Q2 2022 Flowers Foods Inc Earnings Call

August 12, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Yeah.

Good day and welcome to the flowers foods second quarter 2022 results call. At this time all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session as.

As a reminder, this call may be recorded.

I would like to turn the call over to J T Rieck Senior Vice President of Finance and IR you may begin.

Thank you Michelle and good morning.

Hope everyone had the opportunity to review our earnings release listened 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.

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.

Joining me today are rising <unk>, president and CEO and Steve Kinsey, our CFO Ross I'll turn it over to you.

Okay. Thanks, Jade Hey, good morning, everybody. Thanks for joining the second quarter call.

We continue to execute execute well in the quarter.

Driving second quarter sales to record levels, our performance in this challenging consumer environment demonstrates the resilience.

The category and the strength of our leading brands do.

Due to the outstanding efforts of our team.

We successfully mitigated much of the supply chain pressure, we discussed last quarter. As a result, we raised the bottom end of our 2022 EPS guidance by <unk> to $1 25.

I'd like to thank our exceptional flowers team for their hard work and dedication which has made the strong performance possible.

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

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

And with that Michelle we're ready to start the Q&A. Please.

As a reminder to ask a question. Please press star one one.

Our first question comes from Bill Chapell with Jewess. Your line is open.

Thanks, Good morning.

Good morning.

Hey, Ralph you had mentioned in prepared remarks, a little bit about I guess, one competitor being a little bit slower to to raise prices and I don't know if that was just a timing issue.

Maybe discuss any changes in terms of the competitive landscape of pricing or is everybody for the most part kind of moving up with commodities and input costs and what have you and then your kind of thought as I think you also had.

That inflation would start to peak by October in terms of whats Youre looking at maybe a little more color there would be great. Thanks.

Sure happy to do that I'll, let Steve handle the inflation question, but.

With regard to pricing it wasn't so much the other competitors were.

We're late raising price is just that bill we went in a little bit earlier than normal.

So I would say that.

Most of the rest of the industry was relatively on time as far as typical times to raise prices in the industry, but we went in June a little bit earlier and so.

We ended up with where price gaps that were a little bit a little bit larger than historical gaps.

And I think we commented that that impacted our unit share a little bit little bit in the quarter, but since then.

The industry has has followed and raise prices as we have Steve you want to touch on inflation sure Bill. So we have said that Q3 will see our highest overall cost.

From an inflationary standpoint, it will moderate somewhat in Q4, but again it still will be elevated in Q4, but the peak of that happens in Q3, and then it starts to pull back slightly.

Got it and then separately.

Just on an acquisition plus innovation.

Can you give us a little more color and sorry, the name of the company is.

Skipping me.

The investment you made in the quarter I guess.

I would have expected normally Youtube buy outright those type of businesses. So it kind of partnering with the small business and what that brings to the portfolio and then.

I'll leave it at that and let others ask questions on on other innovation.

Sure. Thanks Bill.

Yes. The name of the company is based culture, there are gluten free and grain free baked foods company. So it's all.

Quito and Paleo certified certified very much on trend. The reason that we took more of a venture approach to this is that based culture is much much earlier in their growth cycle than <unk>.

Even like of Dave's killer bread was back in 2015.

And we've been looking for some time to start doing venture type minority type investments to bolster our own internal agile innovation efforts and this one just fit very nicely with our with our portfolio and where we're trying to go as far as healthier eating on trend attributes like Quito, and Paleo, which we don't really have.

Much of an offering in right now so we're quite excited about a small investment but.

Small company, but we're quite excited about the prospects.

And.

When should we start to see I guess wider.

Wider distribution of their products and then is there an option to two.

The company outright down the road.

Yeah, I mean, there is and will be helping them not only with their with their production because obviously, we have that skill set and they don't they're very small organization, but also sales and distribution opportunities. So we're already working in that regard.

So I would see the products in the next couple of quarters everywhere.

Two quick.

It will probably take a little bit longer than that for it to be everywhere again, they're really small, but we'll grow them in a way that they can they can absorb with their production capacity, which eventually will need to be expanded.

Got it I'll turn it over thanks, so much.

Thank you Bill.

Our next question comes from Robert Johnson with Jefferies. Your line is open.

Great. Thanks, so much.

Maybe just a question for you Steve first.

I think you just said.

I think.

Cost may have peaked in Q2 still high Q3 Q4.

Prepared remarks seems like Youre, essentially almost fully hedged for the year.

And ingredients.

Assuming.

So if we think about kind of that.

Margin cadence I guess inclusive of mix in the back half.

Sure.

There should be kind of this implied.

Our expectation for EBITDA actually grow I guess in the second half and then maybe just explain if thats what it sounds like it's a little bit more Q4 weighted and then I have a quick follow up.

Yes, just one quick correction there, we said Q3 would be our highest cost quarter.

<unk> got cost continue so yes coming into Q3, it will pull back some in Q4, but for the most part.

We will remain will be elevated as well just talk.

Quite to the level as Q3.

And Youre right.

Back half, we have said a lot of our initiatives come into play.

We have the pricing to mitigate a lot of the inflation, but we do have.

Several.

Cost savings initiatives as well as productivity initiatives that are in flight.

From a cadence perspective, we said those will come in Q3 Q4.

That will be a big driver of EBITDA.

Back half.

And Rob just to just to put a number on that we're still we're still in the range of that 25% to $35 million all of which is back half.

Okay, great Yeah, I realize that because I think there's a line in the prepared remarks et cetera, as you got through the second quarter, you're actually starting to improve.

Improve sounds like maybe that was also a function of maybe some of the more more of the pricing and some of the productivity coming through in the latter part of the quarter that is that fair.

Yes, and remember too I don't know if this was clear from the prepared remarks, but there is still more pricing that will continue to come in.

Steve roughly through the third quarter right, yes, most of it but there is still more rolling in primarily in foodservice. So that will also help to Rob.

Okay Super and then just quickly on <unk>.

Obviously, it sounds like there is a little bit of supply constraint in the quarter. It seems like that's essentially been six now and then you also have the new West coast facility, So kind of bigger picture, yes, we're thinking through kind of back half of this year, then really on the go forward from there.

Yeah.

<unk> view.

Well lets say youre not going to quantify what the opportunity is the west coast.

But.

Yes.

That would still be kind of an ongoing driver of the business maybe outside of what you see.

On the rest of the business.

Any incremental color would be great.

No question about it Rob I mean, we still we're still so confident in <unk> and its growth prospects we were.

Hampered a bit.

The packaging issues that we had in the second quarter for Dk Bay, but also those capacity constraints, which are now are now resolved those capacity constraints.

Promote dk be that much.

But we were so constrained we weren't able to do much at all.

So that that.

The units a bit now that we have Henderson up and running we can go back to what we've been doing historically driving the growth of <unk> out west.

Even still though I do want to point out and I don't I don't know if we mentioned this in prepared remarks or not but.

Even though <unk> was slightly pressured in the quarter from both from a unit standpoint, the breakfast segment for Dk B was outstanding in the quarter.

And as you know that's been a key area of focus for us since we're underpenetrated. There. So that was one one highlight for <unk> in the quarter that won't call out.

Alright. Thanks.

Thanks, So much I'll pass it on.

Thanks, Rob appreciate it.

Yeah.

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

Hey, guys, Jim <unk> on for Ben Good morning.

Good morning, I wanted to ask <unk> in your prepared comments you had mentioned.

Youre seeing lower income consumers trade down to less expensive, which is kind of on par with expectations, but then for higher income consumers. They had actually been increasing their purchases with the premium products can you, maybe just drill down on that a little bit.

C or talk about what's driving that because we would think that everyone. Just kind of shifts parallel shifts down to the fact that they are increasing as I would say counter cyclical to what you would expect.

Yes.

There's a lot to talk about there really I think theres going to be a lot of questions about elasticity. So this is as good a time as I need to talk about it.

There is.

Quite a few sort of competing data points out there that we're looking at on the one hand, we saw private label.

Gain a little bit of unit share 10 basis points of unit share, but if you look at the overall private label units they were down almost 8 million units in the quarter.

A lot of that private label share growth was being driven.

Mass.

And what we've seen in mass as retail prices being held down.

Which kind of creates a bit more of a.

The gap then you might have historically seen if you look at the if you look at the grocery channel sort of ex mass private label loss share again in the quarter and in that in that channel. The price gaps were much more in line with historical averages and what we're seeing in mass.

Turning to <unk> specifically.

These declines were primarily in California, and the mass channel and they work as you pointed out they were concentrated more among lower income households.

<unk> grew units and share in the northeast and nationwide among higher income households.

You might expect and product Trups also increased nationwide among both middle and higher income households, but then a caveat to that is we are seeing even those higher income households, seek a bit more value from the mass and club channels. So you can see there is.

Little bit of a little bit of Yin and Yang there when we're looking at looking at the data I think it's still early days, but the takeaway is that.

Given given the environment and everybody saw the news yesterday.

<unk> prices up 13, 1% the highest $19 79.

And yet we still performed very very well in that environment nature zone units were up Camden units were up.

Yes, our volumes were down but quite a bit of that is our own portfolio optimization and SKU rationalization, we're doing and our volume declines were right in line with our expectations. So overall when you look at the total picture, even though there is some sort of conflicting data points out there. We were very very pleased with with how our brands and the company before.

During the quarter.

If I can follow up on that do you think it's because the price point is still so accessible just in dollar terms that if everything's up.

13% change on a $2 item is obviously a lot lower than a 13% change on a $20 item.

Is it just that there's nowhere else for the consumer to go and so it's easy to make a $3 indulgent merchants, then a $30 one.

Or.

Thanks.

Yes, certainly I think it is part of it we've said many many times I mean, when you think about an inflationary environment. Brent is still a very very economical choice just given the number of servings.

A loaf right.

And Furthermore.

We even though prices have increased.

We play across all the price points from Super premium Dave's killer bread and Canyon, all the way down to private label. So.

Simply put there is something for everybody there there's something for every household income every household budget.

Okay great.

And then if you guys could give US you mentioned real briefly in the prepared remarks.

Bars test if maybe you could just give us a little more commentary on.

Consumer reception of that maybe channels that are working better or worse, just how we're thinking about the rollout of that.

Yes.

So it's still early days for that we're still in test market, but we're working towards national National distribution.

The first three Skus and as we said in the prepared remarks were wildly excited about the results that we've seen so far it just it's just further testament to the <unk> brand and what it stands for and the quality and the story behind it et cetera.

So we're very excited about it and further news not in the prepared remarks, we've recently launched three additional skus that are high protein.

The original three were not to add to that that we're also putting in the test markets and quite excited about as well so.

Not resting on our laws, we continue to innovate with Dk B and one of the reasons. We continue to be excited about its growth prospects going forward.

Okay, great when do we when should we expect to see.

First handful of Skus out kind of in stores across the country.

Yes early next year.

Okay perfect.

I'll pass it on.

Thank you.

Again to ask a question please press star one.

Our next question comes from Connor <unk> with consumer Edge Research. Your line is open.

Good morning, guys. Thanks for the question.

Good morning.

Just on the mix shift more towards private label in the quarter.

Was wondering if you could address the market locations of that chip just I guess, probably most of the 240 basis point decline was attributable attributable to that mix shift and I guess also sort of just following up on Ben's question.

Appear reasonable assumption that maybe in the next few quarters the portfolio remains slightly more oriented towards private label versus 2021.

So private label definitely went up in the quarter, but remember that's that's virtually all price I've already mentioned that the units were down in the category 8 million units.

Thats a good thing.

As we've mentioned on prior calls we've been working diligently to improve the margin profile of our lower margin business, which is generally speaking the private label and foodservice businesses and we've taken significant price to mitigate these inflationary headwinds in both of those businesses now certainly there is still a lower margin than branded retail.

The pressures, we're feeling on gross margin from ingredients packaging freight eggs you name it certainly impacting us on the gross margin line, but Steve can comment further we have done a good job I think leveraging SG&A and thats come down as a percent of sales right.

I would say overall the inflationary pressures.

Probably drive more of the margin pressure than the mix shift because.

Even though it's happening it's still not we said it's still not meaningful at this point, we continue to monitor that so a lot of the margin pressure really is coming from the inflation on input cost transportation labor.

More than the mix itself.

One other thing I would add to that.

That's exactly why it's more important than ever for us to maintain our marketing and brand support investments because as we said we said it last quarter I mean in this kind of environment I mean, you've got to expect some amount of trade down, particularly.

Particularly among lower income households.

But lower income households believe it or not.

20% of Dave's killer bread units kind of surprising even to me when I first heard firsthand that but.

Continuing to support the brands continuing to be out there from a marketing standpoint, keeping those brands front and center, we will get through this eventually and when we do we want those consumers obviously to come back to the brands They love.

Mhm.

That is helpful.

I guess, just a follow up to that too.

Just a question about the Phoenix bakery closure. So in the prepared remarks, you guys commented that it's I guess, it's an older lower margin.

Bakery that services more private label product.

I guess, just why the decision to close it now I mean with this.

Our long running plan or I mean, just I guess, given the increased private label demand you saw in the quarter.

So Phoenix is an older much less efficient bakery. This is all part of our network network optimization plans that we've been talking about for several years now and alongside that we did exit some lower margin private label and foodservice business out there and we have plenty of capacity to take over what remains.

And ample capacity to fund future growth. So we can take care of all of our all of our remaining business, but as.

As we execute our portfolio strategy. It will it can have network optimization implications as well and Thats, what you saw with Phoenix.

Okay, great. Thank you I'll pass it on.

Thank you.

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

Hey, guys good morning.

Good morning, I wanted to go back I wanted to go back to what you were you were.

Seeing or what you have been seeing.

In terms of the <unk>.

Different tactics.

In terms of private label pricing mass versus grocery.

And how you think that evolves.

You do ultimately.

<unk> prices move higher because the cost the cost picture demands it or.

This risk, creating some kind of competitive dynamic where.

Grocery prices.

Move lower to compete with mass and then we have sort of downward pressure on the category. How are you thinking about that that evolution.

Well, we certainly haven't seen that yet.

Can't speak to why certain retailers are doing what they're doing.

All we can do is execute on our plans and that would obviously, we hope they will come up in some of those gaps will close a bit but it's certainly hard for me to predict what theyre going to do.

But again as we mentioned so far so far we haven't we haven't seen this in grocery and again private label loss share in grocery.

Yes, yes.

And as you say you still have some pricing.

Set to come in it's not nothing that Youre seeing is really altered your own strategy from a pricing standpoint are your own expectations in terms of price realization.

It has not.

Okay.

Very good. Thank you. Thank you very much.

Thanks, Dave.

Okay.

Our next question comes from Mitchell Deniro, Tien Tsin hero with Sturtevant <unk> Company. Your line is open.

Yeah, Hey, good morning.

Hi, Mitch.

Hey.

You talked about price increases ahead of competition, which seem.

Seemed to trim a little bit.

Volume in the quarter.

And.

Is pricing I mean, it seems to suggest that it's.

That maybe this is certainly.

Commodity type product.

Merely.

Price increase a couple of weeks or a month ahead of the competition.

Is.

It's going to affect volume that much.

Why is.

Is it is it.

Was it.

A very large price increase relative.

Relative to the competition or why would it be that dramatic.

Yes, so it.

It's not in terms of magnitude of our price increases versus competitors' price increases. It was just that in this environment when you start getting gaps.

That much larger that can affect behavior somewhat that's not the only thing that affected units in the quarter and we talked about supply chain issues et cetera, but it certainly was a factor. We also we also comped a hurricane which we haven't mentioned yet and we typically performed very well. So there were other things other than that but it certainly had at least some.

Some effect in the quarter.

But that's that's all much more normalized at this point.

Okay and foodservice.

Foodservice is due in the quarter.

From a topline standpoint, really really well. So if you if you look at it from a pre pandemic standpoint year to date.

In terms of sales dollars.

Foodservice business has recovered but the units are still below pre pandemic.

And is that our units below.

Across the board or in one particular segment like <unk>.

Fast casual.

I'd have to look I want to say it was a little bit lower in quick serve.

<unk> was the more challenge.

Okay and is there a reason for that is to just traffic in the <unk> of our customers or.

Is there anything going on underneath that.

No I think it's just Mitch I think it's just a bit more normalization coming out of the pandemic remember quick serve actually did pretty well during the pandemic just because of less contact but now that people are more comfortable going back to restaurants, I think thats why youre seeing that that shift, but that's also good for us because our margins are higher in those other segments.

Alright.

And then <unk>.

Had I don't know it seems like it's about six quarters of lower volume growth.

When does when does that stop.

When are we going to see SKU rationalization slowdown as an impact on your on your results.

And.

If you could talk about that a little bit it would be helpful.

Yeah. So I think I think generally speaking we've done the bulk of what we want to do for now I mean, obviously SKU rat's, it kind of a continual process but.

In large measure we've cleaned out most of the underperforming items that we wanted to to simplify operations simplify our sales execution for that matter.

And get to the business of growing volumes.

I think innovation remains key for that and so obviously our goal over time is to not only grow dollars, but continue growing our units start unit share as well so we're focused on that.

So if we look at the third quarter I mean are we going to still see some.

Year over year volume declines in the overall business.

Sure.

Yes, so mitch embedded in the EPS guidance is the assumption around mainly elasticities and as I've said, so far year to date, we're running right about where we thought we would be so I think it's reasonable to assume that trend to continue through the year.

Okay.

And then could.

Could you talk about specifically about some of the cost savings programs that you are.

You're currently.

Initiating and how theyre going to flow through the second half.

Yes, so that's that 25% to $35 million and it's a mix of.

Benefits from our digital investments that we've made which we expect in the back half we talked a little bit about bank for the future and then so thats bakery improvement in the digital sense. There also.

Separate bakery improvement projects initiatives that are underway and also procurement.

So those are sort of the three big areas that the savings will come from.

And as you look next year does any of that carry through into 'twenty three.

Yes. It does we have not quantified yet that yet, but yes. It does.

Okay.

And then I guess finally.

Just with when it comes to.

Regional variations in your and your business is there any.

We are the best performing region and.

Which were.

The worst performing regions.

Geographic so.

The northeast continues to be a callout for us.

As you know we've put a lot of focus up there and it continues to pay dividends for us.

We did have a couple of regions that underperformed by our standards, but I would I would submit to you that was more.

Operational performance driven than it was top line sales performance driven.

Okay. That's all I have thank you for your time.

Alright, Thank you Mitch.

There are no further questions I'd like to turn the call back over to Ralph Mcmullan for any closing remarks.

Hey, Michelle Thank you very much everybody for your interest in flowers and we look forward to speaking with you again next quarter everybody take care.

Thank you. This concludes the program you may now disconnect everyone have a great day.

To raise your hand during Q&A you can dial star one one.

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Q2 2022 Flowers Foods Inc Earnings Call

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