BARCLAYS GLOBAL CONSUMER STAPLES CONFERENCE …/media/Files/F/Flowers... · 2018-09-04 · BARCLAYS GLOBAL CONSUMER STAPLES CONFERENCE SEPTEMBER 2018 1. REGARDING FORWARD-LOOKING

BARCLAYS GLOBAL CONSUMERSTAPLES CONFERENCE S EPTEMBER 2018

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REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this press release that are not historical facts are forward-looking statements. Forward-looking statements relate to current expectations regarding our future financial condition, performance and results of operations, planned capital expenditures, long-term objectives of management, supply and demand, pricing trends and market forces, and integration plans and expected benefits of transactions and are often identified by the use of words and phrases such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should," "will," "would," "is likely to," "is expected to" or "will continue," or the negative of these terms or other comparable terminology. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. Other factors that may cause actual results to differ from the forward-looking statements contained in this release and that may affect the company's prospects in general include, but are not limited to, (a) general economic and business conditions and the competitive conditions in the baked foods industry, including promotional and price competition, (b) changes in consumer demand for our products, including changes in consumer behavior, trends and preferences, including health and whole grain trends, and the movement toward more inexpensive store-branded products, (c) the success of productivity improvements and new product introductions, (d) a significant reduction in business with any of our major customers including a reduction from adverse developments in any of our customer's business, including as a result of product recalls or safety concerns related to our products, (e) fluctuations in commodity pricing, (f) energy and raw material costs and availability and hedging and counterparty risk, (g) our ability to fully integrate recent acquisitions into our business, (h) our ability to achieve cash flow from capital expenditures and acquisitions and the availability of new acquisitions that build shareholder value, (i) our ability to successfully implement our business strategies, including those strategies the company has initiated under Project Centennial, which may involve, among other things, the integration of recent acquisitions or the acquisition or disposition of assets at presently targeted values, the deployment of new systems and technology and an enhanced organizational structure, (j) consolidation within the baking industry and related industries, (k) disruptions in our direct-store delivery system, including litigation or an adverse ruling from a court or regulatory or government body that could affect the independent contractor classification of our independent distributors, (l) increasing legal complexity and legal proceedings that we are or may become subject to, (m) product recalls or safety concerns related to our products, and (n) the failure of our information technology systems to perform adequately, including any interruptions, intrusions or security breaches of such systems. The foregoing list of important factors does not include all such factors, nor necessarily present them in order of importance. In addition, you should consult other public disclosures made by the company, including the risk factors included in our most recently filed Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission ("SEC") and disclosures made in other filings with the SEC and company press releases, for other factors that may cause actual results to differ materially from those projected by the company. We caution you not to place undue reliance on forward-looking statements, as they speak only as of the date made and are inherently uncertain. The company undertakes no obligation to publicly revise or update such statements, except as required by law.

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PRESENTERS AND AGENDA

Allen L. Shiver President & Chief Executive Officer

R. Steve KinseyChief Financial Officer & Chief Administrative Officer

• Business & Category Overview

• Growth Initiatives Update

• Profit Initiatives Update

• Financial Review & Outlook

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LEADING FRESH BAKERY BRANDS DRIVE OUR BUSINESS

Non-retail & other24%

Branded breads

49%

Branded snack cakes11%

Branded retail59%

TTM* Sales $3.9 billion

Sales Overview Brand Portfolio Highlights

* 52 weeks ended Q2 2018Source: SDW DSD + WD 52 Weeks Ending July 14, 2018

Store branded

retail16%

#1 loaf bread brand

#1 organic bread brand

98% consumer awareness

Iconic snack cakes since 1914

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BROAD SCALE IS A PLATFORM FOR PROFITABLE GROWTH

47Operating bakeries

of the U.S. population

Warehouse distribution NATIONWIDE

Channels served• Grocery / Mass / Club• Natural & Organic• Discount / C-store• Foodservice & Vending• E-commerce

9,800 employees

5,500independent distributors

85%

Direct-store-distribution access to

Information as of year-end fiscal 2017

6

MULTI-YEAR TRANSFORMATION UNDERWAY

• Attacked indirect spend• Clarified brand roles

FY17

• Optimize supply chain• Grow sales with innovation,

adjacencies, and proactive M&A• EBITDA margin goal: 13-14%

• Streamlining organization• Investing in capabilities and brands

DRIVE GROWTH

IMPROVE PROFITABILITY

• Reinvigorate the Core• Capitalize on Adjacencies

• Generate Fuel for Growth• Develop Leading Capabilities

FY18

FY19 and beyond

PROJECT CENTENNIALSTRATEGIC PRIORITIES

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FRESH BAKERY MARKET IS LARGE AND GROWING

• Fresh packaged breads• Commercial cake• Tortillas

$22.5 $23.1 $23.7 $23.9 $24.1

$0. 0

$5. 0

$10 .0

$15 .0

$20 .0

$25 .0

2013 2014 2015 2016 2017

Billi

ons

US Fresh Bakery - Retail Outlets(1)

Retail Outlets = $24.1 billion(1)

• Fresh and frozen breads, buns, rolls

Foodservice = $7.4 billion(2)

(1) Data for Retail Outlets sourced from IRI. FY 2017.(2) Data for Foodservice sourced from Techonomic 2017

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STRONG COMPETITIVE POSITION

IRI Flowers custom data base Total US Multi Outlet + Convenience – 12 weeks ending July 15, 2018

Flowers is growing share with differentiated products

FLOWERS, 15.9

BBU, 29.6

PEPPERIDGE FARM, 5.8

INDEPENDENT BAKERS, 24.2

STORE BRAND, 24.5

Fresh Packaged Bread Dollar Share

14.7

15.1 15.1

15.4

15.9

Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018

Flowers Dollar ShareFresh Packaged Breads

$179.8 $220.9

$275.5

$357.8

$490.4

$566.1

13 FY 14 FY 15 FY 16 FY 17 FY 52 WE 07/15/18

Organic Fresh Packaged Bread Market

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POSITIVE UNDERLYING CONSUMER TRENDS

Source: IRI Custom Database Total US Multi Outlet + Convenience.

Strong demand for differentiated products

Flowers organic bread share:

58.5

26.9%26.5%

26.0%

24.9%24.6%

24.4%

13 FY 14 FY 15 FY 16 FY 17 FY 52 WE07/15/18

Store Brand Fresh Packaged Breads Share Organic Fresh Packaged Bread Market

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TODAY’S CONSUMER

The market is changing as consumers expect more from their food

MORE CHANNELSIncreasing accessibility

MORE INNOVATIVESeeking the different

MORE RELEVANTFitting lifestyle, values

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STRATEGIC PRIORITIES TO CREATE VALUE

DRIVE GROWTH• Reinvigorate the Core• Capitalize on Adjacencies

IMPROVE PROFITABILITY• Generate Fuel for Growth• Develop Leading Capabilities

REINVIGORATING THE CORE BUSINESS

New Nature’s Own Perfectly Crafted reflects investments in brand growth and innovation The Wonder/USO

partnership drovein-store displays

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DKB GROWTH CONTINUES

Source: IRI Custom Database Total US Multi Outlet + Convenience, 12 weeks ended July 15, 2018

$56.9

$83.0

17Q2 18Q2

Total DKB Retail Sales(in millions)

+45.8%

Product launch in 17Q2 more than doubled share in Breakfast Segment

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MARKET SHARE OPPORTUNITIES BEYOND LOAF BREADS

$4.0

$1.9 $1.9

$3.4

$1.6

$0.3 $0.3 $0.1$0. 0

$0. 5

$1. 0

$1. 5

$2. 0

$2. 5

$3. 0

$3. 5

$4. 0

$4. 5

Traditional Loaf Specialty/Premium Loaf Sandwich Bun/Roll Breakfast/Dinner/Other

Billi

ons

Total Branded FLO


Brand extensions and M&A in adjacent segments #1 in

Traditional Loaf

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UNDERDEVELOPED GEOGRAPHIES ALSO A STRATEGIC FOCUS

Mid South, South Central, & Southeast

Northeast

Great Lakes & PlainsCalifornia & West


Bolt-on acquisitions are a key part of our growth strategy

13.7

37.0

24.5

24.8

4.7

27.141.8

26.4

28.2

25.6

22.1

24.1

7.2

32.337.8

22.7

OTHER BRAND

STORE BRAND

BBU

FLOWERS

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CAPITALIZE ON PRODUCT ADJACENCIES

Expand position and diversify in high-growth

bakery categories

Build on leading foodservice position• Expanding share of growing specialty products

o Moving beyond loaf and buno Breakfast items, dinner rolls are opportunities to increase share

Grow in-store bakery/deli• Grow specialty brands on the store perimeter

Grow in baked snacks• Evolve cake strategy to leverage dual-brand capabilities• Further diversify into snacking occasions

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STRATEGIC PRIORITIES TO CREATE VALUE

DRIVE GROWTH IMPROVE PROFITABILITY• Reinvigorate the Core• Capitalize on Adjacencies

• Generate Fuel for Growth• Develop Leading Capabilities

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FOCUSED ON REDUCING COSTS AND BUILDING CAPABILITIES

SCO2

Launched initiatives to achieve margin goals

ORGANIZATIONHeadcount

reduced ~9%1

PG&S$45m+ of gross savings realized

1. Employee count per form 10-K, FY 17 compared to FY 162. Supply chain optimization

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PROGRESS ON SAVINGS INITIATIVES

17FY-Act 18FY-Est

Gross Savings from Tracked Initiatives

$32M

$38M-$48M

• Anticipating 2018 input cost inflation of ~$40 million

• Incremental brand investments

• Inflationary pressures in commodities, wages, and freight

• Taking action to address inflationary pressures

PG&S, SCO, and Org cost savings initiatives are on track

WORKING CAPITAL IMPROVEMENT ENHANCING CASH FLOW

273.0

17.5 27.2

40.0 $ 322.2

$ 357.7 *

17Q2-TTM 18Q2-TTM

Operating Cash Flow Details

Pension Contributions

VSIP (1)

MEPP (2)

Operating Cash Flow

*Excludes the following:

$ 200

$ 155

17Q2 18Q2

Trade Working Capital

$45M YOY decrease

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Trade Working Capital = Accounts receivable plus Inventories less Accounts Payable(1) VSIP = Voluntary Separation Incentive Program(2) MEPP = Multi-Employer Pension Plan

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SECOND QUARTER 2018 SUMMARY:

• Sales grew 1.6% – achieved record second quarter sales

• Increased investments to drive consumer trial of new products

• Experienced inflationary cost pressures from commodities, labor, and transportation

• Addressed operational disruptions caused by inferior yeast

• Appointed COO to better align operations and enhance execution and accountability

FY 2018 OUTLOOK

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Revenue Change

Other

Adjusted EPS(1)

Flat to +1.6%

$1.00 to $1.07

Depreciation & Amortization $145 to $150 million

Net interest expense $11 to $12 million

Effective tax rate 25.0% to 26.0%

Diluted shares outstanding ~211.0 million

Capital expenditures $95 to $105 million

GAAP EPS $0.91 to $0.97

(1) Adjusted for matters affecting comparability. See non-GAAP reconciliations at the end of this slide presentation.

Risk Factors Impacting Back-Half:• Sales comparisons in quarter could be affected

by significant weather activity last year.

• Inferior yeast received in 18Q2 may result in softer-than-expected sales volumes.

• Labor markets remain tight with higher wages.

• Higher bakery workforce turnover is driving reduced manufacturing efficiencies.

• Freight and commodity inflation continues.

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LONG-TERM TRENDS & COST COMPONENTS

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

04FY 05FY 06FY 07FY 08FY* 09FY 10FY 11FY 12FY 13FY 14FY* 15FY 16FY 17FY

EBIT

DA %

of S

alesBi

llion

s

Sales Adj EBITDA Mgn**

Stable sales and margin profile

* 53-week year;** Adjusted for items affecting comparability. See non-GAAP reconciliations at the end of the slide presentation.*** Includes direct labor and indirect manufacturing expenses.

Ing & Pkg28.7%

Conversion***

22.5%

Shipping/ Distribution

22.7%

SG&A and Other14.6%

Adj. EBITDA**

11.5%

Components of Adj EBITDA**% of 17FY Sales

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BALANCED CAPITAL ALLOCATION

$86 $93 $102 $120 $131 $141 $19 $9 $39

$7 $126 $3

$318

$416 $395

12FY 13FY 14FY* 15FY 16FY 17FY

Dividends Share Repurchases Cash for AcquisitionsCapital Allocation Principles:

• Drive core business growth

• Strong dividend

• Investment grade credit rating

• Accretive acquisitions

• Opportunistic share repurchases

Focused on consistent, prudent use of capital

*53-week year

(Amounts in millions)

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INVESTMENT-GRADE FINANCIAL POSITION

$919

$759

$1,005 $958 $832 $826

13FY 14FY 15FY 16FY 17FY 18Q2

Since end of fiscal 2015,Reduced total debt and

capital lease obligations by $179M

$5 $11 $5 $4

$402 $406

18FY 19FY 20FY 21FY 22FY 23FY+

Total Debt & Capital Leases

At 18Q2,leverage ratio of 1.8X,

~$677M available liquidity on undrawn borrowing

arrangements

Total Debt & Capital Leases Aggregate Maturities at 18Q2

(Amounts in millions)

Maintaining flexibility to capitalize on value-creating opportunities

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OBJECTIVES FOR 2019 & BEYOND

• Deliver organic sales growth above categories

• Pursue accretive M&A opportunities

• Target long-term sales growth of 3% to 4%

• Execute on initiatives to realize 250bps of EBITDA margin expansion by fiscal 2021

• Achieve long-term EPS CAGR of 8%-10%

• Dividend yield of 2%-3%

Well-positioned to deliver solid returns over the long-term

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FLOWERS LONG-TERM OPPORTUNITY

Leader in a huge category that is relevant to consumers and profitable for retailers

Has strong competitive advantages and a robust platform for continued growth

Adapting to an ever-changing marketplace to drive shareholder value

Clear strategic priorities to create shareholder value

Well-positioned to deliver top-tier shareholder returns

REGARDING NON-GAAP FINANCIAL MEASURES

The company prepares its consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). However, from time to time, the company maypresent in its public statements, press releases and SEC filings, non-GAAP financial measures such as, EBITDA, adjusted EBITDA, adjusted EBIT, EBITDA margin, adjusted EBITDA margin,adjusted net income, adjusted operating income, adjusted operating income by segment, adjusted EBIT by segment, adjusted EPS, adjusted income tax expense, adjusted selling,distribution and administrative expenses (SD&A), gross margin excluding depreciation and amortization and the ratio of net debt to adjusted EBITDA. The reconciliations attached providereconciliations of the non-GAAP measures used in this presentation or release to the most comparable GAAP financial measure. The company’s definitions of these non-GAAP measuresmay differ from similarly titled measures used by others. These non-GAAP measures should be considered supplemental to, and not a substitute for, financial information prepared inaccordance with GAAP. The company defines EBITDA as earnings from continuing operations before interest, income taxes, depreciation, amortization and income attributable to non-controlling interest. The company believes that EBITDA is a useful tool for managing the operations of its business and is an indicator of the company's ability to incur and serviceindebtedness and generate free cash flow. EBITDA is used as the primary performance measure in the company's 2014 Omnibus Equity and Incentive Compensation Plan. Furthermore,pursuant to the terms of our credit facility, EBITDA is used to determine the company's compliance with certain financial covenants. The company also believes that EBITDA measures arecommonly reported and widely used by investors and other interested parties as measures of a company's operating performance and debt servicing ability because EBITDA measuresassist in comparing performance on a consistent basis without regard to depreciation or amortization, which can vary significantly depending upon accounting methods and non-operatingfactors (such as historical cost). EBITDA is also a widely-accepted financial indicator of a company's ability to incur and service indebtedness. EBITDA should not be considered analternative to (a) income from operations or net income (loss) as a measure of operating performance; (b) cash flows provided by operating, investing and financing activities (asdetermined in accordance with GAAP) as a measure of the company's ability to meet its cash needs; or (c) any other indicator of performance or liquidity that has been determined inaccordance with GAAP. The company defines adjusted EBITDA, adjusted EBIT, EBITDA margin, adjusted EBITDA margin, adjusted net income, adjusted operating income, adjustedoperating income by segment, adjusted EBIT by segment, adjusted EPS, adjusted income tax expense, adjusted selling, distribution and administrative expenses (SD&A), respectively,excluding the impact of asset impairment charges, Project Centennial consulting costs, lease terminations and legal settlements, acquisition-related costs, and pension plan settlements.Adjusted income tax expense also excludes the impact of tax reform. The company believes that these measures, when considered together with its GAAP financial results, providesmanagement and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges. Net debt toEBITDA is used as a measure of financial leverage employed by the company. Gross margin excluding depreciation and amortization is used as a performance measure to provide additionaltransparent information regarding our results of operations on a consolidated and segment basis. Changes in depreciation and amortization are separately discussed and includedepreciation and amortization for materials, supplies, labor and other production costs and operating activities. Presentation of gross margin includes depreciation and amortization in thematerials, supplies, labor and other production costs according to GAAP. Our method of presenting gross margin excludes the depreciation and amortization components, as discussedabove. The reconciliations attached provide reconciliations of the non-GAAP measures used in this presentation or release to the most comparable GAAP financial measure.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

17FY 16FY 15FY 14FY 13FY 12FY 11FY 10FY 09FY 08FY 07FY 06FY 05FY 04FY

Net Income attributable to Flowers Foods, Inc. 150,120$ 163,776$ 189,191$ 175,739$ 230,894$ 136,121$ 123,428$ 137,047$ 130,297$ 119,233$ 94,615$ 81,043$ 61,231$ 50,774$ (Income)/loss from discontinued operations, net of tax - - - - - - - - - - - (6,731) 1,627 3,486 Cumulative effect of a change in accounting principle - - - - - - - - - - - 568 - - Net income attributable to noncontrolling interest - - - - - - - - 3,415 3,074 3,500 3,255 2,904 1,769 Income tax expense (benefit) (827) 85,761 103,840 92,315 91,479 72,651 68,538 73,333 74,047 67,744 54,970 45,304 39,861 35,071 Interest income, net 13,619 14,353 4,848 7,341 12,860 9,739 (2,940) (4,518) (1,426) (7,349) (8,404) (4,946) (6,337) (8,826) Depreciation and amortization 146,719 140,869 132,175 128,961 118,491 102,690 94,638 85,118 80,928 73,312 66,094 64,250 59,344 56,702

EBITDA from Continuing Operations 309,631 404,759 430,054 404,356 453,724 321,201 283,664 290,980 287,261 256,014 210,775 182,743 158,630 138,976 Asset impairment and facility closure costs/divestiture - 24,877 4,507 9,301 - - 4,414 - - - - - - - Lease termination depreciation impact (1,844) - - - - - - - - - - - - - Multi-employer pension plan withdrawal costs 18,268 - - - - - - - - - - - - - Pension plan settlement loss 4,649 6,646 - 15,387 - - - - - - - - - - Legal settlement 6,543 10,500 - - - - - - - - - - - - Project Centennial consulting costs 37,306 6,324 - - - - - - - - - - - - Restructuring and related impairment charges 104,130 - - - - - - - - - - - - - Acquisition-related costs - - 6,187 - 17,776 9,560 6,240 - - - - - - - Divestiture/Bargain purchase gain (28,875) - - - (50,071) - - - - - - - - -

Adjusted EBITDA 449,808$ 453,106$ 440,748$ 429,044$ 421,429$ 330,761$ 294,318$ 290,980$ 287,261$ 256,014$ 210,775$ 182,743$ 158,630$ 138,976$

Net Sales 3,920,733$ 3,926,885$ 3,778,505$ 3,748,973$ 3,732,616$ 3,031,124$ 2,759,367$ 2,560,787$ 2,600,849$ 2,414,892$ 2,036,674$ 1,888,654$ 1,715,869$ 1,551,308$

Adjusted EBITDA Margin 11.5% 11.5% 11.7% 11.4% 11.3% 10.9% 10.7% 11.4% 11.0% 10.6% 10.3% 9.7% 9.2% 9.0%

Flowers FoodsReconciliation of Net Income to Adjusted EBITDA

(000's omitted)

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For the 12 Week Period Ended




Trailing 52 Week Period Ended

October 7, 2017 December 30, 2017 April 21, 2018 July 14, 2018 July 14, 2018

Net income (loss) (33,571)$ 78,533$ 51,247$ 45,442$ 141,651$ Income tax expense (benefit) (22,925) (34,709) 18,534 4,337 (34,763) Interest expense, net 2,730 2,563 2,901 1,748 9,942 Depreciation and amortization 32,972 32,431 44,189 35,098 144,690 EBITDA (loss) (20,794) 78,818 116,871 86,625 261,520 Project Centennial consulting costs 7,050 5,461 6,432 2,215 21,158 Restructuring and related impairment charges 100,549 3,581 1,259 801 106,190 Multi-employer pension plan withdrawal costs 18,268 - 2,322 - 20,590 Pension plan settlement loss 3,030 1,619 4,668 1,035 10,352 Legal settlement 4,253 1,475 1,350 8,345 15,423 Loss on inferior ingredients - - - 3,884 3,884 Adjusted EBITDA 112,356$ 90,954$ 132,902$ 102,905$ 439,117$

Flowers Foods, Inc.Reconciliation of GAAP to Non-GAAP Measures

(000's omitted)

Reconciliation of Net Income (Loss) to Adjusted EBITDA

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As ofJuly 14, 2018

Current maturities of long-term debt and capital lease obligations 9,706$ Long-term debt and capital lease obligations 816,126 Total debt and capital lease obligations 825,832 Less: Cash and cash equivalents 29,554 Net Debt 796,278$

Adjusted EBITDA for the Trailing Twelve Months Ended July 14, 2018 439,117$ Ratio of Net Debt to Trailing Twelve Month EBITDA 1.8

Reconciliation of Debt to Net Debt and Calculation of Net Debt to Trailing Twelve Month Adjusted EBITDA Ratio


(000's omitted)

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Net income per diluted common share 0.91$ to 0.97$ Project Centennial reorganization and consulting costs 0.04 0.05 Loss on inferior ingredients 0.02 0.02 Legal settlements 0.03 0.03 Pension plan settlement loss 0.02 0.02 Multi-employer pension plan withdrawal costs 0.01 0.01 Adjustment to prior year provisional tax reform benefit (0.03) (0.03) Adjusted net income per diluted common share 1.00$ to 1.07$


Reconciliation of Earnings per Share - Full Year Fiscal 2018 GuidanceRange Estimate

Documents

BARCLAYS GLOBAL CONSUMER STAPLES CONFERENCE …/media/Files/F/Flowers... · 2018-09-04 · BARCLAYS GLOBAL CONSUMER STAPLES CONFERENCE SEPTEMBER 2018 1. REGARDING FORWARD-LOOKING