Flowers Foods Reports Results for the Second Quarter and First Half; Updates 2008 Guidance

2008-08-14 06:30:00

    THOMASVILLE, Ga., Aug. 14 /EMWNews/ -- Flowers Foods

(NYSE: FLO) today reported results for its 12-week second quarter and first

half ended July 12, 2008. The company also updated its earnings guidance

for the year.



    



    -- Sales were $540.7 million in the second quarter of 2008, an increase

of 13.1% compared to the second quarter of 2007. For the first half, sales

were $1.22 billion, an increase of 11.9% over last year's first half. The

increase for both periods was driven by favorable pricing, increased

volume, and positive mix shifts.



    -- Net income for the quarter was $23.9 million, or $.26 per diluted

share, a 7.9% increase over net income reported for the prior year's second

quarter. For the first half, net income was $59.7 million, or $.65 per

diluted share, an increase of 17.9% over the same period in the prior year.



    -- EBITDA was $52.4 million, or 9.7% of sales, an increase of 6.3% over

the same period in 2007 and, for the first half, EBITDA was $127.5 million,

or 10.5% of sales, an increase of 11.5% over last year's first half.



    -- Branded retail sales were up 15.8% in the quarter, driven by

Nature's Own soft variety and premium breads and Nature's Own Whitewheat

breads as well as by regional white bread brands.



    -- During the quarter, the company announced agreements to merge with

Holsum Bakery of Phoenix, Ariz., and to acquire ButterKrust Bakery of

Lakeland, Fla. Both transactions were completed early in the third quarter.



    -- Sales and earnings guidance for 2008 was updated as the result of

year-to-date performance and to include recent acquisitions. Guidance for

FY 2008 now anticipates sales of $2.400 billion to $2.425 billion and net

income of $109.2 million to $114.7 million, or $1.17 per share to $1.23 per

share with 93.4 million average shares outstanding.



    George E. Deese, Flowers Foods' Chairman, CEO, and President said,

"Sales for the quarter showed growth across all categories, with our retail

brands performing very well. Our team continues to be successful in

introducing new products, expanding our geographic reach, and maintaining

brand loyalty while driving through price increases. As previously

announced, our steepest commodity cost increases for the year hit during

the second quarter and had a short-term impact on margins. However, as

evidenced by our updated guidance, we expect to deliver good results for

the full year.



    "Over the last few days, we completed the Holsum Bakery and ButterKrust

Bakery transactions. Both companies are operationally strong and

profitable. Together, they will add about $220.0 million in annualized

sales and help fuel Flowers Foods' growth and expansion. Holsum will drive

Flowers' market expansion in Arizona, Nevada, and parts of California with

a broad spectrum of outstanding products and brands. Holsum operates two

highly efficient bakeries, has an experienced and talented team, and

operating strategies similar to Flowers' strategies. ButterKrust has a fine

team and a state-of-the-art bakery with available production capacity to

relieve capacity pressures in our bakeries that serve the rapidly growing

Florida market. We expect both companies to strengthen Flowers Foods and

help create value for shareholders over the long term."



    Second Quarter and First Half Results



    For the second quarter, sales increased 13.1% to $540.7 million over

the $477.8 million reported for last year's second quarter. Net income was

$23.9 million, or $.26 per diluted share, an increase of 7.9% over the

$22.2 million, or $.24 per diluted share, reported for the 2007 second

quarter. The quarter's sales increase of 13.1% was achieved through a

favorable pricing/mix of 10.9% and volume increase of 2.2%. During the

quarter, the company's direct-store-delivery (DSD) sales grew at 14.1% due

to a favorable pricing/mix of 12.1% and unit volume increase of 2.0%. Sales

through warehouse delivery increased 9.1%, reflecting positive pricing/mix

of 6.3% and unit volume increased 2.8%.



    Sales for the first half increased 11.9% to $1.22 billion over the

$1.09 billion reported for the first half of 2007. Net income was $59.7

million, or $.65 per diluted share, an increase of 17.9% over the $50.7

million, or $.55 per diluted share, reported for the 2007 first half. The

sales increase of 11.9% was achieved through a favorable pricing/mix of

10.2% and volume increase of 1.7%. Year-to-date, the company's DSD sales

grew at 13.6% due to a favorable pricing/mix of 11.2% and unit volume

increases of 2.4%. Sales through warehouse delivery increased 4.8%,

reflecting positive pricing/mix of 4.5% and unit volume increases of .3%.



    For the quarter, gross margin as a percent of sales was 45.7% compared

to 48.7% in the second quarter of 2007. The decrease in margin was due to

higher commodity costs, primarily flour, in the quarter. Ingredient costs

in the quarter were up 34% over the prior year quarter. During the quarter,

gross margin also was impacted negatively by $1.3 million in costs related

to the closing of an Atlanta snack cake bakery. These cost increases were

partially offset by sales gains, improved manufacturing efficiencies, and

lower labor costs as a percent of sales.



    Gross margin for the first half was 47.1% of sales compared to 49.3% in

the first half of 2007. This decrease as a percent of sales is also the

result of higher commodity costs, which were up 31% over the prior year's

costs. Year-to-date, gross margin also was impacted negatively by $1.7

million in costs relating to the plant closing. These cost increases were

partially offset by sales gains, improved manufacturing efficiencies, and

lower labor costs as a percent of sales.



    Selling, marketing, and administrative costs as a percent of sales for

the quarter were 36.6% compared to 38.4% in the prior year. For the first

half, selling, marketing, and administrative costs as percent of sales were

36.9% compared to 38.8% last year. These improvements as a percent of sales

were due primarily to increased sales and lower employee-related and

advertising costs as a percent of sales. Though rising energy costs

continued through the second quarter, logistics costs as a percent of sales

also decreased due to the company's continued efforts to minimize miles

traveled and to locate production closer to markets served.



    During the second quarter, the company recorded a gain of $2.3 million

relating to the sale and closure of the Atlanta snack facility. Costs of

$1.3 million were recorded in cost of goods sold and $0.3 million of costs

were recorded as selling, marketing and administrative costs during the

quarter relating to this closure, therefore, the net effect on earnings of

the closure was $0.7 million for the quarter. During the first half, costs

of $2.0 million ($1.7 million as cost of goods sold and $0.3 million as

selling, marketing and administrative costs) were recorded related to the

sale and closure, therefore the net effect on earnings year-to-date was

$0.3 million. The costs consisted primarily of severance, write-off of

obsolete inventory and equipment removal costs. Also, during the second

quarter, the company received final insurance proceeds of $0.7 million

relating to property damage at one of the company's distribution centers

last year.



    Depreciation and amortization expenses for the second quarter and first

half remained relatively stable as a percent of sales compared to the prior

year. Net interest income for the quarter was $0.7 million higher than the

prior year second quarter and $2.3 million higher year-to-date compared to

prior year due to higher interest income related to the sale of new

territories to independent distributors and a decrease in interest expense

due to lower average debt outstanding under the company's credit facility.

The effective tax rate for the quarter and year-to-date was 35.7% and is in

line with the estimated full-year tax rate of approximately 36.0%.



    Operating margin for the second quarter was 6.7% as compared to 7.2%

for the same period last year with the decrease primarily due to higher

ingredient costs. For the first half, operating margin was 7.4% compared to

7.3% in last year's first half. EBITDA for the quarter was $52.4 million,

or 9.7% of sales, an increase of 6.3% over EBITDA for the second quarter of

2007. EBITDA for the first half was $127.5 million, or 10.5% of sales, an

increase of 11.5% over the prior year.



    During the second quarter, the company invested $18.6 million in

capital improvements and paid dividends totaling $13.8 million to

shareholders. No additional shares were repurchased during the quarter

under the company's share repurchase plan. However, since the inception of

the share repurchase plan, the company has acquired 19.4 million shares of

its common stock for $286.2 million, an average of $14.76 per share. The

plan authorizes the company to repurchase up to 30.0 million shares of

common stock. For the first half, net cash provided by operating activities

was $56.1 million, with $42.0 million invested in capital improvements and

$25.4 million paid in dividends to shareholders.



    Updated Guidance for Fiscal 2008



    Taking into consideration the company's performance year-to-date and

the impact of recent acquisitions, the company now expects sales growth in

2008 of 17.8% to 19.1%. Therefore, sales for fiscal 2008 are expected to be

$2.400 billion to $2.425 billion. Fiscal 2008 is a 53-week year and

approximately 1.5% of estimated fiscal 2008 sales are expected from the

53rd week. The company expects net income will be 4.5% to 4.7% of sales or

$109.2 million to $114.7 million. With approximately 93.4 million average

shares outstanding, which reflects shares issued for the Holsum merger,

earnings per share are expected to be $1.17 to $1.23, an increase of 14.7%

to 20.6% over 2007. Previously, the company's guidance for 2008 had been

for sales of $2.220 billion to $2.271 billion, net income of $106.6 million

to $113.6 million, and earnings per share of $1.15 to $1.23 on 92.5 million

average shares outstanding.



    Capital spending in fiscal 2008 is expected to be $95.0 million to

$100.0 million, an amount that includes costs for construction of new

production capacity as well as for maintaining and improving efficiencies

in the company's 39 bakeries.



    Deese said, "Even in the face of higher costs that put pressure on our

margins, we delivered good results for the second quarter and first half of

2008. We continue to make improvements throughout the business to help

offset higher costs. We remain confident in our ability to grow

successfully as we continue to execute our strategies of investing in our

bakeries, products, brands, and people. Our team also is focused on the

growth opportunities presented by our merger with Holsum and acquisition of

ButterKrust. The strength of our products and brands, the quality of our

bakeries and our distribution system, and the experience and determination

of our team provides us with the confidence we can deliver good results for

the full year and continue to build value for our shareholders in the

future."



    The board of directors will consider the dividend at its regularly

scheduled meeting. Any action taken will be announced following that

meeting.



    Conference Call



    Flowers Foods will broadcast its second quarter conference call over

the Internet at 10:30 a.m. (Eastern) August 14, 2008. The call will be

broadcast live on Flowers' Web site, http://www.flowersfoods.com, and can be

accessed by clicking on the web cast link on the home page. The call also

will be archived on the company's Web site.



    Company Information



    Headquartered in Thomasville, Ga., Flowers Foods is one of the nation's

leading producers and marketers of packaged bakery foods for retail and

foodservice customers. Among the company's top brands are Nature's Own,

Whitewheat, Holsum, Aunt Hattie's, Cobblestone Mill, Sunbeam, Blue Bird,

and Mrs. Freshley's. Flowers operates 39 bakeries that are among the most

efficient in the baking industry. Flowers Foods produces, markets, and

distributes fresh bakery products that are delivered to customers daily

through a direct-store-delivery system serving the Southeast, Southwest,

and Mid-Atlantic. The company also produces and distributes fresh snack

cakes and frozen breads and rolls nationally through warehouse

distribution. For more information, visit http://www.flowersfoods.com.



    Statements contained in this press release that are not historical

facts are forward-looking statements. All forward-looking statements are

subject to risks and uncertainties that could cause actual results to

differ from those projected. Other factors that may cause actual results to

differ from the forward-looking statements contained in this release and

that may affect the company's prospects in general include, but are not

limited to, (a) competitive conditions in the baked foods industry,

including promotional and price competition, (b) changes in consumer demand

for our products, (c) the success of productivity improvements and new

product introductions, (d) a significant reduction in business with any of

our major customers including a reduction from adverse developments in any

of our customer's business, (e) fluctuations in commodity pricing, (f) our

ability to fully integrate recent acquisitions into our business, and (g)

our ability to achieve cash flow from capital expenditures and acquisitions

and the availability of new acquisitions that build shareholder value. In

addition, our results may also be affected by general factors such as

economic and business conditions (including the baked foods markets),

interest and inflation rates and such other factors as are described in the

company's filings with the Securities and Exchange Commission.




Flowers Foods Consolidated Statement of Income (000's omitted, except per share data) For the For the For the For the 12-Week 12-Week 28-Week 28-Week Period Ended Period Ended Period Ended Period Ended 07/12/08 07/14/07 07/12/08 07/14/07 Sales $540,656 $477,838 $1,217,363 $1,087,785 Materials, supplies, labor and other production costs 293,594 244,942 643,564 551,894 Selling, marketing and administrative expenses 197,662 183,592 449,337 421,555 Depreciation and amortization 16,032 15,116 36,945 35,233 Gain on sale 2,306 0 2,306 0 Gain on insurance recovery 686 0 686 0 Income before interest, income taxes and minority interest (EBIT) 36,360 34,188 90,509 79,103 Interest income, net 2,657 1,932 6,154 3,865 Income before income taxes and minority interest (EBT) 39,017 36,120 96,663 82,968 Income tax expense 13,931 12,914 34,493 29,414 Income before minority interest 25,086 23,206 62,170 53,554 Minority interest in variable interest entity (1,137) (1,016) (2,438) (2,871) Net income $23,949 $22,190 $59,732 $50,683 Per share amounts: Net income $0.26 $0.24 $0.65 $0.55 Diluted weighted average shares outstanding 92,501 92,413 92,415 92,148 Flowers Foods Segment Reporting (000's omitted) For the For the For the For the 12-Week 12-Week 28-Week 28-Week Period Period Period Period Ended Ended Ended Ended 07/12/08 07/14/07 07/12/08 07/14/07 Sales: Direct-Store-Delivery $440,802 $386,271 $994,683 $875,226 Warehouse Delivery 99,854 91,567 222,680 212,559 $540,656 $477,838 $1,217,363 $1,087,785 EBITDA: Direct-Store-Delivery $48,540 $45,385 $117,890 $106,372 Warehouse Delivery 10,117 9,998 23,098 22,434 Flowers Foods (6,265) (6,079) (13,534) (14,470) $52,392 $49,304 $127,454 $114,336 Depreciation and Amortization: Direct-Store-Delivery $12,153 $11,931 $28,111 $27,849 Warehouse Delivery 3,656 3,216 8,378 7,473 Flowers Foods 223 (31) 456 (89) $16,032 $15,116 $36,945 $35,233 EBIT: Direct-Store-Delivery $36,387 $33,454 $89,779 $78,523 Warehouse Delivery 6,461 6,782 14,720 14,961 Flowers Foods (6,488) (6,048) (13,990) (14,381) $36,360 $34,188 $90,509 $79,103 Note: During the second quarter of 2008, the company's Tucker, Georgia operation was transferred from the Direct-Store-Delivery segment to the Warehouse Delivery segment. Prior year information has been reclassified to reflect this change for comparability purposes. Flowers Foods Condensed Consolidated Balance Sheet (000's omitted) 07/12/08 Assets Cash and Cash Equivalents $19,532 Other Current Assets 267,981 Property, Plant & Equipment, net 489,952 Distributor Notes Receivable (includes $11,507 current portion) 102,841 Other Assets 46,576 Cost in Excess of Net Tangible Assets, net 97,516 Total Assets $1,024,398 Liabilities and Stockholders' Equity Current Liabilities $206,961 Bank Debt 6,000 Other Debt and Capital Leases (includes $3,300 current portion) 26,672 Other Liabilities 87,168 Minority Interest in Variable Interest Entity 9,109 Common Stockholders' Equity 688,488 Total Liabilities and Stockholders' Equity $1,024,398 Flowers Foods Condensed Consolidated Statement of Cash Flows (000's omitted) For the 12-Week For the 28-Week Period Ended Period Ended 07/12/08 07/12/08 Cash flows from operating activities: Net income $23,949 $59,732 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 16,032 36,945 Minority interest in variable interest entity 1,137 2,438 Stock compensation 3,279 6,678 Changes in assets and liabilities (49,919) (49,712) Net cash (disbursed for)/provided by operating activities (5,522) 56,081 Cash flows from investing activities: Purchase of property, plant and equipment (18,640) (41,964) Other 2,426 240 Net cash disbursed for investing activities (16,214) (41,724) Cash flows from financing activities: Dividends paid (13,824) (25,358) Stock options exercised 34 2,438 Income tax benefit related to stock awards 115 1,714 Stock repurchases 0 (5,829) Increase in book overdraft 7,314 8,989 Proceeds from debt borrowings 26,500 30,000 Debt and capital lease obligation payments (21,349) (26,757) Net cash disbursed for financing activities (1,210) (14,803) Net decrease in cash and cash equivalents (22,946) (446) Cash and cash equivalents at beginning of period 42,478 19,978 Cash and cash equivalents at end of period $19,532 $19,532 Flowers Foods Reconciliation of Net Income to EBITDA from Continuing Operations (000's omitted) For the 12-Week For the 28-Week Period Ended Period Ended July 12, 2008 July 12, 2008 Net Income $23,949 $59,732 Minority interest in variable interest entity 1,137 2,438 Income tax expense 13,931 34,493 Interest income, net (2,657) (6,154) Depreciation and amortization 16,032 36,945 EBITDA from Continuing Operations $52,392 $127,454

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