Flowers Foods: Reports Second Quarter 2016 Results

Thomasville / GA. (ff) Flowers Foods Inc., one of the largest producer and marketer of fresh packaged bakery foods in the U.S., reported financial results for the company’s 12-week second quarter ended July 16, 2016.

Summary Q2/2016 versus Q2/2015

Compared to the prior year second quarter where applicable

  • Sales increased 5.2 percent to 935.0 million USD. Acquisitions of Dave’s Killer Bread (DKB) and Alpine Valley Bread (Alpine) contributed 5.6 percent to the overall sales increase.
  • Diluted EPS remained unchanged at 0.24 USD.
  • Adjusted diluted EPS increased 4.0 percent to 0.26 USD.(1)
  • Net income decreased 1.2 percent to 51.2 million USD, adjusted net income(1) increased 1.5 percent.
  • Adjusted Ebitda(2) increased 5.2 percent to 118.7 million USD.
  • Revised guidance for the year ending December 31, 2016:
    • Sales range of 3.930 billion USD to 3.986 billion USD.
    • Diluted EPS range of 0.88 USD to 0.93 USD.
    • Adjusted diluted EPS(1) range of 0.90 USD to 0.95 USD.
  • Launched Project Centennial, a comprehensive business and operational review.

(1) See reconciliations of non-GAAP measures in the financial statements following this release (on flowersfoods.com).
(2) Earnings before Interest, Taxes, Depreciation and Amortization. See reconciliations of non-GAAP measures in the financial statements.

CEO’s Remarks

«Benefiting from strong consumer demand for organic breads, our two recent acquisitions, DKB and Alpine, along with expansion markets, drove sales growth in the second quarter, offsetting sales declines in our core markets due to competitive pressures», said Allen Shiver, Flowers Foods president and CEO. «Over the past five years, we have built a strong competitive position in the marketplace, as we made strategic acquisitions to extend our geographic reach and enhance our portfolio of brands. I am confident that with Project Centennial, an in-depth review of our operations, we can enhance shareholder value by identifying new avenues for growth, as well as focusing on ways to become a more efficient and profitable organization better able to deliver long-term value for shareholders».

Revised Fiscal 2016 Guidance

Due to increased competitive activity and weak category volumes, the company lowered its outlook for fiscal 2016 sales, diluted EPS, and adjusted diluted EPS. Sales are now expected to be in the range of 3.930 billion USD to 3.986 billion USD, representing growth of approximately 4.0 percent to 5.5 percent over fiscal 2015 reported sales of 3.779 billion USD. EPS is now expected to be in the range of 0.88 USD to 0.93 USD, representing a change of approximately -1.1 percent to +4.5 percent over fiscal 2015 EPS of 0.89 USD. Adjusted EPS is now expected to be in the range of 0.90 USD to 0.95 USD, representing a change of approximately -2.2 percent to +3.3 percent over fiscal 2015 adjusted EPS of 0.92 USD.

Commenting on the revised guidance, Shiver said, «Our revised guidance takes into consideration soft consumer demand in the bakery category, as well as heightened promotional activity in our industry. The Flowers team has significant experience successfully navigating periods of heightened promotional activity like we are currently seeing, and we have already taken steps to address underperforming markets and improve profitability. Those markets have begun steady improvement, and as sales grow, the company expects to leverage costs and realize efficiencies».

«As always, we continue to manage Flowers for the long-term», Shiver continued, «and so far this year, we’ve made good strides building share in growing market segments, extending our geographic reach, and investing in bakeries to support our growth. Even though these activities required time and investment, we are confident they are the right things to do in order to build sustainable value».

Project Centennial: Comprehensive Business and Operational Review

Recognizing the challenges facing food companies today, the company has teamed with Accenture and launched Project Centennial, an enterprise-wide business and operational review. Through this project, Flowers is evaluating opportunities to enhance revenue growth, streamline operations, drive efficiencies, and make investments that strengthen its competitive position and improve margins over the long term. The project is in its early stages, and the company expects to provide additional information and details later in the year.

Consolidated Second Quarter 2016 Results Commentary

Consolidated sales for the quarter were 935.0 million USD, an increase of 5.2 percent compared to the prior year second quarter. Of Flowers’ consolidated sales increase, acquisitions contributed 5.6 percent, pricing/mix decreased 0.5 percent, and volume increased 0.1 percent.

Consolidated net income for the quarter was 51.2 million USD, a decrease of 1.2 percent. Adjusted net income was 54.0 million USD, an increase of 1.5 percent.

When compared to the prior year, net income and adjusted net income were positively affected by the increase in adjusted Ebitda described below. Negatively impacting net income and adjusted net income was the increase in depreciation and amortization expense, the increase in net interest expense, and increased certain litigation and consulting costs. Additionally, net income was affected by a pension settlement loss this year and an asset impairment last year.

Consolidated adjusted Ebitda for the quarter was 118.7 million USD, an increase of 5.2 percent. Adjusted Ebitda margin was 12.7 percent, unchanged from the year-ago quarter. As a percentage of sales, declines in input costs (ingredients, packaging, and utilities), distributor distribution fees, and employee incentive costs were offset by increases in workforce-related costs, outside purchased products, marketing expenses (primarily due to the rollout of DKB), and legal and consulting costs (primarily due to distributor litigation and Project Centennial).

Diluted EPS in the second quarter 2016 was 0.24 USD, equal to the year-ago quarter. Excluding costs associated with a pension de-risking settlement, adjusted diluted EPS was 0.26 USD, an increase of 0.01 USD per share, or 4.0 percent, when compared to second quarter 2015 adjusted diluted EPS of 0.25 USD. In the second quarter of 2015, adjusted diluted EPS excluded an asset impairment of 0.01 USD per share.

When compared to the prior year, diluted EPS and adjusted diluted EPS were positively affected by the increase in adjusted Ebitda described above and a reduction in the average number of diluted shares outstanding. The increase in depreciation and amortization expense, net interest expense, and increased certain litigation and consulting costs negatively affected diluted EPS and adjusted diluted EPS.

Cash Flow

During the quarter, cash flow from operating activities was 73.2 million USD, capital expenditures were 17.8 million USD, and dividends paid were 33.4 million USD.

DSD Segment Second Quarter Results Commentary

Direct-Store-Delivery (DSD) segment sales for the quarter were 785.8 million USD, an increase of 4.5 percent compared to the prior year second quarter. Of this increase, the DKB acquisition contributed 5.4 percent, volume decreased 1.8 percent, and pricing/mix increased 0.9 percent. Excluding the DKB acquisition, positive price/mix in the branded retail category was more than offset by volume declines in the category driven by the competitive marketplace. Branded soft variety and specialty loaf bread experienced the largest declines, partially offset by growth in branded cake and buns and rolls. Non-retail and other sales decreased modestly primarily due to volume declines.

DSD segment operating income for the quarter was 80.1 million USD, an increase of 2.6 percent compared to the prior year second quarter. Operating margin for the DSD segment was 10.2 percent in the second quarter, as compared to 10.4 percent in the prior year quarter. Items positively impacting DSD segment operating income and adjusted Ebitda are described below. Negatively impacting DSD segment operating income was higher depreciation and amortization expense. In the second quarter of 2015, DSD segment operating income was negatively impacted by an asset impairment charge of approximately 2.3 million USD.

DSD segment Ebitda for the quarter was 108.1 million USD, an increase of 0.7 percent compared to the prior year second quarter, adjusted for an asset impairment. Ebitda margin for the DSD segment was 13.8 percent in the second quarter, as compared to 14.3 percent in the prior year quarter, adjusted for an asset impairment. As a percentage of sales, declines in input costs and distributor distribution fees were more than offset by higher workforce-related costs, purchases of co-manufactured product, and legal costs. Going forward, to the extent sales of DKB increase on the DSD network, purchases of co-manufactured product are expected to decline as a percentage of sales, as additional internal capacity comes online. This is expected to be partially offset by higher input and workforce-related costs as a percentage of sales.

Warehouse Segment Second Quarter Results Commentary

Warehouse segment sales for the quarter were 149.3 million USD, an increase of 9.1 percent compared to the prior year second quarter. Of this increase, pricing/mix decreased 3.3 percent, volume increased 5.8 percent, and the Alpine acquisition contributed 6.6 percent. Excluding the Alpine acquisition, volume growth of store branded retail, vending, foodservice (driven by new foodservice products for certain customers), and branded bakery/deli items more than offset volume declines of branded retail items and pricing/mix declines largely due to lower foodservice and contract manufacturing pricing/mix.

Warehouse segment operating income for the quarter was 15.7 million USD, an increase of 12.4 percent compared to the prior year second quarter. Operating margin for the Warehouse segment was 10.5 percent in the second quarter, as compared to 10.2 percent in the prior year quarter. Items positively impacting Warehouse segment operating income and Ebitda are described below. Negatively impacting Warehouse segment operating income was higher depreciation and amortization expense.

Warehouse segment Ebitda for the quarter was 20.3 million USD, an increase of 15.6 percent compared to the prior year second quarter. Ebitda margin for the Warehouse segment was 13.6 percent in the second quarter, as compared to 12.8 percent in the prior year quarter. As a percentage of sales, increases in workforce-related costs, and input costs were more than offset by increased sales volumes.

Dividends and Share Repurchases

During the quarter, the company settled the accelerated stock repurchase program completed in the first quarter. Year-to-date, the company repurchased approximately 6.9 million shares. Currently, there are 6.8 million shares remaining on the company’s current share repurchase authorization. As in the past, the company expects to continue to make opportunistic share repurchases under this authorization. Since the beginning of fiscal 2016, through both dividends and share repurchases, the company has returned 191 million USD to shareholders.