Flowers Foods has reported a drop in profits

Flowers Foods has reported a drop in profits

US bakery group Flowers Foods has reported lower first-quarter profits as costs linked to its acquisition of assets from the former Hostess Brands weighed on its bottom line.

Net income for the 16 weeks to 19 April was US$61.1m, down from $112m a year earlier. Operating income was also down, falling from $150m to $98.2m.

Flowers pointed to the "carrying costs" for the purchased Hostess facilities and interest expenses related to the funding of the acquisition.

It also said earnings in last year's first quarter were helped by a $50.1m benefit on its acquisition of former Sara lee assets.

Flowers saw its top line improve, with sales up 2.6% at $1.16bn. However, the higher sales came from the impact of price, mix and acquisitions. Volumes fell 1.5%.

Shares in Flowers were down 3.68% at $20.01 at 09:32 ET.

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THOMASVILLE, Ga., May 15, 2014 /PRNewswire/ -- Flowers Foods, Inc. (NYSE: FLO), the nation's second-largest producer and marketer of fresh packaged bakery foods, today reported results for its 16-week first quarter ended April 19, 2014. 

Summary   



For the 16 Weeks Ended







% Increase



04/19/14


04/20/13


(Decrease)



(Dollars in millions, except per share data)










Sales 


$ 1,159.8


$ 1,130.8


2.6

%









Income from operations (EBIT) *


$     98.2


$    104.4


(6.0)

%

% of sales


8.5%


9.2%












Net income *


$     61.1


$     64.9


(5.9)

%

% of sales


5.3%


5.7%












Net income per diluted share *


$     0.29


$     0.31


(6.5)

%

















*The sixteen weeks ended April 20, 2013 has been adjusted for a bargain purchase accounting gain and acquisition-related costs.  See reconciliations of non-GAAP measures in the financial statements following this release.









Percentages may not compute due to rounding.



 

First Quarter Highlights

  • First quarter sales increased 2.6% compared to the first quarter last year, reflecting positive net price/mix of 2.9%, an acquisition contribution of 1.2%, partially offset by decreased volume of 1.5%.
  • Sales for the DSD segment were up 5.0%; warehouse segment sales were down 8.3%.
  • EBITDA margin for the quarter was 11.9%.
  • Income from operations (EBIT) was 8.5% of sales.
  • Net income for the quarter was $61.1 million, or $0.29 per diluted share, including the negative impact of $0.03 per share of acquired facilities' carrying costs and interest expense to fund the acquisition.
  • Generated $121.8 million in cash flow from operations.
  • Sales of the reintroduced Hostess bread brands WonderHome PrideMerita, andButternut were approximately $41.8 million in the quarter.
  • Opened a bread line in Modesto, Calif., to help provide product for the Californiamarket.
  • Opened the former Hostess bakery in Knoxville, Tenn., this week.
  • Increased Flowers' bread, bun, and roll branded market share to 14.1 dollar share from 12.8 dollar share in the year-ago quarter, as per IRi market data.
  • Announced goal for direct-store-delivery ("DSD") segment to reach 90% of the U.S. population by 2018 and achieve a 20 share of bread, buns, and rolls and a 12 share in snack cake in the IRi U.S. market, driven by market expansion and future strategic acquisitions.

Allen L. Shiver, president and chief executive officer, said, "The results reported for the quarter reflect the underlying strength of our company. The DSD segment delivered solid sales growth and operating results, despite added costs associated with the Hostess acquisition, start-up of added production capacity, and new market expansion. Our acquired bread brands drove share gains, especially in new markets. As previously discussed, the warehouse segment has experienced pressure since the return of Hostess cake to the market in mid-July 2013. However, we are pleased to have maintained a significant portion of the total cake business we gained following Hostess' liquidation in November 2012.

"Cash flow in the quarter was strong and we paid down $81.2 million in debt.  Our investments in Sara Lee/California and in the Hostess assets have helped the company extend its geographic reach to key population centers and to grow market share for breads, buns, and rolls.

"In March, we announced plans for the closed bakeries we acquired from Hostess. We have listed nine closed bakeries and 21 warehouses for sale.  When those transactions are completed, annual carrying costs for the Hostess facilities will be reduced by approximately$10 million," Shiver said. "In addition to the two bakeries we recently put into production, we expect to open another five or six over the next few years, as determined by market demand. As we continue to expand our DSD markets, we will strategically open acquired bakeries to leverage volume and share gains more rapidly than in the past."

Commenting on outlook, Shiver said, "In the near term, added costs associated with our rapid geographic growth impact margins to some extent. However, our team believes Flowers' expanded DSD footprint will help us reach our stated sales, earnings, and margin goals over the longer term. Our recent investments, combined with our decades long commitment to developing efficient bakeries, strong brands, effective distribution, and an experienced team, position Flowers Foods well for the future." 

First Quarter 2014 Results  
For the 16-week first quarter of 2014, sales increased 2.6% to $1.160 billion compared to$1.131 billion in last year's first quarter. This increase was attributable to positive net price/mix of 2.9%, contributions from the Sara Lee/California acquisition of 1.2%, partially offset by decreased volume of 1.5%. The Sara Lee/California acquisition was cycled in the second month of the quarter. The positive price/mix was due primarily to pricing actions in certain categories and a favorable mix shift in branded bread and rolls.  Overall volume declines were driven by decreases in the cake business.

Net income for the quarter was $61.1 million, or $0.29 per diluted share, compared to last year's first quarter of $64.9 million, or $0.31 per diluted share, adjusted for a bargain purchase accounting gain and acquisition-related costs.  Carrying costs for the acquired Hostess facilities and interest expense related to funding of the acquisition negatively affected EPS by $0.03 in the first quarter of this year. During the first quarter of 2013, the company recorded a benefit of $50.1 million, net of tax, or $0.24 per diluted share reflecting a bargain purchase accounting gain related to the Sara Lee/California acquisition. Also during the first quarter last year, Flowers incurred acquisition-related costs of $2.9 million, net of tax, or $0.02per diluted share. Including these items, net income was $112.0 million, or $0.53 per diluted share in last year's first quarter.

Gross margin (excluding depreciation and amortization) as a percent of sales was 48.6%, up 40 basis points compared to 48.2% in last year's first quarter.  Decreased ingredient costs as a percent of sales drove the gross margin increase, as prices for several of our major ingredients were lower this year as compared to last year. Partially offsetting the ingredient decreases were lower manufacturing efficiencies and carrying costs associated with the acquired Hostess facilities.

For the quarter, selling, distribution, and administrative (SD&A) costs as a percent of sales were 36.8%, up 40 basis points from 36.4% of sales in the first quarter of 2013. Distributor fees and costs associated with new market expansion were the primary drivers of the increase. Acquisition-related costs of $4.6 million negatively impacted SD&A as a percent of sales by 40 basis points during the first quarter of 2013. 

Depreciation and amortization expenses as a percent of sales for the quarter increased 40 basis points compared to last year's first quarter. This increase was due primarily to the acquired Hostess assets. Net interest expense decreased for the quarter compared to last year's first quarter primarily due to increased interest income associated with an increase in outstanding distributor notes receivable. The effective tax rate for the quarter was 35.7% compared to 23.0% in last year's first quarter. The bargain purchase accounting gain on theSara Lee/California acquisition positively affected the tax rate by 12.0% in last year's first quarter.

EBIT was $98.2 million, or 8.5% of sales, compared to last year's first quarter of $104.4 million, or 9.2% of sales, adjusted for a bargain purchase accounting gain and acquisition-related costs. During the first quarter of this year, carrying costs of $6.8 million related to the acquired Hostess facilities negatively affected EBIT margin by 60 basis points. Including the bargain purchase accounting gain and acquisition-related costs in the first quarter of 2013, EBIT was $150.0 million, or 13.3% of sales.

Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $137.5 million, or 11.9% of sales, compared to last year's first quarter of $138.6 million, or 12.3% of sales, adjusted for a bargain purchase accounting gain and acquisition-related costs. During the first quarter of this year, carrying costs of $4.0 million related to the acquired Hostess facilities negatively affected EBITDA margin 40 basis points. Including the bargain purchase accounting gain and acquisition-related costs in the first quarter of 2013, EBITDA was $184.1 million, or 16.3% of sales.

Segment Results
The segment results reflect the moving of the company's tortilla operation from the warehouse segment to the DSD segment effective the beginning of 2014. For comparison purposes, prior year information has been recast to reflect this change.

DSD (84% of Q1 sales): During the quarter, the company's DSD sales increased 5.0%, reflecting volume gains of 2.2%, positive net price/mix of 1.3%, and contributions from theSara Lee/California acquisition of 1.5%. The acquisition was cycled in the second month of the quarter.  The volume increase was primarily the result of increases in the branded white bread and branded soft variety bread categories, partially offset by decreases in branded cake. The positive net price/mix was primarily driven by pricing in certain channels.

Income from operations for the DSD segment was $96.8 million, or 10.0% of sales for the quarter compared to $101.4 million, or 11.0% of sales in last year's first quarter, excluding the bargain purchase accounting gain. Carrying costs of $6.8 million related to the acquired Hostess facilities negatively affected income from operations by 70 basis points in the first quarter this year. Decreased manufacturing efficiencies compared to the year-ago quarter and costs associated with new market expansion also had a negative effect on income from operations. Including the bargain purchase accounting gain, income from operations was$151.5 million, or 16.4% of sales in the first quarter of 2013.

Warehouse (16% of Q1 sales): Sales through warehouse delivery decreased 8.3%, reflecting positive net price/mix of 2.6% and volume decreases of 10.9%. Overall, the positive net price/mix was driven by a favorable mix shift.  The volume decrease was driven by decreases in the branded cake, store brand cake and vending categories.

Income from operations for the warehouse segment was $14.1 million, or 7.4% of sales for the quarter compared to $18.4 million, or 8.8% of sales in last year's first quarter. This decrease was due primarily to a decline in sales volumes.

Cash Flow  
During the first quarter, cash flow from operating activities was $121.8 million.  The company paid down its debt by $81.2 million in the quarter. The company invested $23.6 million in capital improvements, paid dividends of $24.0 million to shareholders, and acquired 464,610 shares of its common stock for $9.5 million during the quarter. The company has acquired 59.0 million shares of its common stock under its 67.5 million share repurchase plan since the inception of the plan.

Outlook for 2014 
R. Steve Kinsey, executive vice president and chief financial officer, noted the first half of 2014 offers challenging year-over-year comparisons for Flowers' cake business due to Hostess' cake re-launch in mid-2013 and the carrying costs for the acquired facilities.  The company continues to expect 2014 sales to be $3.976 billion to $4.126 billion, reflecting an increase of 6.0% to 10.0% over the prior year.  Earnings per share are still targeted to be $0.98 to $1.05, reflecting growth of 7.7% to 15.4% for the company's 53-week fiscal 2014, when compared to adjusted EPS reported for 2013.  Capital expenditures for 2014 are forecasted to be $95.0 million to $100.0 million.

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

Conference Call
Flowers Foods will broadcast its first quarter 2014 earnings conference call over the Internet at 8:30 a.m. (Eastern) on May 15, 2014. The call will be broadcast live on Flowers' Web site,www.flowersfoods.com, and can be accessed by clicking on the webcast link on the home page.  The call also will be archived on the company's Web site.

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 2013 sales of $3.75 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 atwww.flowersfoods.com.

Original source: Flowers Foods