Milling & Baking News - February 22, 2011 - 24

Financial Results 

Difﬁcult environment evident in Flowers results and guidance
THOMASVILLE, GA. — After reporting ﬁnancial results that, while reﬂecting moderate earnings growth, failed to meet the company’s targets, Flowers Foods, Inc. on Feb. 8 revised downward its earnings guidance for ﬁscal 2011. Net income at Flowers for the year ended Jan. 1 was $137,047,000, equal to $1.49 per share on the common stock, up 5% from $130,297,000, or $1.41 per share, in 2009. Net sales were $2,573,769,000, down 1% from $2,600,849,000 in 2009. “Flowers Foods delivered solid earnings growth for the quarter and the year, and we again achieved record earnings per share for the year,” said George E. Deese, chairman and chief executive ofﬁcer. “Even so, we did not meet our plan for sales and earnings. Our sales volume was lower than expected in the fourth quarter as we Feb. 8 conference call with investment analysts. “The baking industry is undergoing change and players are having a tough time growing the top line,” Mr. Deese said. Gross margins for the year rose to 47.7% from 46.5% because of lower ingredient costs as a percentage of sales, but the company said margin gains were kept in check by higher workforce-related and packaging costs as well as startup costs for new production capacity. Mr. Deese noted that wheat prices have more than doubled since June 2010 and that Flowers took pricing action beginning in October. He said the pricing action was in line with Flowers’ long-term approach to commodity price moves. “In order to invest in new bakeries, new products and new technologies, we know the company must be proﬁtable,” he said. Mr. Deese acknowledged, though, the market situation for baking has turned out to be more competitive than anticipated when the third-quarter conference call was conducted in November. “Over the remainder of the (fourth) quarter, our volume was impacted more than we expected,” he said. “We see this as a short-term situation. In the long run, we know that the pricing action we took was appropriate.” Still, in reaction to the competitive environment, Mr. Deese said Flowers has taken “very select” promotional actions in certain markets that sustained declines. Allen Shiver, president of Flowers Foods, said promotional activity in the category remained high as Flowers took its pricing during the third quarter. “Our October price increase, combined with dramatic reduction in our white bread promotional activity, resulted in both unit and dollar declines in this segment,” he said. Developments certainly weren’t all negative for Flowers, and Mr. Shiver noted success the company had adding new direct-store delivery coverage. “Los Angeles and San Diego are two of our fastest growing expansion markets,” he said. “With a combined population of 22.5 million, Southern California offers tremendous growth opportunity for the company.” Net income in the fourth quarter of 2010 was $31,438,000, equal to 34c

initiated pricing action and reduced promotion in the face of commodity headwinds. ” Expanding on 2010 results, Flowers said the 1% sales decrease included a 1.7% decrease due to negative pricing/ mix and 0.5% related to the deconsolidation of the variable interest entity (v.i.e. — related to how it accounts for business it does with a transportation carrier) partly offset by a 1% contribution from acquisitions and increased volume of 0.2%. “The increase in volume was primarily driven by soft variety bread and sandwich rounds in the branded retail channel and the cake category in the store-brand channel,” the company said. “These increases were partially offset by decreased sales in branded white bread and the vending and fastfood category of the food service channel. Throughout the year, the company experienced signiﬁcant pricing pressure and substantial promotional activity within the baking industry.” Flowers executives elaborated on the sales picture and other issues during a
24 / February 22, 2011 Milling & Baking News

per share, up 3% from $30,649,000, or 33c per share. Sales were $573,133,000, down 0.6% from $576,824,000. The factors accounting for the sales decline in the fourth quarter were quite different from the year overall. Contributors were a 2.2% volume decline and 0.7% related to the v.i.e. Pricing/mix provided 2% of beneﬁt and acquisitions contributed 0.3%. “The volume declines were primarily related to declines in the branded retail channel, particularly in the white branded, breakfast bread and cake categories, which were partially offset by increases in the sandwich round category,” Flowers said. “These volume declines were partially offset by increases in the store-brand retail channel, primarily in the snack cake category. Although the company initiated signiﬁcant pricing actions during the quarter, the fresh baked foods category remained very competitive.” Updating guidance for 2011, Mr. Deese said the company expects sales growth of 3% to 6% and earnings-pershare growth of 5% to 10%. The earnings growth guidance was lowered from previous guidance of 8% to 13%. In addition to the ﬁnancial results, Flowers said it had ﬁled a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission. The ﬁling will allow the company to sell securities, including stock, preferred stock or debt. The company said proceeds from any sale would be used for general corporate purchases and itemized a range of possible uses from share repurchases to possible acquisitions. During the conference call, Mr. Deese offered observations about acquisitions that, combined with the shelf offering, could have suggested something major was expected in 2011. “We expect acquisitions to be an important part of our growth,“ he said. “Although 2010 did not play out as we had expected in regard to acquisitions, we remain focused on our acquisition strategy. We have more activity today, in regards to potential acquisitions.” Still, when asked by an analyst whether a major acquisition may be in the company’s near future, Mr. Deese quickly poured cold water on the idea. “Our strategy has been the bolt-on type of acquisition,” he said. “That’s where we’re the most comfortable. That’s where we take less risk. Last time I looked, huge transformational type of acquisitions destroy more value than they create. To say we will do a huge transformational program … it’s not likely.” MBN
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Milling & Baking News - February 22, 2011

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