Q4 2021 Flowers Foods Inc Earnings Call (Q&A)
Good day, and thank you for standing by welcome to the flowers foods fourth quarter and fiscal year 2021.
The conference call at this time, all participants are in a listen only mode to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded and if you require any assistance during the call. Please press star zero.
I would now like to hand, the conference over to your Speaker today, Mr. J T Rieck, senior Vice President of Finance and Investor Relations.
Floor is yours.
Thank you and good morning, I hope everyone had the opportunity to review our earnings release and 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 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.
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 around Macmillan, President and CEO and Steve Kinsey, our CFO operator, we're ready to start the Q&A. Please.
Thank you and again as a reminder to ask a question.
You will need to press star one on your telephone to withdraw your question. Please press the pound key.
One moment as we compile the Q&A roster.
Okay.
Okay.
Okay.
Our first question comes from Ben.
<unk>.
The engineer of Stephens.
Your line is open.
Hi, Good morning, everyone seems to linger on for Ben I wanted to ask a little bit about inflation moving into the new year I.
I guess first of all on the January 2022 price increase.
Do you think that'll take to get fully implemented and then maybe you can talk a little bit about the cadence expectations for inflation.
Sure. Thanks. Thanks for the question was the January price increases.
In large measure there is a few small pieces of it.
Due to contracts.
Taking over but the lion's share of the pricing January price increases is already end of the year.
Thank you guys talk maybe a little bit about expectations kind of as the year progresses for inflation.
Sure I mean, when you look at.
Overall inflationary environment, obviously, we're building in Q4.
So in.
2000 22000.
332, as we said we expect it to ramp.
Throughout the year, and then obviously Q4 comps.
While we still have inflation, we'll pull back slightly so you should see a ramp in.
Q2, Q3 would probably be the highest cost.
Back slightly.
Okay, and if I could sneak in one more question.
In regards to wait you guys had hedging position on freight costs or do you have any visibility into what grade thoughts might be into 2022.
Two things on freight what if you recall our biggest transportation cost is around our DSD network.
So we termed out our closed loop network, we actually have three primary haulers, who take product from the bakeries warehouses. So those contracts are usually known couple of years in advance, but we are seeing elevated cost with those as well.
And then.
From a kind of open market transaction on our warehouse business, we've got to go.
To the market.
For auto delivery, there, but we do not hedge any of that so.
Try to buy a forward as much as we can but reality is you.
Like most companies will be on the kind of the.
Current market on the <unk> question.
Okay, great. Thanks, guys best of luck.
Thank you.
Yes.
Thank you.
And next we have bill Chappell Chappell of <unk> Securities.
Your line is open.
Hi, Good morning. This is Donald on for Bill.
This one I'll ask a question on <unk>.
Any color you could provide an acute business 2019 level and also with the biopsy current inflation on the cost front how.
How much of that would you attribute towards labor.
Do you believe there is a time where that could play to at some point. Thank you.
Sure.
Service business as you as you saw it did recover some.
In the fourth quarter, and we saw that sort of through the second half of the year last year.
It's still below 2019 levels, but there there has been some some recovery there.
As you know we've been doing a lot of work on our foodservice business to improve the profitability of it as it does come back because obviously, we've been expecting at least some amount of reversion as we hopefully start to exit this pandemic situation, but.
It does still.
Remain below 2019 levels and Conversely, our branded retail business that continues to hold up really really well.
Given the continued at home eating trends are investments in our in our premium brands et cetera have all helped that business two to maintain its place as part of the mix.
We will address your questions. When you look at I'll take your question was around labor inflation.
We are really no different than other.
Other companies I mean, the labor market is really tied as you know so we're expecting kind of mid to low to mid single digit labor inflation throughout the year, depending on which market you're in.
Okay. Thank you very much.
Thank you.
Thank you.
Up next we have Rob Dickerson of Jefferies. Your line is open.
Great. Thanks, so much.
Just a couple of questions.
I guess first one I missed the first minute of the call. So sorry, if you already spoke to this.
Just in terms of the I guess the <unk>.
Gross margin okay.
Yes.
Potential cadence for the year I know in the prepared remarks, Jerry just kind of speaking to kind of first half back half ish.
So moving pieces obviously.
Back half.
But kind of given what we saw in Q4 should the market be expecting let's say.
Similar.
Year over year gross margin that kind of plays out Q1.
Despite the higher pricing.
And then just kind of an earnings.
We've kind of.
Implied kind of flattish in Q1.
Whatever you're willing to disclose it would be great. Thanks.
Yeah.
Yeah sure Rob I mean, obviously, we don't give guidance on.
Gross margin, specifically is definitely not by quarter, but I'd say overall.
We are expecting some pressure on the gross margin line so it should be down.
Year over year basis.
We get to the full year from a cadence perspective.
Obviously, our inflationary costs will build throughout the year and then because of the experience in Q4, we will see some of that pullback if you will.
And then Ralph ill briefly about pricing you may not have heard the comments, but we do have our January price increase is pretty much in and then we anticipate certain categories or certain distribution segments more pricing coming so that will build.
Through the first half as well.
Depending on the inflationary what really happens with the inflationary environment, because while we do have hedges on and we said we're about 70% covered.
For the year, obviously, we still have some of the coverage in the back half.
There could be potential debt thing.
Moderate somewhat we would need to look again at some pricing initiatives as well.
But we expect.
Like we said in the release the cadence think we'll build a lot of our savings initiatives starting to come in Q3.
So we do anticipate build from that perspective.
Regarding overall margin for the year.
Okay perfect that was helpful.
And then kind of Simplistically again, probably for you, Steve and then I had one.
For <unk>.
The topline guide for the year.
I'm, assuming kind of what we're seeing is maybe all of that is driven by pricing maybe volumes, you've kind of implied or maybe down low single digits I'm, just kind of basing this off of kind of the level of pricing.
Q4, but then also kind of what we already see in the January data set on the track side. So just kind of any kind of perspective on kind of that rate of pricing as of now excluding any additional pricing it sounds like youre kind of talking high single digit ish.
You look when you look at the track channel data.
We're still seeing some positive mix. So that's also helping drive but obviously as in Q4 pricing is a big driver of that.
I would expect you would see that development this year.
Okay fair enough.
That a little bit.
We're pretty optimistic thus far on on elasticities.
Yes, if you look at the if you look at the syndicated data. This is from from IRI for period, one which is essentially January of this year and this would've followed the significant price increase in January were up 15, 3% in dollars.
But were also up five 3% in units both of which are ahead of the category. So point is the early returns on the price increase is holding and those are almost and particularly for branded retail those volumes holding up.
We are pretty optimistic so that gives us confidence going into the going into the year, we'll have to continue to watch it.
And see what the consumer does how much they are able to absorb but early returns are looking promising.
Yes, I think your volumes are actually up year over year sequentially relative to December despite the price increase so that it's good signs so just a lot to play out.
Alright, and then just <unk> for you.
Bakeries in the future right you've been speaking about this for some time.
It sounds like given your prepared remarks that you are.
Have a number of pilots that will be in the market across a lot of your bakeries by the end of this year.
Yes.
The savings Youre speaking to kind of.
So far in through 'twenty, two doesn't seem like it's really contingent bakery the future, but obviously bakery the future would provide I would think some material savings.
In the out years so.
Is that something that kind of starts to kind of.
Go into your network this year and Thats kind of more of a 'twenty three and forward.
Thomas Asian upside potential piece.
Anything you have there.
Yes, exactly I mean, we do start we do expect to start to see benefits from bankers the future of this year and as you saw in the prepared remarks, we will.
Have it rolled out to half of the bakeries this year.
On the back of the.
Three or four pilots that we've done over the last several months.
So we do expect the cadence of savings to begin this year, but we also expect as you indicate that that will ramp up in 'twenty, three and 'twenty four.
Alright, thank you.
Thanks, Rob.
Thank you.
Next we have Mitch can handle gentlemen, and company. Your line is open.
Hey, good morning.
Okay.
Just to follow up there on <unk>.
Bakery in the future.
So number one.
How disruptive is it too.
The changeover of bakery.
<unk> into <unk>.
From current to a to the bakery that future mode is it is it.
What are we talking what's happening is it just.
You are moving some servers around and more computer screens out there were shutting.
Cutting down lines.
And things like that can you talk about that a little bit.
Yes, sure so from an operational standpoint, it's not disruptive so we're not having to shut things down. It's mostly this is mostly data driven type stuff at this point I mean, obviously we're doing.
Some automation work robotics in that type of thing, which is a little bit of a different story.
We did that maybe arent, but yes, the pure initial for us to bank of the future is mostly around paying us better data more real time data.
Driving out inefficiencies lowering scrap costs et cetera, so from an operational standpoint match, it's not disruptive hardly at all.
The way that it is somewhat disruptive.
It does require us to change the mindset of the bakeries.
And that does take a little bit of time.
These folks are have operated in a certain way for a very long time and you bring it all this fancy.
Digital equipment and try to sell them.
On the on the prospects for improving that it can provide.
And that takes a little bit of time to educate them on on how it can benefit them.
Really lives easier and improve the performance of the bakery. So it's really it's as much of a change management exercise as it is anything else, but so far we've been very pleased with the receptivity of the bankers.
And then a lot of that is.
So how does that.
Dovetail with the new ERP program.
I mean, I haven't been shopping for any of our ERP.
Graham personally but.
I was sort of stunned to see $275 million of course provide.
Over five years.
Yes.
Hi.
Sure.
Or is that being spent.
Is that just all software cost with a little bit of hardware.
That's a big number or maybe is it not a big number.
Yes, I mean, when you look at these big projects and you can look kind of across them.
None of our peer set as well. These are not these are not cheap projects.
Ill.
No.
As we've said in the release about 40%, 50% of the cost will be capitalized.
And the rest will.
Beef cost.
Primarily implementing and rolling out.
Yes.
<unk> itself.
But when you look at the ERP itself a lot of that is technology, driven and will be kind of a foundation or in April .
<unk>.
<unk> in the future.
The majority of the calls from months to ERP.
Necessarily through kind of the digital work around future.
Yes.
Your point.
Okay.
It is not an insignificant cash flow item.
A large part of the ERP cost from a capital standpoint will come this year.
You'll begin to see that tail off.
Thanks.
Four years okay.
Okay and then.
Yes.
When you go back and just look at some of the balance sheet numbers like if you look at the fixed asset turns and things like that.
Hey, Mike.
Sort of expecting as we sort of rolled through bakery the future.
And.
As you sort of.
Just kind of adjust your.
Your capacity and things like that.
C.
I mean, we didn't see better fixed asset turns going forward.
I realize that banking is a regional business when it comes to manufacturing you need to be near your markets, but are we going to see some leverage here, where you can go several years without adding capacity because.
Yeah.
Sure.
Finding it through your efficiencies or.
Or is what youre fixed asset turns is it going to be sort of set for a while we're really not going to see much improvement. There can you talk a little bit about that please.
Well a couple of things there Mitch one obviously, our aim is to significantly improve the efficiency of the bakery, so that in and of itself will help us create some capacity, but also remember we are doing some.
Some work via our customer strategy to overtime as we shift more of the mix to branded retail to convert some of that lower margin business and our branded business and you've seen examples of that in Tuscaloosa and much firm with the with the organic conversions and we will continue we'll continue to do that.
But those those those customer strategy is also open up opportunities for us to further optimize the network.
You point out that on our fresh business, we do need to be relatively close to the market, but we don't have to be as close as we used to date.
With some of the enzyme technology that's out there now.
We're already utilizing that all 250 mile radius is not as relevant as it once was so that opens up additional opportunities for us as well.
Okay.
Moving on as far as.
Foodservice.
What type of initiatives are you taking to improve profitability. There can you give us some examples.
Yes, sure I mean look prices the most obvious one and we've said many times that we do have some accounts that are that are underperforming. So we continue to work on those some of those are under contracts that they do they do take some time, but.
But price is certainly one lever.
Our own efficiencies or another this is not this is not all about the customer it's incumbent upon us to be as efficient as possible.
So those are those are two things, but also method.
Message delivery to because some of these some of these accounts are still BSD, which is a pretty expensive route to market as you know and converting them to a more optimized distribution model can help as well. So those are just a few of the levers we're pulling.
Okay, and then final question.
Yes.
On M&A.
Our balance sheet is in terrific shape, you have some great low cost debt.
Now.
You have ample room on your revolvers.
You still generate plenty ample free cash flow.
Next year based on my estimates so.
I know that youre going to stay disciplined youre going to find the right thing, but I mean, how close are we.
Should we expect to see some M&A this coming year I know you can't predict timing, but.
I mean is it still like nothing is really on the radar right now are things that are working that we showed.
<unk> be surprised to see something in 2022.
Yes.
We've been saying for some time now our F&I our appetite rather for M&A is certainly certainly high.
Been a while since we've done one we have a good pipeline of opportunities that we continue to look at.
For one reason or another we haven't we haven't pulled the trigger on one because of because of fit or price or a combination of the two.
But we continue to be active in the space.
I don't I can't predict what's going to happen this year and wouldn't want to prognosticate there but.
Just know that where we continue to be active in that market.
Okay Alright.
Alright, thanks for thanks for the time.
Thanks, so much.
Thank you.
And again to ask a question. Please press star one on your telephone. Please state. Your question. Please press the pound key.
Our next question comes from Ryan Bell of consumer and research. So the line is open.
Just a quick question about the ERP upgrade.
And sort of the efficiencies that would he provided by is there sort of any savings number that you could talk to be sound something on the cost side, just kind of understand exactly what you get out of that program.
Youre right I think a couple of things on the ERP.
Upgrade one.
SAP is our enterprise wide ERP system. The reality is let's say, we're forced but we had to make a move because SAP.
As for Hana platform across the whole so at some point.
Service for our ACC platform will drop off.
It's driving.
A portion of the move to move in the calls.
Because we have to make that move because of the digital initiatives.
That we're looking at.
Things that will enable the productivity needs or hopefully drive long term efficiencies across the bakeries.
Sure.
So.
So there will be efficiency gains to come out of this initiative.
We're not disclosing those at this point.
Okay. Thanks, and then just a broader question about the evolution of your portfolio as we're seeing a bit more normalization of the environment. Obviously, the branded part of your business has been doing really well.
And just trying to understand how you think about the shift and the migration towards branded how much of that can continue.
And then in terms of private label.
Why why do you think that there actually so soft despite some of the pricing that's coming through.
From an industry standpoint.
Sure, Yes, the trials.
So on the on the private label side I mean, we're really seeing the continuation of a trend that's been that's been going on for over five years now and it certainly seemed to accelerate during the pandemic, but even as we kind of.
Towards the end of that we're seeing we're seeing some more trends I mean, it was it was down rather significantly again in the fourth quarter.
We're seeing it down in units is up a little bit $1. So far this year, but in terms of units.
Even as we start this year and what we would point to through our researches you're you're seeing.
Premium amortization trend in the category, where people are really gravitating towards more different differentiated items and obviously, we benefited significantly from that with the branded portfolio that we have today, particularly when you think about.
Thanks, John Brad and Canyon, and then on the nitrous oxide, particularly the perfect perfectly crafted sub line.
Nature's own have done extremely well.
Canyon, and Dave's were both up double digits in the fourth quarter, we're seeing that trend continue even after that those are already premium items and after the price increase in January we're seeing that trend continue so it really demonstrates the consumers preference for.
Our premium quality differentiated item and typically with private label in our category you won't see a lot of that.
And so that's kind of that's the primary driver and then as we think about the prospects for our brands going forward.
With the innovation, we're bringing to market.
We mentioned the <unk> snack bars that were really excited about and early returns on those have been fantastic really shows you that these strong brands can play across categories, which obviously gives us opportunity outside of our core space. If you will.
Hey, Ryan This is Steve just one quick follow up on your question around the ERP plus.
When we started this project.
The discussion there was a rather said it many times as well part.
Part of the part of this initiative really is going to begin the enabler to drive productivity.
<unk> that helps us hit the long term harvest we have out there so.
Really expect.
And those target ranges.
The benefit from the digital and the ERP initiatives in that.
Hopefully will drive us somewhere to the upper end of our range, but that's the.
That's really how we're looking at it more internally.
Thanks, and then just one last one for me in terms of what Youre seeing from a pricing standpoint, I know you are talking about the premium innovation trend across the category.
Just is there a sense as to how much of the pricing is actually being driven by mix shift and stronger demand for products like Kenyan some days.
As you know sort of pricing.
On an individual product basis.
Okay.
Alright.
With the product that we've spoken I think Ralph talk briefly with the current IRI data period, one and we're seeing it really across the both the whole brand portfolio. Obviously your premium products are going to drop off.
Yes.
Any increases.
But.
So far we've taken pricing across.
I'd say the whole tough typically no one brand.
Thanks.
It for me.
Thank you.
Thank you.
And again to ask a question. Please press star one on your telephone.
Okay.
We have a follow up from Rob Dickerson of Jefferies.
Your line is open.
Great.
Clarification question Steve.
On cash flow in Q4, it was a little it was a little light im assuming theres, probably some working cap.
Headwinds on the inventory side. So maybe just explain if that's right and then the only other question I had was just.
The purchase of the leased portfolio I haven't really seen that line item pop up and I'm not sure if thats.
Part of the bakery the future optimization plans, maybe just those two quick two quick questions.
Yes, I mean, when you look at kind of the fourth quarter.
On the lease portfolio.
There was an opportunity that came to us kind of mid quarter with regard to that.
A collection of several warehouses.
With our.
Warehouse optimization strategy.
So it does give us the ability to.
Pick out some leases and now we have some flexibility to look at how we're going to.
Utilize these warehouses or potentially coupon from warehouses so thats.
I don't want that long term strategy.
And then.
The remainder of the elevated capex.
In Q4.
Primarily driven around.
Some of them.
<unk> work, if you will a transformation.
No.
You alluded to.
Working capital.
Got it.
Thank you.
Thank you.
Thank you.
And I'm seeing no further questions in the queue I will turn it back over to the speakers for closing comments.
Well. Thank you for your interest in flowers foods I. Appreciate your time today, everybody has a good weekend. Thank you.
Yes.
This.
Today's conference call. Thank you all for participating you may now disconnect have a pleasant day and enjoy your weekend.
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