Flowers Foods Inc (FLO) 2006 Q2 法說會逐字稿

Good morning. My name is Denise and I will be your conference operator today. At this time, I would like to welcome everyone to the Flowers Foods second-quarter 2006 conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Thank you.

It is now my pleasure to turn the floor over to your host, Miss Marta Turner, Senior Vice President of Corporate Relations. Ma'am, the floor is yours.

Thanks, Denise, and good morning, everyone.

Participating in our call today are George Deese, Flowers Foods Chairman of the Board, Chief Executive Officer and President, and Jimmy Woodward, our Senior Vice President and Chief Financial Officer. Jimmy and George will discuss our results and then we will get to your questions.

But first, I must mind you that our presentation today may contain predictions, estimates or other forward-looking statements. Our use of the words expect, believe or 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 the matters we will discuss during the call, important factors relating to our business are described in Flowers Foods' filings with the SEC.

Now, I'm very pleased to turn the call over to George Deese.

Thank you, Marta, and good morning. Let me thank you for joining our call today and for your interest in Flowers Foods. Needless to say, I was certainly pleased with the quarter's results and certainly the first half of the year.

Our performance was solid in the quarter, reflecting the strength of our bakeries, brands, our access to market and to our great team of people. These good results confirms that our strategies and business model is right on track.

Now, let me bring you up-to-date on highlights for the second quarter. Sales growth was strong and continued at a healthy pace of a 10% increase. Net earnings grew by 11.7%, and earnings per share came in at $0.32 or a 14.3% increase over last year.

Looking closer at sales, branded retail sales were up 12.5%, which outperformed the category by a wide margin. Our white bread brands, led by Nature's Own Whitewheat and local white bread brands, outperformed the category and grew by double digits. Sales of Nature's Own variety bread core items also grew by double digits and outperformed the category.

Buns and rolls, which we talked about last quarter introducing Whitewheat, Nature's Own Whitewheat buns, also grew at a fast pace for the quarter. Multi-pack snack cakes for our Miss Freshley bread brand continues to perform well as we increased distribution. Store brand or private-label also increased by double digits, as we gained new accounts year-over-year. In addition, our foodservice business increased by double -- strong double digits.

In closing the loop on sales, obviously co-pack and private-label cake sales were down. According to IRI, our marketshare grew slightly in the second quarter, but as you know, this is trend information only and does not capture sales for a significant part of the market. Our integration of Derst Baking Company continues to go according to plan. During the quarter, we converted Derst to our management information system.

On a quarter-to-quarter annualized basis, we continue to add roughly 1% to our new sales territories, and of course that effort goes on as we continue to expand territories adjoining our present DSD footprint.

As you know, (indiscernible) tight capacity and robust sales growth requires us to add new and more efficient production capacity to certain regions of the Company. During the second quarter, two major capital projects came online. The new bread line and our existing Villa Rica, Georgia, bakery started up on May 1, and our new bakery in Newton, North Carolina, started producing buns early in June. These start-ups came on without a hitch or no major difficulty. That's a credit to the team of the people that we have starting up these new bakeries, and I thank them for their efforts.

I mentioned, in the first-quarter call, that we had relocated our snack cake distribution center. That has now been bedded down and is running more according to plan. As you are aware, the overall conversion to a branded snack cakes program from private-label is still a work in progress. Gross margins on snack cakes have improved and we are working to take cost out of our [SNDA] for the snack cake business.

Now I'm happy to turn the program over to Jimmy Woodward. Jimmy?

Thank you, George, and good morning.

Our consolidated sales again were $445.8 million for the 12-week quarter. That is a 10% increase over the second quarter last year. Net income was 19.7 million, an 11.7% increase over last year. Diluted net income per share from continuing operations at $0.32 represents a 14.3% increase over last year's second quarter.

The sales for the 28-week period year-to-date exceed $1 billion for the first time, I believe, and represents a 10.8% increase over the comparable period last year.

Our net income for the 28 weeks of 42.6 million is an increase of 13.2% and the $42 million of income from continuing operations before the change in accounting method represents an 11.5% increase. The diluted net income per share before that change in accounting method from continuing operations of $0.68 is an increase of 17.2%. I think all of these amounts continue to reflect solid sales growth and operational execution that is very solid.

The sales increase of 10% for the second quarter was from favorable pricing of 6.4%, a positive mix shift of 5%, and a volume decline of 1.4%. The volume decline was primarily in the snack cake business. The acquisitions of Derst and Royal Cake represented 15.1 million in sales or 3.7% of the quarter's sales -- that 10% sales increase.

The Bakery group sales increased 12% due to a volume increase of 6.4%, favorable pricing of 4.9%, and a 0.7% favorable product mix. The volume growth was driven, as George mentioned, by branded white bread, including our Nature's Own Whitewheat bread and buns, and also growth continues in our core Nature's Own soft variety bread.

Flowers Specialty sales increased 2.3% with favorable pricing of 10.1% and a positive mix shift of 5.4%. These increases were offset by a 13.2% volume decline in the quarter due to the loss of the contract production for certain customers. As George has mentioned, our efforts to reposition the snack cake business for the long-term is continuing to progress, and it does take time, however.

Our gross margin declined to 49.7% of sales from 50% in the prior year's quarter. This was primarily due to the startup cost for the new production line that George mentioned at Flowers Bakeries. The Villa Rica, Georgia plant was an existing plant where we put in an additional line and the Newton, North Carolina facility is a new facility with a new line there.

The effect of the discontinued contract snack cake production at Flowers Specialty also hurt margins and our volumes were not sufficient to cover some of the overhead costs that we incur, and we're focused on growing the Mrs. Freshley's brand. In addition, costs associated with the introduction of a new product for our Flowers Specialty foodservice customer negatively impacted volumes, new production inefficiencies when we initially started up the production of that particular product. These negative items were offset by pricing gains, lower ingredient and packaging costs, and income from insurance recovery related to Hurricane Katrina. I will comment a more on that in just a minute.

Selling, marketing and admin expenses as a percentage of sales for the quarter were 39.5% compared to 40.2% last year. The decrease was due to increased sales. We did have lower pension and advertising expense and income from the insurance recovery there as well. These improvements were partially offset by higher distribution expense in the Specialty Group. We had higher fuel costs obviously, and as we continue to shift from contract production to branded retail sales on the snack cake business, that increases our distribution cost as we bear the cost as opposed to the contract production customer.

During the second quarter, we received proceeds from insurance coverage of 1.7 million related to Hurricane Katrina. Approximately 1 million of those proceeds were applied against material supplies, labor and other production cost and therefore impacted margins. Then about 700,000 of that was recorded in the selling, marketing and admin expense category. The majority of proceeds relates to business interruption expense, most of which was in the first quarter of 2006, and year-to-date, the 1.7 roughly offsets the cost we've incurred. We do continue to have claims outstanding. We are pursuing those claims with insurers and the proceeds, if any, will be recorded as we receive the proceeds.

Depreciation and amortization expense for the quarter was relatively flat as a percentage of sales, and net interest income was relatively unchanged at $1.3 million. You'll note the effective tax rate for continuing operations was down to 36.3%, and that's primarily due to just over $300,000 of a deferred tax benefit related to changes in the state tax laws in the certain states where we do business. We continue to estimate, for the full year, the tax rate will be approximately 37%.

During the quarter, we acquired 327,400 shares of our common stock for $9.1 million, which is an average of $27.90 per share. Since the inception of the plan through the end of the quarter, we had acquired 10.9 million of the 15.3 million shares that have been authorized for repurchase. That totaled 223.6 million, which was an average price of $20.56. You'll note the cash flow we've always commented continues to be strong and remains strong in the quarter at 28.1 million. We did narrow our guidance for the year by slightly raising the low end of our sales range, which represents now sales growth of 9.6 to 10.4%, so we think our sales will be in the 1.88 billion to 1.895 billion range, and then our income from continuing operations before any accounting change would be 3.6 to 4% of sales. That's about 69 to 74 million. With 62 million shares outstanding, that would represent $1.11 to $1.19, which is an increase of some 12 to 20% over last year. That guidance does include the $0.05 to $0.06 per share expense that we are recording this year due to the adoption of FAS 123R for stock-based compensation.

Capital spending for the year we continue to estimate to be in the 58 to $63 million range, and we are supplementing our capital spending with equipment leasing where appropriate. The Board of Directors will consider the dividend at the next regularly scheduled meeting, and we will make an announcement on that as appropriate at that time.

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

Thank you, Jimmy.

As you can hear, the quarter was again very solid. I'm very pleased with the results and have never been more confident in our ability to continue to execute profitably. So, as Jimmy mentioned, which goes in line with the guidance for the year, we expect our sales to come in, as Jimmy indicated, in the 1.880 to 1.895 billion range, and of course net earnings at 3.6 to 4% of sales.

I am pleased to say that our fresh DSD business is doing well. Our foodservice business continues to grow, both fresh and frozen. Our snack group is growing our Mrs. Freshley's brand.

With new production capacity online, we are baking closer to the growth markets which we set out to do, which will save hauling costs and at the same time have a much fresher product for the consumer in those markets. In addition, with these new capacities coming on, we can now move forward much more aggressively with new products that we've been working on for quite some time. They are ready to go and you'll be hearing more about that in the upcoming call and probably a little before the call. I'm very pleased with new products that will be coming on.

Work is now underway for the new bread line in Newton, North Carolina, and we expect that to come on board this spring. When complete, we will be one of the most and best efficient bakeries in America.

Looking ahead, we are faced with very steep cost increases. As you know, fuel prices are at an unprecedented level and although our flour costs -- flour needs are covered in our hedging program in the third and fourth quarter, they are at a higher level than last year. As always, we have a great information system that helps us do this. We monitor our cost profitably. We have information to do that. As our costs go up, we work to maintain our margins by increasing our efficiencies in every way possible. When needed, we increase prices based on competitive circumstances in each local market. Pricing, as you know, does vary for us in different regions, in different plants and different markets, market to market, and the competitive environment is certainly different in each local market. But that does determine pricing effects that we can take effect.

As Jimmy mentioned, cash flow does remains strong, which allows us to make capital investments, to pay dividends to our shareholders, to consider strategic acquisitions, and to continue our share repurchase program.

So in summary, I'm certainly pleased with our performance. All of us remain focused on growing our business, on driving down costs, and on creating value for our shareholders.

Before I open up to questions, I wanted to make a comment, then will open up for questions. As I think about the first quarter and certainly the first half, many of you have asked, you know, you're having such a great first half; why haven't you raised your guidance for the year? I think, as we go forward, we never give quarter's guidance; we give annual guidance for the reasons that I'm about to mention. The first half I think will always hopefully be better than the last half of the year, and let me just give you a few reasons. In the first quarter, Florida -- a major part of our market -- is always strong due to so many visitors in the state. Anywhere around water, we have a lot of coastal area from North Carolina all the way around to New Mexico. Those markets always are stronger -- are strong in the January, February, March time frame, so that always helps business.

Then in the second quarter, it seems like in the South the white bread market really trends up, and buns are always impactful, which white bread and buns are very profitable. And that helps the second quarter. Then as you look out to the second half and school begins, we always have a little slowdown in business. September traditionally in the Southeast and Southwest is one of our slower months, then the holidays. It seems we always -- people do more baking and sales during the Thanksgiving and the Christmas holiday, so those two holidays never peak like Memorial Day for buns and (indiscernible) to July 4, which really helps.

So as we think about the year, I am very confident in the back half of the year. Costs are going up, but we try to manage that. We know what they are. We do have price increases on the tree to try to offset all of our costs. But I just want to give you that sort of thought pattern for this year and the coming years, because even though we say we don't have a big seasonal swing in business, there are a few things that do go on in the Southeast/Southwest to do affect results at a given time.

So with that, Denise, I will -- we will open up for questions.

Thank you. (OPERATOR INSTRUCTIONS). Farha Aslam, Stephens, Incorporated.

Good morning. Thanks, George, for the color you gave us at the end regarding your costs. And just delving into that with a little bit more detail, when you look at your wheat costs and your rising costs in the second half versus the new capacity that's coming online and the fact that you're less capacity constrained, can you just kind of weigh that in terms of -- do you now think, year-over-year, you're going to have lower costs of goods sold as a percentage of sales?

I will preface that by saying I think, based on our projections, and we looked at them again this week, just trying to get a good handle on it for this call. I think cost of goods sales -- cost of goods will be even to up very, very slightly as we look at (indiscernible) sales.

For the full year or for the second half?

No, for the second half.

Okay.

Versus the first half, ever so slightly, is the prediction.

Versus the first half?

Yes.

How about the year-ago period?

I'm sorry?

Versus a year ago?

I think, when you look at the total year, we are still looking at in the 50% range for the total.

Okay. Then, with your share repurchases you did in the second quarter, George or Jimmy, what was your share count at the end of the second -- (technical difficulty)?

(technical difficulty) -- up to 62 million (multiple speakers).

Yes. The average shares outstanding, Farha, is that which are asking about? Yes, it's about 62 million.

Your tax rate now is 37% for the year?

Correct, yes.

George, when we started off the year, it was my understanding that the first half was going to be tougher for Flowers because you had capacity constraints and you were bringing on this new capacity and that the second half was anticipated to be relatively easier because you would have the capacity you needed online, and you still go after sales more aggressively. Now, from today, it sounds like you're building up the second half to be possibly more difficult. Are you just trying to be conservative so that our numbers don't run away, or do you really face some challenges that we should know about?

Well, I would say let's think about first half. The first quarter quite candidly was better than any of us anticipated, I think. It was much better than the prior year, so we were exceptionally pleased with the first quarter. The second quarter of course is a solid quarter as well.

As far as we're talking about year-over-year, I think maybe one thing that maybe was well communicated when we talk about second half would be year-over-year would be easier. As you remember, last year, we had -- (technical difficulty) -- and had horrible results for the third and fourth quarter, even though, as I remember, we probably got in 4 or $5 million from the insurance side. When we're talking about year-over-year, I think the last third quarter, we had earnings of -- I don't remember that off the bat but when we say year-over-year, what I was talking about -- and (indiscernible) I'm going to come back and say something further on it -- I was taking into consideration with that hurricane last year, the year-over-year certainly would be better this year than last year. But I am very confident on the third and fourth quarter. Execution is in place; costs are up. An example (indiscernible) just yesterday, though, we received some confirmation that on the President's desk is sitting (indiscernible) imported from China, some new laws and regulations that's going against that, and that quite candidly will cost Flowers Foods about $1 million for the fourth quarter. That was certainly unknown. Flour cost was known, but (indiscernible) unprecedented costs being passed through from not just flour but different commodities. We know what they are. We do have pricing on the street to take care of it. What I cannot guarantee at this point is will all that price -- will the price increases that we have on the street stick? You never know until they do take effect. I do have confidence, as we was able to do it last year, and I still have confidence that will happen this year. But I can't guarantee it yet.

I think about the beginning of the fourth quarter, by the time we have our next call, all of that will be in place and we will certainly be more confident and have the unknowns out of the way. If everything works according to plan, I think we will be pleased with the third and fourth quarter.

Thank you. Just I have a question. That 6% pricing we saw this quarter, could you just give us some color if what your folks out on the street are trying to get for next year?

We are basically looking for 5%, which would handle the new cost. Then with efficiencies, we will make our margins and improve margins, improve earnings, based on more efficiencies that we have going in as we look at next year.

Tim Ramey, D.A. Davidson.

Good morning. Congratulations. The SG&A costs were lower, both as a percentage of sales and as an absolute basis, year-over-year and certainly versus my estimate. Can you comment on what happened there, other than the $700,000 of insurance proceeds that hit that line?

I'll take that and let Jimmy follow-up. I think (indiscernible) referenced that we felt when we had the new plant startup, we would begin to reduce some costs. The new bun line and (indiscernible) certainly helped relieve some of the transportation that was going through our 'northern' region. So that helped.

From a competitive situation, we've seen some of our competitors reduce advertising and start doing more promotions, so we did reduce slightly some of our advertising and we did put that in the note in the earnings release. So, we had to start promoting a little bit more to stay competitive in the marketplace, and looking at the third and fourth quarter, advertising will be right on the target whatever we predicted for the next two quarters. But we did adjust slightly the second quarter, due to some competitive factors on the feature promotional side of the business.

Again, like I say, going forward, as we do get our plants where the people are and that's certainly the goal with the Villa Rica bread line, with Newton's new bread line coming on, we still have an lawful lot of hauling just to get products to the right location. I would really be disappointed if we don't continue to see that line come down -- (technical difficulty). I'm also prefacing that by saying, I don't know what fuel costs will do either going forward. It is at unprecedented levels but I'm saying if it stays halfway flat, as we go through the next couple of years, getting our manufacturing capacity where the people are will have a great benefit to the [S&D] (indiscernible) line. Do you want to anything to that?

No, I think, Tim, as George mentioned, it's transportation costs on the bakery side in particular, locating the production of the higher sales, slightly lower advertising and insurance. We also referenced slightly lower pension cost. You may recall we have frozen participation in our defined benefit plan, and when you combine the frozen plan along with the funding that we did in the first quarter, we had lower defined benefit plan pension expense in quarter two versus last year. That's why you see it on the corporate line in particular. The lower expenses at corporate was primarily a lower pension expense.

George, I ask this question every quarter but you mentioned fuel and I always worry about the higher diesel prices creating some pushback from your route truck drivers. You've been able to compensate them with volume, I guess, to date. How is that analysis looking as of the end of the Q2?

We do that estimate analysis each quarter, and through the second quarter, we were still very healthy in that regard. But Tim, I'm not saying we will never do anything about it, as long as we can boost sales at this level in the mature markets we feel comfortable with that. God forbid sales slow down, and we will have to look at it another way, but as of today we are still okay.

Thanks for your help.

(OPERATOR INSTRUCTIONS). Diane Geissler, Merrill Lynch.

Good morning. Just a clarification on the Katrina insurance recovery this quarter. I don't recall you mentioning, in the first quarter, that you had a negative -- you know, that there was recoverable expenses from the first quarter. Is the best way to look at the $0.02 sort of netting neutral for the year as opposed to calling it out as an extraordinary item? I didn't strip anything out in the first quarter for incremental Katrina.

Yes, I would say that's right, Diane. We are -- it's obviously an estimate as to what the incremental cost would be, but I'd say, roughly speaking, the $0.02 in insurance proceeds offsets, roughly, the cost we've incurred in both quarters one and two.

Is there any -- you said that you had additional recoveries into the insurance companies sort of lingering from Katrina. Is there an amount that we should thinking about over -- (multiple speakers)?

Yes, again that -- you know, it's an ongoing assessment of the business interruption insurance and I would say remaining outstanding was probably still another couple of cents earnings per share that we're still pursuing. And we are beginning to wind down the claims process, but we are still looking for a couple million more dollars.

Are you pursuing that in conjunction with expenses that were incurred in 2005, or is that from expenses in '06?

Well, the way the process is worked, we accumulated our expenses for 2005 and 2006, and the insurance company reimbursements have not specifically identified which costs they were reimbursing. So it's difficult to say specifically. It is just the cumulative total that is in excess of the reimbursement of a couple of million dollars.

Okay, well that's good cover vacation on that whole process. Could you just talk? You know obviously your quarter sort of exceeded my expectations and the Street. How did it compare versus what you were looking for internally?

Internally, best I recall, we were pretty well right on track with our call pattern. We didn't --. You know, we didn't know specifically when the insurance would be recovered, Diane.

I'm talking about the quarter -- (multiple speakers) -- in general -- (multiple speakers)

If you took out the $0.02 for the insurance, obviously then there was about half a penny from the tax law change in the state of Texas that we didn't anticipate. You know, other than that, I would say everything was about pretty much on plan. Sales continued to be good.

Okay, I guess I think I am echoing some of the previous callers about given that you've booked -- if we don't scrub out the Katrina but we do scrub out your -- some of the things that occurred in the first quarter, you've already booked about $0.67, so if we take the low end of your range, it suggests that the second half would be flat to slightly up year-over-year. I guess we all know the third and fourth quarter, as you said, were of last year were particular difficult. I guess I'm wondering why the lower end of the range is still that low.

That's why, before I opened this phone up for questions, I tried to go through -- thinking through the first half versus last half, and I know if you do the calculations based on the first half, you could certainly come up with a much different number than our guidance, and all it is guidance. I just have to come back and say costs are significantly higher third and fourth, some projected, some not projected, but the price increases come on as anticipated. We will be able to update (indiscernible) guidance for the next call.

Okay. Can you quantify what the negative impact from the startup of the two new lines in the second quarter was in cost of goods?

Yes, I've got -- I can give you dollars; I am not sure I can give you the -- if we look at the first half of startups where roughly $2.5 million, and I get about -- I can go and say 1.4 of it occurred in the first quarter and roughly 1.2 million in the second quarter.

Okay, and presumably that should be kind of well in hand at this point, and you wouldn't expect any more sort of negative comparisons there on the two new lines?

Well, there will always be some. I mean everything always -- even though there's been no major hiccups, we will have some ongoing costs until we get the volumes in the way we want it.

Right, and when would you look for that? Would that be another quarter or two or -- (technical difficulty) -- beyond into 2007?

I think it depends on the bakeries. Of course, Villa Rica was already an existing bakery, so things will be better there, but the new startup of a whole new bakery is a little different than -- obviously when it would be the best is when we get the bread line in next spring and we will have -- be able to recover a lot more overhead from the different things going on. But all in all, we shouldn't suffer much at all third and fourth quarter and going into next year with the new startups.

Yes, I guess that's it for now. Thank you very much.

Thank you. Seeing there are no further questions, I'd now like to turn the floor back to Mr. Deese for any closing comments.

Thank you for joining us today, and obviously, we are pleased with the first half. We have complete confidence in the back half of the year. The execution is really strong. I'm excited about the new products that will be coming on board later September, first of October. As we start looking at next year, exciting progress going on in the new bread line in Newton. So, all of that will happen (indiscernible) get products closer to the consumer and reduce our cost to get it there so all of that should be good going forward. I appreciate the confidence you have in this management team and all -- everyone at Flowers Foods. Thank you for being with us today.

Thank you. That does conclude today's Flowers Foods conference call. You may now disconnect your lines, and have a wonderful day.