Q3 2020 Flowers Foods Inc Earnings Call

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Thank you for standing by and welcome to the flowers Foods third quarter question and answer session Conference call.

I would now like to hand, the conference as the T.J.T. Wake Senior Vice President Finance and Investor Relations. Thank you. Please go ahead Sir.

Thank you operator and good morning.

Hope everyone had the opportunity to review our earnings release and presentation and also listened to our prepared remarks, all of which are available on our investor Relations website.

Following the conclusion of todays Q and a session. We will also post an audio replay of this call.

Please note that in this Q and a session. We may make forward looking statements about the company's on performance. Although we believe these statements to be reasonable they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks important factors relating to flowers foods business are fully detailed in our SEC filings.

We also provide non-GAAP financial measures for which disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website.

Joining me joining me today are rising Bowman, president and CEO and Steve Kinsey our CFO.

With that Deborah can we begin to queuing day.

Deborah we're we're ready to start the Kenai. Please.

Thank you can you hear me now yes.

Yes, Okay Im sorry.

Sure.

To ask a question.

You May press Star one on your telephone keypad.

That is star one to withdraw your question press the pound or hash key please stand by while we compile the Q and a roster.

And your first question comes from Bill.

Bill Chappell with two tourists securities.

Thanks, Good morning.

Hi, Bill.

Hey.

I guess can you talk a little bit more about just just what you're doing or what you're seeing on the price mix I mean in terms of.

The move of consumers more to branded and trying to understand you know.

I guess first from a manufacturing standpoint, I mean are you starting to change your mix, where you're actually making less a private label and making more branded just to reduce kind of sales and out and.

And then at the same point is.

Is this really all just a brand migration or is there any pricing.

Yes, so just to start with the manufacturing concept Bill I mean.

As you know we have pretty flexible manufacturing facility. So the same plant that makes brand oftentimes makes private label twos, its very easy for us to shift you'll.

Along with the the consumer dynamics from private label to two brand.

But to layer on top of that if you. If you think about the Lynchburg bankers, probably a great example of.

Moving up the of the mix chain are up the margin Jane then or how you want to look at it towards our higher margin products and adding production capacity to serve the market that way.

From a pricing standpoint.

Not not too much we haven't seen too much pure pricing this year, but the promotional environment is certainly well than the historical levels.

So average base prices or I guess were up some.

We have seen that start to tick back up a little bit more recently, but still well off the historical levels.

Got it I guess.

What I'm trying to understand the migration to brands I mean, there's one benefit from going from private label to wonder if there's another one going up to Dave's killer bread, which is the bigger driver or is it kind of all the above.

Yes, I mean, it's you kind of in totality, you're right in what you say I mean, the the D. Kb margins and the nature's own margins together would be higher than wonder and some of the other brands, but in any shift out of that lower margin business to high more higher margin business in totality helps the bottom line.

Okay, Dk and DKL be obviously is a tremendous growth driver canyons been a big driver growth driver this year and buses carry very high margins.

Got it and then looking to next year I realize you're not giving a.

Guidance, but but.

Two questions one yeah.

What kind of impact on your business is the fact that.

70% of U.S. school children are going to school at home or virtually or hybrid ended that might change and hopefully for a lot of us are.

It sometime in 2021, yeah does that does that is it a positive or negative impact in the same thing I think Steve you had mentioned there was a variable comp component, which understandably everyone is having a good year, what kind of switches that turn into a tailwind as you can to reset that to normal normal numbers for next year. Thank you.

Yes, sure Bill, let me take the schoolchildren piece and I'll I'll pass it to Steve for the for the incentive comp.

Yeah, I mean is there sort of puts and takes to the kids being home right. I mean, we sort of missed the back to school.

That we normally get in the in the fall with all the all the kids staying home or or having going and getting pull back. But then again you on the other side of the equation you have elevated in whole meeting if the if the children are home all day, which is really what we saw at the outset of this right I mean, everybody sitting around at home kids at home parents at home. So you get that you.

I get that increase and at home meeting so there's a little bit of a balance and put some puts and takes there is a little hard to separate them and quantify them but.

Yes, I guess at the end of the day.

I know, there's probably going be a lot of questions about about 21. This morning, So might as well go ahead and make a few comments around that now.

Obviously as you might as I'm sure you can appreciate it.

It's pretty tough to plan for next year, just given the outsized year. The 2020 has been but there's two ways. You can think about it you can sit here and try to guess what the demand environment, you know is going to be.

In 2021, and beyond or you can sit here and figure out what strategies do you need to put in place to drive that demand environment and that's what we're trying to do through our portfolio strategy through the brand support that we continue to.

Increase and bring to bear to grow are to grow our brand. So you can you to cups take whats your given or control what you can control and try to drive that brand environment was good innovation, great quality and brand support so that's kind of how we're we're approaching next year, Steve you want to address the incentive comp sure.

Obviously billions of you're right as you look at the year and you can see through the through the comments on the financials that ended that we've we've raised guidance and brought up the lower end as the year progress that has been.

Outperformance compared to where we.

We thought coming into the year. So obviously, that's flowing through the Pinedale this year.

As we plan for next year, and we set targets and goals.

We won't give it you just specifics around incentive comp, but we do expect things to normalize somewhat because obviously, we'll set our goals in line with what we think expectations are and while there will be a bit of a tailwind for this year.

We expect the incentive comp to be somewhat more normal going into 2021.

Okay, great. Thanks, so much thank.

Thank you Bill.

Your next question comes from Brian Holland.

D.A. Davidson.

Thanks, Good morning, and congrats on the continued strong results I was wondering.

First about.

For Q.

Yeah, clearly what was the you know at least in my model pretty high bar that I set for you in Q3, then if I look at the guidance revision.

You know you you know the low end is above what.

What my motto implies for Q4 now now certainly it's possible that just not doing.

But I.

Assuming assuming that there's no real issue there I'll ask the question you know anything incrementally stronger building into year end, because it does feel like a pretty marked improvement in guidance.

Yes, I'll, let Steve comment here as well, but.

Nothing specific I would call out I mean, we as I said earlier, we continue to see pretty good trends from a branded retail standpoint, I mean, you see that data as well so.

Still pretty pretty elevated and we don't as far as we can see we don't see that dropping off substantially.

You know the headwinds in Q4 always the holidays for us, which is a very strong role season, which is not a huge part of our portfolio. So it kind of depends on how the holidays go to but you know.

On the upper end of the range you're seeing.

Continued elevated branded retail as we have been seeing it it's sort of you know in recent.

In recent weeks kind of plateaued.

And been pretty steady kind of kind of week over week. So if we continue to see that we feel good about the upper end.

Obviously, the lower end of it will reflect some.

Relatively meaningful drop off and in the branded retail mix, Steve any other commentary you want to.

Specifically I mean, I think Ralph cover the majority of it but just to remind folks Q4 is typically our toughest quarter as you look at the year as things progress and Rouse did call out the.

The fact, and we did call out in the release released the pre recorded content.

There's actually there's three holidays in the fourth this year, even with the extra week.

And typically that business.

It was roll business and our strength is more on the low side. So we.

We are taking a little cautionary look kind of around the holidays, but as Ralph said, if it does branded mix continues to perform well.

Thanks should shape up rather nicely for the quarter.

Yeah, and I should just clarify it I mean I do have the extra week in but I am looking for mid single digits in the branded retail segment Q4, Youre clearly outperforming that in the scanner data that we can see thus far so right.

Anyway, just to clarify that on my end.

Key dynamics that seem to be willing to take a <unk> based.

Based on some other food companies that we have for putting this earnings season that have weighed on you in the past one we're hearing about tight labor markets.

You know and costs related to that and then also we have freight.

Labour seems like Thats, a a particularly acute issue for you guys given the the manual intensive.

Manufacturing and then on the freight side.

2017, 2018, you guys actually have a lag impact as I as I recall.

Kind of given the way you go about that but.

Just curious obviously any comments on the labor side, how we should be thinking about that going forward and then on the freight side just thinking about.

How you manage that what we saw in 2017 into 2018, and how that impacts you and maybe what changes did you make that might allow you to mitigate those factors in 2021. If this continues thanks.

Sure. Thanks, Brian I will take the labor market piece, and maybe let Steve address the transportation side of it.

Yes look the labor markets.

We continue to be a bit of a challenge depending on where you are if.

It's not it's not acute everywhere, but we certainly have some areas, where we continue to struggle that just kind of keeping people keeping turnover down.

Then you have the overlay of Covance, you have folks calling out for one reason or another.

It does present some challenges in the plant in fact.

Despite our excellent results, we still have a lot of opportunity in our plants, our efficiencies are down a bit.

Even from last year.

That may seem counterintuitive with the results that we've had but you get the volume drop off plus you have higher.

Higher scrap rates and things like that that are directly attributable to the stability of your of your labor Force. So you have a lot of effort to try to bed that down in particularly at where it's where it has been most acute because there is some meaningful improvements that we can that we can make there I think beyond that we've talked about before.

Really working on our overall work environment.

Yes, I'm, making sure that our that our pay scales obvious or competitive that's one element, but also working on things like scheduling because we find as many other companies have found that.

Theres a huge quality of life component at play today that is often times equally or more important than the compensation. So you are working on our scale, our scheduling to give more clarity to particularly our frontline employees on when they will have time off trying to ensure that they have consecutive days off where possible which is.

A significant departure from the norm in our industry those types of things really do make a difference. So we continue to work on that as well Steve on freight sure Bill.

So we've benefited somewhat this year from the fact that your mix is more DSD driven so as you recall that we terminate US a closed loop system, we actually have three to four primary care carriers for for our DSD products that deliver to our Dcs. So those contracts are.

Usually negotiated on a.

12 to 24 month cycle. So we're not into <unk>, we're not in the true market.

Buying so much freight as we do typically our warehouse business. So we have seen some benefit for that so if this mix continues into 2021, we would expect some of that to continue until we begin to lap some of it late in Q1 also I would say.

As Rob alluded to on the labor side and be more efficient.

That we've gotten more efficient from a production standpoint, and our our runs we have better.

Transportation running efficiency as well because we were sending for trucks to these dcs versus.

Assuming half loads, so that's impacted us as well and again Thats a mix that's mixed driven so if that continues through 2021 I would expect to come.

We continue to see somewhat stable transportation.

Going into next year as well and then obviously fuel costs will will impact that as well and.

So I would say those are probably the three or four factors that really influenced transportation for us.

Well. Thanks appreciate all the color I'll leave it there best of luck going forward. Thanks again, thanks, Brian.

Your next question comes from Mick can you address sort of launch.

Company.

Hey, good morning.

Mitch.

Hey, so just.

Looking at current trends.

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Hi, foodservice been been ramping for you.

If you could break that out surely QSR and casual.

Sure.

The QSR business I think we've mentioned this on the last quarters, that's kind of a continuation of the trend. The foodservice is the fast food excuse me QSR business has been a bit quicker to recover just by its nature drive throughs that sort of thing you had checked delays the ones I see the lines are double wrapped around the store so they're doing they're doing pretty well.

Yeah, the sit down.

Last casual type stuff is still lagging it Mitch it's off the bottom.

But still still well down you can see that in the in the non retail numbers that we that we put out down roughly 14.5% or so.

But off the lows that we saw earlier in the year. So slow recovery. There I think it is going to be a long time.

My personal opinion.

And you kind of have to factor into that world what happens with with Cobot you have another surge, it's really going to get hurt you are seeing that start to happen in Europe.

With with a new lot downs and does that migrate migrate its way over here as we move into flows as it seeks flu season, we'll have to see.

So you know, it's it's trying to come back but it is it is slow and I think it will be I think it'll be protracted.

And is that so is that off the bottom in that.

In the third quarter.

As you as we're here in the fourth quarter or is it just sort of stabilized is that what you're saying yes.

Yes, if you will in the second quarter non retail for us was down 15.8%.

And in the third quarter it was down 14.7%.

So better but not by a whole lot okay.

Okay.

And then as you look into 21.

Broadly speaking in broad terms what type of.

Cost savings supply chain savings.

Oh part of that 20 million that you.

You had this year.

Yes, I mean are we talking about the same type of level of cost savings next year or is it does it drop off any color.

Around that.

Fraud is very is I'd, rather I'd, rather stop short of actually quantifying it but it is a continuation of many of the same initiatives. We had in place. This year. So it will be it will be largely first half waited until.

Until we lap it in the second half Mitch, but its across those same categories right. The overhead streamline it we did procurement depo consolidation all the things that we've talked about that is not to say that we're not working on additional incremental things.

But thats those are some of those are still in the planning stages, but yes. It will be it will be meaningful there will also be mostly first half weighted.

Okay and then just.

More.

So has the current environment affecting your ability to.

Gain new distribution or new getting new products on the shelf for your newer territories.

Have you ever or there is this is this is it's been good for you has this been neutral.

Any any any.

And any color around that.

You know it it really hasn't I mean, we've continued to to introduce new products saw the dk b bonds. The perfectly crafted line extensions that we talked about in the prepared remarks.

All that's happened in the midst of all this and we're not the only ones I mean, our competitors have put new products fourth.

We've gained new shelf space during this period.

Mitch no really meaningful geographic expansion during this but by the same token we weren't trying to.

We're really focused as we've talked about before on on places like the northeast where were still relatively low share. So we're there, but really trying to gain deeper penetration.

By gaining incremental shelf space and putting forth our brand support those types of things so from that standpoint, it really hasn't I'm Stephen.

Steve unless I'm missing something it really hasn't impacted us negatively.

Okay and.

And then just last question.

On tasty baking.

So I imagine it will not look I'm I'm, Mitch let me touch on Theres I do want to add one more thing to your question as I sit here thinking about it I do think in some ways that that the cobot circumstance has been a positive relative to new product introductions, because what we have seen in the mix shift is somewhat of a shock.

Shift away from traditional love to bundle.

Buns, and rolls and to breakfast items right and so as we've introduced new items in those categories from that standpoint, its actually been a positive rather than a neutral.

Okay got you yes.

Thank you I'll just wanted one more question about tasty cake, if you baking.

So where are we right now here in the fourth quarter with tasty baking is it are we are the operations sort of.

Optimized you know where you want them to be is this something that we're going to see you know slowly build into the first half next year and tasty.

Tasty cake sales.

Up or can you talk about.

Down in the third quarter.

I'll answer your question bluntly to start and then add some color, we're not where we want to be period.

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We are making improvements I'm extremely pleased with the job that David Roche is doing as you know he is one of our more seasoned operational executives is doing a great job up there.

With a very very difficult task, we have installed new automation. Most of that is complete we have made some management upgrades, we have even brought in some.

Some outside help.

To improve our operational processes.

We've been through.

Union contract negotiation and that is all settled down now.

So things are getting better match I think that your I forget the exact phrasing you use but I think it spot on that.

That I expect to see slow steady progress as we move.

Through next year, but if were successful I believe that slow steady progress will culminate in a meaningful improvement for the company next year.

Okay.

Yes, I love the way tasty with taste it was flat for the quarter, but let me point something out there.

The operational inefficiencies that we've been experiencing at Navy yard has impacted their toplines too because we've had to cut because of those inefficiencies and scrap Mitch we've had to cut product, which obviously impacts your topline so making these improvements will not only help the bottom line, but it will improve the top line as well.

Okay and then.

One more thing I, just I do like the new conference call format.

Good thanks.

So I appreciate you doing that.

Sure.

You bet.

Your next question comes from Brian Bedell of consumer edge research.

Hi, Brian.

Morning.

Is there any way you could provide detail about that.

The correction.

Start Brian last week parts of your business throughout the quarter I kind of talking about where they were to start the quarter and where they came at the end just see rather than that.

Is the question.

So that they see in intra quarter trajectory of private label is that what you're asking.

Yes, it does kind of private label and then also the non retail fortunate though.

I know, okay go down and improved a little bit, but it's harder to get the magnitude answered that month to figure out where that might be going.

I'm with you ride I don't have that in front of me I have the totals which you already have from from the release, we get we can look into that and come back to you, though I want to say it was fairly steady for the quarter, but let me check that.

Okay. Thank you and then one were talking a little bit more about private label.

The industry level.

We've been paying that down pretty significantly cantor.

We could build a share some of your perspective about the drivers of the industry decline, obviously producers such so I'd get LNG, that's either branded or star brand in.

And the margin advantage and not the reason.

But is there any commentary you could have about at an industry level.

Yes, I've I've talked a little bit about this before but it's it's a kind of a key question right I think I think it all started at the outset of the pandemic because you had this massive shift to brand because of capacity constraints right. So.

Yes, everybody was popping out as much.

Branded product as they could in a limited SKU assortment, but now as Weve may be found something something akin to a new normal now now what's driving it well I.

I think E commerce is one.

Yes. It is the brands are a bit more prominent on the ecommerce platform and obviously thats playing a much larger role today I think its time spent.

In in store is a lot shorter now number.

Number of trips are shorter people don't want to spend a lot of time wandering around the gross shore. So.

They they go for what day for what they want and in this particular case brand delivers more of what they want than perhaps the private label does there's more there's more differentiation there theres more innovation there some of which we're happy to have brought to the category. So I think those are probably the primary.

Primary drivers.

Okay and that kind of thing again, you're looking out to 2021 that that private label probably.

It's not going to be picking up quite as much given what you are talking about overall.

Yes, and that was certainly thanks, I mean, if we do.

If we do our job correctly, and we bring a compelling brand proposition to the consumer.

Then naturally hope that should lead them to stay with our with our branded products.

Yeah. If you if you think about it.

Deeper recessionary environment, and stimulus money running out and that sort of thing yet you could see some some trade down but the good news for US is that we play across a variety of different price point. So you've got your Super premium was up in the Dave and Dave's and Canyon area as you've got the premium nature's own and you've got a little bit more value.

On to wander into wonder area. So we're kind of we're kind of able to address all those price points with the brands that we have which we believe provides us. Some some insulation should you should you encounter a recession and if you think back to Oh eight or nine.

The last one we had we fared pretty well through that environment as we have through through prior recessions.

Thank you that's it for me.

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Okay. Thanks.

Thank you gentlemen, do you have any closing remarks.

No not except to thank everybody for their time and for your for your interest in the company I certainly hope you liked the new format, we certainly like it better.

Able to dedicate a little more time to your to your questions. So we appreciate you joining the call. This morning.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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