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 16-week first quarter ended April 22, 2017.
First Quarter Summary
Compared to the prior year first quarter where applicable
- Sales decreased 1.4 percent to 1.188 billion USD. Excluding a divestiture, sales decreased 0.9 percent.
- Diluted EPS increased 3.6 percent to 0.29 USD.
- Adjusted diluted EPS decreased 10.7 percent to 0.25 USD.
- Net income increased 1.8 percent to 60.4 million USD.
- Adjusted net income decreased 11.3 percent to 52.6 million USD.
- Adjusted Ebitda decreased 4.2 percent to 132.8 million USD.
CEO’s Remarks
«Our competitive position remains solid as we navigate a difficult marketplace», said Allen Shiver, Flowers Foods president and CEO. «During the first quarter, with Dave’s Killer Bread, Nature’s Own, and Wonder, we gained share in our key segments of the bread category. We also delivered lower production costs as a percentage of sales, the result of investments in capacity and improved manufacturing efficiencies. In early May, we launched four organic breakfast items to expand offerings under the DKB brand».
Shiver continued, «Our top priority is to create value for our shareholders by driving sustainable, profitable sales growth, while improving our operational efficiency. This priority is the focus of Project Centennial. We are on track with our work to streamline the brand assortment, reduce costs for purchased goods and services, and enable independent distributors. Earlier this month, we announced plans to change our organizational structure to support greater brand growth, accountability, operational efficiency, and our long-term strategy. I’m confident these efforts, and the others outlined under Project Centennial, will deliver value to shareholders in line with our long-term goals».
Updated Guidance for Fiscal 2017
- Given category trends to date, the company now expects sales to trend to the lower end of the previously provided 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 is now expected to be in the middle of the previously provided range of 0.85 USD to 0.95 USD, excluding the gain on the sale of the Cedar Rapids, Iowa mix plant of 0.09 USD per share, and costs associated with Project Centennial of approximately 0.07 USD to 0.09 USD per share.
Matters Affecting Comparability
In first quarter 2017, the company recorded Project Centennial consulting costs of 15.4 million USD, a gain on the divestiture of the non-core mix manufacturing business of 28.9 million USD, net lease termination costs of 0.6 million USD, and a legal settlement of 0.25 million USD. The Project Centennial consulting costs and the legal settlement are reflected in the selling, distribution and administrative (SD+A) expenses line item of the income statement. Net lease termination costs consist of 1.3 million USD of lease termination gain recognized in the SD+A expense line item and 1.8 million USD of lease termination cost recognized in the depreciation and amortization (D+A) line item of the income statement.
Project Centennial Recap
During the first quarter, the company made progress on growth and cost reduction initiatives under Project Centennial, including:
- Market assortment/SKU rationalization;
- Increased engagement with independent distributor partners;
- Development of forecasting and trade promotion management capabilities;
- Launch of continuous improvement pilot programs at key bakeries; and
- Implementation of new policies and procedures designed to lower the cost of purchased goods and services.
As previously announced on May 3, 2017, the company is being reorganized to emphasize brand growth and innovation, drive enhanced accountability, focus on margin expansion, and strengthen its long-term strategy. The new organizational structure establishes two business units – Fresh Bakery and Snacking/Specialty – and realigns key leadership roles. The company will transition to the new structure over the next several months with full implementation expected during fiscal 2018. Until that time, the company will continue to report results based on its Direct-Store-Delivery (DSD) and Warehouse Delivery segments.
Consolidated First Quarter 2017 Summary
Compared to the prior year first quarter where applicable
- Sales decreased 1.4 percent to 1.188 billion USD.
- Percentage point change in sales attributed to:
- Pricing/mix: Flat
- Volume: -0.9 percent
- Divestiture: -0.5 percent
- Net income increased 1.8 percent to 60.4 million USD. Excluding matters affecting comparability, net income decreased 11.3 percent to 52.6 million USD.
- Operating income increased 5.2 percent to 100.1 million USD. Excluding matters affecting comparability, operating income decreased 8.1 percent to 87.5 million USD.
- Adjusted Ebitda decreased 4.2 percent to 132.8 million USD, or 11.2 percent of sales, a 30 basis point decline.
- Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 51.2 percent of sales, a 40 basis point decline. This decline was primarily driven by fewer outside purchases of certain Dave’s Killer Bread(DKB) items due to the additional organic production capacity provided by Flowers bakeries in Mesa, Ariz. and Tuscaloosa, Ala., improved manufacturing efficiencies, and the divestiture of the mix business.
- SD+A expenses were 38.8 percent of sales, a 190 basis point increase. Of this increase, 120 basis points can be attributed to Project Centennial consulting costs of 15.4 million USD, a legal settlement of 0.25 million USD, and a net gain related to lease terminations of 1.3 million USD. The balance of this increase was primarily driven by higher distributor distribution fees due to the national rollout of the DKB brand in the company’s DSD markets at the beginning of the second quarter 2016, and a larger portion of sales being sold via independent distributors.
- D+A expenses were 47.2 million USD, 4.0 percent of sales, a 40 basis point increase. This increase was driven primarily by accelerated depreciation of approximately 1.8 million USD relating to lease terminations discussed above, as well as higher amortization expense associated with certain trademarks.
Overall softness in the fresh bread category, a competitive marketplace, and the divestiture of the mix manufacturing business resulted in the consolidated sales decline, partially offset by increased sales of the DKB branded products. The national rollout of the DKB brand on Flowers’ DSD network occurred at the beginning of the second quarter of fiscal 2016 resulting in significant sales growth of the brand, year over year.
On a consolidated basis, branded retail sales decreased 1.0 percent to 693.6 million USD, store branded retail sales increased 0.5 percent to 172.0 million USD, while non-retail and other sales decreased 3.2 percent to 322.0 million USD. The decrease in the branded retail category resulted from price/mix declines in soft variety bread and volume declines in cake and other branded retail products, somewhat offset by increased sales of organic bread. The increase in store branded retail sales was mostly attributable to volume increases for variety bread and buns and rolls, partially offset by volume decreases for cake. The impact of the mix manufacturing business divestiture, as well as decreases in volume, resulted in the decline in the non-retail and other category, which includes contract manufacturing, vending and foodservice.
DSD Segment Summary
Compared to the prior year first quarter where applicable
- Sales increased 0.1 percent to 999.9 million USD
- Percentage point change in sales attributed to:
- Pricing/mix: 0.3 percent
- Volume: -0.2 percent
- Operating income decreased 5.0 percent to 87.4 million USD. Excluding net lease termination costs of 0.6 million USD and a legal settlement of 0.25 million USD, operating income decreased 4.1 percent to 88.2 million USD.
- Adjusted Ebitda decreased 1.2 percent to 127.4 million USD, 12.7 percent of sales, a 20 basis point decline.
- Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 47.5 percent of segment sales, a 10 basis point decrease. This decline was primarily driven by lower outside purchases of product, mostly offset by costs associated with manufacturing those products internally.
- SD+A expenses were 39.7 percent of segment sales, a 20 basis points increase. This increase was primarily driven by higher distributor distribution fees due to the national rollout of the DKB brand in the company’s DSD markets at the beginning of the second quarter 2016, and a larger portion of sales being sold via independent distributors. DSD segment SD+A includes a net gain relating to lease terminations of approximately 1.3 million USD, or 10 basis points of segment sales and a legal settlement of 0.25 million USD.
- D+A expenses were 41.1 million USD, 4.1 percent of segment sales, a 40 basis point increase. This increase was driven by accelerated depreciation of approximately 1.8 million USD relating to lease terminations, as well as higher amortization expense associated with certain trademarks.
DSD segment branded retail sales increased 0.6 percent to 646.1 million USD, store branded retail sales increased 3.4 percent to 137.5 million USD, while non-retail and other sales decreased 3.5 percent to 216.2 million USD. The branded retail category increased due to significant sales growth of the DKB brand through its national rollout in our DSD markets. Partially offsetting this increase were declines in branded soft variety bread on lower pricing/mix and volume declines for other branded retail items. Store branded retail sales increased primarily due to volume gains in variety bread and buns and rolls. Non-retail and other sales decreased primarily due to volume declines, partially offset by positive pricing/mix.
Warehouse Segment Summary
Compared to the prior year first quarter where applicable
- Total segment sales decreased 8.6 percent to 187.8 million USD.
- Percentage point change in sales attributed to:
- Pricing/mix: -3.0 percent
- Volume: -2.8 percent
- Divestiture: -2.8 percent
- Operating income increased 138.5 percent to 44.7 million USD. Excluding the gain on divestiture, operating income decreased 15.6 percent to 15.8 million USD.
- Adjusted Ebitda decreased 11.5 percent to 22.1 million USD, 11.8 percent of sales, a 40 basis point decline.
- Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 71.0 percent of segment sales, a 10 basis point increase. This increase was primarily driven by sales declines.
- SD+A expenses were 17.2 percent of segment sales, a 30 basis point increase. This increase was primarily driven by significantly lower sales that spread the costs over a smaller sales base.
- D+A expenses were 6.3 million USD.
Decreased sales of snack cakes and Alpine Valley branded organic breads, and the impact of the mix manufacturing business divestiture resulted in the sales decrease in the Warehouse segment. Warehouse segment branded retail sales declined 18.6 percent to 47.5 million USD, store branded retail sales decreased 9.8 percent to 34.5 million USD, while non-retail and other sales decreased 2.7 percent to 105.8 million USD. Branded retail sales decreased largely due to volume declines in cake and organic bread. During the second quarter of fiscal 2016, the Warehouse segment’s Mesa, Ariz. bakery significantly increased production of DKB products for the DSD segment. These intercompany sales are not included in the amounts above, but are included in the DSD segment. Higher promotional activity in the prior year quarter, and increased competition in the current year, negatively impacted branded cake sales. Store branded retail sales decreased mainly due to volume decreases in cake. The decrease in non-retail and other sales, which includes contract manufacturing, vending and foodservice, was due primarily to the mix manufacturing business divestiture, partially offset by volume gains in foodservice sales.
Unallocated Corporate Expense Summary
Note: Comparisons are to consolidated sales
- SD+A expenses increased 140 basis points to 2.7 percent of consolidated sales, including Project Centennial consulting costs of 15.4 million USD, or 130 basis points of sales.
- Unallocated corporate D+A charges reduced overall consolidated D+A by 0.2 million USD. In the year ago quarter, D+A charges for the corporate segment increased overall consolidated D+A by 0.1 million USD.
Cash Flow, Dividends, Share Repurchases, and Capital Allocation
In the first quarter of fiscal 2017, cash flow from operating activities was 76.0 million USD, capital expenditures were 17.5 million USD, and dividends paid were 33.9 million USD. During the quarter, the company made net payments on debt borrowings of 64.0 million USD. Net proceeds from the sale of the mix business were 41.2 million USD.
In the first quarter 2017, the company repurchased 0.1 million shares of its common stock in connection with the vesting of performance share awards. There are 6.7 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.
