Q3 2021 Flowers Foods Inc Earnings Call
Yeah.
Yeah.
Good morning, ladies and gentlemen, and welcome to the flowers foods third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance during.
The conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your host J T Rieck, Senior Vice President Finance and Investor Relations.
Thank you and good morning, I hope everyone had the opportunity to review our earnings release listen to our prepared remarks and view the slide presentation. There were all posted yesterday evening on our Investor Relations website.
After today's Q&A session, we will 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 are 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 today are Rob <unk>, President and CEO and Steve Kinsey our CFO.
Operator, we're ready to start the Q&A. Please.
Yeah.
Yeah.
Yeah.
Yeah.
Yeah.
Yeah.
Yes.
Operator, we're ready to start the Q&A.
Yeah.
Okay.
Yeah.
Oh excuse me it feels we have some technical difficulties won second place.
Can you hear me now.
Yes, we can.
Thank you ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
One moment, while we compile the Q&A roster.
Yeah.
Okay.
Okay.
Okay.
Your first question.
Comes from the line of Bill Chapell with twist.
Hey, Thanks, good morning.
Good morning Bill.
Three kind of quick questions.
Based on kind of your commentary.
In the prepared remarks.
One you talked about you're not really.
Too early to tell what kind of normal looks like in terms of people reverting back to work and to school and stuff like that kind of post delta variant, but when you.
Well exposed to the states.
Like Texas, and Florida, where they kind of move back to normal a little bit faster than the rest of the country. So maybe tell us what youre seeing there and kind of what that tells you for as we look to 'twenty two in terms of kind of consumption.
Sure Bill.
It's really kind of broad based across the country, we've been really pleased with how well.
Things have held up particularly on the branded retail side so nothing.
Really in particular to call out by region.
Except to say overall the brand investments that we continue to make the innovation we continue to introduce.
He has really helped us you'll hold onto a lot of these a lot of these consumers and similarly, we're also seeing.
Further increases in household penetration velocities are up repeat buyers are up so all the signs point pretty optimistic direction. When you think about what return to normal ultimately looks like.
Yes.
Got it and then in terms of costs.
Comment that you may look to do additional pricing to cover the cost and can you remind us do you are you looking to kind of cover margin or cover profit dollars in terms of gross margin looking forward.
Sure I mean, obviously, the ultimate goal will be to protect vital.
Now at the end of the day the consumers.
Right, Yes, the ultimate results right.
Consumers are experiencing very very broad based inflation, we've all read the headlines.
30 year highs fifth straight month over 5% that kind of thing so.
Everything from gasoline to our products is going up so we will have to lap.
We'll have to wait and see how the consumer at the end of the day react to that.
If we find ourselves in a situation where yes.
There is a.
Trade down the value or our units drop off you could it's certainly reasonable to assume that there could be some margin compression in the short term, but what I would say overall about the inflationary environment as well.
Whether you believe its transitory or whether you think it will last a little bit longer than that ultimately these issues were temporary and not.
Not completely within our control. So we're focused on what we can control.
We will continue to make investments in our brands will continue to make investments in our digital capabilities et cetera that over time will lead to expanded margins.
Got it and then last one for me you made the comment in the remarks of like Youre seeing M&A activity pick up and I guess the question is why is that the case I mean I was under the impression that the theme kind of 10 key targets you've been talking to for years, if not decades and so it didn't know why.
<unk> would start picking up now or.
And maybe it's more color around that comment.
Sure I mean, I think I think maybe a little bit earlier in the year. It may have been.
Driven by some tax issues now, we'll ultimately see where that where that bill falls. It looks like some of that is not enough in the bill so that could have been driving some of it and youre right.
We still.
We continue to talk to some of the same targets that we have for for a number of years, but the activity has really picked up build more in the adjacent product category somewhere in the snacking space that kind of thing.
Okay, great. Thanks, so much for the color.
Sure. Thanks Bill.
Your next question comes from the line.
Of Ben <unk> with Stephens.
Hey, Thanks, good morning, everybody.
Hey, Matt.
So I wanted to ask about just this continued strength in branded retail.
Really good results still.
Yes, Im sure the mix is still supporting gross margins, even in a environment, where youre seeing some cost increases I'm curious if you could talk about do you think we're at this equilibrium now do you think this is an equilibrium that we can grow off of and to what degree as we continue to see maybe pricing increases does that.
Influence a shift from branded retail store branded retail products.
Yes, great Great question I think.
I think that's a key point and as Atlas Atlas mentioning in response to build a minute ago.
It's all going to be about the consumer.
So far even with the pricing actions that we took in July.
Branded retail units have held up very very well I mean, we've seen little to no drop off at all and branded units now.
Going forward as you look into next year with all of the inflation consumer space.
Yes stimulus payments coming off that kind of thing I think it's yet to be seen just how much the consumer is willing to absorb it.
That'll be that'll be a key topic for next year right.
We've been through situations like this before.
Most recently in kind of at least 709 time period, the business held up relatively well.
We do offer products across a variety of price points with certainly helps from the Super premium Dave's killer bread as all the way down to.
To private label.
Yes, with some with some with some pricing and between two on nature's own and wonder that kind of thing. So we feel like we're very very well positioned to do well in any environment.
Obviously, we would be most pleased if.
The current trends that we're that we're watching continue.
It's really all about the inflationary impacts on the consumer and what there'll be able to absorb.
But that also makes it more important than ever that we continue to keep up with our.
Pressing forward on innovation, and we keep developing our capabilities such that.
Eventually this will subside and it always does and when it does we'll be.
<unk> even stronger.
Perfect understood.
On the cost side of the equation.
How much visibility do you have into the balance of this year into early next year and any thoughts that you have on what that looks like and kind of where we are in terms of.
The curve of cost inflation, how close do you think we are to maybe seen a light at the end of the tunnel from your vantage point.
Yeah.
Sure I mean, obviously, given where we are in the year.
In fact, we do forward by them.
Has a lot of our commodity spend.
We have full visibility for.
For 2021.
So from that perspective, we've been talk to you about the cadence of inflation this year.
Majority of it is coming in the fourth quarter, we will begin to see some of that ramp up but all of that is.
Price it into the guidance, we gave yesterday when we released the.
Looking forward to 2022, we're not prepared to give guidance today, but obviously.
Can you kind of look out at a forward curve, it's pretty significant inflation.
And if things stay at the market levels, we see today as we said in our prepared remarks.
We expect to see pretty meaningful inflation next year, but as Ralph has commented we're looking at efforts to mitigate that through pricing as well as other cost initiatives.
So do.
So we anticipate this to be at least.
Another one year cycle and as Ralph just said.
Depending on whether it's truly transitory or not you would make.
It could go slightly beyond the year.
But right now all indications are that the inflation will will hold through most of 2022 as well.
Cost side.
Okay. Okay. It sounds good. Thanks, so much for the thoughts and best of luck with the rest of the year.
Thank you Beth.
Your next question comes from the line of Steve powers with Deutsche Bank.
Yes, hey, thanks.
And I guess picking up on.
What we've already been talking about your repair at your prepared remarks, and then and then some of the conversations just wanted just really underscore the uncertainties around around.
The pacing of the band migration back towards pre pandemic levels potentially just.
Inflation hedge.
Headwinds in another other.
Variables.
Plus we know that you've got ongoing strategic investments around technology and branding otherwise. So I guess just in that context I'm, hoping you can elaborate.
On the drivers that as I read your.
Presentation at least the presentation slides that accompany the prepared remarks talk about.
Confidence and expectation to get on to those long term long term algorithm in fiscal 'twenty two.
So maybe you know.
Unless that was a misread on my part just what are the drivers that despite all of the uncertainty that you feel like you've got confidence or visibility to to lock in those long term growth targets next year.
Oh sure I mean, I think we've already alluded to a few of them but.
Just to reiterate one.
The momentum that we carry into 2022 I mean, we have gained a lot of consumers over the past two years.
We've invested a lot behind our brands, we are clearly growing our share.
Nationally, but also in very important markets like the northeast, where we're where we're underpenetrated.
We have a lot of new innovation items, some of which we're testing right now.
Some of which will be forthcoming next year that we're quite excited about to continue to drive topline growth and youre right.
We are making.
Significant investments in our ERP platform and other digital capabilities that over the long haul and will enable us to stay on that long term long term algorithm and then of course, Steve. We also have taken a look at the balance sheet.
We're obviously poised.
For acquisition activity should the right opportunity come along so all of those things put together.
Youll give us confidence that we can that we can stay on our long term algorithm using 2019 this year.
Okay, Okay great.
And I guess, maybe just.
Sort of a slightly different topic just on your on your.
Manufacturing footprint, obviously, a diverse footprint of bakery and then I'm assuming that gives you.
Pretty good amount of flexibility to help navigate different supply chain challenges, but maybe you can elaborate that on just kind of talk about that generally but I'm also hoping just for some visibility into how variable operating conditions are across bakery footprint.
Relatively.
Similar across the board or are there.
Is there a lot of our.
Are there other.
Flash points, where youre having more.
You have more challenges.
Im kind of thinking, particularly from a labor perspective.
Any color you have there would be great. Thanks.
Sure not so much by region of the country I mean, the labor challenges are pretty consistent.
Consistent across the company and when we do have a few areas, where we've had somewhat less issue than other areas, but generally speaking it is.
Pretty consistent across the country now we have been able to manage through that I think pretty well just given the challenges that we're that we're all facing but it's still a challenge and it does it does impact our efficiency.
You've got to you read the shorthand it or you have a lot of new people in our bakery for example that increases your scrap lowers your efficiency that kind of thing.
The one call out one call out I would make it.
It has been a bit more intense in the cake bakeries, but those are more labor intensive operations to begin with so you just you have more people.
Particularly in packaging there so it's been a little bit more acute there, but by the same token we have been able to manage through it pretty well.
Okay. That's great color. Thank you very much.
Sure. Thank you.
Your next question comes from the line of Mitch Pinheiro with Sturtevant, <unk> and company.
Good morning.
Good morning.
So we have.
Have you.
Defined what you're in.
Inflation rate has been on cost of goods for 2021.
We have not given that.
Statistics.
I mean.
Because of the way we hedge.
Probably not one obviously youre coming into 2021.
That's really what you begin to see the inflation ramp so more back half driven but we haven't given a specific percentage.
Maybe for competitive reasons.
Okay.
And you could do them you can do the math with acute input costs that would be pretty much in line, but.
But beyond that we haven't disclosed it.
Okay.
When you.
Yeah.
With the branded growth.
Surging.
I'd love to hear more about.
Our brand building efforts.
In particular.
It's.
Alright.
Obviously some of this is driven by.
The consumer is looking for the branded growth looking at looking for premium products looking for.
Higher quality and more diverse set of baked goods, but.
I was wondering whether.
Hi.
Youre looking to capitalize.
And Mark take your way to growth.
More so than in the past and I would love to hear what you're doing and how you're spending is allocated is it being shifted more to T. D like I've seen them to date.
Dave's killer bread or.
Is it is it is it a digital E Commerce initiative, but look here.
A little more on that.
Sure happy to and you can you can just take a look at our marketing spend and see over the last several years, how much we've ramped it up to support the.
Portfolio strategy of growing our branded business at a faster rate.
You touched on a lot of them already I mean, a lot of it is being allocated towards.
Towards our aggressive growth brands.
The Canyon Nature's own Dk B.
It's been more intense in parts of the country, where we're underpenetrated like the northeast that's why you're seeing some of the commercials up your way.
And Youre also correct on digital.
E Commerce is about 8%.
<unk> of our sales right now which is roughly in line with the category. We want to continue to grow that I think E. Commerce is going to continue to be a bigger and bigger part of the picture and we need to have that that digital presence.
On the other side, we're also investing in consumer insights we have to we have to understand our consumers such that we can continue to deliver the innovation that they want in the category. So some of that stands going into into that and continued investments in R&D and I think you'll you'll start to see some of that as we go forward with some of the.
Newer innovation items that we're coming out with that are that are not in the bread category put it that way.
Okay.
Okay.
When it comes to Dave's killer bread.
What's driving the growth there.
Obviously, you have new products.
Curious to hear a little bit more about either any particular channels you'd like to call out products, because theres distribution gains happening I'd love to understand more what's driving TKD rather.
More than just yes.
It was just.
Strong demand for organic product.
Yeah sure I think at the end of the day first of all it all starts with quality.
Yes, there are other organics that are out there.
The days has a commanding 70 share for a reason because it's the best tasting divest best quality best consistency.
We're continuing to grow in the northeast match was at which is a big part of the puzzle. There bring you on Lynchburg last year to support that growth has been a huge thing for us.
And Dave's evolution, we continue to come out with new products with days were testing some new products right now with them there'll be more coming next year.
So.
Increasing awareness is a big one.
<unk> talked about this before.
When you look at the great success of days that we are all very proud of of course, but then you compare it household penetration to that nature zone, it's roughly half that of nature's.
Nature's own.
Even with the great growth, we've experienced we feel like that brand still has a ton of runway ahead of us both with its current categories and in other categories. Because I think the brand is strong enough now to begin playing across different categories, which were obviously very excited about.
Okay.
And then just final question.
Yes.
Update on your cake business as far as the manufacturing side and are we.
There's a lot of that solved or is it still work in progress in 2022.
Yeah.
Yes, Mitch not solved yet, but great progress. This year. They are ahead of pace actually which we're very pleased about but as I said on the past several calls, though we are pleased with the progress we still have some ways to go but the improvement this year has been material.
Okay.
Okay. Thank you very much.
Thank you rich.
I'm showing no further questions at this time I would now like to turn the conference back to Riles Mcmullin.
Yeah.
Thank you very much everybody I appreciate your interest in the company and we will look forward to speaking with you again next quarter everybody take care.
Yeah.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may now disconnect.
Okay.
Okay.
[music].
Yes.
Yes.
[music].
Okay.
[music].
Sure.
Okay.
No.
Okay.
Yes.
[music].
Yes.
Yes.
Okay.
Yes.
[music].
Yes.
Yes.
[music].
Okay.
Okay.
[music].
Okay.
Okay.
Yes.
Yes.
Yes.
[music].
Okay.
Okay.
Yes.
Okay.
[music].
Hum.
[music].
Sure.
[music].
Okay.
Yes.
Yes.
[music].
Okay.
[music].
[music].
[music].
[music].