Home > Market + Management > Flowers Foods: Reports Third Quarter 2018 Results

Flowers Foods: Reports Third Quarter 2018 Results

Thomasville / GA. (ff) Flowers Foods Inc., producer of Nature’s Own, Wonder, Tastykake, Dave’s Killer Bread and other bakery foods, reported financial results for the company’s 12-week third quarter ended October 06, 2018.

Summary compared to Q3/2017 where applicable

  • Sales decreased 1.0 percent to USD 923.4 million.
  • Diluted EPS increased to USD 0.19 from a loss of USD 0.16.
  • Adjusted diluted EPS (1) was unchanged at USD 0.23.
  • Revised earnings guidance for fiscal 2018: The company now expects adjusted diluted EPS in the range of USD 0.90 to USD 0.95.

CEO’s Remarks

«In the third quarter, our strong brand portfolio achieved record market share. We also made additional organizational changes designed to enhance performance and increase accountability,» said Allen Shiver, Flowers Foods’ president and CEO. «We are continuing to take steps to optimize our supply chain, including the start-up of a high-speed production bun line in Oxford, Pennsylvania, and the closing of an inefficient bakery in Brattleboro, Vermont. Extending our portfolio into adjacent product segments is a strategic priority, and today, we announced the acquisition of Canyon Bakehouse, a leading producer of gluten-free bakery products. Gluten-free is a growing segment of the category, and one where we believe we can leverage our powerful distribution network to grow enterprise value.»

«Despite progress on our strategic priorities, we are not satisfied with our performance this quarter. We continue to face a challenging operating environment that impacted our third quarter financial results and our full-year outlook. Sales in the quarter were down, compared to the prior year, due to expected losses of low-margin foodservice business, lower hurricane-related volumes, and disruptions related to inferior yeast. We expect these headwinds to be transitory. Also impacting results in the quarter were inflationary cost pressures from commodities and transportation. We are working to address these higher costs through pricing actions and our ongoing savings initiatives.»

Shiver continued, «Flowers’ competitive advantages lie in our leading brands, efficient bakeries, and flexible distribution platform. Through our multi-year transformational plan, we intend to maximize these advantages to improve margins, reinvigorate core brands, and grow profitably in adjacent product segments. We are on track to achieve the upper end of our gross savings targets for 2018, and are confident that our plan will enable Flowers to achieve long-term success and deliver sustainable, top-tier shareholder returns.»

Revised Outlook for Fiscal 2018

  • Expected sales in the range of approximately USD 3.921 billion to USD 3.982 billion, representing growth of approximately 0.0 percent to 1.6 percent.
  • Expected adjusted diluted EPS in the range of approximately USD 0.90 to USD 0.95, representing growth of approximately 1.1 percent to 6.7 percent. Previously the company had expected adjusted diluted EPS in the range of USD 1.00 to USD 1.07.
  • Adjusted EPS guidance excludes consulting and restructuring costs associated with Project Centennial, the company’s multi-year transformational plan, which are expected to be in the range of USD 13 million to USD 15 million, and costs associated with matters affecting comparability that cannot be practicably estimated.

Announced Acquisition of Canyon Bakehouse

In a separate press release issued today, the company announced that it has entered into an agreement to acquire Canyon Bakehouse LLC in a transaction valued at USD 205 million, or USD 175 million net of the present value of future tax benefits. With the fastest-growing gluten-free bread loaf brand in the U.S., Canyon Bakehouse provides Flowers an entrance to the growing and under penetrated gluten-free bakery market. Flowers intends to leverage its national distribution network to drive growth of Canyon Bakehouse products and create enhanced value. The acquisition, which is subject to regulatory approval and customary closing conditions, is expected to be completed later in the fourth quarter of 2018.

Update on Project Centennial and Strategic Priorities
The company is executing on its strategic priorities under Project Centennial and implementing several initiatives to reinvigorate the core business, capitalize on product adjacencies, reduce costs to fuel growth, and develop leading capabilities. Launched in 2016, Project Centennial is an enterprise-wide, multi-year effort to streamline operations, drive efficiencies, and invest in strategic capabilities strengthening Flowers’ competitive position, drive profitable revenue growth, and create shareholder value. Highlights of the company’s progress in 2018 to date include:

  • On track to realize total gross savings at the upper end of the USD 38 million to USD 48 million target, primarily from a more efficient organizational structure and reduced spending on purchased goods and services.
  • Entered into an agreement to acquire Canyon Bakehouse, a leading producer of gluten-free bakery products.
  • Began operating a high-speed bun line in Pennsylvania and announced closure of an inefficient bakery in Vermont.
  • Continued to refine its organizational structure to better align operating functions, enhance execution, and improve accountability.
  • Realized a significant decrease in selling, distribution, and administrative (SD+A) workforce-related expenses due to organizational restructuring.
  • Grew the recently launched Nature’s Own Perfectly Crafted, a line of artisan-inspired, thick-sliced bakery breads, and Dave’s Killer Bread Boomin’ Berry bagels.
  • Implemented enhanced working capital policies that improved the cash conversion cycle and generated incremental cash flow.

Consolidated Third Quarter 2018 Summary

Compared to the prior year third quarter where applicable

  • Sales decreased 1.0 percent to USD 923.4 million.
  • Percentage point change in sales attributed to:
    • Pricing/mix: 2.5 percent
    • Volume: -3.5 percent
  • Net income for the current quarter was USD 39.6 million compared to a net loss of USD 33.6 million in the prior year quarter. Excluding matters affecting comparability, net income increased USD 0.4 million, or 0.9 percent, to USD 48.7 million.
  • Operating income for the current quarter was USD 53.5 million compared to a net loss of USD 52.1 million in the prior year quarter. Excluding matters affecting comparability, operating income decreased USD 13.4 million, or 17.1 percent, to USD 64.7 million.
  • Adjusted Ebitda decreased 13.2 percent to USD 97.5 million, or 10.6 percent of sales, a 140-basis point decline.
  • Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 52.6 percent of sales, a 150-basis-point increase. These costs were higher as a percent of sales due to increased commodity prices, softer production volumes, increased outside purchases of product (primarily DKB branded breakfast items), and decreased manufacturing efficiencies.
  • SD+A expenses were 38.2 percent of sales, a 10-basis point-decrease. Lower workforce-related costs, as a percentage of sales, were partially offset by higher distributor distribution fees due to a larger portion of sales being sold via independent distributors. Higher legal settlements were mostly offset by lower Project Centennial-related consulting costs. Additionally, higher transportation costs in the current quarter partially offset the decrease in SD+A expenses.
  • Depreciation and Amortization (D+A) expenses were USD 32.7 million, 3.5 percent of sales, flat with the prior year third quarter.

On a consolidated basis, branded retail sales decreased 0.7 percent to USD 547.4 million, store branded retail sales increased 1.7 percent to USD 141.0 million, while non-retail and other sales decreased 3.2 percent to USD 235.1 million. Volume declines drove the decrease in branded retail sales as the company cycled hurricanes in the prior year quarter. Partially offsetting the decline was continued sales growth from DKB organic products, growth in our expansion markets, the contribution from Nature’s Own Perfectly Crafted breads, and more favorable price/mix. Store branded retail sales increased primarily due to positive price/mix. Volume declines in foodservice and vending items drove the decrease in non-retail and other sales, partially offset by positive price/mix.

DSD Segment Summary

Compared to the prior year third quarter where applicable

  • Sales decreased 0.9 percent to USD 780.3 million.
  • Percentage point change in sales attributed to:
    • Pricing/mix: 2.1 percent
    • Volume: -3.0 percent
  • Operating income for the current quarter was USD 58.8 million compared to an operating loss of USD 20.3 million in the prior year quarter. In the prior year quarter, the company recognized restructuring and related impairment charges, multi-employer pension plan withdrawal costs, and costs related to legal settlements totaling USD 99.1 million.
  • Adjusted Ebitda decreased 11.6 percent to USD 94.7 million.

DSD Segment branded retail sales were unchanged at USD 514.4 million, store branded retail sales increased 3.4 percent to USD 114.6 million, while non-retail and other sales decreased 6.7 percent to USD 151.3 million. Branded retail sales were consistent with the prior year quarter as positive price/mix was offset by volume declines. In the prior year quarter, hurricanes positively impacted volume. Sales of DKB products continued to increase along with Nature’s Own Perfectly Crafted breads introduced in the second quarter of fiscal 2018, and in expansion markets. These gains were more than offset by volume declines for other branded products. Store branded retail sales increased quarter over quarter due to positive price/mix and volume growth. Significant volume declines in foodservice primarily resulted in the decrease in non-retail and other sales. Foodservice sales were impacted by inferior yeast and the shift of certain foodservice business from the DSD Segment to the Warehouse Segment.

The significant favorable change in DSD Segment operating income primarily resulted from USD 76.6 million of restructuring and related impairment charges and USD 18.3 million of multi-employer pension plan withdrawal costs incurred in the prior year quarter, as well as the benefit of the voluntary separation incentive program and other restructuring activities, lower employee compensation costs and the recovery of a portion of the loss on inferior ingredients in the current quarter. Increased product costs, increased distributor distribution fees, higher legal settlements of USD 6.5 million, and increased marketing investments partially offset the overall improvement in operating income.

Warehouse Segment Summary

Compared to the prior year third quarter where applicable

  • Sales decreased 1.6 percent to USD 143.2 million.
  • Percentage point change in sales attributed to:
    • Pricing/mix: 3.3 percent
    • Volume: -4.9 percent
  • Operating income for the current quarter was USD 5.9 million compared to an operating loss of USD 9.1 million in the prior year quarter. In the prior year quarter, the company recognized restructuring and related impairment charges totaling USD 20.1 million.
  • Adjusted Ebitda decreased 16.7 percent to USD 13.1 million.

Warehouse Segment branded retail sales decreased 10.9 percent to USD 32.9 million, store branded retail sales decreased 5.0 percent to USD 26.4 million, while non-retail and other sales increased 3.8 percent to USD 83.8 million. Branded retail sales decreased mostly due to volume declines in branded cake and to a lesser extent in warehouse-delivered branded organic bread. Sales of store branded retail items decreased primarily due to volume decreases in store branded cake. Non-retail and other sales, which include contract manufacturing, vending and foodservice, increased primarily from significant volume growth in foodservice sales and to a lesser extent the shift of certain foodservice business from the DSD Segment to the Warehouse Segment in the current year period and increased contract manufacturing, partially offset by declines in vending sales.

The significant favorable change in the Warehouse Segment operating income was primarily due to prior year restructuring costs of USD 20.1 million and lower workforce-related costs in the current year quarter, partially offset by sales declines, higher product and distribution costs, a USD 1.1 million legal settlement and USD 1.1 million of loss on inferior ingredients in the current year quarter.

Unallocated Corporate Expense Summary

Note: Comparisons are to consolidated sales

  • Unallocated corporate expenses decreased 120 basis points to 1.2 percent of consolidated sales, primarily due to the USD 6.3 million decrease in Project Centennial consulting costs, prior year period restructuring charges of USD 3.8 million, and to a lesser extent, reduced workforce-related expenses.

Cash Flow, Dividends, Share Repurchases, and Capital Allocation

In the third quarter of fiscal 2018, cash flow from operating activities was USD 83.4 million, capital expenditures were USD 25.5 million, and dividends paid were USD 38.0 million.

There are 6.6 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 from time to time under this authorization.