Flowers Foods: Reports Results for the Q2 and H1/2009

Thomasville / GA. (ff) Flowers Foods Inc. reported results for its 12-week second quarter and 28-week first half ended July 18, 2009. Highlights: Increased second quarter sales 13,6 percent. Delivered operating margin of 8,0 percent of sales; a 34,4 percent increase. Delivered diluted earnings per share of 0,33 USD for the quarter, a 26,9 percent increase; includes a gain on acquisition of 0,02 USD per diluted share relating to a May 2009 acquisition. Generated net cash from operating activities of 55,6 million USD. Increased branded retail sales by 10,7 percent. Maintained earnings guidance of 1,37 USD to 1,48 USD per diluted share, excluding the gain on acquisition of 1,02 USD; revised sales guidance for fiscal 2009.

George E. Deese, Flowers Foods´ Chairman, CEO, and President: «Our team continues to deliver good results in the face of a challenging marketplace. We increased our overall sales by 13,6 percent, driven by the impressive expansion of our branded sales and sales from last year´s acquisitions. The success of our strategic acquisitions, combined with our efforts to improve costs and increase efficiencies, drove our earnings and helped us deliver improved operating margins».

Commenting on updated 2009 sales guidance, Deese said, «We now expect sales growth of 9,7 percent to 11,0 percent, which takes into consideration the impact the economy has had on consumer spending and certain competitive dynamics in the marketplace. However, we have improved input costs in the second half, so we are maintaining our earnings guidance for the year, excluding the 0,02 USD gain on acquisition. We expect to deliver solid earnings performance of 4,8 percent of sales to 5,1 percent of sales. Going forward, we will continue to seek sustainable growth, manage our resources and operations wisely, and invest prudently to create shareholder value over the long term. Our business strategies have served us well for many years in all economic environments and we remain committed to those strategies».

Second Quarter Results

For the second quarter, sales increased 13,6 percent to 614,4 million USD over the 540,7 million USD reported for last year´s second quarter. Net income attributable to Flowers Foods was 30,3 million USD, or 0,33 USD per diluted share, an increase of 26,7 percent over the 23,9 million USD, or 0,26 USD per diluted share, reported for the 2008 second quarter. The quarter´s sales increase of 13,6 percent was achieved through a favorable pricing/mix of 4,7 percent, acquisitions contribution of 10,6 percent, partially offset by 1,7 percent lower volume. Overall, the volume declines occurred primarily in the non-retail channel. During the quarter, the company´s direct-store-delivery (DSD) sales grew at 15,1 percent due to a favorable pricing/mix of 3,4 percent, acquisitions contribution of 12,1 percent, and a volume decline of 0,4 percent. Sales through warehouse delivery increased 7,1 percent, reflecting positive pricing/mix of 7,8 percent and the acquisition of a bakery mix plant during the quarter that contributed 3,8 percent, which were partially offset by volume declines of 4,5 percent.

For the quarter, gross margin as a percent of sales was flat at 45,7 percent compared to the second quarter of 2008. While ingredient costs were up, decreases in packaging and labor costs as a percent of sales and improved manufacturing efficiencies offset the higher ingredient costs.

Selling, marketing, and administrative costs as a percent of sales for the quarter were 35,3 percent compared to 36,6 percent in the prior year. This improvement as a percent of sales was due primarily to increased sales and lower employee-related costs as a percent of sales. This decrease was achieved despite an increase in pension expense this year as compared to last year.

Depreciation and amortization expenses for the second 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 debt incurred in connection with the Holsum and ButterKrust acquisitions made in the second half of last year. The effective tax rate for the quarter was 36,6 percent as compared to 35,7 percent last year. This increase was the result of state tax benefits recorded last year and lower earnings of the company’s variable interest entity this year as compared to last year.

During the second quarter of 2009, the company recorded a gain on acquisition of 3,0 million USD, or 0,02 USD per diluted share after tax, relating to a mix business acquired in May 2009. The fair value of the identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration paid, and in accordance with the new accounting standard on business combinations, the resulting gain is recorded to the income statement as part of operations.

Operating margin for the second quarter was 48,9 million USD, or 8,0 percent of sales, an increase of 34,4 percent over the operating margin for the second quarter of 2008. EBITDA for the quarter was 67,5 million USD, or 11,0 percent of sales, an increase of 28,9 percent over last year’s second quarter.

During the second quarter, the company invested 13,3 million USD in capital improvements and paid dividends of 16,1 million USD to shareholders. This was the 27th consecutive quarterly dividend paid by Flowers Foods. During the quarter, the company acquired 285’800 shares of its common stock under its share repurchase plan for 6,0 million USD, an average of 21,03 USD per share. This brings total repurchases for the year to 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.

First Half Results

Sales for the first half increased 16,8 percent to 1,42 billion USD over the 1,22 billion USD reported for the first half of 2008. Net income attributable to Flowers Foods was 67,7 million USD, or 0,73 USD per diluted share, an increase of 13,4 percent over the 59,7 million USD, or 0,65 USD per diluted share, reported for the 2008 first half. The sales increase of 16,8 percent was achieved through a favorable pricing/mix of 5,9 percent, contribution from acquisitions of 11,3 percent, and a volume decrease of 0,4 percent. Overall, the volume declines occurred primarily in the non-retail channel. Year-to-date, the company´s DSD sales grew at 18,2 percent due to favorable pricing/mix of 4,0 percent, volume increases of 0,7 percent, and acquisitions contribution of 13,5 percent. Sales through warehouse delivery increased 10,3 percent, reflecting positive pricing/mix of 11,6 percent, volume declines of 3,0 percent, and the recently acquired mix business contribution of 1,7 percent.

Gross margin for the first half was 46,3 percent of sales compared to 47,1 percent in the first half of 2008. This decrease was the result of higher ingredient costs, partially offset by lower labor costs as a percent of sales and improved manufacturing efficiencies.

For the first half, selling, marketing, and administrative costs as a percent of sales were 35,9 percent compared to 36,9 percent last year. This improvement was due primarily to increased sales and lower employee-related costs. This decrease was achieved despite a significant increase in pension expense this year as compared to last year.

Depreciation and amortization expenses for the first half 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 36.6 percent compared to 35,7 percent last year. This increase was the result of 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.

For the first half, operating margin was 108,1 million USD, or 7,6 percent of sales, an increase of 19,4 percent compared to last year’s first half. EBITDA for the first half was 151,0 million USD, or 10,6 percent of sales, an increase of 18,5 percent over EBITDA for the first half of 2008.

Fiscal 2009 Guidance

The company maintained its earnings guidance and revised sales guidance for fiscal 2009, which will be a 52-week year compared to 53 weeks in fiscal 2008. Deese said the company now expects sales growth of 9,7 percent to 11,0 percent, with acquisitions accounting for 6,5 percent to 7,0 percent of the increase. The 53rd week accounted for approximately 2,0 percent of sales for fiscal 2008. Therefore, sales for fiscal 2009 are expected to be 2,65 billion USD to 2,68 billion USD. For 2009, excluding the gain on acquisition, net income is expected to be 4,8 percent to 5,1 percent of sales, or 127,1 million USD to 137,3 million USD. With approximately 93,0 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 1,48 USD, an increase of 7,0 percent to 15,6 percent over fiscal 2008.

Capital spending in fiscal 2009 is expected to be approximately 75,0 million USD, including the completion of the bread line at the company´s new bakery in Kentucky as well as costs for capital maintenance and efficiency improvements in the company´s other bakeries (source).