Q1 2022 Flowers Foods Inc Earnings Call

May 20, 2022

Yes.

[music].

Okay.

Good day, and thank you for standing by.

Welcome to the flowers foods first quarter 2020 results conference call and webcast.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

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.

Or any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today J T Rieck Senior Vice President of Finance and Investor Relations. Please go ahead.

Yeah.

Thank you Shannon 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.

For today's Q&A session. We will also post an audio replay of this call.

Please note that in this Q&A session.

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.

Also provide non-GAAP financial measures for which disclosures and.

Reconciliations are provided in the earnings release at the end of the slide presentation on our website.

Joining me today are Ross Macmillan, President and CEO , and Steve Kinsey, Our CFO Ross I'll turn it over to you.

Thanks, Jason Good morning, everybody appreciate you joining our first quarter call.

I'm very proud of our team's performance.

Tough environment there.

Their perseverance drove record quarterly results in sales and adjusted EPS.

Our leading brands continue to gain share and we're successfully implementing strategies to further that growth inflate.

Inflation and supply chain disruptions are impacting virtually all companies and we're not immune from that.

Our team is working diligently to offset those pressures and we do call out a five cent impact R. 22 results, but we expect those headwinds to be resolved in the third quarter.

Fundamentals of the business are strong and I've never been more optimistic about our prospects.

And no matter the environment. Our team is focused on delivering results in line with or better than our long term financial targets.

So with that Shannon, we're ready to start the Q&A. Please.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Standby, while we compile the Q&A roster.

Our first question comes from Ryan Bell with consumer Edge Research. Your line is open.

Good morning.

Yes.

Well, we're looking at.

The price mix that you have.

Bill to potentially potentially 'twenty some of what's coming from pricing, what's coming from mix.

And then as you're thinking about consumer elasticities.

Just held up pretty well.

Next waves of pricing across the market are hitting a bit more of a pressured consumer so if you'd be able to offer any perspective on that that'd be great. Thanks.

Yes. Thanks for the question Ron I'll take the Elasticities part and then turn it over Steve for price mix. So so far this year, we've been really encouraged by what we've seen.

Our elasticities have been lower than even we anticipated.

I think we called out in the prepared remarks that more.

Most encouraging is the fact that with a significant amount of price increases in January we actually grew our units as well with our top brands Nature's own Dave's and canyon, So I see that as a really good sign going forward now.

As we said we're implementing another price increase in June .

So there's a bit of a wait and see there to see how the consumer reacts.

So that second round of pricing, we all know that the consumer is under quite a bit of pressure, though I will say.

Lot of information out there is somewhat conflicting you read you read some things that suggest that perhaps the consumers starting to bargain have a little bit more making some different decisions I.

I think everybody read a few of the retailers releases this week and saw a little bit of that does that seem to be more limited limited to general merchandise or not as applicable to food.

But nevertheless, we know what the inflationary environment is like and there certainly could be.

A shift in behavior with this next round of pricing, but we just we won't know until we get there. The important thing is that thus far we've seen a pretty healthy healthy consumer Steve you want to take price mix sure. Ryan we typically as you know don't split price mix that are in our reporting but as we've said in our prepared comments the significant majority.

Already a vast majority of that increase on the price mix line actually came from pricing.

So I think it would be safe to assume that the VAT.

Vast majority is price.

Thanks.

In terms of.

The EPS guidance coming down a little bit understandable, given all the inflationary pressures.

My chain disruption.

And you were talking about the impact falling a little bit more.

Heavily into <unk> versus <unk> I was wondering if you'd be able to provide any color on that.

Yes, sure Ryan the price increase that we're implementing won't be effective until June six, but we're already experiencing the higher cost and we have the packaging disruption that we mentioned now the greater part of the impact.

Is due to the pricing lag.

And less due to the packaging effect, but.

Come June six for the remainder of the quarter, we will have the benefit of that additional pricing. So it's really it's really due to a combination of price lag and the packaging disruption we mentioned.

Thanks.

One.

In terms of understanding what kind of increments, how it either has been.

From work from home is there anything you've done in terms of survey work to understand how much bigger the breakfast or lunch occasion.

Now is that you can service with respect to your products.

Yes, so what we've what we've witnessed Ryan is a shift within the category and I think we've mentioned this on some prior calls.

Two specialty buns enroll type products to breakfast feel a lot of that driven by by work from home.

Also a shift to more premium items away from that traditional sort of 20 ounce Loaf segment.

Strong there and we're still quite large there obviously with nature's own.

We have seen a shift in the category out to those.

More premium more differentiated items and the good news is is that has held up at least so far even in this challenging environment.

Great. Thanks, Rob that's it for me thanks.

Thanks, Ron.

Our next question comes from powers with Deutsche Bank. Your line is open.

Alright, Thanks, Hey, good morning.

So Ralph following up on the first question.

Can you just confirm that the new round of pricing has been accepted.

Across the board.

Just confirm also if your guidance contemplates a more adverse reaction to that next round of pricing then.

We may have seen so far and then I wanted to ask kind of loop back on in the wake of Walmart and target this week.

Alluded to there's been a ton of focus on not only elevated concerns around eroding demand.

Elasticity, but.

Kind of embedded my question is.

Learns about increase in retailer pushback to further price increases.

And the prioritization of private label assortment across across a number of categories and against that backdrop. Your your results are forward commentary.

Just kind of stand in opposition to those those concerns.

So could you just maybe give some perspective on that and recognizing past trends right up through this first quarter.

What gives you confidence that you can kind of ride and really double down on that.

Premium innovation momentum going forward into what I think.

<unk> people feel as though maybe everyone feels that much more uncertain future.

Sure. So thanks for the question so as far as the pricing acceptance goes.

We have not had any any issues there most of our pricing is in plant that was planned for June six so theres really no issues there from our standpoint. So we're confident we can get it all in so that's number one number two as far as private label goes just going back to some of our prior conversations as you know private label.

Has been declining in our category for a long time.

And it's still declining, though I will say the declines the declines are less severe than we've seen in <unk>.

Past quarters, but it still has been down I recognize that there has been a little bit of private label growth and broader food, but we're not seeing that in our category right now I keep coming back to the point of differentiation within our category private label are generally very basic items.

We offer a range of items at a range of price points and a range of channels.

That are greatly differentiated from private label.

I am not in any way, suggesting that if we.

Happened to enter a recession or something like that there won't be some level of trade down but as you saw from our prepared remarks, as we look back to the last recessionary period.

See a lot of that in our category.

And on top of that our industry is much different than it was back during that 2008 to 2012 period right. You've got it you got a much more consolidated industry theres been a lot of innovation in the category, we now have Dave's and canyon and nature's own perfectly crafted et cetera that we did not have back then our market share is much higher than it was back then.

So even if there is some level of trade down I feel very confident in our ability to weather any any kind of demand environment. Remember we are in a in a stable and staple category. This is typically a weekly purchase item four for many many consumers.

You add to that the continued work from home trends that we're seeing.

I think we've got a we've got a nice backdrop for continued good performance as far as retailers prioritizing private label, we have not seen that.

I've seen some commentary from retailers that suggests that they're not doing that.

And again, we certainly haven't seen it there seems to still be at.

A focus on.

On branded items in the category and thankfully thankfully.

Got good good brands to fill that space.

Okay.

Very helpful.

Can you just maybe.

You confirmed that or frame for us what kind of degree of.

I guess worsening environment is embedded in.

<unk>.

In your guidance and then I guess.

Mike.

From your prepared remarks, you were pretty clear around sort of the <unk> dynamics rising inflationary headwinds supply chain disruption.

I mean, the pricing that's rolling in leading to that <unk> impact, but I guess.

I'm not as clear as to where you expect the year to and I guess I'm really thinking about it from a gross margin perspective.

Because while you presumably have that full pricing in place by the fourth quarter and supply chain issues resolved costs are likely to keep rising. So I guess, how should we think about the margin profile of the business exiting 'twenty two.

Sure Steve This is Steve.

Kind of talk about it maybe from the cadence of guidance.

As we've said earlier early in the year and now it's really.

Embedded in our forecast because our coverage levels have ramped up but our cost continue to rise and escalate.

Primarily through the third quarter, and then they stabilized somewhat although there'll be it at a higher level in Q4.

Comps perspective.

It will be an easier comp when you have time.

Do you get to the back here.

Back of the year. So so as the year progresses, you will more than likely see some pressure on margin, but as Ralph said, we believe we.

Price to offset or mitigate as much of that as possible.

Then you layer on the cost initiatives that we've talked about.

A couple of quarters now that also allows us to offset some of the some of the inflationary pressure, we're seeing a lot of those initiatives come in the back half.

So you will not really begin to see that ramp up until we are out of Q2.

And then specifically with the nickel around pricing and packaging as we said that should abate somewhat.

Packaging perspective, as we move into Q3, we feel like we have a good plan in place to mitigate that.

And so.

So far we're seeing that plan in action and things are beginning to look somewhat better. So if we feel like.

We've given ourselves from a guidance perspective, what we need to work through that issue.

So the reality is this is going to be the full.

Full year challenge kind of all hands on deck, but we do feel like the way we.

Cash at the way we plan.

And the way, we've thought about kind of elasticities.

Prices continue to ramp.

We have all that built into our guidance.

Okay. Thank you very much I'll pass it on thanks.

Thanks, Steve.

Our next question comes from Michihiro with Sturtevant <unk> Company. Your line is open.

Hey, good morning.

You mentioned.

Okay.

No.

First of all on the supply chain issues I realize you've talked about.

Big bags and things, but what are the specific issues are you.

Are you seeing pressure on or disruptions in creating inefficiencies.

Mitch for us its primarily been packaging, we've had a few raw material type issues, but nothing that I would call out as being terribly significant.

It's really been on the bags, primarily for obviously for our bread items and then a couple of items in cake, but again, we're working through that I have.

Complete confidence that we'll be through it in the third quarter.

Hence again, the reason we call out the nickel impact.

And.

With the bag is it a situation where you.

Your suppliers.

Obviously problems that your suppliers.

Is this.

Wire bag sure.

Yes, it was sort of a combination of factors, but suffice it to say there is plenty of inventory.

Our capacity I should say in the system that we've identified and are moving to so we will actually be spreading our risk around even more than it was before so we will be we will actually come out of this in a much better situation than we went into it. It was a variety of factors that back things up.

Point to one single one.

But again with the actions that we're taking will be from a supplier diversification standpoint will be in much better shape than we were prior.

Okay and then.

As.

So.

We sort of.

Perhaps see the end of the inflation pressure.

And you've taken all your pricing and I know we've talked.

We'll have the questions here about elasticity, but.

Do you expect.

When we get to the other end of this.

This period here.

Matt.

Price list pricing holds when we go to a little more promotional.

Environment or.

Would you prefer that because you can youre promotions can drive accelerated volume or would you rather.

The sort of a stable listed environment.

Modest.

Promotional activity.

What's the what's best for flowers.

Yes.

So great question Mitch.

For me I would rather.

The promotional environment remains stable.

And we've needed to increase our margins margins in this business for for a long time as you well know.

So my hope would certainly be the consumers.

To accept the price increase that the price increase holds and the promotional environment remains remains rational that would be that would be the best for our business.

Okay.

And then.

Still impressive to see your brands gaining share and I'm curious, where that's coming from is it coming from store brands.

Is there are there any regional differences that are noteworthy and your share and your share gains.

Yes, there is one that I'll call out I mean, we continue to perform exceptionally well in the northeast.

We are proud of that performance as you know we put it you've seen you've seen a lot of our commercials I think you've mentioned before.

And we put a lot of investment behind that because as you know it's our our national share is 17 nine to 18, depending on what quarter you look at whereas in the northeast. We're about 10, one or two now I think.

But it was it was zero not too long ago, and we continue to increase that share.

Kind of across all of our all of our categories. So the investment is paying off.

Nature's own.

Perfectly crafted Dave.

Dave's killer bread Canyon, you all continue to gain share.

And we're talking about premium items here and as I mentioned, it's really encouraging to me to see that unit growth along with the price increase.

Okay, and then just one more.

On the foodservice side.

You spoke I guess a quarter or two ago about.

Sort of setting new margin thresholds and foodservice and holding the line on pricing or not accepting.

Unfavorable.

Deals.

How is that strategy Barry.

It's coming along well I'll also said, it's a bit of a long term project because.

Some of our foodservice volume is under contract and.

So we have to work through those contractual terms to fully get to where we want to be but in the areas, where we've been able to take action, we have and it is starting to improve things now the inflation situation does clouded a little bit because.

In foodservice, there is sometimes even more of a pricing lag because.

The contracted business you follow the cadence of the contract and so you may be experiencing inflation, but price increase doesn't come until the contracts as it comes.

So there is a little bit of that going on but where we've been able to take action.

Where we're not under contract it's been it's been very beneficial to have those margin threshold set that the team is fully aligned on working towards so over time I expect to see those foodservice margins start to come up again.

Okay, Alright, thank you very much.

Okay. Thank you.

Our next question is from the end of the new with Stephens. Your line is open.

Hey, Thanks, good morning.

So all of that.

I wanted to ask about your portfolio optimization strategy and you talk about.

Whittling away at your lower margin FTE.

As you think about that strategy are you purely looking at all of your lower margin Skus and removing those strategically from the portfolio or are you retaining some of your higher demand low margin Skus, how do you think about that balance between where the.

Sure.

The margin versus the demand critical mass with us.

Yeah. Good question. So there are some of our excuse me there are some of our lower margin products that we would describe as more strategic.

In the sense that.

In partnership with some of our retailers, having that store brand business for example.

Gives us preferential space for our brands, where that's not the case.

Our intent is to get those margins improved whether that's through.

A combination of pricing.

Distribution methods efficiencies on our end et cetera, but if we're not able to get that up to the correct threshold. Then we have the option to thoughtfully exit that business and then convert that capacity.

As I've mentioned on previous calls to our higher margin branded business, which we've been doing for the last several years, it's really really been beneficial for us.

Got it okay. Thanks Sam.

And then with respect to your Capex guidance.

Came down a little bit you talked about product raw material affords you a departure of a production platform.

To what extent are you seeing that in your capital Capex project pipeline.

And how are you navigating that environment.

Can you can you repeat that first part of that broke up a little bit.

Sure just the revision lower of your Capex guidance, how much of that has to do with production or labor labor challenges are material challenges versus.

Timing differences.

I mean, the reality is the vast majority is probably more timing.

When we look at the bakery optimization that we've been talking about now for a couple of years.

Some of those projects as we continue to evaluate where that needs to happen.

We have we have pushed somewhat on the timing so.

It will probably take us into out of this year into next year.

So it's really it's really mostly timing related I mean, we're pretty much on track when it comes to the largest project going on right now around ERP plus a digital those are coming in about where we thought.

It's really around some of the optimization, but it really has nothing to do with <unk>.

Availability of supply, it's more of just kind of a push from a timing perspective.

Okay fair enough.

Last question.

I know, it's early days, but the <unk> you talked about promising feedback trends there is that mostly a market share gain opportunity or do you think there's an opportunity for distribution gains in the new channels as well.

Or otherwise.

Yes, we absolutely think there's distribution opportunities there and I was careful note. It's early days, but the results in the test markets.

Really really good.

And they did exceed our expectations in it.

It's a wonderful position to be in because.

It's the rare brand that can get can move across segments and days is proving that it can do it right. It moved out a loaf bread into breakfast and then breakfast in the bonds and now we're jumping into the into the healthy snacking category.

And our retail partners are really excited about our consumers are really excited about it as I mentioned, we've got a pipeline of things coming coming behind that.

So it's early but.

It's incumbent upon us to.

Find new revenue streams for this business.

We all know they didn't sort of the mainline low segment the category dynamics are a little bit tough there.

We also note that as well as <unk> and Canyon have performed.

And there are core segments overtime, you got to expect those growth rates are going to start to come down a little bit.

And so it's incumbent upon us to identify new revenue streams and that's what we're doing with these great brands that we have so.

I called it out specifically because we are we are so optimistic about it.

Yes, Okay very good great. Thanks best of luck.

Thank you.

Our next question comes from Bill Chappell with <unk> Securities. Your line is open.

Thanks, Good morning.

Hey, Bill.

Sorry.

A little bit late on the call. So some of this might have been asked but.

In particular.

As you're looking across the the kind of trade down.

So.

Would you expect it.

Having today, but as you kind of look six months nine months out would you expect it to go to the opening price point private label or just be more trade down within your brands.

Sure.

Or do you not.

Do not expect much at all if we go in to greater recession.

Yes, we talked a little about a little bit about this earlier, but I don't I don't mind repeating some of it.

Yes, if you look back to the last recessionary period, we actually saw not.

Not a whole lot of trade down to private label.

We've also mentioned in the past in the past that we play across a variety of price points from private label all the way up to.

Super premium and everything in between right you've got private label, you've got Wonder you've got nature zone, you've got David you've got Canyon.

There is something for everybody there.

But if history is a guide I would not expect a tremendous amount of trade down to private label I also mentioned building.

Build it the industry is quite different now than it was during the last recessionary period. The industry is more consolidated our company is stronger we have a much stronger market share than we did during that last period and we've got a much stronger portfolio of brands that are significantly differentiated from from private label and consumers continue to show a preference for those.

So my outlook would be that while we may see some trade down to private label that would only be natural particularly if we.

In a recession entered a recession for example.

Flowers is well positioned to hold up very well in that environment.

Got it and again this might have been asked but I guess, Walmart yesterday highlighted bread milk fees other things that they really wanted to keep prices low.

I think some people took away the thought that they might start pushing back more on incremental price increases from here I know you are not even talking about individual.

Customers, but.

Do you feel like it's getting going to be tougher to pass off incremental prices with retail.

Business different just because it's such a.

<unk> inventory and scan based kind of price.

Got it.

A little bit different some other packaged food any color there would be great.

Yes, I do think that we're a little bit different just given the service levels that we provided as retailer obviously being being DSD.

I also think that it helps all mentioned and again the strength of the brands I mean, it's yes.

I don't think you want to be in a position where you've got a number for brand right now and so having a portfolio of number one brands certainly does help.

I don't know what the retailers will do in the future what I can tell you is that.

For our Gen six price increase.

Theres been no issue there for us.

Okay that helps and then.

Last one for me just as I kind of look out at use of cash.

Since some of the Capex has been pushed out is there anything else you can do in terms of.

Do you pull forward looking at M&A do you pull forward other projects or is it just.

Kind of the way Capex work.

It takes a little bit longer, especially on some construction projects in this time.

Sure.

The reality is from our overall capital allocation perspective, I would say really nothing changes in our thought process with the slight pullback from a capital perspective, obviously.

You've heard Ralph talk about M&A, we continue to have a pretty strong.

Pipeline from that perspective, it's just a matter of valuation and timing so.

So that's always a consideration.

Then.

As we look at other ways to use our use of our cash whether it's dividends or stock repurchases I'd say, we're pretty we're sticking pretty true to our philosophical views. There. So I don't anticipate that changing so really the pull back from a capital perspective.

As Tommy so it's not like we've eliminated projects as more of a shift maybe between years.

So I don't think Youll see us do anything.

Dramatically different than what you've seen in the past.

Got it and I'm sorry, one last question would you say foodservice business is kind of back to where it was in 2019 or are we still building back to that.

We're still building back to it it's improving but still below pre pandemic for us, but remember also that some of the disruptions that we had.

During the quarter would have impacted that volume a little bit too. So it's a mix of both.

Got it thanks, so much.

Thank you.

Thank you and I'm currently showing no further questions at this time I'd like to turn the call back over to Ralph Mcmullan for closing remarks.

Thank you Shannon. Thank you very much everybody for your interest in our company. We look forward to speaking with you again next quarter and hope everybody has a great weekend take care.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Good day, and thank you for standing by.

Welcome to the flowers foods first quarter 2020 results conference call and webcast.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

I ask a question during this session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded.

For any further assistance please press star zero.

Now like to hand, the conference over to your Speaker today, J T Rieck Senior Vice President of Finance and Investor Relations. Please go ahead.

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.

In addition to what you're hearing 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.

Reconciliations are provided in the earnings release at the end of the slide presentation on our website.

Joining me today are Ross Macmillan, President and CEO , and Steve Kinsey, Our CFO Ross I'll turn it over to you.

Thanks, Jason Good morning, everybody I appreciate you joining our first quarter call I am I am very proud of our team's performance.

<unk> environment.

Their perseverance drove record quarterly results in sales and adjusted EPS.

Our leading brands continue to gain share and we're successfully implementing strategies to further that growth inflation.

Inflation and supply chain disruptions are impacting virtually all companies and we're not immune from that our team is working diligently to offset those pressures and we do call out a <unk> <unk> impact to R. 22 results, but we expect those headwinds to be resolved in the third quarter.

The fundamentals of the business are strong and I've never had never been more optimistic about our prospects.

And no matter the environment. Our team is focused on delivering results in line with <unk>.

We're better than our long term financial targets.

So with that Shannon, we're ready to start the Q&A. Please.

Thank you as a reminder to ask a question you will need to press star one of your telephone to withdraw your question press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from Ryan Bell with consumer Edge Research. Your line is open.

Good morning.

Well.

We're looking at.

The price mix that you have.

Bill to potentially potentially 'twenty some of what's coming from pricing, what's coming from mix.

And then as you're thinking about consumer elasticities.

Just held up pretty well on the next wave of pricing and cost market.

A bit more of a pressured consumer so as you would be able to offer any perspective on that that would be great. Thanks.

Yes. Thanks for the question Ron I'll take the Elasticities part and then turn it over to Steve for price mix. So so far this year, we've been really encouraged by what we've seen.

Our elasticities have been lower than even we anticipated.

I think we called out in the prepared remarks that.

Most encouraging is the fact that with a significant amount of price increases in January .

We actually grew our units as well with our top brands Nature's own Dave's and Canyon, So I see that as a really good sign going forward now.

As we said we're implementing another price increase in June .

So there's a bit of a wait and see there to see how the consumer reacts to.

So that second round of pricing, we all know that the consumer is under a quite a bit of pressure, though I will say.

Lot of information out there is somewhat conflicting yes, you read you read some things that suggest that perhaps the consumer is starting to bargain hard a little bit more making some different decisions I.

I think everybody read a few of the retailers releases this week and saw a little bit of that does that seem to be more limited limited to general merchandise and not as applicable to suit.

But nevertheless, we know what the inflationary environment is like.

And there certainly could be.

A shift in behavior with this next round of pricing, but we just we won't know until we get there. The important thing is that thus far we've seen a pretty healthy healthy consumer Dave you want to take price mix sure. Ryan we typically as you know don't split price mix in our reporting but as we've said in our prepared comments the significant majority.

Already our vast majority of that increase on the price mix line actually came from pricing.

So I think it would be safe to assume that the FAA.

Vast majority is price.

Okay.

Thanks, and then in terms of.

The EPS guidance coming down a little bit understandable, given all the inflationary pressures supply.

My chain disruption.

And you were talking about the impact falling a little bit.

We're heavily into <unk> versus <unk> I was wondering if you'd be able to provide any color on that.

Yes, sure Ryan the price increase that we're implementing won't be effective until June six, but we're already experiencing the higher cost.

We have the packaging disruption that we mentioned now the.

The greater part of the impact.

Due to the pricing lag.

And less due to the packaging effect, but come June six for the remainder of the quarter. We will have the benefit of that additional pricing. So it's really it's really due to a combination of price lag and the packaging disruption we mentioned.

Thanks.

Last one.

In terms of understanding what kind of increments, how it either has been.

From work from home is there anything you've done in terms of survey work to understand how much bigger the breakfast or lunch occasion now.

Now is that you can service with respect to your products.

Yes, so what we've what we've witnessed Ryan is a shift within the category and I think we've mentioned this on some prior calls.

Two specialty buns and rolls type products to breakfast feel a lot of that driven by work from home.

Also a shift to more premium items away from that traditional sort of 20 ounce Loaf segment, we're still strong there and we're still quite large there obviously with nature's own.

We have seen a shift in the category out to those more.

Premium more differentiated items and the good news is is that has held up at least so far even in this challenging environment.

Great. Thanks, Rob that's it for me.

Thanks, Ron.

Our next question comes from powers with Deutsche Bank. Your line is open.

Alright, Thanks, Hey, good morning.

So Ralph following up on the first question.

Can you just confirm that.

New round of pricing has been accepted.

Across the board.

Concept.

Confirm also if your guidance contemplates a more adverse reaction to that next round of pricing.

We may have seen so far.

Then I wanted to ask you a kind of loop back on in the wake of Wal Mart target. This week as you kind of alluded to there's been a ton of focus on not only elevated concerns around eroding demand.

Elasticity, but.

Kind of embedded my question is concerned about increasing retailer pushback to further price increases and the prioritization of private label assortment.

Across across a number of categories and against that backdrop. Your your results are forward commentary.

Standard in opposition to those those concerns.

Can you just maybe give some perspective on that and recognizing past trends right up through this first quarter.

What gives you confidence that you can kind of ride and really double down on that.

Utilization momentum going forward into what I think increasingly people feel as though.

Maybe everyone feels that much more uncertain future.

Sure. So thanks for the question so as far as the pricing acceptance goes we have we have not had any any issues. There most of our pricing is in implant that was planned for June six so theres really no issues there from our standpoint, so we're confident that we can.

Get it all in so that's number one number two as far as private label goes just going back to some of our prior conversations as you know private label has been declining in our category for a long time, and it's still declining though I will say this.

Clients the declines are less severe than we've seen in past quarters, but it still has been down I recognize that there has been a little bit of private label growth and broader food, but we're not seeing that in our category right now I keep coming back to the point of differentiation within our category private label are.

Generally very basic items.

We offer a range of items at a range of price points and a range of channels.

There are greatly differentiated from private label.

I am not in any way, suggesting that if we.

Happened to enter a recession or something like that there won't be some level of trade down but as you saw from our prepared remarks as we look back to the last recessionary period really didn't see a lot of that in our category.

And on top of that our industry is much different than it was back during that 2008 to 2012 period right. You've got it you've got a much more consolidated industry theres been a lot of innovation in the category, we now have Dave's and canyon and nature's own perfectly crafted et cetera that we did not have back then our market share is much higher than it was back then.

You add to that the continued work from home trends that we're seeing.

We've got a we've got a nice backdrop for continued good performance as far as retailers prioritizing private label, we have not seen that.

I've seen some commentary from retailers that suggest that they're not doing that.

And again, we certainly haven't seen it there seems to still be.

Focus on on branded items in the category and Thankfully Thankfully, we've got good good brands to fill that space.

Okay.

Very helpful.

Can you just maybe.

You confirmed or frame for us what kind of degree of.

I guess worsening environment isn't is embedded in.

<unk>.

In your guidance and then I guess.

I was left from your prepared remarks, you were pretty clear around sort of the <unk> dynamics rising inflationary headwinds supply chain disruption.

And then the pricing that's rolling in leading to that <unk> impact, but I guess.

I'm not as clear as to where you expect the year to and I guess I'm really thinking about it from a gross margin perspective.

Sure. Steve This is Steve up when you look kind of I'll talk about it maybe from the cadence of guidance.

As we've said earlier early in the year and now it's really.

Embedded in our forecast because our coverage levels have ramped up but our cost continue to rise and escalate.

<unk>.

Primarily through the third quarter, and then stabilize somewhat although there'll be it at a higher level in Q4 from a.

Comps perspective.

It will be an easier comp when you by the time you get to the back here.

Back of the year. So so as the year progresses, you will more than likely see some pressure on margin, but as Ralph said, we don't believe we price to offset or mitigate as much of that as possible and then you layer on the cost initiatives that we've talked about.

A couple of quarters now that also allows us to offset some of the some of the inflationary pressure, we're seeing a lot of those initiatives come into the back half.

So you will not really begin to see that ramp up until we are out of Q2.

And then specifically with the nickel around pricing and packaging as we said that should abate somewhat.

Packaging perspective, as we move into Q3, we feel like we have a good plan in place to mitigate that.

And so.

So far we're seeing that plan in action and things are beginning to look somewhat better. So if we feel like.

We've given ourselves from a guidance perspective, what we need to work through that issue.

So the reality is this is going to be a full year challenge kind of all hands on deck, but we do feel like.

We forecasted the way we plan.

The way, we've thought about kind of elasticities.

Prices continue to ramp.

We have all that built into our guidance.

Okay. Thank you very much I'll pass it on thanks.

Thanks, Steve.

Our next question comes from Mcmorrow with Sturtevant <unk> Company. Your line is open.

Hey, good morning.

You mentioned.

Okay.

No.

First on the supply chain issues I realize you've talked about plastic bags and things, but what are the specific issues are you.

Are you seeing pressure on or disruptions and creating inefficiencies.

That's for US, it's primarily been packaging, we've had a few raw material type issues, but nothing that I would call out as being terribly significant.

It's really been on the bags, primarily for obviously for our bread items and then a couple of items in cake, but again, we're working through that.

Complete confidence that we'll be through it in the third quarter.

Hence again, the reason we call out the nickel impact.

And.

With the bag is is it a situation where you.

Your suppliers.

Obviously problems that your suppliers.

Is this.

Wire bag short.

Yes, it was sort of a combination of factors, but suffice it to say there is plenty of inventory.

Point to one single one.

But again with the actions that we're taking will be from a supplier diversification standpoint will be in much better shape than we were prior.

Okay and then.

As.

So.

As we sort of.

Okay.

Perhaps see the end of the inflation pressure.

And you've taken all your pricing and I know we've talked.

A lot of good questions here about elasticity, but.

Do you expect.

When we get to the other end of this.

This period here.

Net.

Price.

List pricing holds and we go to a little more promotional.

Environment.

Sure.

And would you.

You prefer that because you can youre promotions can drive accelerated volume or would you rather.

The sort of a stable list environment.

Modest.

Promotional activity.

What's the what's best for flowers.

Yes.

So great question Mitch.

For me I would rather.

The promotional environment remained stable.

And we've needed to increase our margin margins in this business for for a long time as you well know.

So my hope would certainly be the consumers.

To accept the price increase that the price increase holds and the promotional environment remains remains rational that would be that would be the best for our business.

Okay and then.

Still impressive to see your brands gaining share and I'm curious, where that's coming from is it coming from store brands.

Is there are there any regional differences that are noteworthy and your share and your share gains.

Yes, there is one that I'll call out I mean, we continue to perform exceptionally well in the northeast.

Really proud of that performance as you know we put it you've seen you've seen a lot of our commercials I think you've mentioned before.

And we put a lot of investment behind that because as you know.

Our national share is 17 nine to 18, depending on what quarter you look at whereas in the northeast. We're about 10, one or two now I think.

But it was it was zero not too long ago, and we continue to increase that share.

Kind of across all of our all of our categories. So the investment is paying off.

Nature's own, particularly perfectly crafted.

Killer bread Canyon, you all continue to gain share.

And we're talking about premium items here and as I mentioned, it's really encouraging to me to see that unit growth along with the price increase.

Okay, and then just one more.

On the foodservice side.

You spoke I guess a quarter or two ago about.

Sort of setting new margin thresholds and foodservice and holding the line on pricing or not accepting.

Unfavorable.

Deals.

How is that strategy Barry.

It's coming along well I'll also said, it's a bit of a long term project because.

Some of our foodservice volume is under contract.

Correct.

And so we have to work through those contractual terms to fully get to where we want to be but in the areas, where we've been able to take action, we have and it is starting to improve things now the inflation.

Situation does clouded a little bit because.

In foodservice, there is sometimes even more of a pricing lag because.

The contracted business you follow the cadence of the contract and so you may be experiencing inflation, but your price increase doesn't come until the contracts as it comes.

So there is a little bit of that going on but where we've been able to take action.

Where we're not under contract it's been it's been very beneficial to have those margin threshold set that the team is fully aligned on working towards so over time.

To see those foodservice margins start to come up again.

Okay, Alright, thank you very much.

Okay. Thank you.

Our next question is from Ben <unk> with Stephens. Your line is open.

Hey, Thanks, good morning.

Good morning.

I wanted to ask about your portfolio optimization strategy and you're talking about.

Whittling away at your lower margin FTE.

As you think about that strategy are you purely looking at all of your lower margin Skus and removing those strategically from a portfolio or are you retaining some of your higher demand low margin Skus, how do you think about that balance between where the.

The margin versus the demand critical mass.

Yes. Good question. So there are some of our excuse me there are some of our lower margin products that we would describe as more strategic.

In the sense that.

In partnership with some of our retailers, having that store brand business for example.

US preferential space for our brands.

That's not the case.

Our our intent is to get those margins improved whether that's through.

A combination of pricing.

<unk> mentioned on previous calls to our higher margin branded business, which we've been doing for the last several years, it's really really been beneficial for us.

Got it okay. Thanks.

And then with respect to your Capex guidance came down a little bit you're talking about product raw material a forward view of departure of a production platform.

To what extent are you seeing that in your cap some capex project pipeline.

And how are you navigating that environment.

Can you can you repeat that first part of that broke up a little bit.

Sure just the revision lower of your Capex guidance, how much of that has to do with production or labor labor challenges are material challenges versus just.

Timing differences.

I mean, the reality is the vast majority is probably more timing.

When we look at the bakery optimization that we've been talking about now for a couple of years.

Some of those projects as we continue to evaluate where that needs to happen.

We have pushed somewhat on the timing so.

It will probably take us into out of this year into next year.

It's really around some of the optimization, but it really has nothing to do with <unk>.

Availability of supply, it's more of just kind of a push from a timing perspective.

Okay Fair enough and then my last question I.

I know, it's early days, but the <unk> you talked about promising feedback trends there is that mostly a market share gain opportunity or do you think there is an opportunity for distribution gains in the new channels as well two quarters or otherwise.

Yes, we absolutely think there's distribution opportunities there and I was careful note. It's early days, but the results in the test markets.

Really really good.

And they did exceed our expectations in it.

It's a wonderful position to be in because.

It's the rare brand that can get can move across segments and daves is proving that it can do it right. It moved out a loaf bread and breakfast and then breakfast in the bonds and now we're jumping into the into the healthy snacking category.

And our retail partners are really excited about our consumers are really excited about it as I mentioned, we've got a pipeline of things coming coming behind that.

So it's early but it's incumbent upon us to find new revenue streams for this business.

We all know that in sort of the mainline low segment.

Category dynamics are a little bit tough there.

We also know that.

Well as <unk> and Canyon have performed.

And there are core segments overtime, you got expect those growth rates are going to start to come down a little bit.

And so it's incumbent upon us to identify new revenue streams and that's what we're doing with these great brands that we have so.

I called it out specifically because we are we are so optimistic about it.

Yes, Okay very good great. Thanks best of luck.

Thank you.

Our next question comes from Bill Chappell with <unk> Securities. Your line is open.

Thanks, Good morning.

Hey, Bill.

Sorry.

A little bit late on the call. Some of this might have been asked but.

In particular.

As you're looking across the.

On a trade down.

Any.

No.

Would you expect it.

Having today, but as you kind of look six months nine months out would you expect it to go to the opening price point private label or just be more trade down within your brands.

<unk>.

Or do you not.

Do not expect much at all if we go in to greater recession.

Yes, we talked a little about a little bit about this earlier, but I don't mind repeating some of it yes.

If you look back to the last recessionary period, we actually saw.

Not a whole lot of trade down to private label.

We've also mentioned in the past in the past that we play across a variety of price points from private label, all the way up to the Super premium and everything in between right. You've got private label, you've got Wonder you've got nature zone, you've got Dave you've got Canyon.

There is something for everybody there.

But if history is a guide I would not expect a tremendous amount of trade down to private label I also mentioned.

The industry is quite different now than it was.

The last recessionary period, the industry is more consolidated our company is stronger we have a much stronger market share than we did during that last period and we've got a much stronger portfolio of brands that are significantly differentiated from from private label and consumers continue to show a preference for those products. So my outlook would be.

While we may see some trade down to private label that would only be natural particularly if we.

Recession entered a recession for example.

Flowers is well positioned to hold up very well in that environment.

Got it and again this might have been asked but I guess, Walmart yesterday kind of highlighted bread milk tea as other things that they really wanted to keep prices low.

I think some people took away the thought that they might start pushing back more on incremental price increases from here. I know you are not you can talk about individual.

Customers, but I mean do.

Do you feel like it's getting going to be tougher to pass off incremental prices with retail is your business different just because it's such.

Vendor managed inventory and scan based kind of.

Yes.

Got it.

A little bit different some other packaged food any color there would be great.

Yes, I do think that we're a little bit different just given the service levels that we provide as a retailer obviously being being DSD.

I also think that it helps all mentioned and again the strength of the brands I mean, it's yes.

I don't think you want to be in a position where you've got a number for brand right now and so having a portfolio of number one brands certainly does help.

I don't know what the retailers will do in the future what I can tell you is it.

For our Gen six price increase.

Theres been no issue there for us.

Okay.

That helps and then.

Last one for me just as I kind of look out at use of cash.

Since some of the Capex has been pushed out is there anything else you can do in terms of.

Do you pull forward looking at M&A do you pull forward other projects or is it just.

The kind of the way Capex works.

It takes a little bit longer, especially on some construction projects in this time.

Sure.

The reality is from our overall capital allocation perspective, I would say really nothing changes in our thought process with the slight pullback from a capital perspective, obviously.

You've heard Ralph talk about M&A, we continue to have a pretty strong.

Pipeline from that perspective, it's just a matter of valuation and timing so.

So that's always a consideration.

And then.

As we look at other ways to use or use our cash whether it's dividends or stock repurchases I'd say, we're pretty we're sticking pretty true to our philosophical views. There. So I don't anticipate that changing so really the pull back from a capital perspective.

As Tommy so it's not like we've eliminated projects as more of a shift maybe between years.

So I don't think Youll see us do anything.

Dramatically different than what you've seen in the past.

Got it and I'm sorry, one last question would you say foodservice business is kind of back to where it was in 2019 or are we still building back to that.

We're still building back to it it's improving but still below pre pandemic for us, but remember also that some of the disruptions that we had.

During the quarter would have impacted that volume a little bit too. So it's a mix of both.

Got it thanks, so much.

Thank you.

Thank you and I'm currently showing no further questions at this time I'd like to turn the call back over to Ralph Mcmullan for closing remarks.

Thank you Shannon. Thank you very much everybody for your interest in our company.

Look forward to speaking with you again next quarter and hope everybody has a great weekend take care.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2022 Flowers Foods Inc Earnings Call

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