Mixed bag for Flowers in quarterly financials

by Josh Sosland
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THOMASVILLE, GA. — Higher volume and sharply higher sales stood as bright spots in first-quarter financials for Flowers Foods, Inc. that also featured a decline in net income and a decision by the company to lower earnings guidance for 2012.

Net income of Flowers Foods in the first quarter ended April 21 was $37,943,000, equal to 28c per share on the common stock, down 8% from $41,161,000, or 30c per share, in the first quarter of 2011.

Adjusted for one-time charges in 2011, earnings were down 15%.

Quarterly sales were $898,206,000, up 12% from $801,825,000.

Offering revised guidance for 2012, Flowers said it expects 3.5% to 8% growth from adjusted fiscal 2011 earnings per share of 96c. A quarter ago, the company had projected earnings growth in 2012 ranging from 7% to 12%. The company attributed the change to “an increase in interest expense as a result of the recent bond issuance.”

Flowers described its acquisition of Tasty Baking as “slightly accretive” in the first quarter. Results included $4.2 million in one-time costs, after tax, related to the closing of a baking plant ($2.8 million) and the Tasty acquisition (about $1.4 million).

Gross margin as a percentage of sales in the quarter was 46.7%, down 190 basis points from 48.5% in the first quarter of 2011. The margin pressure was attributed by Flowers to “increased ingredient and packaging costs” most notably a double-digit increase in flour cost and smaller gains in shortening and sugar. Mitigating these increases were higher prices for the company’s products, lower labor costs as a percentage of sales and improved manufacturing efficiencies.

Breaking down the 12% sales increase, Flowers said the Tasty acquisition accounted for 7.9 points and favorable price/mix for 2.4. Volume rose 1.7%, though trends were not positive across all channels.

“Dollar sales increased across all channels, while volume increases in the non-retail channel more than offset volume declines in the branded retail channel,” Flowers said. “Volume increases in the non-retail channel were primarily the result of increases in the food service and contract manufacturing categories, while the decreased volume in the branded retail channel was primarily due to decreases in the white bread and buns and rolls categories, partially offset by increases in the soft variety category.”

George E. Deese, chairman and chief executive officer, added, “While input costs presented headwinds in the first quarter, we were relatively pleased with our results. We achieved a 12% sales increase driven by the Tasty acquisition, expansion markets for Nature’s Own and Tastykake, new products, and added food service business. Sales increases for our Nature’s Own soft variety breads were partially offset by decreased sales of branded white breads. Our experienced team is focused on opportunities brought on by changes in consumer trends impacting the fresh baked foods business at retail and food service. As our earnings and margins experienced pressure in the quarter, we tightened administrative and operational expenses and continued to improve productivity levels. We expect to maintain these improved productivity levels and cost structure as the year unfolds.

“Looking ahead, our growth strategies continue to serve us well. We are achieving increases in our core business and our expansion markets. We also expect to take advantage of opportunities as the baking industry further consolidates. We are positioned to add new bakeries as needed, enter new geographic territories, and make acquisitions as we work to build shareholder value over the long term.”

In the company’s Direct-Store-Delivery segment, which accounts for 82% of Flowers total sales, first quarter EBIT was $63,822,000, down 0.6%, from $64,219,000 in the first quarter of 2011. Sales were $737,298,000, up 14% from $646,850,000.

Warehouse Delivery EBIT was $9,594,000, down 15% from $11,331,000. Sales were $160,908,000, up 3.8% from $154,975,000.

In its guidance, Flowers said it expects $75 million to $85 million in capital expenditures, including a recently announced plant expansion in Oxford, Pa. A quarter ago, the company had said capital spending in 2012 would range from $65 million to $75 million.

In a May 24 conference call, Steve Kinsey, executive vice-president and chief financial officer, expanded on the impact of the bond offering, noting the company absorbed $700,000 in unanticipated interest expenses in connection with the issuance of $400 million in 10-year senior notes.

“We ended the quarter with $497 million in debt or 1.8 times trailing 12 month EBITDA,” Mr. Kinsey said. “We also had approximately $186 million of cash on hand, so our net debt was approximately $311 million. Net interest income for the quarter was down quarter-over-quarter due primarily to higher interest expense resulting from debt related to the Tasty Baking acquisition, and the issuance of the senior notes. Based on the step up in leverage, we now estimate interest expense for the full year to be approximately $21 million.”

Asked about locking in the debt at a higher incremental cost, requiring the adjustment in guidance, Mr. Deese predicted that, given the current merger and acquisition market in interest rate environment, the decision will prove wise in the long term.

“I think five years from now we will look back and say, it was great, we did it,” Mr. Deese said. “We think the timing was right. We do see — we said we were using this for general corporate purposes. We also said that we are looking at the M.&A. activity and acquisitions, too. So that’s about all I can say. But we did feel like with the historical lower interest rates this was the right thing to do with opportunities that present themselves going forward.”

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