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Flowers Foods, Inc. Reports Second Quarter 2017 Results

Second Quarter Summary:
Compared to the prior year second quarter where applicable

  • Sales decreased 0.9% to $926.6 million. Excluding sales related to a divestiture, sales decreased 0.4%.

(1) See reconciliations of non-GAAP measures in the financial statements following this release.
(2) Earnings before Interest, Taxes, Depreciation and Amortization, adjusted for certain items affecting comparability. See reconciliations of non-GAAP measures in the financial statements following this release.

To improve the profitability of its Warehouse segment, the company will close a snack cake bakery in Winston-Salem, North Carolina in early October. Sweet baked goods production will shift to more efficient Flowers' snack cake bakeries. Employees affected by the closure will be offered a severance package.

CEO's Remarks:
"We continue to take decisive action to focus on the consumer and become a more efficient, streamlined organization," said Allen Shiver, Flowers Foods president and CEO. "Our portfolio of bread brands, bolstered by the strength of Dave's Killer Bread, continues to gain market share and improve our competitive position. In our cake business, we are taking action to address share losses and improve profitability. Our business is generating strong free cash flow and supporting shareholder returns, our solid financial position, and strategic investments.

"We are executing on our strategic priorities under Project Centennial," Shiver continued. "During the quarter, gross margins increased and manufacturing efficiencies improved. Our cost savings initiatives moved forward in line with our expectations, and we began transitioning to a new, lower-cost, performance-driven structure designed to better address the changing consumer and operating environment. We're on track with our progress, but as our updated guidance reflects, we are realistic about the evolving consumer environment. Our team is driving hard to build shareholder value by reducing costs, strengthening the core business, and capitalizing growth opportunities within the large bakery category."

Updated Guidance for Fiscal 2017:

  • Given category trends to date, the company now expects sales to be in the range of $3.888 billion to $3.927 billion, a year-over-year change of approximately -1.0% to 0.0%.
  • Adjusted diluted EPS is now expected to be in the range of $0.85 to $0.90, excluding the gain on the sale of the Cedar Rapids, Iowa mix plant of $0.09 per share, costs associated with the closing of the Winston-Salem bakery of approximately $0.01 to $0.02 per share, and consulting costs associated with Project Centennial of approximately $0.11 to $0.12 per share.

Matters Affecting Comparability:
In the second quarter of 2017, the company recorded Project Centennial consulting costs of $9.4 million. In the prior year quarter, the company recorded Project Centennial consulting costs of $1.3 million, and a pension settlement charge of $4.6 million.

Reconciliation of Earnings per Share to Adjusted Earnings per Share




For the 12
Week Period
Ended


For the 12
Week Period

Ended




July 15, 2017


July 16, 2016







Net income per diluted common share


$ 0.21


$ 0.24

Project Centennial consulting costs


0.03


-

Pension plan settlement loss


-


0.02

Adjusted net income per diluted common share


$ 0.24


$ 0.26

In fiscal 2016, costs associated with Project Centennial were $1.2 million in the third quarter and $3.8 million in the fourth quarter. For the remainder of fiscal 2017, the company expects Project Centennial consulting costs to be in the range of $10 million to $15 million. Additionally, the company expects costs associated with the closing of the Winston-Salem bakery to be approximately $4.0 million to $6.0 million.

Update on Strategic Priorities:
The company continued to deliver on its strategic priorities under Project Centennial. During the second quarter, notable accomplishments included:

  • Generating Fuel for Growth: Announced a new organizational structure and initiated a voluntary separation incentive program; made progress toward reducing purchased goods and services spending by at least $45 million by fiscal 2018; implemented distributor enablement initiatives to reduce stales; completed the first wave of continuous improvement pilot programs that revealed efficiency savings opportunities in the bakeries; began process of rationalizing existing manufacturing and logistics network; will close a snack cake facility in North Carolina in early October.
  • Reinvigorating the Core Business: Made substantial progress on a streamlined brand assortment to be implemented by the end of 2017; extended Dave's Killer Bread into the breakfast segment with the launch of bagels and breakfast items, used a third-party platform to efficiently expand distribution of fresh products to new markets in the upper Midwest.
  • Capitalizing on Growing Adjacencies: Formulated a strategy and began to identify opportunities to diversify our brand portfolio into attractive adjacent categories.

Consolidated Second Quarter 2017 Summary
Compared to the prior year second quarter where applicable

  • Percentage point change in sales attributed to:
    • Pricing/mix: 1.9%
    • Volume: -2.3%
    • Divestiture: -0.5%
  • Net income decreased 12.5% to $44.7 million. Excluding matters affecting comparability, net income decreased 7.8% to $50.5 million.
  • Operating income decreased 13.8% to $70.2 million. Excluding matters affecting comparability, operating income decreased 8.9% to $79.6 million.
  • Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 50.5% of sales, a 60 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., and improved manufacturing efficiencies.
  • Selling, distribution and administrative (SD&A) expenses were 38.2% of sales, a 200 basis point increase. Of this increase, 90 basis points were due to incremental Project Centennial consulting costs. The balance of the increase in SD&A expenses was primarily driven by higher distributor distribution fees due to a larger portion of sales being sold by independent distributors.
  • Depreciation and amortization (D&A) expenses were $34.1 million, 3.7% of sales, a 20 basis point increase. This increase was driven by additional assets being placed in service as well as higher amortization expense associated with certain trademarks.

Overall softness in the fresh bakery category, a competitive marketplace, and the divestiture of the mix manufacturing business in January 2017 resulted in the consolidated sales decline, partially offset by a net increase in sales of branded organic breads. Sales of DKB branded products continue to grow, driven by both volume and price, even though the company cycled the national rollout of the DKB brand on its DSD network at the beginning of the second quarter.

On a consolidated basis, branded retail sales decreased 0.2% to $548.3 million, store branded retail sales decreased 1.0% to $144.3 million, while non-retail and other sales decreased 2.3% to $234.0 million. The decrease in the branded retail category resulted from volume declines in cake and buns and rolls, mostly offset by increased sales of organic bread. Store branded retail sales declined as a result of volume declines in cake, partially offset by growth in buns and rolls. The impact of the mix manufacturing business divestiture principally resulted in the decline in the non-retail and other category, which also includes contract manufacturing, vending and foodservice.

DSD Segment Summary
Compared to the prior year second quarter where applicable

  • Percentage point change in sales attributed to:
    • Pricing/mix: 0.7%
    • Volume: 0.2%
  • Operating income decreased 0.7% to $79.6 million.
  • Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 47.2% of segment sales, a 30 basis point decrease. This decline was primarily driven by sales increases due to improved pricing/mix, and lower outside purchases of products.
  • SD&A expenses were 39.1% of segment sales, a 40 basis points increase. This increase was primarily driven by higher distributor distribution fees due to a larger portion of sales being sold by independent distributors. Lower workforce-related costs and cost savings initiatives more than offset increased legal costs and partially offset the higher distributor distribution fees mentioned above.

DSD segment branded retail sales increased 1.2% to $514.6 million, store branded retail sales increased 3.1% to $120.1 million, while non-retail and other sales decreased 1.7% to $158.2 million. Branded retail sales increased due to growth of branded organic products, mostly offset by declines in other branded items, largely buns and rolls and cake. The company continues to see substantial growth of the DKB brand from both volume and price, despite having cycled the national rollout of the brand at the beginning of the quarter. Furthermore, the addition of DKB breakfast items, introduced during the quarter, contributed to the increase. Store branded retail sales increased primarily due to gains in buns and rolls. Non-retail and other sales decreased primarily due to volume declines in foodservice, partially offset by positive pricing/mix.

Warehouse Segment Summary
Compared to the prior year second quarter where applicable

  • Total segment sales decreased 10.4% to $133.7 million.
  • Percentage point change in sales attributed to:
    • Pricing/mix: 2.2%
    • Volume: -9.6%
    • Divestiture: -3.0%
  • Operating income decreased 26.2% to $11.6 million.
  • Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 70.2% of segment sales, a 20 basis point increase. This increase was primarily driven by sales declines.
  • SD&A expenses were 17.6% of segment sales, a 120 basis point increase. This increase was primarily driven by significantly lower sales that spread the costs over a smaller sales base.

Decreased sales of snack cakes and Alpine Valley branded organic breads, and the impact of our mix manufacturing business divestiture resulted in the sales decrease in the Warehouse segment. Branded retail sales declined 18.1% to $33.7 million, store branded retail sales decreased 17.4% to $24.2 million, while non-retail and other sales decreased 3.7% to $75.8 million. Branded retail sales decreased largely due to volume declines in both cake and organic bread. During the second quarter of fiscal 2016, the Warehouse segment's Mesa 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...


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