Q4 2022 Flowers Foods Inc Earnings Call

February 10, 2023

Yes.

Good day, and thank you for standing by welcome to the flowers foods fourth quarter and fiscal year 2022 results conference call. 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 the <unk>.

You will need to press star one on your telephone you will then hear an automated message advising your hand as rates to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today J T. Rick Executive Vice President of Finance and Investor Relations. Please go ahead.

Thank you Tania and good morning, I hope everyone had the opportunity to review our earnings release listened to our prepared remarks and view the slide presentation that we're all posted yesterday evening on our Investor Relations website.

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

Please 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 me today are <unk>, president and CEO , and Steve Kinsey, our CFO , Brian <unk>.

I'll turn it over to you.

Thanks, Jason and good morning, everybody. Thanks for joining the fourth quarter call I'm really proud of our accomplishments in 2022 and would once again like to thank our flowers team for their hard work and making that performance possible.

Despite the challenging macro and macroeconomic environment, we generated record sales, we advanced our innovation pipeline and we've made important progress with our digital and supply chain initiatives.

We expect to build on that progress this year in 2023.

We will be making additional investments in digital and supply chain as well as marketing support for the <unk> launch.

Although these investments along alongside continued inflationary pressures will impact our near term results.

Confident by enhancing our already strong foundation, we're positioning the company for future long term success.

So with that Tanya, we're ready to take questions.

Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please wait while we compile the Q&A roster.

One moment.

Our first question will come from Bill Chapell of Truth. Your line is open.

Thanks, Good morning.

Good morning Bill.

Hey, Ralph.

There was a little more color on this kind of.

Stepped up marketing behind the snack bars I guess.

It had been growing in been in test market.

It's been doing well, but we didn't really have a kind of a quantification of how big it is or how big is expected to be this year.

And maybe you could talk about.

What and when is being invested behind the brand.

Kind of what kind of impact thats, having on gross margin or <unk>.

Earnings specifically.

Versus just kind of overall brand spend or marketing step up thanks.

Sure. So bill as you know, we're we're beginning the nationwide rollout as we speak so it will ramp up as production buildup and as we gained shelf space and retailers throughout the year. So it'll be it'll be a build throughout the year and most of the most of the support behind that is going to be marketing support digital spend.

Display execution all of those kinds of things that you really need to activate a new product.

<unk> is a known quantity, but obviously this is a new space for Dk B and so we're being very intentional about the investments we put behind.

The introduction of the new snack line, so mostly marketing support and again it'll be it'll be a build throughout the year as far as far as magnitude guys, we're not going to disclose that separately, but as we as we gain traction during the year. We can start to give you guys additional color.

On how the on how the products performing overall in the marketplace.

Got it but I guess looking at the initial guidance, which is below kind of where we were and granted you hadn't given guidance before I mean is this kind of a <unk> <unk> headwind to earnings.

Earnings is that a <unk> <unk> headwind to earnings just trying to understand how much of that versus other other market dynamics going into the guidance.

You mean, the marketing support itself for the borrowers what kind of help correct correct.

Yes.

Maybe two or three probably.

No that helps.

Yes.

And then just second.

Looking at kind of the private label trends you've talked about it in your prepared remarks, I mean is there an expectation now that pricing is kind of normalize for private label at the one mass customer.

It's stable as we move through this year that it actually improves you mean in terms of branded share improves what's kind of your outlook for sure as we move over these next couple of quarters.

Yes, so the pricing dynamics have started the retail pricing dynamics I should say for private label and massive started to just come up some.

Good development I think it's too early to call the play as to what the overall private label performance will be in 2003 towards the end of last year as we saw private label kind of kind of build the second half of the year gaining share it did sort of plateau.

At the end of the year and sort of through our first period that we just completed this year that same dynamic is at play.

So it's kind of a to be determined and of course, that's kind of factored into our guidance range. That's one of our yes, that's one of our.

Watch out for the year is how those how is the consumer overall and how does that translate in the private label performance.

The divergence between mass and grocery does continue though.

In the first period private label was up pretty significantly in line with what it had been.

Last couple of periods of last year, but it was actually down.

From a unit share standpoint in the grocery segment.

That's yes that continue that's obviously, an encouraging trend in and of itself.

Got it thanks, I'll turn it over.

Thank you.

One moment.

Our next question comes from Robert Dickinson Dickerson of Jefferies. Your line is open.

Great. Thanks, so much.

Bunch of questions, but ill.

Tried to keep it short.

Ralph maybe also Steve just curious in terms of the top line guidance, the essentially 8% to 9% year over year.

There's a lot of that coming from it sounds like some incremental pricing in foodservice and private label and I'm kind of just asking because obviously theres already been some pricing take in right on the branded side, which I would think would decelerate through the year.

Volumes overall for the business were still down a little bit so just seemed a little high to me.

But maybe there is also some tailwind coming from the bar rollout. So just any additional color on that would be awesome.

Yes, so definitely a little bit of tailwind expected from the bar launch, but more more impactful remember Rob we've got.

Roughly five months of wrap around pricing from last year, so that might be maybe.

Maybe something Youre missing there.

Plus we have gone back with additional pricing on top of that this year. So a lot of that.

A lot of topline guidance range as additional price as we continued.

The experience.

Higher costs.

Okay got it.

And then.

In terms of the gross margin.

It sounds like Q1 is a tough comp.

You have some pricing it sounds like maybe there.

There could be some easing costs as you get through the year just in terms of the hedging.

The hedging strategy.

How would you paraphrase the year in terms of the gross margin side is it like probably flattish maybe it's down a little bit maybe it's the second half.

Better than first half again any other color would be great.

I mean, when you look at the full year, Rob I think youre going to youre going to see probably pretty much flattish.

As we said we would.

<unk>.

Significant placement to continue through 2023.

And even with the additional pricing.

As discussed.

From the top.

Raul margin perspective, I would say pretty flattish and pretty.

Even throughout the year.

With some pressure coming in Q1, obviously, because if you go back and look Q1 was a very strong start last year.

Okay perfect that's good enough.

And then lastly from me is just.

Ross in the prepared remarks.

A lot of discussion commentary on the spending side.

Kind of for future benefits and then also some commentary around kind of what those benefits could mean longer term I think the line was.

Meaningful margin expansion potential.

Obviously, you're spending to make the business stronger and hopefully with that strength and some mixed benefits longer term there what the margin expansion potential.

I'm just thinking I'm, just curious like if we're thinking about timing that some of that spending will continue through 'twenty. Three then assuming 24, then maybe it starts to decelerate 'twenty five 'twenty six but still some there.

<unk>.

If we just kind of hold let's say commodities cost center everything else being equal right, which is tough to do but just conceptually.

How do you think of kind of that that flow through on the benefit is it. This is more broad based is it more like yes, we need to really we're spending more in 'twenty three and then we'll still be spending 24, but as we get through these benefits and we would expect to see that margin expansion to maybe play out in year three.

Or four what have you. So that's all thanks.

Well first of all I would certainly hope that this is not.

The new normal as far as commodities go. So hopefully there is some royalties coming as we get through this year and into next year, but no you're good.

Good question, Rob and I think you've largely got it.

Obviously.

Investment has to come before benefit right and I think we've laid out that due to inflation and the consumer and other things, it's going to be a pretty challenging year for us and others.

Food space.

But we remain steadfast about.

Continuing to invest in this business for the future and so we're not slowing down we see no reason to slow down. So we will continue to rollout the borrowers will put marketing support behind that we're investing in supply chain. This year.

We've talked a lot about the efficiency improvements that we needed in the bakeries. We think that this is these investments are going to unlock that as well and then obviously you have the digital ERP spending and I think thats, where youll see kind of a peak peak spending this year would that beginning to moderate.

In the years to come and then of course, you have the expected benefits that will be rolling in as well, so investments going down and benefits coming up all of which we think will contribute to substantial margin improvement.

Got it alright, thanks, guys.

One moment.

And our next question will come from Ben <unk> of Stephens. Your line is open.

Hey, good morning, guys, Jim slower on for Ben.

I wanted to ask some questions around demand elasticity.

In the prepared remarks, you guys called out a significant portion of the volume decline was due to SKU rat.

Can you just give us an idea maybe what the branded volumes would have looked like ex the cake SKU rat I assume that the other the whole volume decline is probably all eliminated skus.

On the branded side of <unk>.

Demand elasticity.

I don't think we don't we don't have that to disclose for you today.

Breakout.

What I can tell you is youre right that.

The lion's share of the volume declines are in cake and foodservice and a lot of that is strategic and intentional.

So we pulled back on a lot of underperforming skus.

We pulled back on a lot of underperforming business in foodservice and we will continue to.

Two.

Attempt to optimize that business. If you will so when you think about volume declines and certainly.

There has been some softness on the branded side.

Yes, we've seen this mix shift to private label I don't think Thats, a surprise to anybody but as you think about the overall business it's mostly.

It is heavily weighted towards cake and foodservice.

Okay.

And then on the pricing for 2023.

Is that kind of evenly spread across the portfolio or is that more targeted on foodservice and private label.

Because my thought as well.

Value gap.

Mass is narrowing you guys put pricing.

We opened that back up or is it still going to kind of trend through a narrow the gap.

Yes, I think the gap should.

They should stay pretty stable throughout the year I mean overall.

There's going to be more.

Total total dollar in private label and good service overall, but the pricing is across the entire business.

Probably a little bit more heavily weighted towards private label and foodservice, but I would expect the gaps to.

Assuming yes.

This is us talking it depending on the retailers can always do something different but I would expect the gaps to.

To maintain where they are.

Okay, and then maybe one more question on that.

From a consumer perspective.

Once if they have traded down whether it's from us.

Hi, premium just a norm.

<unk> branded work from normal branded the private label do you think that there needs to be promo in the channel to get them to make the switch back up the value chain or as the gaps narrow do you think they'll just kind of naturally go back to buying the more premium.

Skus.

Yes, I mean, it's certainly my hope is that it's the latter.

That's just something we'll have to wait wait and see what happens to you so far.

The competitive environment has been has continued to be stable haven't seen any meaningful uptick.

I would certainly hope that.

Any consumers that might have left <unk> to trade down to something else will come back, but thats also remember.

The reason that we're continuing with our marketing spend we're not we're not slashing that for the year, because it's going to be a difficult year, we're continuing to invest in our brands and when.

When the time comes and some of this pressure.

Relieved on the consumer.

I think that they yes, they recognize the differentiated aspects of our top brands.

I mean, I think that alone in addition to the marketing support will help drive them back to us.

Okay great.

This proposal.

One moment.

Okay.

I'm going to remove Mitchell from the platform.

Yes.

One moment.

Sure.

Our next question will come from Connor Rattigan consumer edge. Your line is open.

Hey, guys good morning, and thanks for the question.

Good morning.

Yes, so it sounds like you guys have a really exciting innovation pipeline coming from Dave bear fruit snack bites to makers, having breakfast pastries and Cleveland.

<unk> is totally incremental to that.

The current portfolio, but.

I guess on the breakfast pastry research you guys see this as a substitute for your current breakfast products like Bagels English muffins or is this really bringing in a new customer.

There are new occasion.

Yes, we actually think it will be incremental Qatar, which is a pretty exciting prospect now remember those breakfast spacers are still just in just in test, but the thesis is bringing something additionally, differentiated and what's interesting about these.

These breakfast phase III is that we would intend actually the market knows and the bread aisle.

So I see it as an incremental item two of Bangalore in English muffin something like that.

Distinguish distinguishes those from the <unk>, which of course are.

Warehouse distributed in there and the kind of the traditional borrow.

Okay, that's great that's really interesting.

And then also too just a little bit on the basis of the future initiative.

If possible could you guys maybe share some of the data points, you're collecting or maybe some of the invasive going thus far and maybe any cost savings initiatives because it is likely to pursue.

Yes, I mean, a big one for us is scrap or waste reduction and so having greater data insights into how the bakeries are running.

<unk> allows us to be smarter about how we run the lines and reduce that waste and waste is a big a big cost for us.

Not immaterial at all the other thing that helps us do is.

It helps us with preventive maintenance you understanding.

When breakdowns may occur so that we can plan for downtime instead of having unplanned downtime which is costly.

And then there's the whole there's a whole notion of Microsoft's online.

You have your normal downtime for cleaning or whatever or if you have a mechanical problem, but it's the tiny stops.

10, 15 2031 minutes stops.

The buildup day by day week by week month by month throughout the year.

<unk> become a big expense as well so youll all this data that we're able to gather.

It's going to help us alongside of leadership capabilities and process improvements things like that help us gain those efficiencies in the bakeries.

We've made it for some time now.

Alright, Thanks that was great I appreciate it I'll pass it on.

Thanks Scott.

No Matt.

Okay.

And our next question will come from Mitchell Pinheiro of Sturtevant. Your line is open Mitchell.

Hey, good morning.

I mentioned.

So.

Of your sales guidance.

Is there any path P that included in that.

Yes.

Okay have you.

So what should we assume is that.

Small, but what percentage of the sales guidance comes from copper pillar.

Yes, we can't we can't break that out specifically match I mean, it's not it's not tremendous remember they were they were kind of manufacturer for us.

So yeah overall, yes, the overall topline sales impact is not that got that.

Okay, but it is included in there.

Or whatever.

Whatever incremental you expect to get out of that would be included.

It's in the sales guidance, yes, Okay, and then of the sales guidance.

What's the breakdown.

Volume and mix.

Pricing and mix.

And the year.

I mean, it's primarily price mix.

Mitch.

Yeah, Okay and that would be another.

Brian .

What.

What would be the SKU rat.

This year is it the same 3% ish of sales.

Is that included in there.

We should see the effect of SKU rat decline as we go throughout the year now again that will we will continue to do SKU rat, but yes.

The volume losses that <unk> been seeing over the last year or so.

That should start to.

Moderate as we move through the year.

Okay.

When I look in terms of Youre going to try to take some pricing in foodservice and private label, but I'm looking at slide eight of your fourth quarter presentation, you have been or some of your store brands in the priority and some of your store brands tactical.

What percentage of your store brands are in each of those categories, and where where are you going to be taken the price.

We're taking price across the portfolio Mitch.

And <unk> already been taken.

Okay and is that I mean, and what percentage is your is your store brand the breakout between priority and tactical is it 50 50 is it mostly priority can you.

Describe that.

I'll forget all to get back to you all and I don't have that in front of me.

Okay.

And then another question.

A question just.

Sure.

Interest expense is expected to go up this year, but most of your.

Your debts fix and.

When I look at your cash flow just based on the preliminary guidance.

Youre going to have free cash flow, so I wouldn't anticipate that to rise am I wrong.

I mean, you'll have the financing of the <unk> acquisition. So you will see it rise.

For a moment in time until we are able to to Delever and pay back down also.

No problem.

Investment perspective, we're still investing in the ERP this year so.

Although last year was the highest cash flow year.

So pretty significant in 2023 as well.

Okay.

Then I finally.

So.

As you look at the.

Your guidance range that your EBITDA guidance range EPS.

If you were down.

At the bottom.

What's that saying about.

What would cause that to be down at the very low end is there'll be more more private label pressure.

Commodity cost spikes, what's the what.

What gets you to the low end.

Yes, it's not really going to be on the commodity side, just because of our of our hedging program. So we pretty much know what our costs are going to be for the year, Mitch, but I think you're spot on it's mostly going to be the overall health of the consumer.

How does this private label.

TIK trend play out throughout the year.

What happens with the competitive environment to an earlier question does it start getting.

We start seeing much higher promotions as perhaps.

We move into the back of the year and some of this inflation subsides and people start trying to win consumers back with promotions and then finally, it's our ability to execute on our savings programs.

You saw in the in the prepared remarks, and we have additional savings of $20 million to $30 million in the plan for this year and it is.

Up to us to execute on that so.

Those those are the biggest swing factors that we can see during the year that could move you higher or lower on the guide of spectrum.

I would also note that.

Yes.

Once again in addition to those items pressuring EPS. This year are the investments that we're making behind bars behind our supply chain capabilities additional <unk>.

<unk> and digital yes.

Yes.

Much of a 9% headwind on the digital ERP side alone. This year plus you have the additional DNA from the orthopedic acquisition and the ERP plus program that are pressuring EPS as opposed to EBITDA.

Yes.

That's helpful and have you made any have you made any.

Included in your guidance.

Would be continued gross margin improvement I guess in the cake business or is that not in your guidance do you anticipate that in your guidance I should ask.

Yes.

Every year, we're making improvements with the Kate business I mean last year. Despite some of the syndicated data that you all see it doesn't pick up nearly all of our cake business.

Profitability in our cake business improved substantially last year.

Okay and that should continue.

I thought earlier in the year, we're still struggling a little bit so is there incremental growth there.

Remember that a lot of times when we're talking about the Kate business. Some of the struggles that we focus on are the struggles at the Navy yard specifically in the Navy yard is not all of the cake business right. So significant improvements have been made at the Navy yard the long side that we've done really well with our SKU rat program getting rid of all the unprofitable, while not all of them, but a lot of the unprofitable.

<unk> Skus.

<unk> pricing to improve profitability.

Innovation et cetera is has done a lot to improve the profitability overall of the cake business.

Okay Alright.

Alright, Thats all I have thank you.

Thank you Mitch.

I would now like to turn the conference back to Ralph Mcmullan for closing remarks.

Okay. Thank you Tanya and thanks, everybody for your interest in flowers foods, and we certainly look forward to speaking with you again next quarter everybody take care.

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

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

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Q4 2022 Flowers Foods Inc Earnings Call

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