Flowers Foods, Inc., producer of Nature's Own, Wonder, Tastykake, Dave's Killer Bread, and other bakery foods, reported financial results for the company's 16-week first quarter ended April 21, 2018.

First Quarter Summary:
Compared to the prior year first quarter where applicable

• Sales increased 1.6% to $1.206 billion. Excluding a 2017 divestiture of a mix manufacturing business, sales increased 1.7%.

• Diluted EPS decreased $0.05 to $0.24.

• Adjusted diluted EPS⁽¹⁾ increased $0.05 to $0.30.

• Net income decreased 15.2% to $51.2 million.

• Adjusted net income increased 20.1% to $63.2 million

• Adjusted EBITDA⁽²⁾ increased 0.1% to $132.9 million.

(1)   See reconciliations of non-GAAP measures in the financial statements following this release.
(2)   Earnings before Interest, Taxes, Depreciation and Amortization, adjusted for certain items affecting comparability. See reconciliations of non-GAAP measures in the financial statements following this release.

CEO's Remarks
"We are pleased with the solid start to the year. We achieved record sales in the first quarter, and made important progress on our strategic priorities, giving us confidence in our ability to meet the objectives we've set for the year," said Allen Shiver, Flowers Foods president and CEO. "Sales growth for the quarter was ahead of expectations, driven by the continued strength of Dave's Killer Bread and the solid performance of our Nature's Own and Wonder brands. In April, we introduced new, artisan-style products under Nature's Own, and initial consumer response has been encouraging."

Mr. Shiver continued, "The restructuring actions we began last year under Project Centennial have empowered our new teams to grow our core brands, improve productivity, and capitalize on opportunities. As we transition to our new organizational model, we are now better able to drive brand growth through new products and innovation, enhance execution in the marketplace, and streamline our supply chain. We remain intensely focused on delivering profitable growth and higher returns on invested capital, and we are moving forward with urgency to optimize our manufacturing network to drive efficiencies and lower manufacturing costs. Through these actions we intend to drive cash flows and shareholder returns."

Reaffirmed Outlook for Fiscal 2018:

• Expected sales in the range of approximately $3.921 billion to $3.982 billion, representing growth of approximately 0.0% to 1.6%.

• Expected adjusted diluted EPS in the range of approximately $1.04 to $1.16, representing growth of approximately 16.9% to 30.3%.

• Adjusted EPS guidance includes approximately $0.14 to $0.16 related to the impact of the lower effective tax rate, and excludes consulting and restructuring costs associated with Project Centennial expected to be in the range of $13 million to $16 million. Previously, the company estimated the effect of the lower tax rate to be approximately $0.15 to $0.17 and costs associated with Project Centennial to be $12 to $15 million.

• This quarter included an additional $2.3 million revision to the multi-employer pension plan (MEPP) withdrawal liability, a pension settlement loss of $4.7 million, and a legal settlement of $1.4 million. These items are also excluded from adjusted EPS guidance for fiscal 2018.

Update on Project Centennial & Strategic Priorities
The company continues to execute on its strategic priorities under Project Centennial to reinvigorate the core business, capitalize on product adjacencies, reduce costs to fuel growth, and develop leading capabilities. Project Centennial is an enterprise-wide effort to streamline operations, drive efficiencies, and invest in strategic capabilities to strengthen the company's competitive position, drive profitable revenue growth, and create shareholder value. Highlights of the company's progress in 2018 to date include:

To reinvigorate the core business and capitalize on product adjacencies, the company:

• Introduced Nature's Own Perfectly Crafted, a line of artisan-inspired, thick-sliced bakery-style breads that are Non-GMO Project Verified and have no artificial preservatives, colors or flavors or high fructose corn syrup;

• Introduced Non-GMO Project Verified Nature's Own varieties in select markets;

• Strengthened the consistency, quality, and store presence of Wonder breads and buns by standardizing sizes and formulas and updating packaging; and

• Launched Camo for the Cause promotion to support the USO.

To reduce costs to fuel growth and develop leading capabilities, the company:

• Continued its organizational restructuring by building teams with new capabilities, including business unit field marketing teams dedicated to capturing consumer insights in markets nationwide and sharing feedback on brand performance and campaigns;

• Improved order quality and reduced stale product returns through closer partnership with independent distributors (IDP);

• Achieved a significant decrease in adjusted Selling, Distribution, and Administrative (SD&A) expenses as a percentage of sales during the quarter, due to its organizational restructuring; and

• Initiated supply chain optimization initiatives to improve efficiencies, lower costs, and drive enhanced gross margins.

As a result of its more efficient and productive organizational structure, reduced spending on purchased goods and services, continuous improvement, supply chain optimization, and improved ordering and stale reduction initiatives, the company is targeting total gross savings in fiscal 2018 of $38 million to $48 million.

Matters Affecting Comparability:

Consolidated First Quarter 2018 Summary
Compared to the prior year first quarter where applicable

• Sales increased 1.6% to $1.206 billion.

• Percentage point change in sales attributed to:

• Pricing/mix: +1.5%

• Volume: +0.2%

• Divestiture: -0.1%

• Net income decreased 15.2% to $51.2 million. Excluding matters affecting comparability, net income increased 20.1% to $63.2 million.

• Operating income decreased 22.0% to $76.6 million. Excluding matters affecting comparability, operating income increased 2.8% to $88.0 million.

• Adjusted EBITDA increased 0.1% to $132.9 million, or 11.0% of sales, a 20 basis point decline. Adjusted EBITDA in the first quarter of fiscal 2018 includes a $2.5 million asset impairment charge related to a non-IDP customer.

• Materials, supplies, labor and other production costs (exclusive of depreciation and amortization) were 51.8% of sales, a 60 basis point increase. This increase was primarily driven by increases in outside purchases of product due to strong demand for DKB breakfast items, higher ingredient costs and decreases in manufacturing efficiencies, partially offset by more favorable price/mix.

• SD&A expenses were 37.7% of sales, a 130 basis point decrease. Of this decrease, 50 basis points can be attributed to the net effect of the following matters affecting comparability: lower Project Centennial consulting costs, a higher legal settlement in the current year quarter, and a lease termination gain in the prior year. The balance of the decrease in SD&A expenses as a percentage of sales was primarily driven by decreased workforce-related costs, partially offset by higher distributor distribution fees due to a larger portion of sales being sold via independent distributors.

• Depreciation and Amortization (D&A) expenses were $44.2 million, 3.7% of sales, a 30-basis point decrease. This decrease was driven primarily by accelerated depreciation of approximately $1.8 million relating to prior year lease terminations noted above, as well as reduced amortization expense as a result of impairing certain trademarks in the second half of fiscal 2017.

On a consolidated basis, branded retail sales increased 2.4% to $711.2 million, store branded retail sales increased 0.2% to $172.6 million, while non-retail and other sales increased 0.6% to $322.7 million. Branded retail sales increased due to continued sales growth from branded organic products and in our expansion markets, as well as from a more favorable price/mix, partially offset by declines in branded buns and rolls and branded cake. Sales of DKB products continued to increase, driven by continued volume gains and the introduction of breakfast items during the second quarter of fiscal 2017. Store branded retail sales were relatively unchanged quarter over quarter. Volume growth in foodservice and vending drove the increase in non-retail and other sales, partially offset by softer bakery outlet store sales.

DSD Segment Summary
Compared to the prior year first quarter where applicable

• Sales increased 1.6% to $1.015 billion.

• Percentage point change in sales attributed to:

• Pricing/mix: 3.4%

• Volume: -1.8%

• Operating income decreased 3.3% to $84.4 million.

• Adjusted EBITDA decreased 0.4% to $126.9 million.

DSD segment branded retail sales increased 2.8% to $664.1 million, store branded retail sales decreased 0.6% to $136.7 million, while non-retail and other sales decreased 0.8% to $214.7 million. Branded retail sales increased due to significant sales growth for DKB organic products, growth in our expansion markets, and improved price/mix. This was somewhat offset by declines in other branded items, with the largest decrease in branded buns and rolls and branded cake. Store branded retail sales declined quarter over quarter due to volume declines, with the largest decrease in store branded white bread. Decreased sales of products in our bakery outlet stores and, less significantly, the shift of certain foodservice business from the DSD Segment to the Warehouse Segment resulted in decreased non-retail and other sales.

The change in the DSD Segment operating income as a percent of sales was driven by $2.3 million of MEPP withdrawal costs, a $2.5 million asset impairment charge related to a non-IDP note receivable and $1.2 million of restructuring charges incurred during the first quarter of fiscal 2018, as well as increased outside purchases and higher ingredient and workforce-related costs as a percentage of sales, declines in manufacturing efficiency and a higher legal settlement in the current year quarter. Partially offsetting these items were higher sales on improved pricing and reduced stales, the benefit of the voluntary separation incentive plan (VSIP) and other restructuring initiatives, and decreased depreciation and amortization expense.

Warehouse Segment Summary
Compared to the prior year first quarter where applicable

• Sales increased 1.7% to $191.0 million.

• Percentage point change in sales attributed to:

• Pricing/mix: -3.6%

• Volume: 5.8%

• Divestiture: -0.5%

• Operating income decreased 67.4% to $14.6 million. In the prior year, the company recognized a gain on the divestiture of its mix business of $28.9 million.

• Adjusted EBITDA decreased 4.1% to $21.2 million.

Warehouse segment branded retail sales decreased 3.6% to $47.0 million, store branded retail sales increased 3.5% to $35.9 million, while non-retail and other sales increased 3.6% to $108.0 million. Branded retail sales decreased mostly due to volume declines in warehouse-delivered branded organic bread. Volume increases in store branded items due to a new customer in the second half of fiscal 2017 resulted in the increase in store branded retail sales. Non-retail and other sales, which include contract manufacturing, vending and foodservice, increased primarily from volume growth in foodservice and vending sales, and to a lesser extent, the shift of certain foodservice business from the DSD Segment to the Warehouse Segment in the current year. This was partially offset by the impact of the mix manufacturing business divestiture in January of fiscal 2017 and a reduction in contract manufacturing.

The change in the Warehouse Segment operating income as a percent of sales was primarily due to the $28.9 million gain on divestiture in the prior year quarter, and a shift in mix from higher margin branded bread items to lower margin cake and foodservice items, partially offset by lower workforce-related costs.

Unallocated Corporate Expense Summary
Note: Comparisons are to consolidated sales

• SD&A expenses decreased 110 basis points to 1.8% of consolidated sales, primarily due to the $9.0 million decrease in Project Centennial consulting costs, and to a lesser extent, stock-based compensation expense.

Cash Flow, Dividends, Share Repurchases, and Capital Allocation
In the first quarter of fiscal 2018, cash flow from operating activities was $97.1 million, capital expenditures were $26.6 million, and dividends paid were $36.2 million. During the quarter, the company had a net decrease in debt and capital lease obligations of $1.3 million.

There are 6.5 million shares remaining on the company's current share repurchase authorization. As in the past, the company expects to continue to make opportunistic share repurchases under this authorization.