice sales were impacted by the shift of certain foodservice business from the DSD Segment to the Warehouse Segment.

The decrease in DSD Segment operating income primarily resulted from higher restructuring and related impairment charges, increased product costs, increased distributor distribution fees, and increased marketing investments partially offset by lower workforce-related costs.

Warehouse Segment Fourth Quarter Summary

Compared to the prior year fourth quarter where applicable

• Sales decreased 1.5 percent to USD 133.0 million.
• Percentage point change in sales attributed to:
  • Pricing/mix: 3.1 percent
  • Volume: -4.6 percent
• Operating income decreased 19.3 percent to USD 6.1 million. Excluding matters affecting comparability, adjusted operating income increased 1.6 percent to USD 7.7 million.
• Adjusted Ebitda increased 3.2 percent to USD 12.8 million, or 9.6 percent of sales, a 40-basis point increase.

Warehouse Segment branded retail sales decreased 5.6 percent to USD 31.0 million, store branded retail sales decreased 3.1 percent to USD 23.8 million, while non-retail and other sales increased 0.7 percent to USD 78.2 million. Branded retail sales decreased mostly due to volume declines in branded cake and to a lesser extent in warehouse-delivered branded organic bread. Sales of store branded retail items decreased primarily due to volume decreases in store branded cake. Non-retail and other sales, which include contract manufacturing, vending and foodservice, increased primarily from the shift of certain foodservice business from the DSD Segment to the Warehouse Segment in the current year period and increased contract manufacturing sales, partially offset by declines in vending sales.

The decrease in the Warehouse Segment operating income was primarily due to higher restructuring and related impairment charges. These were offset by lower operating costs.

Unallocated Corporate Expense Fourth Quarter Summary

Note: Comparisons are to consolidated sales

• Unallocated corporate expenses were unchanged at 2.0 percent of consolidated sales, including USD 4.5 million of acquisition costs, USD 3.5 million of asset impairments, and a USD 5.1 million decrease in Project Centennial consulting costs.

Cash Flow, Capital Allocation, and Capital Return

In the fourth quarter of fiscal 2018, cash flow from operating activities was USD 63.8 million, capital expenditures were USD 24.4 million, and dividends paid were USD 38.0 million. During the quarter, the company had a net increase in debt and capital lease obligations of USD 177.0 million, due to the acquisition of Canyon Bakehouse.

There are 6.5 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.