Flowers Foods Inc (FLO) 2005 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Flowers Foods second-quarter 2005 earnings conference call. At this time all participants have been placed on a listen-only mode, and the floor will be open for your questions following today's presentation. It is now my pleasure to turn the floor over to Marta Turner, Senior Vice President of corporate relations. Ma'am, you may begin.

Good morning, everyone. Participating in our call today are George Deese, Flowers' Foods President and Chief Executive Officer and Jimmy Woodward, our Senior Vice President and Chief Financial Officer. They first will discuss our results and then respond to your questions.

But before we begin I must remind you that our presentation may contain predictions, estimates or other forward-looking statements. Our use of the words expect, believe or other such expressions should 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 the matters we will discuss during the call this morning, important factors relating to our business are described in Flowers Foods filings with the SEC. Now I am pleased to introduce Flowers Foods President and Chief Executive Officer, George Deese.

Thank you, Marta. Good morning. Thanks for joining our call today and for your interest in Flowers Foods. The results we reported this morning for our second quarter reflect the competitive advantages that we have developed over time. Our strategies and strong execution of our team continue to set the standard in our industry.

I am pleased to report that our sales increased by 12.4% for the quarter, net income increased by 18% and earnings per share was $0.28 compared to $0.22 last year. Now let's look more closely at our sales increase. Branded retail sales are up 12.9%. The growth was driven by our performance in three primary retail classes. In the soft rye bread class our number one brand, Nature's Own, continues to show a double-digit increase. In the white bread class our local white bread brands increased by double digits. And in the multipack snacked cake class, our Mrs. Freshley's cake brand grew double digits, primarily through increased distribution in the mass merchandising channel.

Also in the retail channel store brand, our private-label sales increased at double digits for the quarter. We continue to work with our retail partners to optimize results in the bread category. Bread and snack cake sales in the foodservice and vending channels also were up double digits. More than offsetting the decrease in sales of contract production of snack cake items. In the foodservice channel we continue to work closely with national accounts to develop innovative bread and bun products that will drive sales for our customers and for Flowers Foods.

Our marketshare continues to grow in both retail and foodservice, and we expect these trends to continue. Flowers Bakeries continues to add 1 to 1.5% of our DSD sales base as a result of expansion into new sales territories. Since the inception of this program our Fresh products are available to approximately 12 million additional consumers. We continue to see opportunities for growth as the competitive landscape changes. Therefore, for the second time this year we are raising our sales guidance. We now expect our sales to be 1.675 billion to 1.7 billion.

Also of interest we acquired 1.3 million shares of Flowers Foods common stock during the quarter. Now I will turn the program over to Jimmy to go through the numbers in more detail.

Thank you, George. If you have your press release we will just walk through the financial information. Today we did report diluted earnings per share of $0.28 for the second quarter, an increase of 27% compared to $0.22 per share reported last fiscal year. Net income was 17.7 million, an increase of 18% over the 15 million reported for the second quarter last year.

The percentage increase in diluted earnings per share is higher than that of net income due to the Company's repurchase of shares that I will comment more on later. Sales for the second quarter increased 12.4% to 405.3 million from 360.7 million. As George stated the 12.4% increase shows we are capturing growth opportunities resulting from changes in the baking industries competitive landscape. The increase resulted from a 5.9% unit volume increase, a 3.7% favorable product mix shift and a 2.8% price increase. The bakeries group experienced double-digit volume growth in both Nature's Own soft variety bread and in branded white bread with slight improvements in price and mix. The Specialty Group's double-digit sales increase was achieved with pricing and mix, and the increased distribution in sales of the Mrs. Freshley's brand of snack cakes in the mass merchandisers and also in convenient store and vending channels.

The Specialty Group sales growth was partially offset by the planned decrease in sales of contract manufactured snack cake items, a trend that we expect to continue for the remainder of the year. Gross margin as a percentage of sales for the second quarter improved to 50% compared to 49.5% last year. The sales increase offset higher packaging and energy costs, which is primarily natural gas for the ovens. At this time we expect our oven fuel costs we are seeing increases of some 20% and the cost will exceed our plans somewhere between $2.5 to $3 million. But we have and will take actions necessary to offset this cost increase.

The increase in flour costs have been offset by decreases in other items such as eggs, shortening, sweeteners and cocoa. The improved margin for the quarter is a significant achievement I think by our operations group given that we incurred higher cost that I just mentioned and we absorbed the startup cost of the new bread line in Denton, Texas, and the cost to restart production lines for buns in Crossville, Tennessee and Miami, Florida.

Selling, marketing and administration costs as a percentage of sales was 40.2% for the second quarter compared to 39.8% for the second quarter last year. The benefit of the higher sales was offset by higher transportation expense as fuel costs increased and as important, we transported the product further to meet the demand of the marketplace.

Depreciation and amortization were relatively flat compared to last year. Other income of 1.6 million is broken out and we recognized the favorable settlement of some class-action litigation relating to high fructose corn syrup. Those were purchases made by the Company in prior years, and that was our share of that settlement.

Interest income from the distributor notes 2.1 million was essentially flat with last year. However, interest expense was incurred this year because we had drawn on our credit facility primarily to fund the stock repurchases in each of the last two quarters.

Looking at the tax rate, the 37% effective income tax rate for the quarter is lower than the 38% rate we reported, we expect to report for the full year. You will recall in Q1 we reported that we had resolved a state tax audit and our tax rate was approximately 39% in Q1. The rate for Q2 and expected rate for Q3 and 4 is approximately 37%, and we expect there to be an annual rate will be about 38%. We have utilized the tax carryforwards that were generated from the frozen dessert business, and we resumed cash federal estimated income tax payments during Q2 which were some $11.6 million. We expect Q3 and Q4 cash federal tax deposits to be somewhere in the $8 to $10 million per quarter range as we will benefit from tax deductions being generated by option exercises.

The income of the variable interest entity is eliminated entirely since the Company has had and still has no equity ownership in the entity. During the quarter we repurchased approximately 1.3 million shares of stock for some 28.3 million, which is an average of $22.54 per share. Since the inception of the stock repurchase plan in 2002 through the second quarter of this year, we've acquired approximately 8.8 million shares of common stock for some $166.4 million at an average price of $18.91 per share. The plan authorizes the repurchase of 11.3 million shares. So we do have approximately 2.5 million shares remaining under the current share repurchase authorization.

Commenting on the diluted weighted average shares outstanding for the quarter was 62.7 million shares. Accounting for the share repurchases through the first half of the year we expect that number to be approximately 62.3 million for quarters 3 and 4 and for the year, approximately 63.6 million in diluted weighted average shares outstanding.

We are increasing the fiscal 2005 sales guidance and reaffirm the net income guidance as a percentage of sales. I think George mentioned sales are expected to be 1.67 to 1.7 billion, which represents an increase of some 8 to 10% over last year, and there again net income should be 3.75 to 4% of that increased sales expectation.

In addition, we are increasing the expected capital expenditures by some $10 million. I think the range of CapEx this year will be $55 to $60 million as a result of the need to bring on production capacity somewhat sooner than expected. You will see we paid a dividend during the quarter of 6.2 million and the Board will consider the dividend at its next regularly scheduled meeting and any action on the dividend will certainly be announced following that meeting.

One last comment in the segment data, you compare the numbers for 2004 to last year you will notice there were some changes there. The Birmingham, Alabama plant was moved from the Specialty Group to the Bakery Group. The totals did not change. It was just moving the Birmingham facility from one group to the other. So that is just a reclass on the 2004 numbers to make them completely comparable with the 2005 results we are reporting today.

So George, with that, I'll turn it back to you.

Let me comment more fully on why we are raising our sales guidance for the year. We are experiencing better-than-expected growth due to the changes in the competitive landscape. During the past twelve months our fresh bread competitors have closed 7 bakeries and restructured distribution in the geographic regions that we serve, which opens up growth opportunities for Flowers Foods.

Our brand products continue to perform well at retail and due to our efficient cost structure and innovative products, our foodservice business is very strong. Our fresh bread sales are growing in our core markets, as well as in our expansion territories.

We entered this year expecting a decline in snack cake sales to a planned reduction in contract manufacturing. Instead, we are successfully replacing contract snack cake production with sales of branded Mrs. Freshley's multipack snack cake items.

The pending acquisition of Royal Cake is expected to give us additional sales opportunities and a good production facility of snack cakes. Our foodservice bread sales continue to benefit from the relationships we have with our national partners, including the success of one of our key customers is experiencing with a product uses a bun we make exclusively for them.

As our sales continue to grow, additional production capacity in the right location is critical and will help us increase our margins. As we said in our press release, we are increasing our anticipated capital expenditures by some $10 million to a range of 55 to 60 million for fiscal '05. As a result of the need to bring on fresh bread and bun production capacity sooner than we expected.

The new bread line in Denton, Texas bakery started up in June and by year end will be operating at peak efficiency. The Denton bread line will be one of our largest and most productive lines. We did successfully start up in the second quarter existing bun lines in Crossville, Tennessee and in Miami that helped ease the pressure on bun capacity somewhat during the busy summer season.

To take advantage of the growing Georgia market I am happy to announce we are adding a second bread line in our Billerica, Georgia bakery. We expect this line to be producing bread in the Spring of 2006. In addition, we are studying the market to determine where to locate additional manufacturing capacity that will be needed to help take care of our existing customers, as well as our territory expansion.

As you remember, two years ago when we announced our plans for territory expansion we told you to expect us to add a new bakery very 18 months to 2 years. With the success of our territory expansion and the growth opportunities in our core market, we expect to accelerate that pace. We expect these investments in these production assets to improve our fresh bread distribution costs by reducing the transport distances. As we add capacity in locations closer to the customer and consumer, our distribution costs will come down, but that will take some time.

In-store execution of our independent distributors remains essential to growing our business, and they do a wonderful job for our Company. By year end we will complete the rollout of our third generation handheld computers. We expect to benefit from -- with this a better shelf space management with the new handhelds.

Cash flow continues to be strong at Flowers Foods, allowing us to make capital investments, pay dividends to our shareholders, consider strategic acquisitions and to continue our share repurchase program. Most of all, we recognize that as managers our most important job is to create value for our shareholders. We remain focused on creating value through the growth opportunities we have outlined this morning. Now Jimmy and I will take your questions.

(OPERATOR INSTRUCTIONS) Tim Ramey, D.A. Davidson.

Congratulations George and Jimmy. That's great. Just a couple of nitpicky questions. You know, I worried about fuel costs being up for your route truck drivers, and you did show some increase in selling expense, but how are you handling fuel increases for your independent drivers?

That is a great question. The real good news and we analyze this continually, the good news is with our sales increases, our fuel costs with them are staying pretty flat as a percent of their sales, and I (indiscernible) looked at it no later than yesterday. Due to our structure on margins with the great sales increases, the fuel is factored in, and our distributors are in good shape based on that.

Okay, great. Just for Jimmy, was there any tax, was there tax impact on the settlement on the high fructose corn syrup, or is that a net number or a gross number, I guess is my question.

Well, that is the gross number, and then it is taxed as part of the effective rate.

Great. Thank you very much.

Farah Aslam with Stephens, Inc.

Good morning. The sales guidance you issued today, does that include your Royal Cake revenue?

No, it does not.

So that would be an additional potential 25 million annually?

That is correct, 23, 25.

And as you expand into your territories, how long has it been your experience for a new territory to kind of reach the same profitability as an existing territory?

That is a tough question. What we do expect at end of certainly by twelve months and we have experienced that for the last two years, we certainly had a profitable or breakeven position in all those markets that we've been in for at least twelve months. And that does take time depending on circumstances; you could expect two to three years according to (indiscernible) to get to the average of the rest of the Company. That is not immediate, but just over time.

So you have been able over the last 18 months or so to increase your operating margins while you are incorporating these much lower territory margins for the new territories?

That is correct.

Bill Leach, with Neuberger Berman.

Congratulations on a good quarter. I had a couple questions here. Your full year sales guidance obviously implies the slowdown in the second half. Are you just being conservative or is it tougher comps or?

Well, I tell you one of the main reasons as we look at the second half, if you remember we had the Texas acquisition in September of last year. So we will be meeting those same comps come September. And in addition, we have made all of you aware that we will be planned some exits from the contract manufacturing for some people, and that is more weighted toward the last half than the first half. So those two reasons I think would pretty well answer that.

How much did acquisitions add to this year's quarter year-over-year?

The acquisition was roughly 30 million annually.

So (indiscernible) more than that?

Yes.

So 30 million this year you didn't have last year?

Yes, in the quarter. There again it would have been 30 divided -- that would have been about 7.5 to 8, something like that in the quarter.

You're saying of your 12% sales gain, 7 to 8% was due to acquisition?

$7 to $8 million.

A big difference. And on the high fructose settlement was that included in corporate income or is that in the divisional income?

I believe it is in the corporate number, Bill, yes. In the segment data that you're speaking to, yes in the segment data I believe it is in the corporate number.

Okay. And last question, where did you end the quarter in terms of shares outstanding?

I'm trying to look and make sure I responded to your -- on the question on the high fructose corn syrup settlement, that was primarily in the bakery, not in corporate.

It was in bakery?

Yes and I think that is because bakery is the one that incurred most of that cost, back in the -- I believe it was in the '90s when those costs were incurred. So it is in the bakery's number.

So if we take that out, you are up about 6% it looks like bakery EBITDA.

Right. Now the other question as far the literal number of shares outstanding, at the end of the quarter got the diluted weighted --. I will have to let you know on that, Bill, I don't have the number here in front of me. It would obviously be something -- I want to say it is lower than the diluted weighted average, obviously. It is between 60 and 61 million shares, Bill. I don't know the exact number off the top of my head, but it is between 60 and 61.

Great. Thanks very much.

Heather Jones, BB&T Capital Markets.

Thanks and good morning. Great quarter. I was wondering just how much of -- you mentioned that the contract volume will be more pronounced in the second half. Do you have a rough estimate for what that hit was during Q2?

I think, Heather, we were looking at some, was it roughly $15 million for the year?

(multiple speakers) two or so. In the second quarter it would have probably been a couple million dollars.

Okay. And was Sara Lee at a full run rate in Q3 of last year -- that acquired facility?

Well, it was into Q3 -- I don't remember the exact date, but it was in September. Again, when we announced the transaction last year we began to get additional sales immediately upon announcement, but it really would have been more (multiple speakers) mid September really.

Just for clarification, we did not -- we don't operate bakeries, (multiple speakers) added sales in (multiple speakers)

I'm sorry I didn't catch that.

The comment was we bout a customer list and a closed bakery that -- the bakery has not been operating so we just gained (multiple speakers).

So during Q3 it should add incrementally but not as much as it did during Q1 and Q2?

That is correct.

Now it seems like you have been benefiting from IBC's bakery closures but some of those didn't even occur until -- I want to say late June, early July. Have you seen a pickup in the benefit following the closures, or is it been like a steady improvement?

I would say more at the tail end of the quarter some new business came on. Maybe a week before the quarter ended some more came on, and then immediately after the quarter we picked up some more volume.

Okay, so it has been accelerating?

That is correct.

Now do you have like a long-term timeline for building out geographically? I guess I'm trying to get an idea for -- I guess we should see steady margin improvement for quite a few years just as these new routes mature, and I am just trying to get an idea if you all have a specific time frame for when you will reach -- I think what was it you're wanting to add 100 million new consumers? By your geographical buildout?

That was 150 mile extension of the territory. I don't think it was quite 100 million.

It was like 50 million. Like I say, we feel like we have about 12 million additional consumer's todate.

Okay, must have gotten the miles and the consumers mixed up. How many years do you think that will take you?

We said three to five. You know, that can slow down or speed up; sometimes based on different acquisition becomes available in key market could change that. And also we will have some consideration as we (technical difficulty) will add capacity, could either slow down or speed up that process.

Okay. Now just my final question, SG&A you mentioned higher fuel costs. Now that I assume is a diesel for your direct deliveries?

Again it is transporting the products from the plant location to the distribution warehouse where it is picked up by the direct store door independent distributor.

Okay, and do you have a rough estimate or a number with that hurt you during the quarter?

It cost us 1.5 this (technical difficulty) second quarter.

All right. Thank you. Congratulations again.

Leonard Teitelbaum with Merrill Lynch.

May I ask a, just trying I thought I understood it, and then I'm getting a little confused, so speak slowly when I ask the question. I was talking about first shares outstanding, Jimmy. I thought you said you closed at about somewhere between 60 and 61 million shares outstanding at the end of the quarter.

Let me get back to those comments, Lenny and tell you that.

Let's assume that's right; I think it was the answer to Bill Leach's question.

The second quarter the average was 62.7 million, and we expect some 63.6 for the full fiscal year.

But if you're at 60 to 61 for the second half that just seems awfully high. And that is what I am trying to figure out.

Well it is a weighted average. I mean I will go back and check our math on that, but it was -- I know in the first quarter was pretty late in the quarter when we made a pretty big stock acquisition, and then in the second quarter I'm trying to recall it was probably middle of the quarter. But I will go back and check.

Because I mean there is a major difference here in terms of its impact obviously on EPS.

Yes, yes.

And you said that you're going to average 62.3 million for Q3 and Q4 in your release. And just questioning whether or not that number -- I mean obviously you did your math but it just seemed high to me so I raised the question.

We will go back and certainly recheck it.

And now just to -- I want to make sure I understood it correctly -- I think it was Tim's question. You don't directly help the drivers to satisfy their increase in fuel costs? You're saying in essence they are making it up with the selling price level. Are you adjusting your price to them on the initial buy to compensate for higher fuel, or are you getting it on the spread between your charge to them and what they charge the retailer?

Lenny, what really happens, the basic wholesale price in the marketplace dictates the price of them less the margin less a discount.

Right.

So as price moves up or sales move up, their margin automatically -- not as a percent but pure dollars.

In the absolute dollars, correct. All right. So you're not adjusting your wholesale price to them to reflect higher -- sorry you're not adjusting the driver price to reflect higher fuel costs?

That is correct.

They are making it up on the spread in absolute dollars.

That is correct. And in the improvement in mix. Our program is structured so that the driver's margins are better for branded product, and therefore as our mixed continues to improve, that creates the incentive for them to sell more branded product.

Very good. Now just two more quick questions I hope. On the Royal margins, how far below Flowers' average margin are those products?

I think I misunderstood, did you say Royal?

Yes.

Their margins today would be lower than our margins.

I appreciate that, is it a significant amount?

Not significant, but we, as always when (indiscernible) an acquisition we do what we have to do to get its margins up to the normal Flowers margins.

I think what I'm doing is asking a question that was asked before -- I think by (indiscernible) I'm not sure that in essence if you can -- if these margins are not at a significant GAAP by the fourth quarter we equalize those margins on, let's say $7 or $8 million worth of sales. And its obviously where we were going. How fast will you (technical difficulty) Flowers margin at least at parity rather than at a discount for the 30 million in sales? And would it be because they are not that much lower than yours, could it be this year we see them equalized?

Lenny, I would not characterize it quite that way. As you know, it takes time to study what's going on. We would anticipate probably first part of the year before you begin to see margin expansion. Obviously when you do some things, but I would not anticipate a lot on the margin side this year.

One final question on the bun line. You are opening up due to the demands from a new customer or you seem to say it was basically multifaceted reason that you are opening up previously mothballed plants. But is this because primarily because of the demands from the as yet unnamed customer?

I say two things. One, our foodservice segment did have a huge increase first quarter and second quarter due to one particular customer with a new innovative item that we make exclusively for. But the bigger question is greater consumption and added marketshare for buns for Flowers Foods continues to rise and that's why we needed the extra capacity.

All right. Very good.

Maybe we can go back to the Royal question just to make sure when you work your numbers for this year, I think as George said the sales of Royal right now are in that 23 million, 25 million range, and I think you may have said something about 30. I want to make sure --.

I was just hoping you wouldn't comment on it.

Yes, we clarify that. And then I think again it is an acquisition that is still pending, I believe certain bankruptcy court approvals, etc. So we don't know exactly if and when it would close. But let's say our expectations are it would close it add about one-fourth of that number to sales, and then we would essentially expect it to breakeven this year as far as the impact on our net income.

That's great. Thank you very much, and good job.

David Liebowitz, Burnham Securities.

Thank you and let me add my congratulations. I'm not certain when you spoke about the new facilities and you had them scheduled for 18 month spacing and now you are going to hasten, does that include acquisitions, or is this separate and distinct from acquisitions?

Separate and distinct. Unless you have an acquisition that had a lot of capacity close by one of our regions, but I'm not expecting that. So basically what we are saying, Dandee just opened and right on top of that we are adding a bread line in Billerica, which is not 18 months. We had to speed it up. And we are having to study an additional consideration for additional capacity. We would not wait two years.

Okay, and roughly how many dollars worth of capacity are we talking about adding, and what is the cost of adding such capacity?

Well, you know you look at a bakery with two big lines, big bun line, big bread line and be a little (technical difficulty)equipment talking roughly 40, 38 to 42 million. I would take an average of 40. In the Billerica case the bakery is already there. We already having to add some space for building. So I think roughly bread line we anticipate bread could be 18 million or so I think on that particular situation. And you asked a follow up question then how much sales would that generate.

I'm sorry I could not hear that answer, you are cracking up on us.

Maybe I didn't speak. No, David, you know what a normal bakery for us that size over time, you will generate 50 to 60 million in sales.

And how many incremental routes does that create?

Off the top of my head probably 200.

And the last question right now, how many routes do you still have to sell at this time?

We have probably roughly 10% due to new territories or territories that (technical difficulty) pending sales. It normally runs about 10% at all times.

Thank you very much, and keep up the great work.

Tim Ramey, D.A. Davidson.

I'm intrigued by the strong performance in private-label. I think you've seen mixed moving away from private-label to branded in the last few quarters, and can you shed any light on what's going on there?

Yes, I can. If you look at the national data, private-label is flat to down. Our normal customer would be in that same area. So the additional sales on private-label would be additional customers or particular stores. As a result of I think Heather asked about our competitors, as they change their business model and discontinuing their thought pattern on private-label, and you know our strategy all the time Tim has been this. And even though private-label might as a percent of our sales might be ticking up slightly, I look for the long term which says the only reason we want private-label is so that we can have, manage the category in the particular account, show improvement in overall categories, driving sales and earnings for the particular account. But more importantly, that is the way we over time we've been able to build Natures Own, Cobblestone Mill, our white bread brands, our cake brands is in some of those major supermarkets have in the private-label program.

And just to follow up on the interstate plant closures, are there any of those boxes that are of interest to you, anything that makes sense there?

We always look when they are available. At this point I don't know that anything is available from them to look at.

Thank you.

I will turn the call back to George Deese for his closing comments.

Thank you for joining our call this morning. We hope you plan to join us at our analyst meeting in New York or Boston in late September. And we certainly appreciate your continued interest in Flowers Foods. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.