Flowers Foods Inc (FLO) 2003 Q3 法說會逐字稿

Good morning, and welcome to your Flowers Foods third quarter earnings conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the floor over to your host, Marta Turner, Vice President of Communications and Investor Relations. Ma'am, the floor is yours.

Thank you. Just to correct, this is Flowers Foods, with an S. Good morning everyone. Participating in our call today we will have Amos McMullian, Flowers Foods Chairman of the Board and Chief Executive Officer; George Deese, President and Chief Operating Officer; and Jimmy Woodward, Senior Vice President and Chief Financial Officer.

George and Jimmy will give financial and operations reports, and then George and Jimmy, along with Amos, will take your questions. After the Q&A session, George will make a few closing comments.

But before we began the discussion, I must remind you that our presentation today may contain predictions, estimates or other forward-looking statements. Our use of the words expect, believe or other such expressions will identify those forward-looking statements.

While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause actual results to differ materially. In addition to some of the matters we will discuss during the call, important factors related to our business are described in Flowers Foods' filings with the SEC.

Now I'm very pleased to introduce Flowers Foods' President and Chief Operating Officer, George Deese.

Thank you, Marta, and good morning to all. And thank you for joining our call this morning. Our third quarter performance shows solid performance from our continued operations. The increase in sales and earnings reflects the underlying strength of Flowers Foods. Our fresh bakeries, our strong brands, our distribution systems, our technology platforms, and our talented people continue to set us apart.

I know you're anxious to hear more detailed financial discussions, so I'll turn the call over to Jimmy Woodward, our Senior Vice President and Chief Financial Officer.

Thank you, George. Good morning. If you have the release, we will start with our statement of income, and then go through the financial statements. Our consolidated Q3 sales of 333.2 million represents a 7.1 percent increase over the same quarter last year. The Batesfield, Arkansas fresh bread operation and our Bishop baking snack operation in Cleveland, Tennessee were the acquisitions that yielded the 3.3 percent sales increase.

We experienced volume increases in both branded and foodservice products, which contributed 3 percent of the sales increase. Increase in our branded sales were primarily the driver of that volume increase, with most of this due to the Healthline products of Nature's Own, consisting of Three Islands, primarily our light product line, our sugar free and our recent introduction of the seven gram of carbohydrates wheat and fiber product. The balance of the sales increase is primarily due to stable pricing in all channels of distribution for both the Bakery and Specialty segments.

Income from continuing operations for Q3 was $12.7 million, or 28 cents per share, up 14.9 percent from the same period last year. As you see, our production cost as a percentage of sales increased by 1 percent versus the same period last year. Early in the quarter we did have a product recall that cost approximately $1.2 million, most of which was the cost of the product and downtime at one of our production plants. The balance of the increase was primarily due to higher ingredient, packaging and utility costs during the quarter when compared to last year.

Our selling, marketing and administrative expenses declined by 1 percent as a percentage of sales compared to the same period last year, primarily due to the higher sales base. Also, although we continued to incur costs to transition the frozen bread and roll business of Mrs. Smith's that we retained to our Flowers Information System, we more than offset the increase there with various cost containment initiatives. Offsetting some of these cost decreases, we did have approximately 1.4 million more in compensation expense resulting from accounting for the stock price appreciation, and the stock appreciation rights program that we have as part of our equity compensation.

You will see that depreciation and amortization expense was essentially flat year-over-year. The source of our interest income is primarily the distributor notes, with the balance coming from the cash that we do have invested in overnight accounts.

The effective tax rate of 38.5 percent remains unchanged, and is expected to be the rate for the year. I will reemphasize that we're not making federal cash tax payments due to our tax loss carryforwards. And except for alternative minimum tax, which we are closely monitoring, if any, we expect no cash tax payments to be made until fiscal 2005.

The $259,000 loss you see reported as discontinued operations is due to frozen inventory storage costs that were incurred prior to the sale of the Mrs. Smith's dessert business. Again, we believe substantially all of the costs associated with the frozen dessert business that we sold has been reported.

On a per-share basis, the discontinued operations was a 1 cent loss, and income from continuing operations was 28 cents. You will note that our diluted weighted average shares outstanding have increased since the same quarter a year ago.

During the quarter we made our initial share repurchases under the authorization we had to purchase 7.5 million shares. We purchased approximately 241,000 shares late in the quarter, which had a minimal impact on diluted weighted average shares outstanding.

Also, during the quarter we granted approximately 1.4 million nonqualified stock options at 21.02 per share. And these equity based awards are granted every other year as part of our ongoing compensation program. This award and the grant in 2001 both clip best four years from the date of grant, so that the option grants do slightly increase weighted average shares outstanding on a prorated basis over the respective four-year vesting periods. We do expect weighted average shares for the year to be about 45.7 million shares.

The balance sheet reflects cash of $46.8 million. We have provided a cash-flow statement for the quarter that shows $28.1 million in cash from operating activities. There again emphasizing the strength -- one of the many strengths of our Company is the cash generation. We used 6.8 million for capital expenditures in the quarter. We paid a $4.5 million dividend. Embedded in the change in assets and liabilities line is the fact that we made an $11 million contribution to our defined benefit pension plan. And we used $5.4 million to repurchase 241,000 shares of our common stock at an average price of 22.42.

The balance sheet continues to reflect zero bank debt. In October, we did replace our secured credit agreement with a new unsecured $150 million three year credit agreement. It has not been drawn upon. And we do appreciate the support the bank group provided in getting that in place.

At this point in the year, we have narrowed our guidance for sales and income from continuing operations for fiscal 2003. For the year we expect sales to be 1.44 to $1.45 billion, and income from continuing operations to be 3.4 to 3.5 percent of sales, which would be $1.07 to $1.11 per share for the continuing operations.

Through three quarters we've reported 88 cents per share from continuing operations. Therefore, as you can see, we would expect Q4 to be some 19 to 23 cents per share from continuing operations. And as I stated earlier, we do not expect significant changes in the amount we have already reported as discontinued operations.

Looking to next year, which will return to a 52-week year, we expect sales to be 1.475 to 1.5 billion, with net income moving up to 3.75 to 4 percent of sales. And we would expect the pattern of that income to be very similar to this year's pattern.

So, George, with that financial statement review, I will turn it back to you for comment.

Thank you, Jimmy, for certainly an outstanding financial report. As Jimmy said, both our Bakeries Group and our Specialty Group performed outstandingly in the quarter. I'm really proud of their progress as they stay focused on their operations. Our bakeries and never performed better. And our sales continue to grow, especially in our branded products. Nature's Own, Cobblestone Mill, and our cake brands, Mrs. Freshley's and Bluebird, performed well during the quarter.

I do want to mention the product recall one more time, which Jimmy already talked about. The recall did cost us in the neighborhood of $1.2 million. However, we take absolutely no chances where the health and safety of our consumers are concerned. We took immediate action, as we always would. And we have taken precautions in all our bakeries to insure that a similar instance will never happen again.

As you know, at analyst day in San Antonio, we announced during the quarter that we will open a new bakery in Denton, Texas to serve the Dallas, Fort Worth market. We have purchased an existing building, and work is already started on the bakery. We expect to be producing effective October of 2004. As we said when we made the announcement, we expect the capital investment in Denton to be about $18 million next year.

I want to thank so many of you for joining us, either in person or on the web for our analyst day San Antonio. You will remember that we discussed our plans for future growth, and we said we expect to grow by introducing new products, enter new markets, and by making strategic acquisitions. I would like now like to update you on each of those.

First, new products. Under the Nature's Own brand, we introduced a new 7 grain loaf in early October to extend our Nature's Own core items. We have had good consumer acceptance of that new product.

As we mentioned in San Antonio, we also introduced the Nature's Own Healthline banner for products that appeal to certain dietary needs, such as sugar free, wheat and fiber with fewer carbohydrates, and our light items. We will continue to develop other new products for our Nature's Own Healthline, and will likely introduce one of those in early 2004.

Just last week, our new Pan Dulce de Mi Casa and Tesoritos hispanic cakes were introduced to the market. I know you're anxious to know but, of course, it is much early to give you any data about the new line, but indications are good so far.

Now let's talk about new markets for Flowers. I have already mentioned the new bakery in Denton, which will help us more fully service the Denton, Fort Worth market. We told you in San Antonio that we extended Flowers DSD territory to serve Northern Virginia, as well as Jocelyn and Springfield, Missouri. We're pleased with the progress we have made in those new territories. But this progress is in-process, and this does takes time.

We expect to steadily, over time, extend our DSD territory to serve states that adjoin our current southeastern and southwestern territory. It won't happen overnight, but we will grow carefully and steadily, much like we have grown in the past.

Now moving on to acquisitions. You know, in addition to the organic growth as a result of our new products and new territories, we also expect it to grow through acquisitions. We're always looking for businesses that will fit strategically, operationally and financially into Flowers Foods. Since 1968 we have made more than 100 acquisitions. And we expect that to continue when the fit and the price is right.

Before we open the call to your questions, I remind you once again that Flowers Foods' philosophy, which we developed over many decades is working as evidenced this year. Our bakeries, our products, our brands, our technologies and our people combine to give us great strength in the marketplace.

Going forward, we will continue to refine our operating philosophy so that we came continue to building long-term value for our shareholders. And we will continue to innovate as we introduce new products, enter new markets, make acquisitions, and in every way possible work to make our business better.

With that, Melinda will now open the call for questions.

(OPERATOR INSTRUCTIONS) Mitch Pinheiro.

A couple of questions for you. First, looking at your sales, the volume growth, how does that compare to the category in your markets?

Looking at each category that we compete in, white bread, looking at ROI we did outperform the category. Soft variety, we did outperform the category. Our specialty super premium Cobblestone brand did outperform the category. And our cake products outperformed the category, when you look at each category that we do compete in that arena.

Mitch Pinheiro. I don't know if you're not being specific for a particular reason, but is there -- was the category flat, up?

Yes, it was off specific, quite honestly. But when you look at the total overall white bread market, the white bread market was off a little. When I look at soft varieties, up slightly. Super premium, up 1.5 percent in the total. And cakes also were up from our (technical difficulty).

Mitch Pinheiro. How about private-label? How did your private-label do, and how did private-label in the category do?

We're running right along with that same trend. We were up in the 3 to 4 percent neighborhood. And looking at ROI, it looks like the same neighborhood.

Mitch Pinheiro. What about -- one thing that I was actually surprised -- your Specialty segment margins were better than I had anticipated. What type of -- this is sort of the first year we're getting to see what Flowers Specialty is, minus Mrs. Smith's. What type of margins -- is this a normal baking margin here for specialty, or should it exceed fresh at some point? How should we look at that?

Mitch, you know, I go back -- as we took our snack cake business out of Mrs. Smith's, we always knew we had a good cake business. And it certainly proved out, since we have gone forward with that that they have lived up to expectations, and we did uncover the value. All of us can see now what is going on there.

We certainly feel just as good or better about the frozen bread and roll business. The good news is, we can go national in scope. We have efficient plants. And I think what you do see is certainly an indication of things to come. As Jimmy indicated also I think in report, that even in those numbers we did continue to have some ongoing costs on the administrative side, IT to blend that business in. So we think that over time, and caution by saying over time, that frozen bread and roll should certainly be equal, and maybe better, than our fresh business on margins.

Mitch Pinheiro. One more question. Actually two more. One, did you any routes in the quarter year-over-year? I would like to know sort of what of the volume growth -- how much of that was distribution related versus same store sales and same routes sales related?

Mitch, I can't answer that specifically. You know, adds in routes is always an ongoing equation due to growth in our own existing markets. As routes get too large and can't grow, we're always working with our partners, our distributors, to split routes. So I don't have a number on that, but we are up as I have indicated with these new markets. But that is not a significant number at this point, even though we have moved in those markets. I said it takes time to develop markets. And routes are up over last year, but I can't give you that number.

Mitch Pinheiro. Last question relates to your '04 guidance. Embedded in the guidance, how do you guys about flour, energy, pension, insurance? Can you talk about some of the factors that are driving a $1.21 to $1.31 type of range?

Jimmy and I both will take that question. Let me respond maybe first to the flour and energy. As we have already said this year that we feel very good with where we are on flour. We are covered through this year and over half of next year. We did see yesterday, and probably you can see that flour -- wheat did jump yesterday late due to some rumors with maybe China looking at the market. But that is a long time out.

We are covered and feel very comfortable with the first half of the year. And we feel that by the latter part of the year that we'll also feel very comfortable with those numbers as we get to it.

On the energy side, we're finishing this year and we're covered. Those costs are fixed. And we're fixed through basically the winter of next year. So we know what those costs are. Those costs -- the first part of year we will be up slightly year-over-year, but the rest of the year's predictions are that we should be in good shape, and I feel comfortable with that.

Those two things I will respond to and I will turn now to Jimmy to respond to the insurance and etc.

Mitch, specifically on the pension, with the defined benefit plan we experienced a significant cost increase 2003 versus 2002 to the tune -- I think it was 5 to $6 million, virtually doubled. Looking forward to 2004, we do use a September 30 measurement date, so we already have estimated probably a 2 to $2.5 million increase in that category next year. Again, that is a function of the investment returns of the pension plan assets, the interest, the discount rate -- interest rates being lower. That type of thing.

Mitch Pinheiro. Are there any other cost factors just relating to your guidance that we need to be aware of?

I am not aware of any, Mitch. That guidance, there again, we have assessed all of our costs, be it employee related, ingredients, cost of starting up Denton. Growing in these new markets, as George said, does take time. We have built in some costs that you incur into those new markets. We feel comfortable with that guidance in total. There are obvious a lot of things, some going up and some going down.

Mitch, I think I indicated last quarter that we couldn't give you guidance this quarter because our planning was in process. We have just completed that, and I think a very thorough job of planning. So, as Jimmy indicated, all of those factors are on our plan, as well as in the guidance that we are giving.

Leonard Teitelbaum.

A couple of questions please. I have kind of drawn up a little map. I think you guys compete with Interstate in about 15 or 16 different sectors, at least when I look at it. How does your price of bread on the rack compare to theirs?

Well, this is a big country.

Well, I'm more interested in your (technical difficulty).

Specifically in the southeast, southwest where we compete, you know, on any given day that can change here or there. It does come to a local situation.

Hey, George, are you above them or below them?

Day in and day out, as I look at our view from the marketplace, we're always pretty close to each other.

Okay, so there is -- earlier in the year they were below you and it really didn't hurt your volume. And I was just wondering whether you felt you had to bring prices down? I just wanted to make sure that trend was there.

The trend is fine.

If we take a look at your expansion plans, which are certainly I think well thought out. At what point do we have to start expanding the fixed asset base? Let me ask the question a different way. What are your CapEx plans going forward two to three years? Do you see them holding steady here or do you see them ramping up?

I think we indicated in San Antonio, and I will indicate again today. In completing our plans, we are looking at roughly, on an on-going basis, in that 40 to 45 million neighborhood. Jimmy, is that --? And then any special projects would be on top of that. That is why I did indicate the money that will be spend in Denton this coming year.

Yes.

And you are absolutely right. And that is why as we expand in the Dallas-Fort Worth market, even though we have been there for a while, we feel that we are underdeveloped in that market. And that is why we do need the added capacity.

And as we look throughout the Company, we will have to -- as time goes along some of that will be necessary, some of it might be from existing plants. And on occasions we might have to put in a plant from scratch somewhere. London, Kentucky, as we talk about the cake business, we will be putting in -- we've got that in our budget this year for a new doughnut line in London. So as we look at each one of our categories and see what the capacities are, we do put that in our financial plan and our Capex program to be able to meet the demands of the market.

So ongoing you can expect maintenance of that 4 to 5 million range. And then you could have a special project every year or every other year. It is too early to predict.

All right. Now if I take a look at your cash buildup -- one question before I get to it. Your tax accounting, Jimmy, I presume that the non-cash portion of the tax accrual goes into -- where does go into, unallocated, or it goes into other assets on your cash flow? Where does that show up on your cash flow statement?

Lenny, I think on this one it is in that Change in Assets liability line.

If my numbers are right, and there is every reason to think that they may not be, your cash buildup here is significant, and yet you only went in the market for a very, very minimal amount of shares. Is there some reason that you did not buy in heavier, or what is the justification for that? And do you have a plan in place, or going to put one in place, where you'll have a regular purchase regardless of market price?

Let me try to respond to that. We're in the market when we deem it is appropriate and the Board has given us the authority. I think Amos has indicated that as time goes along, we do want to be buying in our shares. And at this point, the price has not been a factor. It sure hasn't (indiscernible) by any stretch of the imagination. We still think it is the best value in the food business. So we will continue, from time to time, keep buying in our shares, as long as we deem it is appropriate.

Eric Katzman.

Just so I am clear, Jimmy, there is roughly 1 to 2 cents associated with the recall.

Yes. The 1.2 million on the recall --.

On an after-tax basis, that is 1 to 2 cents?

Yes. I typically say about 700,000 pretax is a penny. So that is probably a penny and a half or so.

I may have to recalculate that if you get aggressive on your share repurchase, but that is another topic. How much was the transition cost as you absorb some of the IT and frozen stuff?

Eric, I don't have a specific number on that. Again it would be the cost of maintaining a separate SAP system for the time being, until we can migrate that over to our system. And you know, it would be some number -- 100,000. I hate to say because I just don't know specifically the cost of maintaining that system, and then the personnel that we have working on making the transition from that system to our current one.

That wasn't all that material, but assuming that you're not having a recall every quarter, you actually did on an operating basis, closer to 30 cents.

That's correct.

I guess ultimately we see the expansion plans, as you said, it is kind of a go slow and do it right. I am kind of following up on Lenny's question. It is pretty clear, even if you put out 70, $80 million or 70 million in CapEx, you still get quite a cash build at the Company, assuming working capital behaves.

So I guess, can you just give us again the priorities in terms of the cash flow usage? Is dividend more important to you than the share repurchase? Do you think that adds more to shareholder value? Or are the M&A opportunities and the IRO (ph) associated with that spending so high, that that is the number one priority?

I will take that. I think -- I know it is not a straight answer, like you like to have, because the priority does change. We indicated in San Antonio that the uses of that cash, which we are generating cash, thank goodness, we would think about roughly half would go to our dividend program, which we think is important, and we think does build shareholder value and rewards our shareholders. Capex is important, as we continue to grow and become more efficient. So we need to spend the capital to meet the demands of the marketplace.

And then the other half, we are looking toward acquisitions. Acquisitions of our stock or other companies, which would fit strategically, operationally, financially, which would make this Company a lot stronger. So depending on what is going on in the coming years will help determine the priority for that particular year. And those things do change and they are fluid. I wish I could give you more of a concrete answer, but that is exactly our philosophy, and we think it is the right one.

And then I guess -- just as clarification, when you are referring to the Healthline of Nature's Own, that includes the low carb bread?

That is correct. Yes.

When do you think you'll have a good read on the ethnic Hispanic rollout? Should you have a pretty good sense as to how that is going the next time we have a conference call?

We will. We will have a lot better indication. I will say that our research, we think, was right on target. We were pleased with that. Our customers are excited about it, because it does serve the needs of their customers. So it has been well accepted in the marketplace by the customers. And after only a week, a week and a half in the market, it is hard to tell the consumer pool. But on the customer side, we're real pleased with the acceptance and their excitement and our excitement of that product line.

Just for modeling purposes, for those of us that actually develop a balance sheet, Jimmy what kind of cash should we expect at the end of the year on the books? What are you kind of comfortable in maintaining there?

Well, Eric, again we ended the quarter with 46.8 million. I would expect the characteristics of the cash to be similar in the fourth quarter as it is in this third quarter. I don't have a specific number, if any, for the share repurchases. So it will be substantially more than the 46.8 that we have now.

Andrew Cole.

What percent of your product is currently shipped as extended shelf life?

I missed Melinda. She said this was Andrew?

Yes, Andrew Cole.

Andrew, as we said, along since ESL (ph) came about two years ago, a year ago, we have been careful on our approach, very conservative; always making sure that we meet the needs of our consumers with freshness, because we still think freshness is certainly the way to go on bread, having been in this industry for so long. As far as giving a specific number on those products, I don't have a number. I can get it to you later, maybe.

Is it significant? Is that the majority of your product shipped today?

On the bread and roll side. I won't call it exactly ESL. We have been developing better ingredients and better technologies for quite some time, so I would say a good majority would fit that category.

Is it changing the way you load plants and plan distribution versus maybe the way you did a year or two ago?

No, not significantly. As I mentioned, very conservative in our approach. Making sure we sell today's bread today, if at all possible.

And then with regard to pricing, am I right to conclude if your revenues were up about 7 percent and volume was 3 percent that essentially you raised pricing by 4 percent?

The 7.1 percent you would take off acquisitions of 3.3. It comes to 3.8. And of that 3.83 percent was volume (multiple speakers).

So .8 percent was pricing then give or take?

Or mix.

And how did pricing in the marketplace -- how did that .8 percent increase in pricing compare with earlier quarters this year and last year?

Andrew, pricing is up slightly as Jimmy indicated. How this quarter's pricing compared to last quarter a year ago, all I can say is, it is up slightly.

And I think we have commented in earlier quarters that it is been a favorable pricing environment from our point of view this year.

Last question I had was, you mentioned that you outperformed in basically every category. And I just wondered if you could offer some explanation as to why in how you were able to do that?

I come back to our operating philosophies, having great products, great brands, an outstanding distribution system, the right people, and execution of all the above. I thank our people for the great job they do on execution in the marketplace. We know it is a tough environment. It is very competitive. So it does -- at the store level is where the execution really happens. Even though you've got to execute and plan on having great products that the consumer will purchase. But day in and day out at store level, it comes down to execution.

Thanks very much. Nice job.

Levon Van Reddin (ph), Hockey Capital (ph).

Melinda, we must not have that caller.

Richard Hyde (ph) with Hill and Olson (ph).

I pass.

(technical difficulty) Blake and Company.

We are getting some interference, Melinda.

(OPERATOR INSTRUCTIONS)

Melinda, since there are no other questions, could I go and make my closing remarks?

Okay, sir. I'll send the conference back to George Deese with his closing comments.

Thanks, Melinda. All at Flowers Foods are proud to be part of the baking industry, and I think can tell that by our conversation this morning. It is where we have created value for our shareholders, our customers and our employees over time. We're also pleased to be part of the larger grain based food industry, which continues to serve the public with nutritious products at a very good value.

Finally, Flowers Foods is in good shape. And we will continue working to make our Company even better and stronger. Let me thank all of you for your time this morning and for your interest in our Company. Talk to you next quarter. Thank you.

Thank you. This concludes today's teleconference. Please disconnect your lines at this time, and have a wonderful day.