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Flowers Foods: Reports Q4 and Year-End 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 fourth quarter and year ended December 31, 2016. The company also provided an update on Project Centennial.

Fiscal 2016 Summary

Compared to the prior year where applicable

  • Sales increased 3.9 percent to 3.927 billion USD. Acquisitions of Dave’s Killer Bread (DKB), until cycled September 12, 2016, and Alpine Valley Bread (Alpine), until cycled October 13, 2016, contributed 4.0 percent to the overall sales increase.
  • Diluted EPS decreased 12.4 percent to 0.78 USD.
  • Adjusted diluted EPS(1) decreased 1.1 percent to 0.91 USD.
  • Net income decreased 13.4 percent to 163.8 million USD.
  • Adjusted net income(1) decreased 3.0 percent to 190.8 million USD.
  • Adjusted Ebitda(2) increased 1.4 percent to 446.8 million USD.
  • Costs associated with Project Centennial were 6.3 million USD, or 0.02 USD per share

Fourth Quarter Summary

Compared to the prior year fourth quarter where applicable

  • Sales increased 1.2 percent to 868.7 million USD.
  • Diluted EPS decreased 60.0 percent to 0.06 USD.
  • Adjusted diluted EPS(1) was unchanged at 0.16 USD.
  • Net income decreased 59.6 percent to 13.0 million USD.
  • Adjusted net income(1) increased 0.5 percent to 34.1 million USD.
  • Adjusted Ebitda(2) increased 1.2 percent to 87.7 million USD.
  • Costs associated with Project Centennial were 3.8 million USD, or 0.01 USD per share.
  • Disposed of idle assets, reducing annual carrying costs going forward by approximately 3 to 4 million USD.
(1) See reconciliations of non-GAAP measures in the financial statements following this release.
(2) Earnings before Interest, Taxes, Depreciation and Amortization, adjusted for certain items affecting comparability. See reconciliations of non-GAAP measures in the financial statements following this release.

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Matters Affecting Comparability: In fiscal 2016, the company recorded trademark and asset impairments of 24.9 million USD (recorded in the fourth quarter), legal settlements and related tax liabilities of 10.5 million USD (of which 9.25 million USD were recorded in the fourth quarter), pension plan settlement losses of 6.6 million USD (of which 0.2 million USD were recorded in the fourth quarter), and loss on extinguishment of debt of 1.9 million USD (recorded in the third quarter).

In fiscal 2015, the company recorded acquisition-related costs of 6.2 million USD (of which 1.2 million USD were recorded in the fourth quarter), and asset impairments of 3.8 million USD (of which 1.5 million USD were recorded in the fourth quarter).

For the 12 Week Period Ended For the 52 Week Period Ended
12/31/2016 1/2/2016 12/31/2016 1/2/2016
Net income per diluted common share USD 0.06 USD 0.15 USD 0.78 USD 0.89
Trademark impairment 0.04 0.04
Asset impairment and facility closure costs 0.03 0.01 0.03 0.01
Legal settlement 0.03 0.03
Pension settlement/debt extinguishment 0.02
Acquisition-related costs 0.02
Adjusted net income per diluted common share USD 0.16 USD 0.16 USD 0.91 USD 0.92
Certain amounts may not compute due to rounding.

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The trademark impairments are primarily the result of a brand rationalization initiative that is part of Project Centennial, while the asset impairments relate to certain assets held for sale. The legal settlements relate to agreements reached to resolve certain independent distributor program litigation. The pension plan settlement losses are due to our ongoing pension plan de-risking strategy. The loss on extinguishment of debt is related to the repayment of our then existing term loan facilities with a portion of the proceeds from the issuance of senior notes in the third quarter of fiscal 2016.

CEO’s Remarks

«Our adjusted fourth quarter results were in-line with expectations. We gained market share, driven by the solid performance of Dave’s Killer Bread, volume improvement by Nature’s Own, and growing sales of the Wonder brand. We also had lower input costs that helped offset higher workforce-related and consulting costs», said Allen Shiver, Flowers Foods president and CEO. «With Project Centennial we are taking decisive action to pivot towards the consumer and remove complexity and costs from our business. In fiscal 2017, we are moving forward with urgency to reinvigorate our core business, reduce costs, and build capabilities to efficiently grow our brands». For 52-week Fiscal 2017, the Company Expects:

  • Sales in the range of 3.927 billion USD to 4.006 billion USD, representing growth of approximately 0.0 percent to 2.0 percent.
  • Adjusted diluted EPS in the range of 0.85 USD to 0.95 USD, excluding a gain on the sale of the Cedar Rapids, Iowa mix plant of approximately 0.09 USD to 0.10 USD per share, and costs associated with Project Centennial of approximately 0.07 USD to 0.09 USD per share.
  • During fiscal 2017, the company will be transitioning to a more effective operating model. Costs associated with these efforts are anticipated to be weighted to the first half of 2017, while the majority of savings are expected to be realized in fiscal 2018.

Project Centennial Update

Based on the results of a comprehensive diagnostic review, Flowers has begun executing on four strategic initiatives:

  1. Reinvigorating the core business -invest in the growth and innovation of our core brands, streamline our brand and product portfolio, improve trade promotion management, and strengthen our partnership with distributors so they can grow their businesses
  2. Capitalizing on product adjacencies -greater focus on growing segments of the bakery category, such as foodservice, in-store bakery, impulse items, and healthy snacking
  3. Reducing costs to fuel growth -reduce complexity and better leverage scale to lower costs
  4. Developing leading capabilities -invest in capabilities to become a more centralized and analytics-focused company

Flowers is targeting at least 250 basis points of net Ebitda margin improvement by fiscal 2021, and expects to achieve run rate cost reductions of at least 45 million USD by fiscal 2018, primarily from greater cost discipline in purchased goods and services.

Flowers’ priorities for fiscal 2017 and 2018 are to simplify and streamline its brand assortment, provide additional tools to distributors to enable them to grow their businesses, reduce costs of purchased goods and services, and put in place a more efficient operating model for a national company. During this phase of the project, Flowers expects sales growth to be in the range of flat to 2 percent, and Ebitda margins in the range of 12 percent to 13 percent.

In 2019 and beyond, Flowers expects to fully realize the benefits of a stronger brand architecture and a lower-cost operating model. These benefits are expected to drive sales growth in the range of 3 percent to 4 percent, and Ebitda margins in the range of 13 percent to 14 percent.

Subsequent Event

On January 14, 2017, Flowers completed the sale of a non-core mix plant in Cedar Rapids that resulted in a preliminary gain on sale to be recorded in the first quarter of fiscal 2017 in the range of 31.0 million USD to 33.0 million USD.

Consolidated Fourth Quarter 2016 Results Commentary

Consolidated sales for the quarter were 868.7 million USD, an increase of 1.2 percent compared to the prior year fourth quarter. Of the consolidated sales increase, pricing/mix increased 0.1 percent, and volume increased 1.1 percent. The Alpine acquisition was cycled at the beginning of the fourth quarter.

Diluted EPS in the fourth quarter 2016 was 0.06 USD, a decrease of 0.09 USD, or 60.0 percent, when compared to fourth quarter 2015 diluted EPS of 0.15 USD. Adjusted for the items discussed above, diluted EPS was 0.16 USD, equal to the year ago quarter.

Net income in the fourth quarter 2016 was 13.0 million USD, a decrease of 59.6 percent when compared to the fourth quarter 2015. The decline in net income was driven primarily by higher asset impairments, a legal settlement, and higher workforce-related and consulting costs, partially offset by lower input costs, income taxes, and the absence of acquisition-related costs.

Adjusted for the items discussed above, net income was 34.1 million USD, an increase of 0.5 percent when compared to fourth quarter 2015 adjusted net income of 34.0 million USD.

Consolidated Ebitda, adjusted for the items discussed above, for the quarter was 87.7 million USD, an increase of 1.2 percent when compared to the fourth quarter 2015. Adjusted Ebitda margin was 10.1 percent, unchanged when compared to the prior year fourth quarter. As a percentage of sales, declines in input costs (ingredients, packaging, and utilities) and outside purchases were offset primarily by increases in workforce-related costs, distributor distribution fees, and consulting costs. As of the end of 2016, purchases of co-manufactured product had declined significantly as a percentage of sales, due to the additional organic production capacity provided by the Alpine bakery and our Tuscaloosa, Ala. bakery, which began producing organic bread at the beginning of the second quarter 2016.

Cash Flow

During the quarter, cash flow from operating activities was 62.8 million USD, capital expenditures were 34.3 million USD, and dividends paid were 33.3 million USD. During the quarter, the company made net payments on debt borrowings of 32.8 million USD. Other cash flow sources consisted primarily of changes in net working capital items, sale of idle assets, and proceeds from stock option exercises.

DSD Segment Fourth Quarter Results Commentary

Direct-Store-Delivery (DSD) segment sales for the quarter were 730.5 million USD, an increase of 2.2 percent compared to the prior year fourth quarter. Of this increase, volume increased 1.6 percent and pricing/mix increased 0.6 percent. Branded organic breads and store-branded items drove the increase.

DSD segment operating income for the quarter was 22.1 million USD, a decrease of 57.0 percent compared to the prior year fourth quarter. Operating margin for the DSD segment was 3.0 percent in the fourth quarter, as compared to 7.2 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 were a legal settlement charge and asset impairments.

DSD segment adjusted Ebitda for the quarter, which excludes the legal settlement and asset impairments discussed above, was 83.3 million USD, an increase of 3.5 percent compared to the prior year fourth quarter, adjusted for an asset impairment in the prior year. Adjusted Ebitda margin for the DSD segment was 11.4 percent in the fourth quarter, as compared to 11.3 percent in the prior year quarter. As a percentage of sales, declines in input costs and outside purchases more than offset higher workforce-related costs and intercompany purchases of product. Outside purchases of DKB products decreased significantly due to the additional capacity provided by the Tuscaloosa bakery conversion, as well as the Alpine bakery in the Warehouse segment.

Warehouse Segment Fourth Quarter Results Commentary

Warehouse segment sales for the quarter were 138.2 million USD, a decrease of 3.6 percent compared to the prior year fourth quarter. Of this decrease, pricing/mix decreased 3.2 percent and volume decreased 0.4 percent. Volume declines for cake items and branded organic bread, and pricing/mix declines in foodservice and contract manufacturing were partially offset by volume increases for foodservice products.

Warehouse segment operating income for the quarter was 11.7 million USD, a decrease of 13.9 percent compared to the prior year fourth quarter. Operating margin for the Warehouse segment was 8.5 percent in the fourth quarter, a decrease of 100 basis points as compared to the prior year quarter. Lower sales, which spread fixed costs over a smaller base, resulted in the decrease in Warehouse segment operating income.

Warehouse segment Ebitda for the quarter was 16.4 million USD, a decrease of 11.0 percent compared to the prior year fourth quarter. Ebitda margin for the Warehouse segment was 11.8 percent in the fourth quarter, as compared to 12.8 percent in the prior year quarter. Lower sales primarily drove the margin decline.

Dividends and Share Repurchases

In fiscal 2016, the company repurchased 6.9 million shares. 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.

During fiscal 2016, through both dividends and share repurchases, the company has returned 257.4 million USD to shareholders.