Flowers Foods Reports Fourth Quarter and Fiscal 2011 Results

George E. Deese, Flowers Foods' chairman and chief executive officer, said, "Given ongoing challenges in the marketplace, we are pleased to report strong sales growth driven by the Tasty acquisition and our direct-store-delivery (DSD) segment.

Feb 13 2012 --- Flowers Foods, Inc., reported results for its fourth quarter and fiscal year ended December 31, 2011 and provided guidance for 2012.  Highlights for the quarter and full year (vs. year-ago amounts):

-Sales for the quarter grew 14.0% to $653.6 million, reflecting favorable net price/mix of 3.8%, contributions from the Tasty acquisition of 9.6%, and volume increases of 0.6%.; sales for the year increased 7.8% to $2.77 billion, with favorable net price/mix of 3.7% and a 5.0% contribution from the Tasty acquisition, partially offset by volume declines of 0.9%;
-Diluted EPS was $0.17 for the quarter, down 26.1% due primarily to 14% higher input costs;  diluted EPS for the year was $.90, down 9.1%; adjusted for one-time charges related to the Tasty Baking acquisition and a facility closure, diluted EPS for the year was $.96, down 3.0%;
-Margins for the quarter and year were pressured by higher input costs; 
-Tasty Baking (acquired May 2011) exceeded revenue expectations and was slightly accretive to earnings, excluding one-time acquisition costs; expansion of the Tastykake brand in Flowers' core markets continues;
-Nature's Own brand reached approximately $935 million in annual retail sales, driven by growth in core and expansion markets; and,
-The company provided 2012 guidance for sales growth of 7.0% to 9.0% and EPS growth of 7.0% to 12.0%, from adjusted 2011 EPS of $.96. 

George E. Deese, Flowers Foods' chairman and chief executive officer, said, "Given ongoing challenges in the marketplace, we are pleased to report strong sales growth driven by the Tasty acquisition and our direct-store-delivery (DSD) segment. For the fourth consecutive quarter, the DSD segment achieved improved volume trends, reflecting the strength of the Nature's Own brand and continued growth in new markets, which offset lower sales of regional white breads. Tasty exceeded our sales and earnings expectations. In the warehouse segment, higher input costs that were not offset by pricing, lighter-than-expected volumes, and sales mix significantly impacted results. For the quarter and year, higher input costs and sales mix changes in both the DSD and warehouse segments put pressure on earnings and gross margin.

"We remain cautious about the near-term given the input cost pressures we face in the first half of 2012, the ongoing marketplace competitiveness, and relatively weak consumer demand. However, the confidence we have in our core business is reflected in our 2012 guidance and we expect further opportunities as the industry continues to consolidate."

Fourth Quarter 2011 Results

Fourth quarter sales increased 14.0% to $653.6 million from $573.1 million in last year's fourth quarter. This increase was attributable to favorable net price/mix of 3.8%, contributions from the Tasty acquisition of 9.6% and volume increases of 0.6%. Net price/mix and dollar sales increased across all major channels. The volume increases were primarily related to increases in the store brand and foodservice channels, partially offset by decreases in the branded retail channel, mainly in the white bread category.

Net income for the quarter was $23.0 million compared to $31.4 million in the fourth quarter of fiscal 2010. For the quarter, diluted earnings per share were $.17, compared to $.23 in last year's fourth quarter.

Gross margin as a percentage of sales for the quarter was 45.9%, down 220 basis points as compared to 48.1% in the fourth quarter of 2010. This decrease was due primarily to increased ingredient and packaging costs as a percent of sales. The increase in ingredient costs was attributable to double-digit increases in flour, sugar, shortening/oil, and cocoa. The increase in ingredients and packaging costs were partially offset by price increases and lower workforce-related costs as a percent of sales. Improved manufacturing efficiencies also had a positive effect on gross margin.

Selling, distribution, and administrative costs as a percent of sales for the quarter were 36.8%, relatively flat as compared to 36.7% of sales in the fourth quarter of fiscal 2010. Higher sales prices and lower workforce-related costs as a percent of sales were mostly offset by higher distribution and advertising costs as a percent of sales.

Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year's fourth quarter. Net interest income for the quarter was $1.0 million lower than last year's fourth quarter due to increased borrowings related to the Tasty acquisition. The effective tax rate for the quarter was 37.7% as compared to 33.3% in last year's fourth quarter. This increase was primarily due to a lower benefit from discrete items in this year's fourth quarter as compared to last year's fourth quarter.

Operating margin as a percent of sales for the quarter was 5.6% compared to 8.0% in last year's fourth quarter. Earnings before interest, taxes, depreciation, and amortization (EBITDA) as a percent of sales for the fourth quarter was 9.1%, compared to 11.4% for the fourth quarter of 2010.

Segment Results

DSD (82% of Sales): During the quarter, the company's direct store delivery (DSD) sales increased 17.7%, reflecting positive net price/mix of 3.0%, contribution from the Tasty acquisition of 11.9% and volume increases of 2.8%. Net price/mix and dollar sales increased across all major channels. The volume increases were primarily due to increases in the store brand and foodservice channels, partially offset by decreased volume in the branded retail channel, particularly in the white bread category.

Operating income, defined as earnings before interest and taxes (EBIT), for the DSD segment was $40.7 million, or 7.5% of sales for the fourth quarter compared to $44.3 million, or 9.6% of sales in last year's fourth quarter. This decrease was due to higher ingredient costs, mainly flour, and packaging costs, partially offset by higher sales. During the quarter, Tasty had a slightly positive effect on operating income.

Warehouse (18% of Sales): Sales through warehouse delivery decreased 0.5%, reflecting positive net pricing and mix of 4.3%, and decreased volume of 4.8%. The decreased volume was primarily the result of decreases in store brand cake and contract manufacturing.

Operating income for the warehouse segment was $3.6 million, or 3.2% of sales for the fourth quarter compared to $10.3 million, or 9.1% of sales in last year's fourth quarter. This decrease was due to higher ingredient costs, mainly flour, sugar, shortening/oil, and cocoa, which were not fully offset by pricing.

Cash Flow

During the fourth quarter, cash flow from operating activities was $39.5 million. The company invested $13.8 million in capital improvements and paid dividends of $20.3 million to shareholders during the quarter. The company did not acquire any of its common stock under its share repurchase plan during the quarter. Since the inception of the plan, the company has acquired 37.8 million shares for $430.8 million, an average of $11.40 per share.

Fiscal 2011 Results

Sales for fiscal 2011 increased 7.8% to $2.77 billion from the $2.57 billion reported for fiscal 2010. This increase consisted of positive net price/mix of 3.7%, contributions from the Tasty acquisition of 5.0%, partially offset by decreased volume of 0.9%. Price/mix and sales dollars increased across all major channels. The volume decline was driven by decreases in the branded retail channel, partially offset by volume increases in the store brand, foodservice, and contract manufacturing channels.

Net income for the year was $123.4 million as compared to $137.0 million for fiscal 2010. Diluted earnings per share were $.90 for fiscal 2011, compared to $.99 reported for fiscal 2010.  Excluding one-time costs of $7.5 million, net of tax, relating to the acquisition of Tasty and the closure of a manufacturing facility in the first quarter, diluted earnings per share were $.96.

Gross margin as a percentage of sales for the full year was 46.9%, down 80 basis points as compared to 47.7% in the prior year. The decrease in margin was the result of increased ingredient and packaging costs as a percent of sales, partially offset by price increases and lower workforce-related costs as a percent of sales. Higher prices for flour, sugar, shortening/oil, and cocoa drove the increase in ingredient costs. Costs of $2.4 million associated with the manufacturing facility closure negatively impacted gross margin.

For the year, selling, distribution, and administrative costs as a percent of sales were 36.7%, up 30 basis points as compared to 36.4% in the prior year. One-time costs of $6.2 million associated with the Tasty acquisition negatively impacted selling, distribution and administrative costs 20 basis points as a percent of sales. Costs of $2.0 million associated with the manufacturing facility closure negatively impacted selling, distribution, and administrative costs 10 basis points as a percent of sales.

Depreciation and amortization expenses for fiscal 2011 remained relatively stable as a percent of sales compared to the prior year. Net interest income for the year was $1.6 million lower than the prior year. The effective tax rate for the year was 35.7%, compared to 34.9% last year. This increase was primarily the result of certain non-deductible transaction costs associated with the Tasty acquisition.

Operating margin as a percent of sales for the year was 6.8% compared to 8.0% of sales last year. Excluding the one-time acquisition related costs of $6.2 million and one-time manufacturing facility closure costs of $5.0 million, operating margin as a percent of sales was 7.2%. EBITDA for the year as a percent of sales was 10.2% compared to 11.3% for fiscal 2010. Excluding the one-time acquisition related costs and the manufacturing facility closure costs, EBITDA as a percent of sales was 10.6%.