Q2 2023 Flowers Foods Inc Earnings Call

August 11, 2023

Good day, and thank you for standing by and welcome to the flowers Foods second quarter 2023 results Conference call. Please be advised that today's event is being recorded I would now like to hand. The conference temperature you speak today J T Rieck executive Vice President of Finance and <unk>.

Relations. Please go ahead Sir.

Thank you Darla and good morning, everyone.

Hope you all had the opportunity to review our earnings release listened to our prepared remarks and view the slide presentation that will 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 the 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 are important factors relating to flowers foods' business are fully detailed in our SEC filings. We will also provide non-GAAP financial measures for which disclosures and reconciliations are provided in the earnings release and at the end of the slide presentation on our website.

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

Thanks, J T. Good morning, everybody. Thanks for joining the call today.

I'm I'm I'm very pleased with the strong quarterly results.

Our performance recovered after a slow start to the year.

Helped by the competitive strength of our leading brands.

<unk> strategic pricing initiatives designed to mitigate inflationary pressures.

Volume trends in our branded retail business did improve and that may be an early indication that consumer demand is migrating back to pre inflationary levels.

That topline strength translated into improved margins and earnings which is reflected in our updated 2023 guidance.

Private label products gained share, but that growth appears to be moderating so.

So we remain confident that the trend toward towards premium position.

Driven by our investments in innovation and marketing went out over the longer term.

Im excited about our prospects I've really never been more confident in our ability to grow shareholder value overtime.

So normal with that we're ready to open up for questions.

Thank you to ask your question you will need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced please standby, while we compile the Q&A roster one moment for your first question. Please.

And our first question will come from the line of Bill Chappell with <unk> Securities. Your line is now open.

Thanks, Good morning.

Hey, Bill.

I guess.

Can we start a little bit more commentary on canyon I didn't fully understand kind of what.

What happened to that.

The deterioration.

<unk> market share and margins over the past few months and just trying to understand how that improves going forward. It seemed like inside a pretty strong trajectory for the past few years and I just didn't know if it's more of a sign that we're hitting a plateau or if theres something else there.

I don't fully understand.

Yeah sure I'd be happy to I would describe it as temporary bill I mean, a lot of it has to do with capacity.

It's in some ways a good problem to have because as you note Canyon has been on a really nice trajectory, but we got a little bit tight.

We've had to do some things to restructure canyons portfolio.

And made some more investments at Canyon bakery to help free up additional capacity. So we've got that's all thats coming online in the second half and we've got plans to reinvigorate the growth there is a little bit of channel shifts as well that's happening does not picked up by the syndicated data.

What youre seeing is a little different than than reality, but.

But again I put that in the temporary category, we will get that back on track cadence got still got a great future ahead of it.

Got it thank you and then.

This is the second or third time, you put in.

Your commentary kind of thought of me.

Moving into tangential categories through M&A and at the same I think you've talked about rolling out Dave's killer bread.

Bars sometime in 'twenty, four and didn't know if those kind of coupled if you'd like to have greater expertise in the snack bar or tangential categories before.

Spanning that kind of nationwide or any kind of update on how thats going would be great. Thanks.

The rollout is going we're going really well so those initial three skus of bars, bill or in the middle of a nationwide rollout right now.

So I think we noted in the prerecorded commentary that we're in about 12000 stores will be in more than 13000 by year end and will actually slightly be slightly ahead of our own expectations for that rollout.

For 2024, there are three new skus of bars coming out that are higher protein based.

They are the amped up protein bars really great product they've been in test market for a while.

They have done extremely well in test market and I think most promising as they are proving to be incremental to the original three skus. So I think where we're touching a different consumer segment would that higher protein offering.

And then of course behind that we've got the snack bites those are still in tests as it will be coming a little bit lighter and then a whole pipeline of innovation even behind that so we're really excited about what we're building from an innovation standpoint with daves.

And I guess from an M&A standpoint does that make the bars category more attractive from a non getting out of St.

Straight bread.

As you are building expertise in building kind of a national following up behind a brand.

Yes, it could I mean, it would it would do.

Absolutely depend on the brand and what that.

Brand brings to the consumer I mean, it is a crowded category.

So we want to be careful that we're that we're investing in the right. The right segments of that category, but yes, there are definitely opportunities out there we'd be interested in.

Great. Thanks, so much.

Thank you Bill. Thank you one moment for our next question. Please.

Our next question comes from the line of Mitchell Pinheiro with Sturtevant Company <unk> Company. Your line is now open.

Hi, good morning.

And I.

I guess.

Couple of questions here first.

Yes.

You spoke a lot you spent time in the.

In your script about.

Label and Youre seeing.

Improved trends.

But you still.

Have you still worry on yes.

You're just not sure where it's going and I'm curious.

Are you seeing.

The positive.

And back to brands.

Even into here in August .

And.

What you might be looking for as signs of either of movement in either direction.

Yes sure Great question, So a couple of things there.

Private label still gained share in the quarter.

But I think it is important to note that that growth is slowing.

And this was towards the end of the quarter was the lowest that we've seen in terms of gains for private label. This year. So that's definitely on a good trend.

The other thing to remember and we've talked about this all year.

As the private label phenomenon is playing out more in mass than it is in grocery to exit loss share in grocery continues to gain in mass.

We've talked about there's been a little bit of channel shift.

As consumers seek bargains and mass club dollar of that sort of thing.

I do think also that it is important to note that the private label share gains are generally confined to.

So that loaf category the traditional products.

Other words, those with the least differentiation.

Private label loss share in virtually every other category, where you tend to see more differentiation so specially breakfast sandwich.

Sandwich buns and rolls that sort of thing so.

Trend towards premium position is definitely still there.

Clearly consumers are still looking for bargains, but that that trend is headed in the right direction from our standpoint, as we as we look to build our branded business.

Mitch I would also point to we did mentioned this in the.

Prerecorded commentary.

Dave has had a great quarter.

Up 7% in units in the syndicated data.

It's a really really good sign.

Particularly given its premium positioning if you recall.

About 20% of.

Dave's killer bread shoppers are low income households.

Surprising number to me when I first found out but that's why we were really starting to lose a lot of the unit volume and in fact earlier earlier in the year Dave.

Dave's units had turned negative well now those low income shoppers are coming back to the brand.

And helping us achieve that nice.

Growth in the second quarter and were positive for for the year.

We did also gained some some penetration.

And higher income households that helps so just all of those factors put together put together give us some confidence that consumer health is improving.

Now we did we did caution everyone that we.

We're not ready to call the play yet we'd like to see that trend.

Continue well into the third quarter before we conclude that it's here to stay but definitely some some really nice early signs.

Okay. Thank you and then.

Looking at your foodservice.

And the other category.

How much pricing is there still pricing to go there.

Number one number two.

Are you seeing any any any pushback on pricing.

Hi.

So far.

And.

And as these volumes come down how does that have an impact on your gross margins.

Sure so as far as pricing goes we got in the pricing that we needed for the year now.

There is some of it on the on the contractual business that will continue to trickle in but I think it's fair to say most of its own as far as resistance goes broadly speaking everyone.

He understands the inflationary environment. So we again, we were able to get through.

All of the pricing that we wanted in terms of volume remember a lot of the a lot of the volume declines first of all overall the volume declines are largely made up of foodservice and cake volume declines.

And then most of that is intentional so as we rationalize some of that lower margin business that we've been talking about that certainly plays into it same thing on the cake side, just getting out of that.

Some of the cheaper business focusing more on the branded business obviously.

Obviously that is having an effect on volumes.

Sequentially.

For cake, you should you should see that improve it did improve this quarter quite markedly because.

Because we are really starting to lap some of the heavy SKU rat that we did that we did last year and then finally in terms of foodservice.

We did have some disruptions in the quarter.

From one of our cold storage suppliers that definitely impacted.

Volume performance in the quarter.

Okay, and then just last question.

So.

When it comes to you talked about I was interested in the <unk>.

You've moved some of your sales.

The bakery.

Function away from the sales leadership and more to the supply chain leadership and Youre seeing positive.

Benefits.

On both ends better better efficiency in the bakery and also you pointed out how youre pleased with how.

The sales sort of have improved and I'm just curious.

How that how that.

You have a lot of national customers how.

How much influence.

The local sales.

Leadership has at each bakery.

And.

And weather.

Is there also is there also.

A reduction in force at all.

As it relates to the sales just having more sales out there more salespeople out there.

Well I'll answer your last question first no not not from a material standpoint, I mean, obviously, there is always a little bit of attrition and turnover but.

I think the more important pieces of your questions are yes. It does it does have an effect at local level, yes lot of national accounts now grocers have consolidated we all know that.

But the area sales directors and can have a major impact at the local store level.

Helping to selling that additional display for example.

Those those types of execution elements are.

Critical.

And I would point to that reorganization as one of the reasons we put.

A form so well in the quarter as you know this is the big summer Bun season, we had our best best Bun season ever we achieved our highest bunch.

<unk> share.

In the quarter.

Those are all proof points that the organization restructure is working it's just mix, it's really a matter of focus.

Having our sales folks to be able to focus only on sales what they do best and then similar similarly on the supply chain side.

Having that expertise solely focus on running those bakeries as efficiently as possible and to your point, we've seen improvements on both fronts.

Okay, Alright, thank you very much for the questions.

Thanks, Matt Thank you.

One moment for our next question please.

Our next question comes from the line of Connor <unk> with consumer edge. Your line is now open.

Hey, guys. Good morning, Congrats on a great quarter.

Thank you John I appreciate it.

Yes, so just kind of wanted to follow up on some of <unk> questions. There. So so.

<unk> seen any private label share gains somewhat moderating in the quarter on sort of combined and the more I guess traditional loaf segment and sort of what those sure.

Sure.

I guess just trying to get it back just trying to get a sense just how much of a factor as maybe mix shift.

Shifting maybe moving more towards.

The bonds segment or I guess, it's more differentiated segments.

And I guess, maybe is there any concern that consumers are maybe just temporarily moving to different segments of the category, where private label is under shared.

Yes, actually we've been seeing that trend for some time. If you go back quite a quite a few quarters I think we talked about that pretty heavily that even within the category.

We were seeing shifts more towards specialty premium more towards breads, buns and rolls more towards breakfast items all of which.

Tend to have a higher level of differentiation.

And are certainly more more premium products as well. So for example, our nature's own perfectly crafted brioche buns have done extremely well that's a differentiated item from just the standard light bond the daves killer bread bagels, English muffins et cetera.

The bonds with days.

I've done done really well as well as that broader specialty premium category. So I think it's a trend we've been seeing for a while.

Somewhat disrupted by the inflationary environment, because obviously, we've talked a lot about trade down and households, economizing, but I think over the longer pole.

I think that I think that trend remains in place one of the things that we're focused on here is how can we how can we bring more differentiation to that traditional loaf category. It is still our largest segment. So it's very important.

The performance from a cash flow standpoint, all of it so what can we do to further differentiate <unk>.

Those mainline nature's own items from a quality standpoint of packaging standpoint, and a different flavors et cetera. So.

That's something that we're focused on here.

Perfect and then just back to SKU rationalization is a little bit as well so that was a volume headwind again in the quarter, obviously and I guess I was just wondering.

It was a headwind driven mostly by comparison prior from prior rationalizations or were there more skus actually limited during the quarter and I know you mentioned the impact is expected to lessen in the second half, but I guess I'm just trying to get a sense for if there are a lot more skus, particularly on the chopping block or if you are pretty much all finished.

I'm going to break that into two pieces because on the cake side, we're largely done and I think we said at the beginning of the year Youll see those those volume declines start to moderate as we move to the back half of the year and we saw that even in the second quarter. So that's on the <unk> side.

I mean, obviously there is.

Theres always continued SKU rationalization, but.

The bulk of it that we've been doing over the last couple of years, we're sort of through that.

On the foodservice side, it's a little bit different because we still have some of that.

That lower margin business that will be rationalizing over time.

And it's not all going to come at once sell ups under contract and so that affects the timing we did exit some more light in the quarter I Wouldnt say that thats.

Heavily responsible for the volume decline in the second quarter that's more.

The previous rationalizations, we did.

Disruption with the coal storage, operator et cetera was more responsible for that so.

The foodservice side to sum up I would say, we're not done yet.

But it's not like it's going to come all at once it'll be spread out over a number of years.

And it's really it's really about.

We intend to stay in foodservice, we liked the foodservice business, it's really about exiting that lower margin business margining up in foodservice and even more importantly, shifting that capacity and production to branded retail.

Alright, great. Thanks for the color as always.

Okay. Thank you Tom. Thank you one moment for our next question.

Question comes from the line of Jim <unk> with Stephens. Your line is now open.

Hi, guys. Thanks for taking our question.

In the prepared remarks about the stabilization on the branded side do you feel like Theres anything you can do in the near term to maybe juice that a little bit whether it's from an advertising standpoint, or a promotional standpoint do you feel that there's a way you can kind of help it along.

To get the brand had gone back in the right direction and gaining share.

Yes. Good question I'm glad somebody asked about promotions I was hoping we get that.

Yes, so to answer your question, Yes, we are we are doing things.

Juice that you used to use your words. So if you look at SD into SG&A marketing was up in the quarter.

I think thats something you can continue to expect to see from US we're very we're very committed.

Our marketing efforts to support these brands and I think that's always important.

From a promotional standpoint, we did promote a little bit more in the quarter.

Didn't call it out as anything terribly significant I think overall in the category.

Promotions were up a little bit.

But still well below.

Historically or even pre pandemic levels.

So no significant movements there the interesting bit that we're seeing.

Is that even when we do promote.

The incremental units aren't terribly attractive.

So we have to be very selective about when we do promotions to ensure we're getting a good return on those promotions and there are some good ones out there to be had to be sure.

But I think what that tells you.

As a little something else about the consumer right.

If you are putting in item, one promotion and you're really not getting that lift that you normally see what it tells me is the shopper is still not.

They are only buying what they need so it's another indication that consumers are still trying to economize in the household. So we'll see how those trends continue but I think the takeaway is.

The category has not gotten.

Terribly promotional at least not yet.

And to the extent that there are promotions, we're really not seeing that incremental lift that you might've seen in the past.

Great. That's helpful and then maybe to drill down on kind of a balance between.

Promotions versus marketing thing because you mentioned.

It's coming up on the marketing side could you give a sense for which one of those drives consumer engagement, especially with the less differentiated branded products is it better to have a low price and taking the number of <unk> less or is it better to have 5% more airtime or visibility. So it hasnt been brand top of mind.

Jim.

Yes.

I think they are both important.

They may serve slightly different purposes, I mean promotions can be very effective in driving trial. For example, so if you think about our bar launch obviously, what we're doing.

Ads and promotions for the bars, because we're trying to bring new consumers to that certainly marketing can do that for you as well.

But almost look at marketing is as much about retention as it is acquisition.

So it's really the combination of the two are really important depending on what you are trying to drive.

In a more commoditized category, yes promotions are probably at.

At least historically a little bit more effective despite what I just got finished talking about.

But I think the most important thing that we can do within our portfolio of brands has continued to drive differentiation.

And then drive consumers to that with a combination of promotions and marketing.

Great that's very helpful I'll pass along.

Thanks, Jim Thank you.

I am currently showing no further questions at this time I would now like to turn the conference back to Ross Macmillan.

Chairman, Chief Executive Officer, and President for closing remarks.

Great. Thank you Norma just want to thank everybody for taking time today and joining us for questions. We really appreciate your interest in our company and as always we'll look forward to speaking with you next quarter everybody take care.

Thank you for your participation you may now disconnect everyone have a wonderful day.

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Good day, and thank you for standing by and welcome to the flowers Foods second quarter 2023 results Conference call. Please be advised that today's event is being recorded I would now like to hand, the conference over to your speaker today J T Rex Executive Vice President of Finance and Investor Relations. Please go ahead Sir.

Thank you Darla and good morning, everyone.

Hope you all had the opportunity to review our earnings release listened to our prepared remarks and view the slide presentation. They 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.

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

Thanks, J T. Good morning, everybody. Thanks for joining the call today.

I'm I'm I'm very pleased with the strong quarterly results.

Our performance recovered after a slow start to the year.

Helped by the competitive strength of our leading brands.

Spike strategic pricing initiatives designed to mitigate inflationary pressures.

Volume trends in our branded retail business did improve and that may be an early indication that consumer demand is migrating back to pre inflationary levels.

That topline strength translated into improved margins and earnings which is reflected in our updated 2023 guidance.

Pivot label products gained share, but that growth appears to be moderating.

We remain confident that the trend toward towards premium position.

Driven by our investments in innovation and marketing went out over the longer term.

I'm excited about our prospects I've really never been more confident in our ability to grow shareholder value overtime.

So normal with that we're ready to open up for questions.

And our first question will come from the line of Bill Chappell with <unk> Securities. Your line is now open.

Thanks, Good morning.

Hey, Bill.

I guess.

Can we start a little bit more commentary on canyon I didn't fully understand kind of what what happened to.

The deterioration.

Market share and margins over the past few months and just trying to understand how that improves going forward it seemed like inside of <unk>.

Strong trajectory for the past few years.

Didn't know if it's more of a sign of we're hitting a plateau or if theres something else.

I don't fully understand.

Yes, sure I'd be happy to I would describe it as temporary bill I mean, a lot of it has to do with capacity.

In some ways a good problem to have because as you know canyon has been on a really nice trajectory, but we got a little bit tight.

We've had to do some things to restructure canyons portfolio.

And made some more investments.

Canyon bakery to help free up additional capacity. So we've got that's all thats coming online in the second half and we've got plans to reinvigorate the growth there is a little bit of channel shifts as well that's happening does not picked up by the syndicated data.

So what youre seeing is a little different than than reality, but.

But again.

I put that in the temporary category, we will get that back on track Canyon's got still got a great future ahead of it.

Got it thank you and then.

This is the second or third time, you put in the.

Your commentary kind of thought of moving into tangential categories through M&A and at the same I think you've talked about.

Dave's killer bread.

Bars sometime in 'twenty, four and didn't know if those kind of coupled if you'd like to have greater expertise in the snack bar or tangential category before.

Spanning the kind of nationwide or any kind of update on how thats going would be great. Thanks.

The rollouts going we're going really well so those initial three skus of bars, bill or in the middle of a nationwide rollout right now.

So I think we noted in the prerecorded commentary that we're in about 12000 stores will be in more than 13000 by year end and we will actually slightly be slightly ahead of our own expectations for that rollout.

For 2024, there are three new skus of bars coming out that are higher protein based.

They are the amped up protein bars really great product they've been in test market for a while.

They've done extremely well in test market and I think most promising as they are proving to be incremental to the original three skus. So I think where we're touching a different consumer segment with that higher protein offering.

And then of course behind that we've got the snack bites those are still in test that will be coming a little bit lighter and then a whole pipeline of innovation even behind that so we're really excited about what we're building from an innovation standpoint with daves.

And I guess with from an M&A standpoint does that make the bars category more attractive from a non getting out of just straight bread.

As you are building expertise in building kind of a nation national following up behind a brand.

Yes, it could I mean, it would it would definitely depend on the brand and what that brand brings to the consumer I mean, it is a crowded category. So.

So we want to be careful that we're that we're investing in the right. The right segments of that category, but yes, there are definitely opportunities out there we'd be interested in.

Great. Thanks, so much.

Thank you Bill. Thank you one moment for our next question. Please.

Our next question comes from the line of Mitchell Pinheiro with startup Company <unk> Company. Your line is now open.

Hi, good morning.

Okay.

I guess.

Couple of questions here first.

Yes.

You spoke about you spend time.

In the.

In your script about.

Label and Youre seeing.

Improved trends.

But you still.

Have you still worry on.

I'm, just not sure where it's going and I'm curious.

Are you seeing.

The positive.

Back to brand even into here in August .

And.

What you might be looking for as signs of either of movement in either direction.

Yes sure Great question, So a couple of things there.

Private label still gained share in the quarter.

But I think it's important to note that that growth is slowing and this was towards the end of the quarter was the lowest that we've seen in terms of gains for private label. This year. So that's definitely on a good trend.

The other thing to remember and we've talked about this all year.

This is the private label phenomenon is playing out more in mass than it is in grocery to exit loss share in grocery continues to gain in mass.

We've talked about there has been a little bit of channel shift.

As consumers seek bargains in mass club dollar of that sort of thing.

I do think also that it is important to note that the private label share gains are generally confined.

So that loaf category the traditional products.

Other words, those with the least differentiation.

Private label loss share in virtually every other category, where you tend to see more differentiation, so specially breakfast sandwich buns and rolls that sort of thing so.

The trend towards premium position is definitely still there.

Clearly consumers are still looking for bargains, but that debt.

That trend is headed in the right direction from our standpoint, as we as we look to build our branded business.

Mitch I would also point to we did mentioned this.

And the prerecorded commentary.

Dave had a great quarter.

Up 7% in units in the syndicated data.

That's a really really good sign.

Particularly given.

Its premium positioning if you recall.

About 20%.

Dave's killer bread shoppers are low income households.

A surprising number to me when I first found out but that's why we were really starting to lose a lot of the unit volume and in fact earlier earlier in the year Dave.

Dave's units had turned negative will know those low income shoppers are coming back to the brand.

And helping us achieve that nice.

Growth in the second quarter and were positive for for the year.

We did also gained some some penetration.

And higher income households that helps so just all of those factors put together put together give us some confidence that consumer health is improving.

Now we did we did caution everyone that we.

We're not ready to call the play yet we'd like to see that trend.

Continue well into the third quarter before we conclude that it is here to stay but definitely some some really nice early signs.

Okay. Thank you and then.

Looking at your foodservice.

And the other category.

I mean, how much pricing is there still pricing to go there.

Number one number two.

Are you seeing any any any pushback on pricing.

Hi.

So far.

And.

And as these volumes come down how does that have an impact on your gross margins.

Sure so as far as pricing goes we got in the pricing that we needed for the year now.

There is some of it on the on the contractual business that will continue to trickle in but I think it's fair to say most of its own as far as resistance goes broadly speaking.

Everybody understands the inflationary environment. So we again, we were able to get through.

All the pricing that we wanted in terms of volume.

Remember a lot of the a lot of the volume declines first of all overall the volume declines are largely made up of foodservice and cake volume declines.

And then most of that is intentional so is.

We rationalized some of that lower margin business that we've been talking about that certainly plays into it same thing on the cake side, just getting out of some of the cheaper business focusing more on the branded business.

Obviously that is having an effect on volumes.

<unk>.

Sequentially.

For cake, you should you should see that improve it did improve this quarter quite markedly because we're really starting to lap some of the heavy SKU rat that we did that we did last year and then finally in terms of foodservice.

We did have some disruptions in the quarter from.

From one of our cold storage suppliers that definitely impacted.

Volume performance in the quarter.

Okay, and then just last question.

So.

Yeah.

When it comes to you talked about I was interested in the <unk>.

You've moved some of your sales your I guess the bakery <unk>.

<unk> away from the sales leadership and more to the supply chain leadership and Youre seeing positive.

Benefits.

On both ends better better efficiency in the bakery and also you pointed out how youre pleased with how.

The sales have improved and I'm just curious.

How that how that.

You have a lot of national customers, how much influence.

Look the local sales.

Later ship has at each bakery.

And and weather.

Is there also is there also.

A reduction in force at all.

As it relates to the sales just having more sales out there more salespeople out there.

Well I'll answer your last question first no not not from a material standpoint, I mean, obviously, there is always a little bit of attrition and turnover but.

I think the more important pieces of your questions are yes. It does it does have an effect at the local level, yes lot of National accounts now grocers have consolidated we all know that.

But the area sales directors and can have a major impact at the local store level.

And the selling that additional display for example.

Those those types of execution elements are.

Critical.

And I would point to that reorganization as one of the reasons, we performed so well in the quarter. As you know this is the big summer Bun season, we had our best best Bun season ever we achieved our highest bunch.

<unk> share.

In the quarter.

I think those are all proof points that the organization restructure is working it's just mix, it's really a matter of focus.

Having our sales folks to be able to focus only on sales what they do best and then similar similarly on the supply chain side.

Having that expertise solely focus on running those bakeries as efficiently as possible and to your point, we've seen improvements on both fronts.

Okay, Alright, thank you very much for the questions.

Thanks, Matt Thank you.

One moment for our next question please.

Our next question comes from the line of <unk> with consumer edge. Your line is now open.

Hey, guys. Good morning, Congrats on a great quarter.

Thank you John I appreciate it.

Yes, so just kind of wanted to follow up on some of <unk> questions. There. So so.

So private label share gains somewhat moderating in the quarter on sort of confined and the more I guess traditional loaf segment and sort of what those share loss.

Sure.

I guess just trying to get it back just trying to get a sense just how much of a factor as maybe mix shift.

Shifting maybe moving more towards.

The bonds segment, where I guess, it's more differentiated segments.

And I guess, maybe is there any concern that consumers are maybe just temporarily moving to different segments of the category, where private label is under shared.

Yes, actually we've been seeing that trend for some time. If you go back quite a quite a few quarters I think we talked about that pretty heavily that even within the category.

We were seeing shifts more towards specialty premium more towards breads, buns and rolls more towards breakfast items all of which.

You tend to have a higher level of differentiation.

And are certainly more more premium products as well. So for example, you know our nature's own perfectly crafted brioche buns have done extremely well that's a differentiated item from just the standard light bond the daves killer bread bagels, English muffins et cetera.

The bonds with days.

You have done done really well as well as that broader specialty premium category. So I think it's a trend we've been seeing for a while.

Somewhat disrupted by the inflationary environment, because obviously, we've talked a lot about trade down and households, economizing, but I think over the longer pole.

The performance from a cash flow standpoint, all of it so what can we do to further differentiate.

Those mainline nature's own items is it from a quality standpoint of packaging standpoint, and a different flavors et cetera. So.

That's something that we're focused on here.

Perfect and then just back to SKU rationalization is a little bit as well so that was a volume headwind again in the quarter, obviously and I guess I was just wondering.

It was the headwind driven mostly by compares from prior from prior rationalizations or were there more skus actually limited during the quarter and I know you mentioned the impact is expected to lessen in the second half, but I guess just trying to get a sense for if there are a lot more skewed potentially on the chopping block or if you are pretty much all finished.

I'm going to break that into two pieces because you're on the cake side, we're largely done and I think we said at the beginning of the year Youll see those those volume declines start to moderate as we move to the back half of the year and we saw that even in the second quarter. So that's on the cake side.

I mean, obviously there is.

There is always continued SKU rationalization, but.

The bulk of it that we've been doing over the last couple of years, we're sort of through that.

On the foodservice side, it's a little bit different because we still have some of that.

Lower margin business that we will be rationalizing over time.

And it's not all going to come at once some of it's under contract and so that affects the timing we.

We did exit some more light in the quarter I wouldn't say that that's.

Heavily responsible for the volume decline in the second quarter that's more.

The previous rationalizations, we did the disruption with the coal storage, operator et cetera.

More responsible for that so on.

On the foodservice side to sum up I would say, we're not done yet.

But it's not like it's going to come all at once it'll be spread out over a number of years.

And it's really it's really about.

We intend to stay in foodservice, we like the foodservice business, it's really about exiting that lower margin business margining up in foodservice and even more importantly, shifting that capacity and production to branded retail.

Alright, great. Thanks for the color as always.

Okay. Thank you Tony Thank you one moment for our next question.

Question comes from the line of Tim <unk> with Stephens. Your line is now open.

Hi, guys. Thanks for taking our question.

Following the prepared remarks about the stabilization on the branded side do you feel like Theres anything you can do in the near term to maybe juice that a little bit whether it's from an advertising standpoint, or a promotional standpoint do you feel that theres a way you can kind of help it along.

To get it done the brand had gone back in the right direction and gaining share.

Yes. Good question I'm glad somebody asked about promotions also could we get that.

Yes, so to answer your question, Yes, we are we are doing things.

Juice that they used to use your words. So if you look at SD into SG&A marketing was up in the quarter.

I think thats something you can continue to expect to see from US we're very we're very committed.

Our marketing efforts to support these brands and I think that's always important.

From a promotional standpoint, we did promote a little bit more in the quarter I wouldn't call it out as anything terribly significant.

Overall in the category.

Promotions were up a little bit.

But still well below.

Historically or even pre pandemic levels.

So no significant movements there the interesting bit that we're seeing.

Is that even when we do promote.

The incremental units aren't terribly attractive.

So we have to be very selective about when we do promotions to ensure we're getting a good return on those promotions and there are some good ones out there to be had to be sure.

But I think what that tells you.

As a little something else about the consumer right.

If you're putting it on a more promotion and you're really not getting that lift that you normally see what it tells me is the shopper is still not.

They are only buying what they need so it's another indication that consumers are still trying to economize in the household. So we'll see how those trends continue but I think the takeaway is.

The category has not gotten <unk>.

Terribly promotional at least not yet.

And to the extent that there are promotions really not seeing that incremental lift that you might've seen in the past.

Great. That's helpful and then maybe to drill down on kind of a balance between.

Promotions versus marketing thing because you mentioned.

We stepped up on the marketing side could you give a sense for which one of those drives consumer engagement, especially with the less differentiated branded products is it better to have a low priced and taking the number of <unk> less or is it better to have 5% more airtime or visibility. So it hasnt been brand top of mind.

Jim.

Yes.

I think they are both important.

They may serve slightly different purposes, I mean promotions can be very effective in driving trial. For example, so if you think about our bar launch obviously were doing.

Ads and promotions for the bars, because we're trying to bring new consumers to that certainly marketing can do that for you as well.

But you almost look at marketing is as much about retention as it is acquisition.

So it's really the combination of the two are really important depending on what you are trying to drive.

In a more commoditized category, yes promotions are probably at.

At least historically a little bit more effective despite what I just got finished talking about.

But I think the most important thing that we can do within our portfolio of brands has continued to drive differentiation.

And then drive consumers to that with a combination of promotions and marketing.

Great that's very helpful I'll pass along.

Thanks, Jim Thank you.

I am currently showing no further questions at this time I would now like to turn the conference back to Ross Macmillan.

Chairman, Chief Executive Officer, and present for closing remarks.

Great. Thank you Norma.

Thank you everybody for taking time today and joining us for questions. We really appreciate your interest in our company and as always we'll look forward to speaking with you next quarter everybody take care.

Thank you for your participation you may now disconnect everyone have a wonderful day.

Q2 2023 Flowers Foods Inc Earnings Call

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