Flowers Foods Inc. Q1 2023 Earnings Call

Speaker 2: Good day and thank you for standing by. Welcome to the flowers foods 1st, quarter, 2023 results conference call. Please be advised that today's event is being recorded.

Speaker 2: 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.

Speaker 3: Thank you, Shannon, and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation that 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.

Speaker 3: 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.

Speaker 3: In addition to what you hear in these remarks, important factors relating to Flower's Foods business are fully detailed in our SEC filings. We also provide non-GAAP financial managers for which disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website.

Speaker 3: Joining me today are Riles McMullen, President and CEO , and Steve Kinsey, our CFO . Riles, I'll turn it over to you. Okay, thanks JT. Good morning everybody. Thanks for joining the call. Our results this quarter reflect the strength of our leading brands and the dedication of our flowers team and I do want to thank them for their hard work.

Speaker 3: It was instrumental in helping us drive record quarterly sales. We did face difficult year-over-year comparisons in the quarter due to a strong impact from the Omicron surge early last year and by some storm activity during the same time period.

Speaker 3: The macroeconomic environment remains challenging, with inflation pressuring consumer demand and input costs.

Speaker 3: and demand patterns continue to shift as the impact of the pandemic wanes.

Speaker 3: We adjusted our 2023 financial guidance to reflect those factors.

Speaker 3: But we believe the current environment is temporary and we are focused on positioning ourselves for long-term success. Our investments in innovation, including the exciting nationwide launch of the DKB Snack Bars and digital and supply chain initiatives, are designed to enhance our competitive position.

Speaker 3: Some of these initiatives may impact near-term results, but they are crucial for enabling our growth plans.

Speaker 3: I'm excited about our prospects and I've really never been more confident in our ability to grow shareholder value over time.

Speaker 3: So with that, Shannon, we are ready to take questions.

Speaker 2: Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced.

Speaker 2: To withdraw your question, please press star 11 again.

Speaker 2: Please stand by while we compile the Q&A roster.

Speaker 2: Our first question comes from the line of Steve Powers with Deutsche Bank. Your line is now open. Next question comes from strange Larry House.

Speaker 3: Hey, thanks and good morning everybody. I guess picking up on those opening comments, just how much of the

Speaker 3: sort of temporary transitory nature of the headwinds that you're seeing, do you expect to improve within this year? I guess that wasn't clear from your prepared remarks last night. In other words, are you assuming that things get better, is it temporary within the year or is it temporary over a longer period of time?

Speaker 3: Yeah, Steve, I appreciate the question. Look, we are likely being a little bit conservative with the guidance just given the soft start to the year. We felt it just most prudent to do that at this time. However, what we did see, you know, towards the end of the quarter was some pretty meaningful improvement. And by that, I mean,

Speaker 3: you know, our branded retail units turned flat to positive in several of the last weeks of the quarter. At the same time, private label share gains really started to come down. When we started off the year, I think in the first period of the year, we saw private label gain the most unit share that we've seen during this whole trade down situation.

Speaker 3: has been concentrated in mass. So that's a continuation of what we've talked about in prior quarters. So as to exactly when it's going to happen, that's a little bit difficult to predict. But I do have at least some hope at this point that things already look like they're beginning to get better. But for the time being, we've decided to be conservative.

Speaker 4: Okay, so I guess that's

Speaker 5: So, you know, the soft start you called out, you know, in the year, I guess.

Speaker 5: I mean, it's evident in the data. And I guess what I'm trying to reconcile is.

Speaker 5: it seems like that would have been evident also, you know, to you when you guided in early February .

Speaker 5: things are getting better towards the end of the quarter.

Speaker 5: So what got worse?

Speaker 3: is my question. Well, yeah, fair enough. The start to the year was softer than we expected out of the gate.

Speaker 3: And it was significant enough to make us...

Speaker 3: perhaps be a little bit more cautious about the health of the consumer than we were at the start of the year. I mean, we knew it was gonna be a challenging year, right? We said that. But given the really soft start, it turned out to be a little more challenging than we anticipated. Hopefully that helps.

Speaker 5: Okay, and I'll pass it on in a second, but just one more question if I could. You caught up the temporary imbalance between.

Speaker 5: as a result of the softer start. I guess, can you elaborate a little bit on that in terms of what the implications are from a financial perspective, and then just the timeline you expect some resolution through the supply chain optimization work?

Speaker 3: Yeah, sure. I mean, we're not going to quantify it, but I want to make it clear too that the imbalance was certainly a factor in the quarter. It is definitely not the factor. The factor is the consumer and the solstice in the category. So I just want to be very clear about that. But we try to be transparent with you guys and give you as complete of a picture as we can.

Speaker 3: as to what's going on good, bad or indifferent with the company. And when we talk about our portfolio strategy and we've talked about, not really so much the SKU rationalization, that's kind of a common ongoing thing, but more of the business exits.

Speaker 3: Where where we have elected to exit certain lines of business that were marginally profitable and really didn't have a chance to to to ever really meet our profitability thresholds through pricing or efficiencies or whatever.

Speaker 3: Those types of exits are what I'm referring to and, you know, typically those pieces of business do contribute at least a little bit of something to the business, right? So you're going to have a little bit you're going to have a little bit of stranded costs when you exit those pieces of business. Now over time...

Speaker 3: as we, and we've talked a lot about network optimization over time, that's where that comes into play.

Speaker 3: And once again, you've seen us do this, you've seen us, you know, we exited the Phoenix bakery recently, but we've also converted facilities to organic production, you know, all brand that type of thing. That's what we'll take care of that. In addition to brand and growth over time. We'll take care of that imbalance.

Speaker 5: Okay, okay. Thanks, Riles. Appreciate everybody. Thank you.

Speaker 5: Okay, thanks Riles, appreciate everybody, thank you. Sure, my pleasure.

Speaker 2: Thank you. Our next question comes from the line of Bill Chappell with Troth Security. Shall I now open?

Speaker 6: Hey, good morning. This is Stephen Langau for Build Chapel. Thank you for taking our question.

Speaker 6: Can you guys give us some more color regarding the price gap dynamics following another pricing round? How have the mass retailers reacted to additional pricing? Is it kind of fair to assume that maybe the gaps have started to re-widen and you might need some time to…

Speaker 3: touch up any color there would be super helpful. Yeah, so if you recall, you know last year when we implemented pricing, the gaps between brand and private label did widen. You know some retailers were holding their holding their retail prices down, and I believe it was late in the year or early this year those gaps started to narrow as the private label retails came back up.

Speaker 3: temporarily, at least for a while, but it's too early to say because the pricing just went in so we haven't seen the data yet.

Thank you for some of the color on the DKB launch. It seems like you have to make some real progress there. Can you share some high-level thoughts on how you are performing versus your internal expectations?

Yeah, no, we're still really excited about it. So we're in about 6000 stores now. So call it roughly halfway to where we want to be by the end of the year. And as far as. Um, us entering the retailers that we expected to were largely on track there. Um, as far as the performance goes where the bars have been in the market the longest, we're doing really, really well.

So, you know, all in all, we're in a really good position and super excited about where we're headed with the bars.

Awesome, thank you very much and I'll pass it on.

Thank you. Thank you. Our next question comes from the line of Robert Dickerson with Jeffries LLC. Your line is now open. Thank you.

Great, thanks so much. A couple questions. I guess kind of the first question is just with respect to that incremental pricing that's coming through. I know that was already discussed previously. Just kind of where you're seeing

share trends as you're entering, or sorry, as you're exiting the quarter. Is there a scenario that plays out such that maybe you do need to promote a little bit more? Because I know Raul, as you've said, historically, right, it's not a very heavily promoted category, but at the same time, you know, at some point, volume growth.

You know, should matter, so I'm just kind of curious how you think about that right now. Yeah, absolutely. So, Rob, the, the brand of pricing just went in, so we're not really, you know, we can't really see any impacts from that just yet. I will tell you we, we promoted a little bit more in the quarter. It wasn't terribly significant, but we did pick up a little bit as far as our activity went.

virtually everything. Now when you look at something like Tasty Cake for example, where we don't have a strong of a brand, you know we've had we've had more elasticities there and have had to promote a little bit more from that standpoint that that probably wouldn't be a surprise to anybody. But overall yeah we've seen once again we've seen some pockets of competitive activity from

from our competitors in the category and our promotional level did tick up just a little bit in the category. But as of yet, Rob, I wouldn't call out anything terribly meaningful. I think we've got to continue to your point, continue to watch the volume trends. Once again, they did start to get better and we actually saw unit increases towards the end of the quarter.

So that gives me a little bit of confidence. I just don't have enough of a trend line yet because it happened right at the end of the quarter to call it a long-term trend just yet.

So once again, that's why we're a little bit conservative with the goddess.

Got it got it. Okay. And then I guess just questions around input costs, kind of where the grain markets have gone. How that could potentially benefit you, I think in the prepared remarks, you said, you know, there could be some. Kind of back half benefit, but, you know, not really stating that there will be.

looks like you're 80% covered for the year. And then previously it's probably about flat gross margin. So just kind of wrapping all that in, gross margin was down kind of as expected, maybe a little bit more Q1. Guide comes down a little bit on EBITDA, which I'm assuming is gross margin driven.

while at the same time, grains deflated. So I would assume at some point that does become a benefit, but I don't know if you're being conservative because maybe you need to kind of reinvest some of that back in. So a lot in there, but just trying to get a gauge as to how the year could play out, right, in terms of gross margin. Thanks. I mean, the reality is overall, we expect inflation throughout the whole year.

I mean, the first half is definitely our toughest comp because we had pretty favorable hedges coming into the year last year and then obviously the inflationary environment around wheat really did begin to wrap up.

early first half and we would have been covered.

for most of that period last year. So look into the you know kind of the full year and kind of thinking about cadence. Obviously the first half is the top of the back half. Like I said we still expect inflation. A lot of it is driven by other buckets other than flour across the input bucket. You know sugar's up.

gluten is up pretty significantly and we use quite a bit of gluten because of typically because of protein quality within the wheat.

We're also seeing the yeast is up.

We're also seeing the yeast is up, honey.

several other smaller, minor ingredients. So while we do expect better and easier, better costs in the back half, we are expecting an inflationary environment throughout the whole year.

Okay, got it. Fair enough. It's helpful. And then, you know, look, I know you're not, it's not really your style, so to speak to kind of speak to, to the next quarter, right? A quarterly guide. But I am kind of curious, you know, maybe kind of in more general terms.

You know we saw this EBITDA step down.

In Q1, you know, is there any way you can frame it? So we kind of understand a little bit of the cadence as it gets through the year. Like, we'll probably again see more of a step down in Q2 relative to what we would expect in the back half. Just thinking about kind of the midpoint of the updated guide. That's it.

We do think comps get easier in the back half.

And.

Overall, from a kind of cadence perspective, hopefully, as Ryle said too, we're seeing improvement across.

Because markets coming out of the 1st quarter, so. You're not speaking specifically to any quarter.

we should come in kind of in line with some of the comments you've made and expectations.

All right, great. Thank you guys, appreciate it. Thanks, Rose. Thank you.

Our next question comes from the line of Mitchell Pinero with Sturdivant & Company. Your line is now open.

Hey, good morning.

So, you know, why do you think the environment is transitory?

and not, you know, and I don't know what transitory means. Like is it, you know, quarter, two quarters, whereas transitory, it's, you know, shorter than that. But, you know, the environment looks pressured and looks pressured for longer, at least in our view. So why,

and not, you know, and I don't know what transitory means. Like is it, you know, quarter, two quarters, or transitory, it's, you know, shorter than that. But, you know, the environment looks pressured and looks pressured for longer, at least in our view. So why do you see it as transitory?

Yeah, Mitch, I think the trans story to me means temporary, right? I don't think that this is a permanent situation that we're in.

There are a variety of competing factors out there. I mean, you read the same stuff that we do. Inflation continues to tick down. The job market looks pretty strong.

So, I can't say with any assurance exactly when things are going to turn, but I do believe that they will. And the reason I believe that is because eventually we're going to come out of this inflationary cycle. Presumably at some point you have a recovering consumer. And when you think about our business in particular and the trade down to private label.

I firmly believe that the premiumization of the category is a long-term trend. I do believe that people will come back to differentiation. I do believe that people will come back to our top brands. That's why I believe that it's temporary. Now, is that the price of rhetoric towards regret?

Two months? Is it six months? Is it nine months? Is it a year? I don't know that. But I do believe it will come back and I think we'll be well positioned to take advantage of it when it does. Once again, we're keeping up our brand investments, we're keeping up our market activity, we're investing in the business, we're investing in our team. So we wouldn't be doing that if we believe that this was a permanent circumstance.

What else are you doing?

in the short term here.

Well, obviously, you know, cost savings activities, I think we said in the prepared prepared remarks were on track for our 20 to 30Million for this year. You know, all the investments that we're making in the bakeries from a digital standpoint, Baker, the future in particular, which I'm excited to say is really starting to show some nice returns. It took it a while to gain some momentum, but once we got through the first period or so of this year, it's really starting to come on strong and that's going to be particularly.

second quarter last year that we'll be copping as well. We don't have those issues this year. We're in great shape from a supply chain standpoint. So all of those factors together, you know, help to mitigate not only inflation but just kind of the overall macro environment that we're facing today.

Okay, thank you much. Thanks, Mitch. Thank you. Our next question comes from the line of Connor Ratigan with Consumer Edge. Your line is now open.

Good morning guys, thanks for the question. Hey Connor. Yeah, so it seems like you guys are doing really well in groceries. The pressure really is just coming from the mass channel and so I guess I'm trying to better understand the dynamics here. So I suppose we can assume the more budget conscious shoppers more likely to both trade down via channel.

and from the private label. But I guess if we think about the consumer's decision to make either jump, have you typically seen the consumer jump right from, say, a nitrogen-only loafing grocery to private label mass? Or has this been sort of a gradual waning? And I guess also, for those consumers that have already made the jump, how should we think about bringing them back into the brand of food?

Yeah, exactly. Well, I think to the last part of your question, it goes back to the brand investments. Frankly, no matter where they shop, whether they're shopping in mass, whether they're shopping in club, dollar, grocery, we have an omnichannel strategy. So we look at all of those different channels.

The dynamics are interesting though, because you're right, our grocery performance has far exceeded our performance in mass for a couple of reasons. One, there's been a channel shift, so people across the income spectrum, quite interestingly, including higher income,

shoppers are looking for bargains, you know, given the environment that we face. So there has been, you know, a bit of that channel shift, you know, in the mass, in the club, you know, in the dollar stores and away from groceries, so that does play into it. However, you know, for those shoppers that are still, you know, in grocery, our performance has been really good. I mean, we were up.

and your share in grocery and we were up across the board in every category. Well, flat or up across every category, subcategory rather. So it is an interesting dynamic, but I think to your point about how do you bring them back to brands if they trade down the private label? I think you've got to keep them front and center.

We've got to be spot on with our display execution. We have to put our marketing dollars in the right places, whether that's digital or TV or whatever, to keep these brands in front of people. I think it's also still about innovation. We're not slowing down our innovation just because of the environment we're facing. I think it's more important than ever now. Whether that's in our core category, in terms of our Keto loaf or our Hawaiian.

These new items that we're putting out or whether it's outside of our core category in terms of the bars, keeping these brands front and center for consumers is more important than ever today.

And that was great, Raul. That was really helpful. And then also just a quick follow-up too. So on Canyon, I think it's a prepared remark to you guys' comment is that the track data was kind of skewed just given the sort of mixed shift in the club channel. And yeah, I think it's okay to quantify about 80 bits of share losses but flat unit sales. I guess how are shared trends looking when accounting for the club channel mix?

So the ultimate question is what Connor sorry. I just kind of want to get a sense for how shared friends were looking for Canyon when accounting for that club channel. Nick shift. I think in fact, channels, you guys said share was down about 80 bits. But I think it'd be better than the function when you account for the club channel that is.

It is, it is. Yeah, so our internal data, we're still up. We've got every confidence in CAN. You know, it's proven to be one of the most inelastic brands that we have, which I guess makes sense given some of the dietary.

dietary issues with folks and gluten allergies. But yeah, we're still really excited about candy. It's doing quite well. And frankly, from an innovation standpoint, we're really excited as well. Obviously we started with DKB from an innovation standpoint just because it's a bigger category. But I think that we've got...

We've got some really nice opportunities to innovate both inside and outside the core with Canyon as well. All right, that was great. Thank you.

nice opportunities to innovate both inside and outside the core with Canyon as well. All right, so it's great. Thank you. Okay. Thank you.

Thank you. Our next question comes from the line of Jim Solera with Stevens. Your line is now open. Hi, guys. Good morning. Thanks for taking our question. To just follow up on the canyon dynamic there a little bit, I believe in the prepared remarks you mentioned some dislocation, just as you're doing some ski rad and some product availability.

Should we think about the Canyon as you kind of have a limited amount of Canyon product, you shift the distribution towards Club, and as the production capacity kind of comes back online and moving forward, do you have a chance to refill the SKUs in the track channels or should we think of those as gone?

No, no, when we, you know, it's a good news bad news situation, right? Because we are a little bit strained with Canyon, but we're strained because it's grown so much. So, once we get our capacity situation resolved, which we're obviously actively working on, we expect to refill that space.

When we, you know, it's a good news, bad news situation, right? Because we are a little bit strained with Canyon, but we're strained because it's grown so much. So once we get our capacity situation resolved, which we're obviously actively working on, we expect to refill that space.

And then maybe more broadly just across the branded portfolio, we talked about kind of the price gaps narrowing, obviously consumers strained right now, but

As things hopefully ease as the years progresses, do you think that the consumer will just kind of gradually come back to branded? Or are you gonna need to have some additional push to pull that consumer into the branded portfolio if they shifted towards private label?

Yeah, that's a really good question and it's I'll answer it in two parts. It frankly it depends on what brand you're talking about. If you're talking about a brand like DKB, it has tremendous consumer pull, right? So there you don't you don't have to do as much to draw people back to Dave's because they want to come back to it naturally.

We want to keep it front and center now so that they you know, they want to come back to us. So I do think it depends on which brain you're talking about. Some will take a little bit more pushing than others will, if that makes sense. Yeah, yeah, absolutely. Should we think about from kind of the...

the levers that you guys have to pull to bring them back? Is it more?

traditional marketing, you know, kind of just making the consumer more aware, kind of highlighting the positives of the brand or is it promotion, you know, getting them to come back with an initial lower price point and then hoping that with the inertia as you pull the promotion off, they kind of stay in the brand and portfolio. Well, we certainly hope it's not the latter, right? I mean, but sometimes...

We've got to be best in class in that regard. If we can do that, and I believe we can, when the consumer's ready, I think we're well positioned to win. So it's really, you've got a toolbox of things, right? You've got marketing, you've got some hopefully limited promotions, you've got display execution, you've got minimal out of stocks, minimizing your nil picks for e-commerce purposes. All these things are important. It's not just...

driving weeks worth of unit volume. Got it. And let me, if I can sneak in one more question. Just looking at the DKB bar launch, I know we've still got a lot of opportunity to ramp that. So the kind of initial results that you guys are seeing, are there existing DKB buyers that are just expanding their buy rate and taking it into new categories?

So it's so interesting and so fun to think about going forward. I've talked about the household penetration for DKB many times in the past, and it's actually still quite low. Matter of fact, I was actually speaking with a recently retired chief parking officer from a major fatherogeneous neighborhood that

CPG company that had never heard of DKV before and this is you know this is a person that's you know in the in the business of marketing so it just goes to show you that as well as that brand is done we still have a tremendous runway ahead of us both in the you know with the core items and with the new consumers. So to answer your question it's both. There are people that are discovering bars that may not even know excuse me that the bread exists.

and vice versa. And we're also doing some things from a shopper marketing standpoint to cross-pollinate that and encourage it more.

And we're also doing some things from a shopper marketing standpoint to cross-pollinate that and encourage it more. Okay, great. Thanks, guys. I'll pass it along.

Thank you. Thank you. I'm sure no further questions at this time. I'd like to hand the call back over to Riles McMullen for closing remarks. Okay, I want to thank everybody for taking time today and joining us for questions. Thank you very much for your interest in our company. And as always, we look forward to speaking with you again next quarter. Take care.

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

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