Flowers Foods Reports First Quarter 2013 Results
17 May 2013 --- Flowers Foods, Inc., the second-largest producer and marketer of fresh packaged bakery foods in the United States, reported results for its 16-week first quarter ended April 20, 2013. Sales increased 25.9% to $1.13 billion. Diluted EPS, excluding certain benefit/costs, was $0.46, up 64.3% from last year's first quarter.
The company recorded a benefit of $0.37 per diluted share related to a bargain purchase accounting gain on the Sara Lee/California acquisition and acquisition-related costs of $0.02 per diluted share. Including the benefit and costs, diluted EPS was $0.81. Other highlights for the quarter include:
- Volume increased 19.3%, acquisitions contributed 7.7%, and net price/mix was unfavorable 1.1%, driven by a change in product mix;
- Gross margin was 48.2%, compared to 46.7% for the first quarter of fiscal 2012;
- EBITDA margin, excluding the benefit/costs, was 12.3% for the quarter;
- Operating margin (EBIT), excluding the benefit/costs, was 9.2%;
- Generated $86.8 million in cash flow from operations;
- In January, announced an agreement to acquire certain Hostess bread assets. The agreement was approved by the bankruptcy court in March and is currently under regulatory review;
- In February, completed acquisition of the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California from BBU, Inc. The new business is being rolled out in stages through early summer;
- Announced the election by the board of directors of Allen L. Shiver, current president of Flowers Foods, as chief executive officer and George E. Deese, current chairman of the board and chief executive officer, as executive chairman, effective May 22, 2013 at the annual shareholders meeting;
- In April, entered into a new term loan with a commitment of up to $300.0 million and amended existing $500.0 million senior unsecured credit facility and existing term loan to reflect more favorable terms in anticipation of funding for acquisitions and other needs.
Commenting on first quarter results, Chairman and CEO George Deese said, "We believe the results we reported reflect the best performance in the company's history. We achieved substantial sales increases in both segments, across all channels, and in our primary product categories. We also delivered outstanding earnings. Throughout our company, team members performed incredibly well as they worked to serve customers' needs following Hostess' departure from the market last fall. Our investments in our bakeries and our distribution systems over several decades, combined with the strength and determination of our team, allowed us to take on new business and meet the needs of existing and new customers.
"This is an exciting time for Flowers Foods as we focus on integrating Lepage Bakeries in the Northeast and Sara Lee in California, while maintaining the gains we have achieved in markets throughout the country in recent months," Deese continued. "Looking ahead, we expect to have growth opportunities in our newer markets as customers and consumers gain confidence in Nature's Own, Tastykake, and our other strong brands."
First Quarter 2013 Results
For the 16-week first quarter of 2013, sales increased 25.9% to $1.13 billion from $898.2 million in last year's first quarter. This increase was attributable to increased volumes of 19.3% and contributions from the Lepage Bakeries and Sara Lee/California acquisitions of 7.7%, partially offset by unfavorable net price/mix of 1.1%. Dollar sales and volume increased across all channels. Increases in soft variety, white bread, buns and rolls, and cake primarily drove volume increases in the branded retail channel. The volume increases in the store brand channel were driven by increases in the white bread, buns and rolls, and cake categories. The non-retail channel volume increases were primarily in the foodservice and vending categories. The unfavorable net price/mix was driven primarily by a mix shift in the cake business.
Net income for the quarter, adjusted for a bargain purchase accounting gain and acquisition-related costs, was $64.9 million, or $0.46 per diluted share compared to $37.9 million or $0.28 per diluted share in the first quarter of fiscal 2012. During the first quarter this year, the company recorded a benefit of $51.3 million, net of tax, or $0.37 per diluted share reflecting a bargain purchase accounting gain related to the Sara Lee/California acquisition. Also during the first quarter, Flowers incurred acquisition-related costs of $2.9 million, net of tax, or $0.02 per diluted share. Including these items, net income was $113.3 million, or $0.81 per diluted share.
Gross margin as a percentage of sales for the quarter was 48.2%, up 150 basis points from 46.7% in the first quarter of 2012. This increase was due primarily to higher sales volumes and decreased workforce-related costs as a percent of sales.
Selling, distribution, and administrative costs as a percent of sales for the quarter were 36.4%, down 40 basis points from 36.8% of sales in the first quarter of fiscal 2012. Higher sales volumes and lower workforce-related costs as a percent of sales were the main drivers of the decrease. Acquisition-related costs negatively impacted selling, distribution, and administrative costs by $4.5 million, or 40 basis points as a percent of sales, in the first quarter of this year.
Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year's first quarter. Net interest expense increased in this year's first quarter as compared to last year's first quarter primarily as a result of the issuance of $400.0 million of senior notes late in the first quarter of last year. The effective tax rate for the quarter was 22.8% as compared to 35.9% in last year's first quarter. The bargain purchase accounting gain on the Sara Lee/California acquisition positively affected the tax rate 12.2% during the first quarter. The full-year tax rate is expected to be approximately 35.5% to 36.0%, excluding the effect of the bargain purchase.
Income from operations defined as earnings before interest and taxes (EBIT) adjusted for the bargain purchase accounting gain and the acquisition-related costs, was $104.4 million, or 9.2% of sales compared to $59.2 million, or 6.6% of sales in last year's first quarter. Including the benefit/costs, EBIT was $151.2 million, or 13.4% of sales. Adjusted for the benefit/costs, earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first quarter was $138.6 million, or 12.3% of sales, compared to $89.0 million, or 9.9% of sales, in last year's first quarter. Including the benefit/costs, EBITDA was $185.4 million, or 16.4% of sales.
Segment Results
DSD (82% of sales): During the quarter, the company's direct store delivery (DSD) sales increased 25.1%, reflecting volume gains of 15.0%, contributions from the acquisitions of 9.4%, and positive net price/mix of 0.7%. Dollar sales and volume increased across all channels. Increases in soft variety, white bread, buns and rolls, and cake primarily drove volume increases in the branded retail channel. Increases in the store brand channel were driven primarily by increases in the white bread and buns and rolls categories. The non-retail channel volume increases were primarily in the quick serve and other restaurant categories.
Income from operations for the DSD segment adjusted for the bargain purchase accounting gain was $101.2 million, or 11.0% of sales for the first quarter compared to $63.8 million, or 8.7% of sales in last year's first quarter. Increased sales volumes and recent acquisitions were the primary drivers of the increase. Including the bargain purchase accounting gain, DSD's operating income was $152.5 million, or 16.5% of sales.
Warehouse (18% of sales): Sales through warehouse delivery increased 29.5%, reflecting volume increases of 33.1%, partially offset by negative net pricing/mix of 3.6%. Dollar sales and volume increased across all channels. Branded and store brand cake, foodservice, and vending were the primary drivers of the volume increases. The unfavorable net price/mix was driven primarily by a mix shift in the cake business.
Income from operations for the warehouse segment was $18.7 million, or 9.0% of sales for the first quarter compared to $9.6 million, or 6.0% of sales in last year's first quarter. This increase was due primarily to increased sales volumes.
Cash Flow
During the first quarter, cash flow from operating activities was $86.8 million. The company invested $22.6 million in capital improvements and paid dividends of $22.5 million to shareholders. The company also acquired 137,000 shares of its common stock under its share repurchase plan for $3.8 million.
Other Matters of Importance during the Quarter
On January 11, 2013, Flowers announced it signed two asset purchase agreements with Hostess Brands, as the "stalking horse bidder" for certain Hostess assets. The first agreement provided for the purchase by Flowers of the Wonder, Nature's Pride, Merita, Home Pride, and Butternut bread brands; 20 bakeries; and approximately 38 depots for a purchase price of $360.0 million. That bid has been approved by the bankruptcy court and is currently under regulatory review. The process is expected to be completed in the second half of fiscal 2013. The company paid $18.0 million as a deposit for the potential acquisition of Hostess bread assets. The second agreement, which provided for the purchase by Flowers of the Beefsteak brand for $30.0 million, was topped by another bidder, and consequently, was terminated. The company received a break-up fee of $0.9 million related to its stalking horse bid for the Beefsteak brand.
In February 2013, the company announced that in keeping with the company's management succession plan, the board of directors elected Allen L. Shiver president and chief executive officer, effective May 22, 2013 at the annual shareholders' meeting. Shiver has 34 years of service with the company and currently serves as president. George E. Deese, current chairman of the board and chief executive officer, was elected executive chairman of the board, effective the same date.
On February 23, 2013, the company completed its previously announced acquisition of certain assets and trademark licenses from BBU, Inc., a subsidiary of Grupo Bimbo, S.A.B. de C.V. The cash purchase price was approximately $50.0 million. The company received perpetual, exclusive, and royalty-free licenses to the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the state of California. The new business in California is being added in phases through early summer. Annualized sales for the acquisition are expected to be approximately $134.0 million.
On April 5, 2013, the company entered into a senior unsecured delayed-draw term loan facility with a commitment of up to $300.0 million to finance the pending Hostess transactions, and to pay certain acquisition-related costs and expenses. The company announced amendments to its existing $500.0 million senior unsecured credit facility and existing unsecured term loan, providing for less restrictive leverage covenants and certain more favorable terms consistent with the new term loan facility.
Outlook for Second Quarter and Full Year 2013
R. Steve Kinsey, executive vice president and chief financial officer, said, "We continue to be very optimistic about the outlook for fiscal 2013 and, in the second quarter, we are continuing to see very good sales growth. Second quarter operating earnings also are expected to be strong, although we are experiencing start-up costs related to the integration of the Sara Lee business in California. Given that the Hostess transaction is currently under regulatory review, we are delaying full year 2013 guidance until the review is completed."
