Flowers Foods Inc. Reports 13 Percent Sales Increase In Third Quarter

Flowers Foods, Inc. reported sales and earnings for its 12 and 40 weeks ended Oct. 8, 2011. In summary, Flowers Foods:

• Reported diluted earnings per share of $0.23, equal to last year's third quarter; year-to-date, diluted earnings per share of $0.73 ($0.79 excluding one-time charges relating to the Tasty Baking acquisition and the closing of a facility in the first quarter), compared to $0.76 for the first nine months of 2010;
• Achieved sales increase of 13.0 percent compared to last year's third quarter, with price/mix contributing 4.9 percent and Tasty acquired sales contributing 8.7 percent, offset by a volume decline of 0.6 percent; increased sales year-to-date 6.0 percent, with price mix of 3.7 percent, acquisitions contribution of 3.6 percent, offset by a volume decline of 1.3 percent;
• Continued to experience pressure on margins from higher input costs;
• Introduced the Tastykake brand in Flowers' core markets in the Southeast; continued integration of Tastykake;
• Announced 2011 sales growth expected to be in line with guidance of 7 percent to 11 percent; 2011 earnings expected to be at low end of guidance; and
• Offered outlook for 2012 — sales within long-term growth targets of 5 percent to 10 percent; input costs projected up 4 percent to 8 percent.

George E. Deese, Flowers Foods' chairman and chief executive officer, said in a prepared statement, "Flowers Foods achieved strong sales growth in the quarter and delivered solid earnings despite the challenges presented by ongoing economic uncertainty. Our sales growth was driven by a combination of pricing/mix and the contribution from the Tasty acquisition. Earnings were driven by continued strong performance in the DSD segment, although cost increases and sales mix pressured gross margin. In the warehouse segment, margins were negatively impacted as significantly higher ingredient costs were not fully offset by pricing and by the previously announced shift in certain planned volume to the fourth quarter.

"I am pleased that our integration of Tasty is progressing as scheduled and meeting our expectations. During the quarter, we rolled out Tastykake products in our DSD markets across the Southeast and we will continue moving the brand into other Flowers markets.

"The weak economy and high unemployment continued to pressure the markets and impact consumer buying patterns during the quarter. However, we remain confident in our team's ability to manage through those challenges and leverage our long history of taking care of customers' needs, outperforming in the marketplace, and creating long-term value for shareholders," Deese said.

For the 12-week third quarter of 2011, sales increased 13.0 percent to $675.4 million compared to the $597.9 million reported for last year's third quarter. The sales increase was attributable to net favorable pricing/mix of 4.9 percent, contributions from the Tasty acquisition of 8.7 percent, partially offset by decreased volume of 0.6 percent.  Price/mix and dollar sales increased across all major channels. The volume decline was primarily the result of lower volume in the branded retail channel, particularly in the white bread and snack cake categories, partially offset by increases in the store brand, foodservice and contract manufacturing channels.

Net income for the quarter was $31.0 million compared to the $31.2 million reported for the third quarter of fiscal 2010. Net income was negatively impacted $.5 million, net of tax, due to one-time acquisition costs. Diluted earnings per share were $.23 compared to $.23 reported in the third quarter last year.

Gross margin as a percent of sales for the quarter was 45.9 percent compared to 47.1 percent in last year's third quarter, a decline of 120 basis points. This decrease was due primarily to an increase in ingredient and packaging costs as a percent of sales, partially offset by price increases and decreases in workforce-related costs as a percent of sales. The increase in ingredient costs was primarily attributable to flour, sweeteners, shortening, and cocoa.

Selling, distribution, and administrative costs as a percent of sales for the quarter were 35.4 percent compared to 36.0 percent in the same quarter last year. This decrease of 60 basis points as a percent of sales was primarily the result of lower workforce-related costs as a percent of sales.

Depreciation and amortization expenses for the quarter remained relatively flat as a percent of sales as compared to last year's third quarter. Net interest income for the quarter decreased $.9 million from last year's third quarter due to higher interest expense as a result of borrowings related to the Tasty acquisition. The effective tax rate for the quarter was 35.4 percent compared to 34.9 percent in the third quarter last year. This increase was primarily due to favorable discrete items in last year's third quarter.

Operating margin as a percent of sales for the quarter was 7.1 percent compared to 7.8 percent in last year's third quarter. EBITDA as a percent of sales for the third quarter was 10.5 percent compared to 11.1 percent for the same quarter last year.

During the quarter, the company's DSD sales increased 16.3 percent. This increase consisted of positive net pricing/mix of 4.8 percent, an 11.0 percent contribution from the Tasty acquisition, and volume increases of 0.5 percent. Price/mix and dollar sales increased quarter over quarter in all major channels. Increased volumes in the store-brand and foodservice channels were partially offset by decreased volume in the branded retail channel.

Operating income, defined as earnings before interest and taxes (EBIT), for the DSD segment was $47.0 million, or 8.5 percent of sales for the third quarter as compared to $42.2 million, or 8.9 percent of sales in last year's third quarter. This increase was primarily due to increased sales, partially offset by increases in ingredients, mainly flour, and packaging costs. During the quarter, Tasty was neutral to operating income, as expected.

Sales in the warehouse delivery segment were relatively flat as compared to the third quarter last year. Net pricing/mix increases of 3.4 percent were offset by volume declines of 3.4 percent. All major channels experienced positive pricing/mix. Decreased volume in the branded retail and store-brand channels was partially offset by increased volume in the foodservice and contract manufacturing channels.

Operating income for the warehouse segment was $7.3 million, or 6.0 percent of sales for the third quarter as compared to $12.2 million, or 10.0 percent of sales for last year's third quarter. This decrease is due primarily to higher ingredient costs, mainly flour, sweeteners, shortening, and cocoa, which were not fully offset by pricing.

Although negatively impacted during the quarter by hedging activities and pension contributions, cash flow from operations was $28.6 million. During the third quarter, the company invested $21.9 million in capital improvements and paid dividends of $20.3 million to shareholders. During the quarter, under its share repurchase plan, the company acquired 459,700 shares of its common stock for $8.6 million, an average price per share of $18.64. Since the inception of the plan, the company has acquired 37.8 million shares of its common stock for $430.8 million for an average price per share of $11.40.  Under the plan, 7.2 million shares may still be repurchased.

For the 40 weeks of 2011, sales increased 6.0 percent to $2.12 billion compared to $2.00 billion last year. The sales increase consisted of positive net price/mix of 3.7 m percent, contributions from the Tasty acquisition of 3.6 percent, and decreased volume of 1.3 percent. Price/mix increased across all major channels. Volume was impacted by lower volume in the branded retail channel. The foodservice channel, driven by a decrease in the institutional category, also experienced volume declines. Partially offsetting these volume declines were increases in store brand volume.

For the three quarters, net income was $100.4 million, a decrease of 4.9 percent as compared to the $105.6 million reported for the 40 weeks of fiscal 2010. Diluted earnings per share were $.73, a 3.9 percent decrease from the $.76 reported in the three quarters last year. Excluding one-time costs of $7.9 million, net of tax, relating to the acquisition of Tasty and the closing of a manufacturing facility in the first quarter, diluted earnings per share were $.79.

Gross margin as a percent of sales for the 40 weeks was 47.2 percent compared to 47.5 percent for the 40 weeks last year. Costs for a manufacturing facility closure in the first quarter negatively impacted gross margin $2.8 million, or 10 basis points as a percent of sales, and ingredient costs increased 30 basis points as a percent of sales.

Selling, distribution, and administrative costs as a percent of sales for the 40 weeks were 36.6 percent compared to 36.3 percent for the 40 weeks last year. One-time costs of $6.0 million associated with the Tasty acquisition negatively impacted selling, distribution, and administrative costs 30 basis points as a percent of sales. Costs of $2.4 million associated with the manufacturing facility closure negatively impacted selling, distribution, and administrative costs 10 basis points as a percent of sales.

Depreciation and amortization expenses year-to-date remained relatively flat as a percent of sales as compared to last year's year-to-date. Net percent interest income for the 40 weeks decreased $0.6 million from last year's forty weeks. The effective tax rate year-to-date was 35.2 percent as compared to 35.3 percent year-to-date last year. The full-year tax rate is expected to be approximately 35.0 percent to 35.5 percent.

For the 40 weeks, operating margin as a percent of sales was 7.2 percent compared to 8.0 in last year's year-to-date. Excluding the one-time acquisition related costs of $6.0 million and one-time manufacturing facility closure costs of $5.7 million, operating margin as a percent of sales was 7.7 percent. EBITDA as a percent of sales year-to-date was 10.6 percent compared to 11.3 percent for the same period last year. Excluding the one-time acquisition related costs and the manufacturing facility closure costs, EBITDA as a percent of sales was 11.1 percent.