THOMASVILLE, GA. — The recent shuttering by Flowers Foods, Inc. of a Vermont baking plant is part of a multi-year effort to optimize the company’s fixed cost structure, said Allen L. Shiver, president and chief executive officer. With sales growth scant and expected to remain challenged in the years ahead, steadfast cost-cutting efforts will be crucial if the company is to achieve its long-term profitability targets, he said.
Noting that 2018 was “year two of a five-year journey to reposition Flowers,” Mr. Shiver discussed supply-chain optimization during a Feb. 7 conference call with investment analysts. The call was in connection with the company’s financial results for 2018 and earnings guidance for 2019.
Net income in the year ended Dec. 29, 2018, was $157,160,000, equal to 74c per share on the common stock, up 4.7% from $150,120,000, or 71c per share, in 2017. Sales were $3,951,852,000, up 0.8% from $3,920,733,000.
Results in both years included large special items. In the most recent year, these included restructuring charges of $9,767,000; losses attributed to inferior ingredients, $3,212,000; impairment of assets, $5,999,000; and multi-employer pension plan withdrawal costs, $2,322,000. Flowers said its adjusted net income for the year was up 5% while adjusted EBITDA was down 8.5%. The company’s adjusted EBITDA margin fell 110 basis points, to 10.4%.
Net income in the fourth quarter was $20,841,000, equal to 10c per share, down 73% from $78,533,000, or 37c per share. Sales were $880,667,000, up 0.8% from $873,623,000 in the final quarter of 2017.
In the fourth quarter, sales of branded products rose 2.3%, to $519 million, and private label sales rose 5.2%, to $134 million. Non-retail sales fell 4.7%, to $227.6 million.
“Continued sales growth from (Dave's Killer Bread) organic products, growth in our expansion markets, the contribution from Nature’s Own Perfectly Crafted bread and more favorable price/mix drove the increase in branded retail sales,” Flowers said of the fourth-quarter results. “Partially offsetting the increase were volume declines in white breads, specialty breads and sandwich buns and rolls. Store branded retail sales increased primarily due to positive price/mix and, to a lesser extent, increased volumes. Food service and vending volume declines primarily drove the decrease in non-retail and other sales, partially offset by positive price/mix.”
Offering guidance for 2019, Flowers projected sales of $4,030 million to $4,109 million, up 2% to 4% from 2018. Earnings per share of 94c to $1.02 would compare with adjusted earnings per share of 94c in 2018 (74c reported). As part of the guidance, Flowers said it expects sales of $70 million to $80 million from its newly acquired Canyon Bakehouse business. Capital expenditures in 2019 were forecast at $110 million to $120 million, versus $99.4 million in 2018 and $75.2 million in 2017.
During the conference call, R. Steven Kinsey, chief financial officer and chief administrative officer, said the Canyon Bakehouse sales alone are expected to account for two percentage points of growth for Flowers in 2019. The remaining growth (zero to two percentage points) are expected to be driven by positive price/mix, offset by volume weakness, he said.
He projected 150 basis points of inflationary pressures in commodity, transportation and labor.
“We intend to mitigate these costs through the comprehensive cost-savings and productivity initiatives,” Mr. Kinsey said. “These initiatives are being supported by new capabilities that enable improved tracking and enhanced accountability.”
Mr. Shiver talked about Flowers’ fixed costs as part of a broader update on Project Centennial, the company’s five-year restructuring program. In addition to steps taken to cut costs in the short and medium term (including a 15% management headcount reduction program in 2017), he said Flowers is “working on a multi-year supply-chain optimization project to address our fixed cost structure.”
He continued, “This initiative is essential to achieving our long-term margin targets and enhancing returns on our capital investments. One important aspect of this project is taking a sharper look at contribution margins across different channels and product lines. In many of our bakeries, a single production line can produce a variety of products for branded, store-branded and non-retail segments. Our objective is to take advantage of this flexibility and optimize for higher-value production visions.”
As an example, Mr. Shiver cited the installation of a high-speed bun line in the company’s Oxford, Pa., plant. The project helped more fully utilize existing infrastructure at Oxford and allowed Flowers to close a less efficient plant at Brattleboro, Vt., (announced in November), he said.
“Another example is we are adding organic production capabilities to one of our bakeries in the Northeast,” he said. “When this project is completed, we can improve service to the Northeast market while also lowering transportation cost.”
Given the baking industry’s sluggish sales trends, cost containment is crucial, Mr. Shiver said.
“Commodity and transportation costs have been stiff headwinds to margin over the past two years,” he said. “We have been able to partially mitigate these headwinds through our savings initiatives, which have offset more than $80 million of these costs since 2016.”
Both Mr. Shiver and Mr. Kinsey discussed price increases already implemented, and Mr. Shiver said further price increases are planned for the year ahead. Asked about market response, Mr. Shiver said customers generally have been receptive to the price action.
“We accomplished these share gains with less promotional activity this quarter compared with the year ago,” he said.
Other parts of Project Centennial include invigorating the company’s core brands and capitalizing on adjacencies. He said the renewed focus on the company’s top brands have helped Flowers gain additional space and better shelf position.
“We have significantly increased our investment in innovation and marketing,” he said. “Our marketing team is focused on translating unique consumer insights into innovation and brand loyalty.”
Regarding adjacencies, Mr. Shiver said Flowers continues to seek “strategic acquisition targets in underdeveloped product segments and geographies that leverage our competitive advantages and align with our value-creation strategies.”
Integration of Canyon Bakehouse is going well, Mr. Shiver said.
Overall, he described the fourth quarter of 2018 as in line with expectations. He said the company achieved record market share for the quarter, gaining share in the loaf and breakfast segments.
In the company’s D.S.D. segment, growth of branded retail sales in the fourth quarter was lifted by price/mix while volume was flat. A decline in food service was attributed, in part, to a shift of certain food service accounts to the company’s Warehouse segment.
Overall, D.S.D. operating income in the fourth quarter was $41.8 million, down 25% from the fourth quarter of 2017. Sales were $747.7 million, up 1.2%.
Warehouse segment operating income was $6.1 million, down 19%. Adjusted operating income was up 1.6%. Sales were $133 million, down 1.5%.
Branded retail sales from the Warehouse segment declined mostly due to a sales drop of branded cake and, to a smaller degree, weak sales of warehouse delivered organic bread. The weaker warehouse income was attributed to higher restructuring and related impairment charges, offset by lower operating costs.
The struggling snack cake business will be an area of focus in 2019, Mr. Shiver said.
“We’re already making significant progress streamlining the product assortment, improving price/mix and exiting low-margin business,” he said. “Now it’s about driving profitable growth. We have a solid pipeline of new cake products, and we look forward to improved results in 2019.”
Asked by an analyst whether this effort will translate into sales growth, Mr. Shiver was cautious.
“We're not projecting tremendous growth in our cake business, but I want to make sure you understand it remains an important part of our overall product mix,” he said.
In trading on the New York Stock Exchange Feb. 7 following the earnings announcement, Flowers shares were strong while the overall market gave ground. Shortly before noon eastern time, Flowers shares were trading at $20.49, up 61c, or 3%, from the Feb. 6 closing price.