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Flowers Q2 2013: Sales Increase 31.8%; Earnings Per Share Jump 71.4%, Excluding Acquisition Costs

 
Source: Flowers Foods Inc. | Released Aug. 13, 2013
(8/13/2013)

THOMASVILLE, GA (August 13, 2013) -- Flowers Foods Inc. (NYSE: FLO), the second-largest producer and marketer of fresh packaged bakery foods in the United States, today reported results for its 12-week second quarter ended July 13, 2013. Sales increased 31.8% to $898.2 million. Diluted EPS, excluding acquisition-related costs, was $0.24, up 71.4% from last year's second quarter. Including the acquisition-related costs of $0.02 per diluted share, diluted EPS was $0.22.

During the quarter, the company's board of directors declared a three-for-two split of the company's stock, effective June 19, 2013. All share information included in this release and the accompanying financial schedules reflect the stock split.

Other highlights include:

• Volume increased 21.8%, acquisitions contributed 10.9%, and net price/mix was unfavorable 0.9%, driven by a change in product mix;

• Gross margin was 47.5%, compared to 46.3% for the second quarter of fiscal 2012;

• EBITDA margin, excluding the acquisition-related costs, was 11.8% for the quarter;

• Operating margin (EBIT), excluding the acquisition-related costs, was 9.0%;

• Generated $88.8 million in cash flow from operations;

• Completed roll out of the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California as a result of the February 2013 acquisition of rights to these brands in California from BBU, Inc.;

• Completed the acquisition of 20 bakeries; the Wonder, Merita, Home Pride, Butternut, and Nature's Pride brands; and 36 depots from Hostess Brands for $355.0 million. This occurred subsequent to the end of the second quarter on July 19, 2013;

• Offered 2013 guidance for sales of $3.793 billion to $3.824 billion, an increase of 24.5% to 25.5%, and earnings per share of $0.92 to $0.98, excluding acquisitions-related costs, an increase of 34.2% to 43.0%.

Commenting on second quarter results, President and CEO Allen Shiver said, "Our team's extraordinary efforts to serve customers' needs resulted in another record quarter for Flowers Foods. Similar to the results reported last quarter, sales were up across all channels and earnings were strong. Margins improved due to higher volume and capacity utilization. It is gratifying that our long-term investments in our bakeries, distribution systems, and our team positioned us to take advantage of growth opportunities available in the marketplace. Our confidence in the current year and long-term outlook is reflected in our guidance.

"The integration of our recent acquisitions -- Lepage Bakeries in New England and Sara Lee in California -- remains on pace. Both of these businesses have significant growth potential as Nature's Own, Tastykake, and other Flowers brands gain more acceptance in these markets.

"We are pleased with the July 2013 acquisition of certain bread assets from Hostess Brands. Our plans to re-introduce these well-known brands across our direct-store-delivery (DSD) markets later this year are taking shape. We expect to continue our methodical market expansion into new regions of the country, using the new brands along with legacy Flowers brands, such as Nature's Own," Shiver said.

Second Quarter 2013 Results

For the 12-week second quarter of 2013, sales increased 31.8% to $898.2 million compared to $681.6 million in last year's second quarter. This increase was attributable to increased volumes of 21.8% and contributions from the Lepage Bakeries and Sara Lee/California acquisitions of 10.9%, partially offset by unfavorable net price/mix of 0.9%. 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 buns and rolls, white bread, and variety bread categories. The non-retail channel volume increases were primarily in the foodservice, restaurant, and vending categories. The unfavorable net price/mix was driven primarily by a mix shift in the cake business to more single-serve snack cakes.

Net income for the quarter, adjusted for acquisition-related costs, was $50.1 million, or $0.24 per diluted share compared to $29.8 million (excluding acquisition-related costs), or $0.14 per diluted share in the second quarter of fiscal 2012. During the second quarter this year, the company incurred acquisition-related costs of $3.7 million, net of tax, or $0.02 per diluted share. Including these items, net income was $46.5 million, or $0.22 per diluted share. During the second quarter of last year, the company incurred acquisition-related costs of $1.4 million, net of tax. Including these items, net income was $28.4 million, or $0.14 per diluted share.

Gross margin as a percentage of sales for the quarter was 47.5%, up 120 basis points from 46.3% in the second quarter of 2012. This increase was due primarily to higher sales volumes and decreased ingredient and workforce-related costs as a percent of sales, partially offset by increased outside purchases as a percent of sales.

Selling, distribution, and administrative costs as a percent of sales for the quarter were 36.3%, up 20 basis points from 36.1% of sales in the second quarter of fiscal 2012. Acquisition-related costs negatively impacted selling, distribution, and administrative costs by $5.7 million, or 60 basis points as a percent of sales in the second quarter of this year, and $2.3 million, or 30 basis points as a percent of sales in the second quarter last year.

Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year's second quarter. Net interest expense decreased slightly in this year's second quarter compared to last year's second quarter primarily because of increased interest income. The effective tax rate for the quarter was 35.6% compared to 36.2% in last year's second quarter, due in part to legislative extensions of certain tax benefits. The full-year tax rate is expected to be approximately 35.5% to 36.0%, excluding the effect of the bargain purchase accounting gain recorded in the first quarter this year.

Income from operations, defined as earnings before interest and taxes (EBIT) adjusted for the acquisition-related costs, was $80.5 million, or 9.0% of sales, compared to $49.7 million (adjusted for acquisition-related costs), or 7.3% of sales, in last year's second quarter. Including the costs, EBIT was $74.9 million, or 8.3% of sales in the second quarter this year, as compared to $47.4 million, or 7.0% of sales in the second quarter last year.

Adjusted for the acquisition-related costs, earnings before interest, taxes, depreciation, and amortization (EBITDA) for the second quarter was $106.3 million, or 11.8% of sales, compared to $71.9 million (adjusted for acquisition-related costs), or 10.6% of sales in last year's second quarter. Including the costs, EBITDA was $100.6 million, or 11.2% of sales in the second quarter this year, compared to $69.7 million, or 10.2% of sales in the second quarter last year.

Segment Results

DSD (82% of sales): During the quarter, the company's DSD sales increased 31.2%, reflecting volume gains of 15.5%, contributions from the acquisitions of 13.2%, and positive net price/mix of 2.5%. 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 $76.4 million, or 10.3% of sales for the second quarter compared to $51.6 million, or 9.1% of sales in last year's second quarter. Increased sales volumes and acquisitions were the primary drivers of the increase.

Warehouse (18% of sales): Sales through warehouse delivery increased 34.6%, reflecting volume increases of 43.0%, partially offset by negative net pricing/mix of 8.4%. Dollar sales and volume increased across all channels. Branded cake (primarily single-serve items) and store brand cake, foodservice, and vending were the primary drivers of the volume increases. The unfavorable net price/mix was driven primarily by a mix shift in the cake business to more single-serve snack cakes.

Income from operations for the warehouse segment was $15.2 million, or 9.6% of sales for the second quarter compared to $6.3 million, or 5.4% of sales in last year's second quarter. This increase was due primarily to increased sales volumes.

Cash Flow

During the second quarter, cash flow from operating activities was $88.8 million. The company invested $23.8 million in capital improvements and paid dividends of $23.4 million to shareholders. The company did not acquire any shares of its common stock during the quarter. Giving effect for the three-for-two stock split, the company has acquired 58.3 million shares of its common stock under its 67.5 million 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, which was fully drawn following the end of the second quarter to finance the Hostess transaction and to pay certain acquisition-related costs and expenses. Following the second quarter of 2013, the company also entered into a two-year, $150.0 million receivables loan, security, and servicing agreement, partial proceeds from which were drawn to finance the Hostess transaction.

Outlook for 2013

R. Steve Kinsey, executive vice president and chief financial officer, said the company expects 2013 sales of $3.793 billion to $3.824 billion, an increase of 24.5% to 25.5% over 2012. The Lepage and Sara Lee/California acquisitions are expected to contribute approximately 7.0% of the sales increase. Including the impact of financing and carrying costs of the acquired assets, earnings per share are now forecast to be $0.92 to $0.98, excluding acquisition-related costs, an increase of 34.2% to 43.0% over the 2012 adjusted earnings per share of $0.69. Capital expenditures for 2012 are expected to be $90.0 million to $100.0 million.

Dividend

The board of directors will consider the dividend at its next regularly scheduled meeting. Any action taken will be announced following that meeting.


About Flowers Foods

Headquartered in Thomasville, Ga., Flowers Foods, Inc. (NYSE: FLO) is one of the largest producers of fresh packaged bakery foods in the United States with 2012 sales of $3.1 billion. Flowers operates bakeries across the country that produce a wide range of bakery products. Among the company's top brands are Nature's Own and Tastykake. Learn more at www.flowersfoods.com.

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