Thomasville / GA. (ff) Flowers Foods Inc., the second-largest producer and marketer of fresh packaged bakery foods in the United States, reported results for its 12-week third quarter ended October 05, 2013. Sales increased 22,5 percent to 878,5 million USD. Including acquisition-related costs of 0,02 USD per diluted share, diluted earnings per share (EPS) was 0,16 USD. Excluding acquisition-related costs, diluted EPS rose 5,9 percent to 0,18 USD over last year´s third quarter. Strong performance in the company´s direct-store-delivery (DSD) segment was offset by higher marketing expense, margin pressure in the warehouse segment and added infrastructure to support sales growth. In summary, during the quarter:
- Volume increased 20,1 percent, acquisitions contributed 3,6 percent and net price/mix was unfavourable 1,2 percent;
- Gross margin (excluding depreciation and amortization) of 46,7 percent was flat compared to the third quarter of fiscal 2012;
- Ebitda margin, excluding the acquisition-related costs, was 10,3 percent for the quarter;
- Earnings before interest and taxes (Ebit) as a percent of sales was 6,9 percent, excluding acquisition-related costs:
- DSD segment (83 percent of sales) operating margin was 8,7 percent of sales, impacted 70 basis points by carrying costs of acquired Hostess assets;
- Warehouse segment (17 percent of sales) operating margin was 4,8 percent of sales, impacted by margin pressure on certain frozen foodservice business;
- Generated 44,7 million USD in cash flow from operations;
- Completed the acquisition of 20 closed bakeries; the Wonder, Merita, Home Pride, Butternut and Nature´s Pride brands; and 36 depots from Old HB Inc. (formerly Hostess Brands) for 355,0 million USD. Reintroduction of Wonder, Merita, Home Pride and Butternut brands across Flowers´ DSD territory began in late September and will continue throughout 2014.
- Updated 2013 guidance – maintaining expectation for sales growth of 24,5 percent to 25,5 percent or 3,793 billion USD to 3,824 billion USD; revised earnings per share guidance to 0,90 USD to 0,93 USD, reflecting 30,4 percent to 34,8 percent growth.
Commenting on third quarter results, President and CEO Allen Shiver said, «We achieved another quarter of robust sales growth as our team capitalized on opportunities presented by the marketplace and our recent acquisitions. The DSD segment achieved exceptional sales growth for our fresh breads, buns, rolls and snack cakes and delivered operating earnings in line with our expectations. In the warehouse segment, our cake business fell slightly short of expectations. Overall earnings were impacted primarily by the warehouse frozen foodservice business, which experienced margin erosion. We are taking action to improve margins in that portion of our business.
«The integration of Lepage Bakeries, Sara Lee California and Hostess bread assets, all of which were acquired in the last 18 months, is ongoing. Our team is leveraging the strength of our brands and operations to grow in new markets and with new customers. Late in the quarter, we began reintroducing our newly acquired brands – Wonder, Merita, Home Pride and Butternut». Shiver said the company expects the acquired brands to gain momentum as the reintroduction continues.
Commenting on 2013 guidance, Shiver said, «This is a remarkable year for Flowers Foods and our top line guidance reflects the success of our growth strategies as we make acquisitions, enter new markets and take advantage of changes in the marketplace. Our revised earnings guidance takes into consideration the margin decline in the warehouse segment, higher-than-planned marketing expense in the second half and added infrastructure for the significant increase in volume».
«Flowers Foods is well positioned with the brands, products, bakeries, strategies and experienced team to achieve further sales and earnings growth as we continue to build long-term value for shareholders», Shiver concluded.
Third Quarter 2013 Results
For the 12-week third quarter of 2013, sales increased 22,5 percent to 878,5 million USD compared to 717,3 million USD in last year´s third quarter. This increase was attributable to increased volume of 20,1 percent and contributions from the Sara Lee / California acquisition of 3,6 percent, partially offset by unfavourable net price/mix of 1,2 percent. The company cycled the Lepage Bakeries acquisition in the first week of the third quarter. Dollar sales and volume increased across all channels. Increases in the soft variety, white bread, buns and rolls and single-serve cake categories primarily drove volume increases in the branded retail channel. Volume increases in the store brand channel were driven by increases in the white bread, buns and rolls and variety bread categories. The non-retail channel volume increases were primarily in the foodservice, vending and restaurant categories. The unfavourable net price/mix was driven primarily by a mix shift in the cake business to more single-serve snack cakes and negative price/mix in the foodservice category.
Net income for the quarter was 33,9 million USD or 0,16 USD per diluted share. Excluding acquisition-related costs in both years, net income for the quarter was 38,4 million USD or 0,18 USD per diluted share compared to 35,2 million USD or 0,17 USD per diluted share in the third quarter of fiscal 2012. During the third quarter this year, the company incurred acquisition-related costs of 4,5 million USD, net of tax or 0,02 USD per diluted share. During the third quarter of last year, the company incurred acquisition-related costs of 4,0 million USD, net of tax or 0,02 USD per diluted share. Including these items, net income was 31,2 million USD or 0,15 USD per diluted share.
Gross margin (excluding depreciation and amortization) as a percent of sales was 46,7 percent or flat compared to the third quarter of 2012. Increased outside purchases as a percent of sales, decreased manufacturing efficiencies and carrying costs related to the acquired Hostess assets were offset by higher sales volumes and decreased ingredient and workforce-related costs as a percent of sales. Although ingredient costs as a percent of sales decreased, prices for ingredients rose.
Selling, distribution and administrative (SD+A) costs as a percent of sales for the quarter were 37,3 percent, up 140 basis points from 35,9 percent of sales in the third quarter of fiscal 2012. Acquisition-related costs negatively impacted SD+A costs by 7,0 million USD or 80 basis points as a percent of sales in the third quarter of 2013. In last year´s third quarter, acquisition-related costs negatively impacted SD+A by 5,1 million USD or 70 basis points as a percent of sales. Increased workforce-related costs and marketing costs were the main drivers of the increase as a percent of sales.
Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year´s third quarter. Net interest expense decreased slightly in this year´s third quarter compared to last year´s third quarter primarily because of increased interest income associated with an increase in distributor notes receivable outstanding. The effective tax rate for the quarter was 32,4 percent compared to 36,4 percent in last year´s third quarter, due primarily to a discrete benefit recorded by the company. The full-year tax rate is expected to be approximately 35,5 percent to 36,0 percent, excluding the effect of discrete items and the bargain purchase accounting gain recorded in the first quarter this year.
Income from operations (Ebit), adjusted for acquisition-related costs (adjusted Ebit), was 60,3 million USD or 6,9 percent of sales, compared to adjusted Ebit of 57,8 million USD or 8,1 percent of sales, in last year´s third quarter. Including the acquisition-related costs, Ebit was 53,3 million USD or 6,1 percent of sales in the third quarter this year, compared to 52,7 million USD or 7,3 percent of sales in the third quarter last year. Carrying costs related to the acquired Hostess assets negatively affected Ebit margin 60 basis points in the third quarter this year.
Earnings before interest, taxes, depreciation and amortization (Ebitda) adjusted for acquisition-related costs (adjusted Ebitda) for the third quarter was 90,2 million USD or 10,3 percent of sales, compared to adjusted Ebitda of 82,5 million USD or 11,5 percent of sales in last year´s third quarter. Including the costs, Ebitda was 83,2 million USD or 9,5 percent of sales in the third quarter this year, compared to 77,4 million USD or 10,8 percent of sales in the third quarter last year. Carrying costs related to the acquired Hostess assets negatively affected Ebitda margin 30 basis points in the third quarter this year.
DSD (83 percent of sales): During the quarter, the company´s DSD sales increased 23,2 percent, reflecting volume gains of 15,9 percent, contributions from the Sara Lee / California acquisition of 4,3 percent and positive net price/mix of 3,0 percent. The company cycled the Lepage Bakeries acquisition in the first week of the third quarter. Dollar sales and volume increased across all channels. Increases in the soft variety, white bread, buns and rolls and cake categories primarily drove volume increases in the branded retail channel. Increases in the store brand channel were driven primarily by increases in the white bread and buns and rolls categories. The non-retail channel volume increases were primarily in the quick serve and other restaurant categories. The positive net price/mix was primarily driven by the branded retail channel.
Income from operations for the DSD segment was 63,6 million USD or 8,7 percent of sales for the third quarter compared to 58,6 million USD or 9,9 percent of sales in last year´s third quarter. Increased sales volumes were the primary drivers of the increase. Carrying costs related to the acquired Hostess assets negatively affected income from operations 70 basis points in the third quarter this year. Decreased manufacturing efficiencies also had a negative effect on income from operations.
Warehouse (17 percent of sales): Sales through warehouse delivery increased 18,9 percent, reflecting volume increases of 34,4 percent, partially offset by negative net price/mix of 15,5 percent. Dollar sales and volume increased across all channels. Branded cake (primarily single-serve items), foodservice and vending were the primary drivers of the volume increases. The foodservice category was the primary driver of the unfavourable net price/mix.
Income from operations for the warehouse segment was 7,1 million USD or 4,8 percent of sales for the third quarter compared to 7,6 million USD or 6,1 percent of sales in last year´s third quarter. This decrease was due primarily to increased outside purchases and lower manufacturing efficiencies, partially offset by increased sales volumes.
During the third quarter, cash flow from operating activities was 44,7 million USD. The company invested 25,5 million USD in capital improvements and paid dividends of 23,5 million USD to shareholders. The company did not acquire any shares of its common stock during the quarter. The company has acquired 58,3 million USD shares of its common stock under its 67,5 million USD share repurchase plan.
Other Matters of Importance
In April of this year, the company entered into a senior unsecured delayed-draw term loan facility with a commitment of up to 300,0 million USD, which was fully drawn during the third quarter to finance the Hostess transaction and to pay certain acquisition-related costs and expenses. During the third quarter of 2013, the company also entered into a two-year, 150,0 million USD receivables loan, security and servicing agreement, partial proceeds from which were drawn to finance the Hostess transaction.
Outlook for 2013
Steve Kinsey, executive vice president and chief financial officer, said the company expects 2013 sales of 3,793 billion USD to 3,824 billion USD, an increase of 24,5 percent to 25,5 percent over 2012. The Lepage and Sara Lee / California acquisitions are expected to contribute approximately 7,0 percent of the sales increase. Including the impact of financing and carrying costs of the acquired Hostess assets, but excluding acquisition-related costs and the bargain purchase accounting gain, earnings per share are now forecast to be 0,90 USD to 0,93 USD, an increase of 30,4 percent to 34,8 percent over the 2012 adjusted earnings per share of 0,69 USD. Previous guidance was for earnings per share of 0,92 USD to 0,98 USD. Capital expenditures for 2013 are expected to be 90,0 million USD to 100,0 million USD.