Flowers Foods Nature's Own
Flowers Foods foresees another tough year in 2017, then gains.

THOMASVILLE, GA. — While adjusted net income per share at Flowers Foods, Inc. was flat in fiscal 2016 and is projected to be essentially flat in the new year, the company is forecasting significant margin improvements over the 2018 to 2021 time frame.

The tough near-term environment and anticipated benefits from the company’s Project Centennial were described in financial results issued Feb. 13. Following release of the financial results, Flowers Foods shares fell sharply in trading on the New York Stock Exchange. As of mid-morning Feb. 14, Flowers shares traded as low as $19 per share, down $1.54, or 9%,  from the Feb. 13 close of $20.84. 

Flowers Foods net income in the year ended Dec. 31, 2016, was $163,776,000, equal to 78c per share on the common stock, down 13% from $189,191,000, or 89c per share, in the same period a year ago. Sales for the year were $3,926,885,000, up 3.9% from $3,778,505,000.

Adjusted earnings per share were 91c in 2016 and 92c in 2015. In its initial forecast for 2017, Flowers projected earnings per share of 85c to 95c.

Special items affecting results in the most recent two years included, in 2016, trademark and asset impairments of $24.9 million, legal settlements and related tax liabilities of $10.5 million, pension plan losses of $6.6 million and a loss on debt extinguishment of $1.9 million, for a total of $43.9 million. Most of the charges were recorded in the fourth quarter. In 2015, the company recorded charges totaling $10 million.

Dave's Killer Bread, Flowers Foods
Flowers gained market share, driven by the solid performance of Dave’s Killer Bread.

Elaborating on the charges in 2016, Flowers said the trademark impairments were the result of a brand rationalization initiative within Project Centennial, and asset impairments relate to certain assets slated for sale.

“The legal settlements relate to agreements reached to resolve certain independent distributor program litigation,” the company said “The pension plan settlement losses are due to our ongoing pension plan de-risking strategy. The loss on extinguishment of debt is related to the repayment of our then existing term loan facilities with a portion of the proceeds from the issuance of senior notes in the third quarter of fiscal 2016.”

In the fourth quarter ended Dec. 31, Flowers net income was $13,042,000, equal to 6c per share, down 60% from $32,246,000, or 15c per share, in the fourth quarter of 2015. Net sales were $868,717,000, up 1.2%.

Adjusted fourth-quarter earnings per share were 16c, unchanged from the final period of 2015. Lower input costs were offset by higher workforce-related costs, distributor distribution fees and consulting costs.

“As of the end of 2016, purchases of co-manufactured product had declined significantly as a percentage of sales, due to the additional organic production capacity provided by the Alpine bakery and our Tuscaloosa, Ala., bakery, which began producing organic bread at the beginning of the second quarter 2016,” Flowers said.

Allen L. Shiver, president and chief executive officer of Flowers, said fourth-quarter results were “in line with expectations.”

Allen Shiver, Flowers Foods
Allen L. Shiver, president and c.e.o. of Flowers

“We gained market share, driven by the solid performance of Dave’s Killer Bread, volume improvement by Nature’s Own, and growing sales of the Wonder brand,” Mr. Shiver said. “We also had lower input costs that helped offset higher workforce-related and consulting costs. With Project Centennial we are taking decisive action to pivot toward the consumer and remove complexity and costs from our business. In fiscal 2017, we are moving forward with urgency to reinvigorate our core business, reduce costs, and build capabilities to efficiently grow our brands.”

In its Project Centennial update, Flowers said it has launched four strategic initiatives emanating from a diagnostic review conduced over the last several months:

1) “Reinvigorating the core business — invest in the growth and innovation of our core brands, streamline our brand and product portfolio, improve trade promotion management, and strengthen our partnership with distributors so they can grow their businesses;

2) “Capitalizing on product adjacencies — greater focus on growing segments of the bakery category, such as food service, in-store bakery, impulse items, and healthy snacking;

3) “Reducing costs to fuel growth — reduce complexity and better leverage scale to lower costs;

4) “Developing leading capabilities — invest in capabilities to become a more centralized and analytics-focused company.”

With these efforts Flowers said it is targeting EBITDA margin improvement of at least 250 basis points by fiscal 2021and annual cost reduction of at least $45 million by fiscal 2018, “primarily from greater cost discipline in purchased goods and services.”

“Flowers’ priorities for fiscal 2017 and 2018 are to simplify and streamline its brand assortment, provide additional tools to distributors to enable them to grow their businesses, reduce costs of purchased goods and services, and put in place a more efficient operating model for a national company,” the company said. “During this phase of the project, Flowers expects sales growth to be in the range of flat to 2%, and EBITDA margins in the range of 12% to 13%.

“In 2019 and beyond, Flowers expects to fully realize the benefits of a stronger brand architecture and a lower-cost operating model. These benefits are expected to drive sales growth in the range of 3% to 4%, and EBITDA margins in the range of 13% to 14%.”

In addition to adjusted earnings per share of 85c to 95c, Flowers is projecting sales of $3,927 million to $4,006 million, equating to growth of 0% to 2%.

“During fiscal 2017, the company will be transitioning to a more effective operating model,” Flowers said. “Costs associated with these efforts are anticipated to be weighted to the first half of 2017, while the majority of savings are expected to be realized in fiscal 2018.”

Earnings before interest and taxes (EBIT) for the Direct-Store-Delivery Division were $260,495,000 in 2016, down 14% from $302,361,000. Sales were $3,284,177,000, up 3.3% from $3,179,348,000.

Fourth-quarter EBIT of the Flowers Direct-Store-Delivery Division was $22,080,000, down 56% from $51,293,000 in the fourth quarter of 2015. Sales were $730,487,000, up 2.2%, from $714,949,000.

Special charges accounted for the sharp EBIT decline in the fourth quarter. Excluding the charges, adjusted EBITDA margins were about unchanged from the year before — 11.4% in 2016 versus 11.3% in 2015.

“As a percentage of sales, declines in input costs and outside purchases more than offset higher workforce-related costs and intercompany purchases of product,” Flowers said. “Outside purchases of DKB products decreased significantly due to the additional capacity provided by the Tuscaloosa bakery conversion, as well as the Alpine bakery in the Warehouse segment.”

For the Warehouse Delivery Division, 2016 EBIT was $58,465,000, up 12% from $55,266,000 in 2016. Sales were $642,708,000, up 7% from $599,157,000.

EBIT in the fourth quarter was $11,703,000, down 14% from $13,599,000. Fourth-quarter sales were $138,230,000, down 3.6% from $143,414,000.

“Volume declines for cake items and branded organic bread, and pricing/mix declines in food service and contract manufacturing were partially offset by volume increases for food service products,” Flowers said.

Subsequent to the start of fiscal 2017, Flowers completed the sale of its mix plant in Cedar Rapids, Iowa, expected to generate a gain of $31 million to $33 million in the first quarter of the new year.