Q2 2021 Flowers Foods Inc Earnings Call
[music].
Good day, and thank you for standing by.
Come to the flowers foods second quarter 2021 results call at this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session.
To ask a question during the session you will need to press star one on Europe telephone these.
Please be advised that this conference is being recorded.
You require any further assistance please press star zero.
I would now like to hand, the conference over to your speaker today.
J B, Rick Senior Vice President of Finance and Investor Relations. Sir. Please go ahead.
Thank you operator, and good morning, I hope everyone had the opportunity to review our earnings release listened to our prepared remarks and view the slide presentation that we're all posted yesterday evening on our Investor Relations website. After today's Q&A session. We will also post an audio replay of this call. Please.
Please note that in this Q&A session. We may make forward looking statements about the company's 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.
Also provide non-GAAP financial measures for which disclosures and reconciliations are provided in the earnings release and at the end of the slide presentation on our website.
Joining me today are miles enrolling president and CEO and Steve Kinsey our CFO.
Operator, we're ready to start the Q&A. Please.
Thank you Sir again as a reminder, if you would like to ask a question simply press Star then the number one on Europe.
Often span.
We have our first question from the line of Bill Chappell from true is securities. Your line is now.
Thanks, Good morning.
Bill.
Just.
One of the things we've heard from.
Several or multiple food companies over the past month month, and a half is that there's been a meaningful for whatever reason trade up from private label to branded.
The THAAD as stimulus checks or other issues, though no one can quite figure it out and clearly that had some impact or continues to have some positive impact on your business. So I guess the question is do you see this as a sustainable shift.
Or do you think that people will move back towards private label, which could put margin pressure as we move into the back half of this year or into next year.
Yes, good question Bill.
Our category with private label being historically, so ever developed we were actually seeing these private label declines even prior to the pandemic.
And I think we've mentioned that on a couple of a couple of prior calls we've actually done a fair bit of research consumer insights research and into why that trend is continuing and almost accelerating really and it really comes down to.
In our category there is there's a distinct lack of differentiation in private label.
Yes.
Basic white and wheat bread and buns, whereas in the category.
Flowers has participated in this obviously you have a lot of differentiation with the new perfectly crafted brioche roles with things like Dave's killer bread and Canyon and that's yeah, that's driven a bit of a premium amortization process up to branded from private label.
Whether it's sustainable or not I actually think it is and that's why we're making all the investments, we're making behind our brands and marketing support et cetera.
If you if you get into.
A recessionary.
Situation, you could see some move back to value.
But even though in the last recession that we saw in sort of <unk> nine we didn't see that much of a move back to private label, even even then.
But I guess did you see a step change.
In this current quarter or is it just more of a continuation of the trend, it's really more a continuation of the trend.
Private label continues to fall and branded retail continues to hold up very very well.
Great and then just on the cost front same thing hurt a lot.
Sure.
Tears talk about especially more on freight.
And incremental costs you seem to.
April to raise EPS guidance for the full year. It seems like it's less of an impact is that largely due just to the way your supply chain distribution works or is there something else that that's helping you offset these costs, yes parts, partially thats it and Steve can jump in here too, but yes, that's partially the DSD networks a bit more of a close.
Closed loop system, so we're not as exposed to the long haul freight.
And then the other thing I would say is with our with our hedging strategy being four to seven months out sometimes a little bit longer yes that gives us good visibility in advance of what our costs are going to be and we can be proactive about mitigating those costs, Steve anything you'd add to that no. I mean, I think as we said earlier bill in the year, we know we had pretty good visibility.
And to our overall cost structure for this year.
Obviously.
Inflation in the back half a little heavier, but we think we've taken the right steps to mitigate most of that and as Ralph said on transportation.
We're not immune to the increases, but we'd still like.
For 2021.
Contracts that protected us the best they can.
Got it thanks, so much for the color.
Thanks Bill.
Thank you. Our next question is from the line of Mitch Pinheiro from said event and company. Please go ahead.
Hey, good morning, Hey.
You bet.
Just just following up on Bill's question.
Regarding private label.
It is the retailers view.
<unk>.
Their private label offerings.
Changing as well.
Shelf space allocation.
Are they looking for.
<unk> premium is private label.
To a greater extent trying to key.
Key private label or is that really not one of their strategies and.
They're willing to let the market go where it goes.
And we will reallocate shelf space can you give us some.
Color on that yes.
Yeah, I mean, we've had some we've had some isolated discussions about that but nothing.
Nothing broadly in the market, we're not hearing much about wanting to premium is private label or anything like that to this point you know probably the one exception for us the one area of private label continues to do well.
<unk> canyons private label gluten free that's probably the one call out and private label Thats actually showing some growth in our in our portfolio.
But also as part of your discussions.
Are they looking for reduced shelf space for private label I mean, clearly the dollar value in their gross margin.
Right.
You know.
<unk> of the brands versus private label would suggest I would think.
Yes.
More allocation to the branded shelf space, but is that happening at all for.
Again, I would say that it has happened to some extent, but we haven't seen any any broad.
Sort of market wide moves to take shelf space down, but there has there have been some some isolated customers where that's been reduced and you also have.
You also have.
The labor situation.
Kind of happening to everybody that debt.
That limits somewhat limits.
The ability to two.
To provide all of the all of the Skus.
Out of this pandemic and this whole labor situation.
We've had to we've had to in some cases limit some of our Skus and so that has had some some effect on the shelf space allocation, but as far as the overall private label allocation. There has been no meaningful change really.
Okay.
Is there is there.
Are there any pricing changes.
Private labels.
Is it is it a volume decline or is it is there pricing going up you talked about that a little bit yes.
Yes, I mean, we have taken some pricing over the last several years in private label, yes. Okay.
Yeah.
In terms of Covid.
Part of your part of the whole strategy or some of the benefits of Claris gets us from.
Gaining share in that.
And lower penetrated newer markets there were flowers that is and.
You could call out geographically strengths or weaknesses.
Your territory.
Yeah, I mean, we've been calling out the northeast for the for the last several quarters is a focused market for us we continue to make investments up there and the good news is we're seeing share gains there.
We had we had a good quarter in the northeast we continue to gain share on the West Coast you know another another really strong market for us.
Obviously, we're we're we're super strong in the South I mean, Mitch as you know the big the big hole or opportunity for us is that whole upper Midwest QUADRA.
Okay.
And then just a couple more in terms of.
What what's happening with snack cakes and tasty cake in particular.
Progress on your profitability.
Yeah, Yeah. Thanks for asking really good progress at Navy yard again, I'll say, we're not we're still not where we want to be but the trajectory is really good the.
The team's done a great job up there are our automation investments are paying off in scrap rates are coming down.
Labor in the Cape market is in the cake plants rather.
Continues to be a bit of a challenge. It's just the nature of the cake bakeries with with more people in there, but overall, we've been able to manage through it really well. We've we've also done some things on the commercial side Mitch from a price promotion standpoint to.
To make us more competitive there so all signs are pointing in the right direction in fact.
Relative to our internal goals, we're actually ahead of plan there.
Okay, and then I guess.
Final question is when you look longer term and you looked at it.
Your margin profile.
I think you mentioned I think either in this quarter.
While mix is certainly a powerful help for you.
Do you have productivity and you have your whole.
At work optimization to support further margin improvement but.
Yes.
Wow.
It just seems that the branded versus non branded mix is still going to be the most important part.
Hum.
<unk> and.
I'm curious as to a if you agree with that and B you know what.
<unk> been doing.
Right.
Vic.
Specifically, you're doing to create the positive mix going forward.
No absolutely and I agree with you I mean, the whole notion of shifting more of our mix to branded retail is the most powerful tool we have to.
To improve our overall margin profile, but all the other things you mentioned, whether its network optimization, whether it's our marketing investments whether its our digital transformation are all intended to support that mix shift to branded retail.
You it all rolls up to the same strategy of over time shifting more of our mix two brands. Both the brands, we have today and hopefully the brands will have tomorrow with future M&A.
Okay, and then just I actually said almost all my questions speaking of M&A is that.
Can you talk about.
<unk> pipeline or maybe the environment.
And M&A right now.
Sure It really no change from last quarter I mean, its deal activity continues to pick up.
We're looking at quite a few things right now which is a welcome change from last year, when it really kind of dried up so.
So we're happy with the pipeline and Mitch it's nice to be in a position that we're in that we've got the we got the balance sheet to act.
When when the timing is right.
Okay. Thank you I'll get back in the queue.
Thanks, Matt.
Thank you. Our next question is from Ryan Bell with consumer Edge Research. Please go ahead.
Hi, how are you guys.
Right.
Okay.
Touching maybe a little bit more on the inflationary environment.
And the impacts.
The rising costs.
Can you talk about maybe your ability to take pricing as we get into the end of the year in 2022.
Yes, I mean, obviously, we're not going to talk about 2022 today, we're not prepared at.
At this point to give guidance.
Although it is on our mind given the inflationary environment, we're in we've seen pretty.
Substantial runs like most other companies, regardless of which industry or segment Europe Youre operating in.
All experiencing pretty tremendous inflation.
I would say for.
For 2021, and I think we talked about in our prepared comments.
In the back half.
Pretty confident in our overall cost structure and also confident in the measures we've taken to mitigate.
Inflation the way we have weather that was.
Pricing I think youll see promotional efficiency, which we saw in Q2.
A lot of our projects are on track.
With regard to efficiencies.
Kind of productivity.
And we expect really to use kind of the same tools going into 2022, but beyond that no.
Can't really comment about.
Beyond this year.
Hey, Brian one thing that I would add to it and we mentioned this a bit in our prepared remarks is if you think back to the to the last inflationary period significant inflationary period that we saw sort of the seven or eight.
Period, we were a much different excuse me a much different company back then.
Market share was a lot lower we really only had one sort of quasi national brand and nature's own and then you fast forward to today and we've got.
And roughly an 18 share we've got nature's own and expanded nature's own now with perfectly crafted as well we've got days, we've got Canyon, we've got wonder and so the brand portfolio a portfolio. If you will is quite a bit stronger than it was which also gives us greater confidence that we can we can pull that lever to the extent necessary.
To help mitigate any any rises in cost.
Okay. Thank you that's helpful and then.
Could you talk about how youre thinking of.
Back to school season in terms of your guidance.
You're assuming about the season and sort of what would change potentially.
To your base case.
Given some of the variability that we would see with the Delta variant.
Back to school and other types of getting back to normal.
Yes, our perspective on that has changed markedly since the first of the year. When we when we first issued guidance and then with the vaccine rollout we were kind of planning for what that was going to look like and how that was going to.
The market dynamics.
And now here, we find ourselves right at the beginning of back to school season, and we've got this.
Delta variant that surging significantly across the across the country. So our perspective has changed as the as the dynamics out there have changed and obviously, it's hard to say we had originally expected that.
The back to school season will give us a really good indication of what the.
The new normal might look like in a more steady state going forward.
The rise of the Delta variant has brought that somewhat in the question and they pushed that timeline out a bit now.
And obviously in our results through Q2, and even the beginning of Q3, we're continuing to see very strong branded retail performance.
In line with what we've been seeing for the first part of the year. So it's going to be a little bit of a wait and see I would've thought that back to school would have and people starting to return to office would would have given us a better indication, but I think thats gotten pushed out a little bit now.
Thanks, that's helpful and would you be able to.
Maybe a little bit more detail about some of the shifts in your Capex guidance. This year I know you took it down.
A little bit.
And you said that it was largely due to delays from the pandemic the.
The expectation for that just to shift out to next year.
Yes, I mean, the majority of that will just roll into 2022 I mean, the reality is there is no. One I would say one specific large project that was impacted it's kind of across the whole.
Just some delay in timing and getting equipment in for some of the projects.
Yeah.
Thanks, and then just the last one for me how would you feel just about the general longer term impacts of incremental at home demand I think that its pretty evident at this point that is going to be incremental work from home relative to 2019.
So could you potentially share some of your thoughts.
How about the extent of the potential impact to your business over the next few years.
Yes, I'd be happy to frankly, Brian I'm quite optimistic about it I mean, I think there's been a fundamental shift.
In several things.
Some good and some not so good the good parts are I think that.
The future of work is going be a lot different.
We here at flowers are going to be doing it differently permanently and many other companies or as you as you read or are doing the same thing and I think that that that shift or that change in mindset really only benefits are.
Our business.
With more people eating at home more sandwiches consume whatever it might be.
I think we're very well positioned coupled with that.
Our commitment to innovation and continuing to bring new and exciting offerings to the consumer.
That's going to continue to be really important for us to drive future growth. So.
I'm frankly really optimistic on the on the negative side.
The labor situation continues to be difficult.
As we read across every industry, whether service manufacturing or otherwise it's.
It's a difficult situation, it's tough to attract and retain people right now so.
So far we've done a really good job of managing through it it has not been easy.
But we've been able to continue to serve the market effectively throughout this period, but it is a challenge and we're having to re look at how we view labor in the bakeries, and we'll probably have to make.
Both some short term and long term changes to how we approach that because I think it's more than just extended unemployment benefits I think theres been a systemic change of how work is viewed in this country.
Great. Thank you Scott.
Thank you. Our next question is from the line than Denver, New its defense. Your line is now open.
Hey, Thanks, good morning.
Hey, Bill.
Ralph I wanted to follow up on that on the compensation side of things you talked about reviewing compensation.
I'm wondering where you are today in that process whats considered in your guidance with respect to compensation and benefits for the balance of the year in fiscal 'twenty one.
And then you talked about a combination of short and long term.
It sounds like Youre being holistic with how you approached us.
And more surgical can you can you talk about your mindset and kind of what youre seeing today relative to normal and how you feel about your ability to kind of ameliorate those dynamics.
Sure I mean for 'twenty, one I wouldn't I wouldn't worry about it too much.
From a wage standpoint, because for one thing I think it's more than just wages that are the issue now certainly we will look at that we do periodically look at at any way to make sure that in each of our markets that our bakeries are competitive but.
Again, the whole dynamics change what you used to look at as your peer set and.
In manufacturing has changed we used to look at other other food companies are warehouses will now youre competing against Amazon Youre competing against Tesla and with all the government payments coming in and you're competing with the government.
So it makes it makes it pretty difficult. So youre right were taking a holistic look because I don't believe its only about compensation it could be to some extent and we want to remain competitive.
But I think the quality of life factors are even more important and what I mean by that is the bank.
Occurs can be hot that can be unpleasant the summertime what can we do.
To improve the overall working environment.
<unk> the bakeries were looking at different uniforms, we're looking at different cooling systems et cetera.
Those types of things, but one of the biggest issues for us and I've mentioned this before is scheduling in the bakeries.
Working in our bakeries tough job and we're running the bakeries really hard, particularly right now with the labor labor.
Shortage and we've had.
Increases in overtime and things because of that our folks are working really hard.
That's not a situation that you want to sustain for too long. So what can we do from a scheduling standpoint.
To give more consecutive days off more and more.
Victims or predictable rather.
Schedule, so that people can plan their childcare or doctor visits or what or whatever it might be in daily life that they need to do so we're looking at myriad number of things to.
To help mitigate this and I'm glad that we are because.
Ben I don't I don't think that this is a temporary situation.
Okay.
Yeah, Okay. It makes sense.
And then you noted promotional efficiency contributed to better price mix can you talk about what's happening there is it that kind of return to normal or a new normal dynamic around consumer behavior is sustaining volumes better than you thought.
Is it initiatives that you have in place maybe just help us understand what's going on there and.
Kind of the glide path associated with that how repeatable is that dynamic.
Yes, sure I'll, let I'll start and Steve can chip in if he has something else, but yeah. The.
The overall promotional environment has been pretty steady for a while now.
And it's really in our category I would call. It at least five year lows and that's been that's been pretty steady.
And with the demand for branded retail price I don't see that changing anytime soon.
We also internally do a much better job with our TPM system than we did historically at managing our promotions and only only.
Pursuing those that have.
Our high return associated with them and so.
Both the kind of the macro environment is supporting this but also our internal efforts at being more efficient with our promotions is helping Steve anything you'd add.
<unk>.
<unk> point about systems.
Really can't be.
Emphasized enough I mean, the last couple of years, we've worked really hard.
On implementing some new technology and it gives us great visibility.
Like we talked about in Q1.
Promotional activity is pulled back quite a bit so it was really about not getting price.
Our inflation comes in the back half.
It does.
With more true pricing would show up.
I'd say, so we've been really pleased kind of with the promotional.
Environment and the levels we've seen.
Yes.
And a big part of the margin.
The equation.
And Ben the only the only thing I would add to it is we did we did implement a price increase right at the beginning of Q3 and while it's early days, we've been really pleased with.
How volume has held up.
With that price increase so that's.
That's encouraging certainly.
Yes for sure Okay very good thanks, so much and best of luck.
You bet.
Thank you there are no further questions at this time, Mr. Ross Macmillan East continue.
Okay.
Well. Thank you very much everybody for your interest in the company.
And we'll look forward to speaking with you again next quarter take care everybody.
This concludes today's conference call. Thank you for participating you may now disconnect have a great day.
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Good day, and thank you for standing by.
Welcome to the flowers foods second quarter 2021 results call at this time, all participants are in a listen only mode.
After the Speakers' remarks, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Please be advised that this conference is being recorded.
You require any further assistance please press star zero I would.
Now like to turn the conference over to your Speaker today, Mr. J T Rieck senior Vice President of Finance and Investor Relations. Sir. Please go ahead.
Thank you operator, and good morning, I hope everyone had the opportunity to review our earnings release listen to our prepared remarks and view the slide presentation that we're all posted yesterday evening on our Investor Relations website. After today's Q&A session. We will also post an audio replay of this call.
Please note that in this Q&A session. We may make forward looking statements about the company's 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 disclosures and reconciliations are provided in the earnings release and at the end of the slide presentation on our website joining.
Joining me today are miles enrolling president and CEO and Steve Kinsey our CFO.
Operator, we're ready to start the Q&A. Please.
Thank you Sir again as a reminder, if you would like to ask a question simply press Star then the number one on Europe.
The fence bad.
Yes.
We have our first question from the line of Bill Chappell from chewing Securities. Your line is laughing.
Thanks, Good morning.
Bill.
And just.
You know one of the things we've heard from.
Several or multiple food companies over the past month month, and a half is that there's been a meaningful for whatever reason trade up from private label to branded.
The THAAD as stimulus checks or other issues, though no one can quite figure it out and clearly that had some impact or continues to have some positive impact on your business. So I guess the question is do you see this as a sustainable shift.
Or do you think that people will move back towards private label, which could put margin pressure as we move into the back half of this year or into next year.
Yes, its good question Bill.
Our category with private label being historically, so ever developed we were actually seeing these private label declines even prior to the pandemic.
And I think we've mentioned that on a couple of a couple of prior calls we've actually done a fair bit of research consumer insights research and into why that trend is continuing and almost accelerating really and it really comes down to an hour category. There is there's a distinct lack of differentiation in private label.
Yes.
Basic white and wheat bread and buns, whereas in the category.
Flowers has participated in this obviously you have a lot of differentiation with the new perfectly crafted brioche roles with things like Daves killer bread Canyon, and that's yeah, that's driven a bit of a premium amortization process up to branded from private label as to whether it's sustainable or not I actually think it is and.
That's why we're making all the investments, we're making behind our brands and marketing support et cetera.
If you if you get into.
A recessionary.
Situation, you could see some move back to value.
But even though in the last recession that we saw in sort of <unk> nine we didn't see that much of a move back to private label, even even then.
But I guess did you see a step change.
In this current quarter or is it just more of a continuation of the trend, it's really more a continuation of the trend.
Private label continues to fall and branded retail continues to hold up very very well.
Great and then just on the cost front same thing I heard a lot.
Your peers talk about especially more on freight.
And the incremental cost you seem to in April.
April to raise EPS guidance for the full year. It seems like it's less of an impact is that largely due just to the way your supply chain distribution works or is there something else that that's helping you offset these costs, yes parts, partially that's it and Steve can jump in here too, but yes, that's partially at DST that works a bit more of a close.
Closed loop system, so we're not as exposed to the long haul freight.
And then the other thing I would say is with our with our hedging strategy being four to seven months out sometimes a little bit longer yes that gives us good visibility in advance of what our costs are going to be and we can be proactive about mitigating those costs, Steve anything you'd add to that no. I mean, I think as we said earlier bill in the year, we know we had pretty good visibility into our own.
We're all cost structure for this year.
Obviously.
The inflation in the back half a little heavier, but we think we've taken the right steps to mitigate most of that and as Ralph said on transportation.
We're not immune to the increases, but we'd still like.
For 2021.
Our contracts have protected us the best they can.
Got it thanks, so much for the color.
Thank you Bill.
Thank you. Our next question is from the line of Mitch Pinheiro from certain events and company. Please go ahead.
Hey, good morning.
Hey, just following up on Bill's question.
Regarding private label.
Yeah.
But as the retailers view.
Their private label offerings.
Changing as well in terms of shelf space allocation.
You know are they looking for.
To premium is private label.
To a greater extent try this to keep private label or is that really not one of their strategies and they're willing to let the market go where it goes.
We will reallocate shelf space can you give us any sort of color.
Color on that.
Yeah, I mean, we've had some we've had some isolated discussions about that but nothing.
Nothing broadly in the market, we're not hearing much about wanting to premium is private label or anything like that to this point you know probably the one exception for us the one area of private label to continues to do well.
His eyes canyons private label gluten free that's probably the one call out and private label Thats actually showing some growth in our in our portfolio.
But also as part of your discussions.
The reduced shelf space for private label I mean, clearly you know the dollar value in their gross margin.
Right.
You know contribution of the brands versus private label would suggest I would think.
More allocation to the branded shelf space, but is that happening at all or.
Again, I would say that it has happened to some extent, but we haven't seen any any broad.
Market wide moves to take shelf space out, but there has there have been some some isolated customers where that's been reduced and you also have.
You also have the labor situation.
It's kind of happening to everybody that debt.
That limits somewhat limits the ability to to.
To provide all the all the Skus I mean throughout this pandemic and this whole labor situation.
We've had to we've had to in some cases limit some of our Skus and so that's had some some effect on the shelf space allocation, but as far as the overall private label allocation. There has been no meaningful change really.
Okay.
Is there is there are there.
Are there any pricing changes.
Private labels.
Is it does it is it a volume decline or is it is there a pricing going up you talked about them a little bit.
We have taken some pricing over the last several years in private label, yes, Okay.
Yeah.
In terms of Covid.
Is it part of your part of the whole strategy or some of the benefits of Iris.
From.
Gaining share in that.
And lower penetrated newer markets.
Flowers that is.
Thank.
You could call out geographically strengths or weaknesses.
In your.
Your territory.
Yeah, I mean, we've been calling out the northeast for the for the last several quarters is a focused market for us we continue to make investments up there and the good news is we're seeing share gains there.
We had we had a good quarter in the north.
<unk> will continue to gain share on the West Coast you know another another really strong market for us.
Obviously, we're we're we're super strong in the South I mean, you mentioned you know the big.
The big hole or opportunity for us is that whole upper Midwest QUADRA.
Okay.
Okay.
Then just a couple more in terms of.
What's what's happening with our snack cake and eat it.
Tasty cake in particular.
You're making progress on your profitability.
Yeah, Yeah. Thanks for asking really good progress at Navy yard again, I'll say, we're not we're still not where we want to be but the trajectory is really good.
The team has done a great job up there are our automation investments are paying off in scrap rates are coming down.
Labor in the Cape market is in the cake plants rather.
Continues to be a bit of a challenge is just the nature of the cake bakeries with with more people in there, but overall, we've been able to manage through it really well. We've we've also done some things on the commercial side Mitch from a price promotion standpoint.
US more competitive there so all signs are pointing in the right direction in fact.
Relative to our internal goals, we're actually ahead of plan there.
Okay.
And then I guess.
Final question is.
When you look longer term.
And you look at it.
Your margin profile.
I think you mentioned I think either in this quarter.
While mix is certainly a powerful help for you.
Do you have productivity and you have your whole.
Network optimization to support further margin improvement.
I mean.
Hal.
It just seems that the branded versus non branded mix is still going to be the most important part.
Hum.
Change and.
I'm curious as to a if you agree with that.
You know what Youre doing.
Right.
Specifically, you're doing to create the positive mix going forward.
No absolutely and I agree with you I mean, the whole notion of shifting more of our mix to branded retail is the most powerful tool we have to do to.
Improve our overall margin profile, but all the other things you mentioned, whether its network optimization, whether it's our marketing investments whether its our digital transformation are all intended to support that mix shift to branded retail.
So you it all rolls up to the same strategy of over time shifting more of our mix two brands. Both the brands, we have today and hopefully the brands will have tomorrow.
With future M&A.
Okay, and then just I actually said almost all of our questions speaking of M&A is that.
Can you talk about.
That's a pipeline or maybe the environment.
The M&A right now.
Yes, sure it really no change from last quarter I mean, its deal activity continues to pick up.
We're looking at quite a few things right now which is a welcome change from last year, when it really kind of dried up.
So we're happy with the pipeline and that's you know it's nice to be in a position that we're in that we've got the we got the balance sheet to act.
When when the timing is right.
Okay. Thank you I'll get back in the queue. Thanks.
Thanks, Matt.
Thank you. Our next question is from Ryan Bell with consumer Edge Research. Please go ahead.
Hi, how are you guys good morning, Ryan.
Okay.
Touching maybe a little bit more on the inflationary environment.
And the impacts of the rising costs.
Can you talk about maybe your ability to take pricing as we get into the end of the year in 2022.
Yes, I mean, obviously, we're not going to talk about 2022 today were not prepared.
At this point to give guidance.
Although you know it is on our bond given the inflationary environment, we're in we've seen pretty.
Substantial runs like most other companies, regardless of which industry or segment, you're you're operating in.
All experiencing pretty tremendous inflation.
Let's say for.
For 2021, and I think we talked about it in our prepared comments.
In the back half.
Pretty confident in our overall cost structure and also confident in the measures we've taken to mitigate.
Inflation the way we have weather that was.
Pricing I think youll see promotional efficiency, which we saw in Q2.
A lot of our projects are on track.
With regard to efficiencies.
Kind of productivity.
And we expect really to use kind of the same tools going into 2022, but beyond that no.
Can't really comment about.
Beyond this year.
Hey, Brian one thing that I would add to it and we mentioned this a bit in our prepared remarks is if you think back to the to the last inflationary period significant inflationary period that we saw sort of seven or eight.
We were a much different excuse me a much different company back then.
Our market share was a lot lower we really only had one sort of quasi national brand and nature's own and then you fast forward to today and we've got.
And roughly an 18 share we've got nature's own and.
The expanded nature zone now with perfectly crafted as well we've got days, we've got Canyon, we've got wonder and so the brand portfolio a portfolio. If you will is quite a bit stronger than it was which also gives us greater confidence that we can we can pull that lever to the extent necessary to help mitigate any any rises in cost.
Okay. Thank you that's helpful and then.
Could you talk about how youre thinking of.
Back to school season.
Some of your guidance.
You're assuming about the season and sort of what would change potentially.
So your base case.
Given some of the variability that we see with the Delta variant.
Back to school and other types of getting back to normal.
Yes.
Our perspective on that has changed markedly since the first of the year. When we when we first issued guidance and then with the vaccine rollout we were kind of planning for what that was going to look like and how that was going to.
The market dynamics.
And now here, we find ourselves right at the beginning of back to school season, We've got this.
Delta variant that searching some significantly across the across the country. So our perspective has changed as the as the dynamics out there have changed and obviously, it's hard to say we had originally expected that.
The back to school season will give us a really good indication of what the.
The new normal might look like in a more steady state going forward.
I think the rise of the Delta variant has brought that somewhat in the question and they pushed that timeline out a bit now.
And obviously in our results through Q2, and even the beginning of Q3, we're continuing to see very strong branded retail performance.
In line with what we've been seeing for the first part of the year. So it's going to be a little bit of a wait and see I would've thought that back to school would have and people starting to return to office would would have given us a better indication, but I think thats gotten pushed out a little bit now.
Thanks, that's helpful.
Would you be able to provide maybe a little bit more detail about some of the shifts in your capex guidance. This year I know you took it down.
A little bit.
And you said that it was largely due to delays from the pandemic the.
Is the expectation for that just a shift out into next year.
Yes, I mean, the majority of that will just roll into 2022.
<unk> is there is no one I would say one specific large project that was impacted it's kind of across the whole.
Just some delay in timing and getting equipment in for some of the projects.
Thanks, and then just the last one for me.
How would you feel just about the general longer term impacts as incremental at home demand I think that its pretty evident at this point that is going to be incremental work from home relative to 2019.
So could you potentially share some of your thoughts.
How about that.
Extend the potential so this impact your business over the next few years.
Yeah, I'd be happy to frankly, Brian I'm quite optimistic about it I mean, I think there's been a fundamental shift.
And several things.
Some good and some not so good the good parts are I think that.
The future of work is going be a lot different.
We here at flowers are going to be doing it differently permanently.
And many other companies or as you as you read or are doing the same thing and I think.
That that shift or that change in mindset really only benefits.
Our business.
With more people eating at home.
More sandwiches consume whatever it might be.
We're very well positioned coupled with that.
Our commitment to innovation and continuing to bring new and exciting offerings to the consumer.
That's going to continue to be really important for us to drive future growth. So.
I'm frankly really optimistic on the on the negative side.
The labor situation continues to be difficult.
As we read across every industry, whether service manufacturing or otherwise, it's a difficult.
Situation, it's tough to attract and retain people right now.
So far we've done a really good job of managing through it it has not been easy.
But we've been able to continue to serve the market effectively throughout this period, but it is a challenge and we're having to re look at how we view labor in the bakeries, and we'll probably have to make.
Both some short term and long term changes to how we approach that because I think it's more than just <unk>.
Extended unemployment benefits I think theres been a systemic change of how it work is viewed in this country.
Great. Thanks, a lot.
Sure.
Thank you. Our next question is from the lines Ben <unk> with Stephens. Your line is now open.
Hey, Thanks, good morning.
Ralph I wanted to follow up on that on the compensation side of things you talked about reviewing compensation.
Wondering where you are today in that process whats considered in your guidance with respect to compensation and benefits for the balance of the year in fiscal 'twenty one.
And then you talked about a combination of short and long term.
It sounds like Youre being holistic with how you approached us.
And more surgical can you can you talk about your mindset and kind of what youre seeing today relative to normal and how you feel about your ability to kind of ameliorate those dynamics.
Sure I mean.
For 'twenty, one I wouldn't I wouldn't worry about it too much.
From a wage standpoint, because but one thing I think it's more than just wages that are the issue now certainly we'll look at that we do periodically look at that any way to make sure that in each of our markets that our bakeries are competitive but.
Again, the whole dynamics change what you used to look at as your peer set and manufacturing has changed we used to look at other other food companies from warehouses will now youre competing against Amazon Youre competing against Tesla and with all the government payments coming in and you're competing with the government.
Yes. It makes it makes it pretty difficult. So youre right were taking a holistic look because I don't believe its only about compensation it could be to some extent and we want to remain competitive.
But I think the quality of life factors are even more important and what I mean by that is the bankers can be hot that can be unpleasant. The summertime what can we do.
To improve the overall working environment inside the bakeries were looking at different uniforms, we're looking at different cooling systems et cetera, those types of things, but one of the biggest issues for us and I've mentioned this before is scheduling and the bakeries.
Working in our bakeries tough job and we're running the bakeries really hard, particularly right now with the labor labor.
Shortage and we've had.
Increases in overtime and things because of that our folks are working really hard.
That's not a situation that you want to sustain for too long. So what can we do from a scheduling standpoint.
To give more consecutive days off more and more.
<unk> or predictable rather.
Schedule, so that people can plan their childcare or doctor visits or whatever it might be in daily life that they need to do so we're looking at myriad number of things.
Mitigate this and I'm glad that we are because.
I don't think that this is a temporary situation.
Yeah, Okay. It makes sense.
And then you noted promotional efficiency contributed to better price mix can you talk about what's happening there is that.
And a return to normal or a new normal dynamic around consumer behavior is sustaining volumes better than you thought.
It.
That you have in place, maybe just help us understand what's going on there and.
Kind of the.
The glide path associated with that how repeatable is that dynamic.
Yes, sure I'll, let I'll start and Steve can chip in if he has something else, but yeah. The overall promotional environment has been pretty steady for a while now.
And it's really.
Our category I would call it at least five year lows and that's been that's been pretty steady.
And with the demand for branded retail price I don't see that changing anytime soon.
We also internally.
Do a much better job with our TPM system than we did historically at managing our promotions and only only.
Pursuing those that have.
Our high return associated with them and so both the kind of the macro environment is supporting this but also our internal efforts at being more efficient with our promotions is helping Steve anything you'd add.
I think relative.
<unk> point about systems.
Really can't be.
Emphasized enough I mean in the last couple of years, we've worked really hard on implementing some new technology and it gives us great visibility and.
Like we talked about in Q1.
Promotional activity is pulled back quite a bit so it was really about not getting price.
A lot of our inflation comes in the back half so that's.
When more true pricing would show up I.
I would say so we've been really pleased kind of with the promotional.
Environment and the levels we've seen.
And.
<unk> been a big part of the margin.
The equation.
Ben the only the only thing I would add to it is we did we did implement a price increase right at the beginning of Q3 and while it's early days, we've been really pleased with.
How volume has held up.
With that price increase so that's.
That's encouraging certainly.
Yes for sure Okay very good thanks, so much and best of luck.
You bet.
Thank you there are no further questions at this time, Mr. Ross Macmillan. Please continue.
Okay.
Well. Thank you very much everybody for your interest in the company.
And we will look forward to speaking with you again next quarter take care everybody.
This concludes today's conference call. Thank you for participating you may now disconnect.
Have a great day.