Flowers Foods: Reports Results for the Third Quarter

Thomasville / GA. (ff) Flowers Foods Inc. reported results for the twelve and 40 weeks ended October 09, 2010. The company also updated its guidance for 2010 and provided preliminary guidance for 2011. Summarizing the third quarter announcement, Flowers Foods:

• Reported diluted earnings per share of 0,34 USD, even with last year´s third quarter.
• Generated 73,5 million USD of operating cash flow.
• Reported sales were down 0,8 percent compared to last year´s third quarter due to pricing pressure and higher promotional activity.
• Achieved volume growth of 1,4 percent and 0,8 percent growth from acquisitions; offset by 2,4 percent negative pricing/mix and 0,6 percent from the deconsolidation of a variable interest entity (VIE).
• Expects 2010 sales will be flat to slightly up and diluted earnings per share will be up ten to twelve percent (excluding the 0,02 USD per share gain on acquisition recorded in 2009).
• Provided preliminary 2011 guidance for 3,0 to 6,0 percent sales growth and diluted earnings per share growth of 8,0 to 13,0 percent

George E. Deese, Flowers Foods´ Chairman and CEO: «This quarter proved to be another challenging one. As the economy continued under pressure from high unemployment, consumers shopped in different patterns and promotional levels for fresh bread products increased. These marketplace dynamics, coupled with higher-than-anticipated costs for starting up new manufacturing lines and introducing new products, resulted in flat sales and earnings compared to last year´s third quarter. It is important to note the overall sales trend has improved quarter to quarter since the beginning of the year. I am pleased to report that four weeks into the fourth quarter, we have seen sales improve compared to last year´s quarter due to the pricing actions we have taken».

Third Quarter Results

For the third quarter, sales decreased 0,8 percent to 597,9 million USD from the 602,6 million USD reported for last year´s third quarter. The sales decrease was attributable to negative pricing/mix of 2,4 percent, due to continued pricing pressures and substantial promotional activity, and 0,6 percent due to the deconsolidation of a VIE. Partially offsetting these declines were increased volume of 1,4 percent and a 0,8 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 volume increases were partially offset by sales declines in white bread, specialty bread, and breakfast breads in the branded retail channel. 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.

DSD Segment: During the quarter, the company´s direct store delivery (DSD) sales decreased 2,5 percent. The decrease consisted of negative pricing/mix of 3,4 percent and 0,8 percent due to the deconsolidation of the VIE. Increased volume of 1,7 percent partially offset the declines. The increased volume was primarily the result of increases in branded soft variety and branded sandwich rounds. The branded retail channel in the DSD segment increased both in dollars and volume in the third quarter as compared to the same quarter last year. The increase in the branded retail channel was more than offset by declines in the store-brand retail and foodservice channels. While store-branded retail sales dollars were down, the channel did experience volume growth. The decline in the foodservice channel was mainly attributable to decreases in the fast food category.

Warehouse Delivery Segment: Warehouse delivery sales increased 6,5 percent, reflecting a 4,1 percent contribution from acquisitions, positive pricing/mix of 2,2 percent and volume increases of 0,2 percent. The warehouse delivery segment experienced declines in the branded retail and contract manufacturing channels, and increases in the store-brand retail and foodservice channels. The increase in the store-brand retail channel and the decrease in the branded retail channel resulted from a shift in snack cake sales from branded retail to store-brand retail.

Net income for the quarter was 31,2 million USD, down slightly from the 31,9 million USD in the third quarter of fiscal 2009. For the quarter, diluted earnings per share were flat at 0,34 USD.

For the quarter, gross margin as a percent of sales was 47,1 percent, up 60 basis points as compared to 46,5 percent in last year´s third quarter. This increase was due primarily to decreases in ingredient costs 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, and start-up costs associated with new production lines at several bakeries.

Selling, distribution, and administrative costs as a percent of sales for the quarter were 36,0 percent compared to 34,9 percent in the prior year. This increase was due primarily to higher workforce-related costs and the decrease in sales quarter over quarter.

Depreciation and amortization expenses for the third quarter remained relatively stable as a percent of sales compared to the prior year quarter. Net interest income for the quarter was 1,0 million USD higher than last year´s third quarter due to lower interest expense as a result of less debt outstanding. The effective tax rate for the quarter was 34,9 percent as compared to 35,5 percent last year.

Operating margin as a percent of sales for the quarter was 7,8 percent compared to 8,5 percent in the third quarter of 2009. Ebitda as a percent of sales for the quarter was 11,1 percent compared to 11,6 percent for the same quarter last year.

During the third quarter, the company invested 19,4 million USD in capital improvements and paid dividends of 18,4 million USD to shareholders. During the quarter, the company acquired 822’200 shares of its common stock under its share repurchase plan for 20,6 million USD, an average of 25,11 USD per share. Since the inception of the share repurchase plan, the company has acquired 23,6 million USD shares of its common stock for 387,8 million USD, an average of 16,46 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 2010 decreased 1,2 percent to 2,00 billion USD compared to 2,02 billion USD reported for the 40 weeks of 2009. The sales decrease consisted of negative pricing/mix of 2,7 percent and 0,4 percent due to the deconsolidation of the VIE. Partially offsetting these declines were increased volume of 0,7 percent and a 1,2 percent contribution from acquisitions. The volume increase was primarily driven by Nature´s Own soft variety bread 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 branded white bread and foodservice.

DSD Segment: Year-to-date, the company´s DSD sales decreased 3,1 percent. The decrease was attributable to negative pricing/mix of 3,1 percent and 0,5 percent due to the deconsolidation of the VIE. These decreases were partially offset by increased volume of 0,5 percent. The increased volume was mainly due to increases in branded soft variety, branded sandwich rounds, and store-brand buns and rolls, partially offset by a decrease in branded white bread.

Warehouse Delivery Segment: For the 40 weeks of 2010, warehouse delivery sales increased 7,9 percent, reflecting a 7,1 percent contribution from acquisitions and volume increases of 1,1 percent. These positive items were partially offset by negative pricing/mix of 0,3 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.

Year-to-date, net income was 105,6 million USD, an increase of 6,0 percent compared to 99,6 million USD year-to-date last year. Year-to-date, diluted earnings per share increased 6,5 percent to 1,14 USD as compared to 1,07 USD last year. Last year´s results included a gain on acquisition of 0,02 USD per diluted share relating to a May 2009 acquisition.

Gross margin for the 40 weeks of 2010 was 47,5 percent of sales compared to 46,4 percent for the same period in 2009. This increase was due primarily to decreases in ingredient costs 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 and start-up costs associated with new production lines at several of our bakeries.

Year-to-date, selling, distribution, and administrative costs as a percent of sales were 36,3 percent compared to 35,6 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 and the decrease in sales year over year.

Depreciation and amortization expenses year-to-date have remained relatively stable as a percent of sales. Net interest income for the 40 weeks of 2010 was 2,5 million USD higher than the same period last year due to lower interest expense as a result of less debt outstanding. Year-to-date, the effective tax rate was 35,3 percent as compared to 36,2 percent last year. The full-year tax rate is expected to be approximately 35,5 percent.

Operating margin as a percent of sales for the 40 weeks of 2010 improved slightly to 8,0 percent compared to 7,9 percent for the same period in 2009. Ebitda as a percent of sales increased to 11,3 percent year-to-date compared to 10,9 percent year-to-date last year.

Guidance for Fiscal 2010 and Preliminary Guidance for Fiscal 2011

The company revised guidance for 2010 and now expects sales to be flat to slightly up. Diluted earnings per share are expected to grow ten to twelve percent, excluding the 0,02 USD per share gain on acquisition recorded in 2009. Capital spending in fiscal 2010 is expected to be approximately 95 to 100 million USD.

Providing preliminary guidance for 2011, Deese said the company expects sales growth of 3,0 to 6,0 percent, excluding future acquisitions, and diluted earnings per share growth of 8,0 to 13,0 percent. Capital expenditures for fiscal 2011 are expected to be 90 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.