Flowers Foods Announces 6.2 Percent Net Sales Increase In Third Quarter 2012

Flowers Foods, Inc. reported results for its 12 and 40 weeks ended Oct. 6, 2012. Sales were $717.3 million compared with $675.4 million for the third quarter of 2011. Net income was $31.2 million, or $0.22 per share-diluted, compared with $31.0 million, or $0.23 per share-diluted, in last year’s third quarter. Adjusted for one-time acquisition-related costs, earnings per share were $0.25 for the quarter.

George E. Deese, Flowers Foods’ chairman and chief executive officer, said, in a prepared statement, “We delivered solid sales growth in the quarter in spite of a highly competitive marketplace and continued economic pressure on consumers. Margins were impacted by higher promotional activity and soft volumes. However, the Lepage acquisition contributed nicely to our sales increase. We also achieved positive price/mix that is encouraging. Nature’s Own again drove our internal growth, helping to offset lower sales of white breads, buns, and rolls. “The integration of Lepage is going well with sales and earnings in line with our expectations. We are introducing Nature’s Own and Tastykake in the Lepage market during the fourth quarter and are pleased with trade customers’ reaction to those brands as an add-on to Lepage’s product offerings. The recently announced acquisition of trademark licenses for the Sara Lee and Earthgrains brands in California strengthens our position and gives us a growth platform in that high population market for years to come. When the transaction is completed, our fresh baked foods will be available to more than 75 percent of the U.S. population, which puts us ahead of our previously announced goal.

“In the fourth quarter, we have begun taking pricing to offset higher input costs for 2013 and we also are reducing the frequency and depth of our promotions. We are confident in our team’s ability to continue driving growth as we leverage the power of our Nature’s Own and Tastykake brands while successfully integrating two highly strategic acquisitions into Flowers Foods.”

Third quarter 2012 results For the 12-week third quarter of 2012, sales were $717.3 million, a 6.2 percent increase from the $675.4 million in last year’s third quarter. This increase was attributable to favorable net price/mix of 2.7 percent, contributions from the Lepage acquisition of 5.8 percent, partially offset by volume declines of 2.3 percent. The favorable net price/mix was driven by the branded retail and non-retail channels. The volume decline was a result of declines across all channels. In the branded retail channel, cake and white bread volume declines were partially offset by an increase in soft variety volume. Store brand cake declines led the volume decrease in that channel. The non-retail channel volume declines were primarily related to the institutional and contract manufacturing categories, partially offset by increases in the foodservice category. Net income for the quarter was $31.2 million compared to $31.0 million in the third quarter of fiscal 2011. For the quarter, diluted earnings per share were $0.22, down 4.3 percent as compared to $0.23 in last year’s third quarter. During the third quarter this year, we incurred one-time acquisition-related costs of $4.0 million, net of tax, or $0.03 per diluted share, and in last year’s third quarter, we incurred one-time costs related to the Tasty acquisition of $0.5 million, net of tax, but this had no effect on earnings per diluted share. Gross margin as a percentage of sales for the quarter was 46.7 percent, up 80 basis points from 45.9 percent in the third quarter of 2011. This increase was due primarily to gross margin contributed by Lepage. Higher sales and improved manufacturing efficiencies also contributed to the increase. Gross margin in the quarter was negatively impacted by higher promotions. Selling, distribution, and administrative costs as a percent of sales for the quarter were 35.9 percent, up 50 basis points from 35.4 percent of sales in the third quarter of fiscal 2011. Increases in acquisition-related and workforce-related costs were the main drivers of the increase. The one-time acquisition-related costs were $5.1 million, or 70 basis points as a percent of sales during the third quarter this year and $0.7 million, or 10 basis points as a percent of sales in last year’s third quarter.

Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year’s third quarter. We incurred net interest expense during the quarter due to the issuance in the second quarter of this year of $400.0 million of 4.375 percent senior notes due 2022, with the majority of the proceeds from the notes used for the Lepage transaction. The effective tax rate for the quarter was 36.4 percent as compared to 35.4 percent in last year’s third quarter. This increase was primarily due to certain temporary differences that reduced the Section 199 deduction and certain non-deductible, acquisition-related costs. Operating income, defined as earnings before interest and taxes (EBIT), for the third quarter was $52.7 million, or 7.3 percent of sales as compared to $47.8 million, or 7.1 percent of sales in last year’s third quarter. Earnings before interest, taxes, depreciation, and amortization (EBITDA) for the third quarter was $77.4 million, or 10.8 percent of sales compared to $70.6 million, or 10.5 percent of sales for the third quarter of 2011. One-time acquisition-related costs negatively affected EBIT and EBITDA by $5.1 million, or 70 basis points as a percent of sales in this year’s third quarter and by $0.7 million, or 10 basis points as a percent of sales in last year’s third quarter. Segment Results DSD (83 percent of sales): During the quarter, the company’s direct-store-delivery (DSD) sales increased 6.9 percent, reflecting positive net price/mix of 0.7 percent, contribution from the Lepage acquisition of 7.0 percent, offset by volume decreases of 0.8 percent. The positive net price/mix was primarily driven by the branded retail channel, primarily cake. The volume decrease was a result of declines in the branded cake, foodservice, and institutional categories, partially offset by increases in the soft variety category. Operating income for the DSD segment was $58.6 million, or 9.9 percent of sales for the third quarter compared to $47.0 million, or 8.5 percent of sales in last year’s third quarter. This increase was attributable to the Lepage acquisition, lower ingredient costs, and improved manufacturing efficiencies.

Warehouse (17 percent of sales): Sales through warehouse delivery increased 2.8 percent, reflecting positive price/mix of 9.4 percent, partially offset by volume decreases of 6.6 percent. The positive price/mix was primarily attributable to the contract manufacturing category in the non-retail channel. The volume decrease was the result of declines in store brand cake and contract manufacturing, partially offset by increased foodservice volume.

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