Q2 2023 Flowers Foods Inc Earnings Call Pre-Recorded

Now I'll provide an overview of our second quarter performance in the context of our four strategic priorities developing our team focusing on our brands prioritizing margins and pursuing smart M&A following that Steve will review, our financial results and I'll come back with a discussion on key themes moving forward in our plan to drive shareholder value in 2020.

Three and beyond.

I'd like to start by recognizing the incredible contributions of our team, whose passion and commitment are the key ingredients of our success.

Our efforts were instrumental in our strong second quarter performance.

Last quarter I discussed the restructuring of operational responsibilities of our bakeries shifting them from the sales function to the supply chain function. One of the primary objectives of this change was to free up our sales team to focus solely on bringing our lean products to as many customers as possible.

I'm happy to say that the restructuring is already bearing fruit.

The sales team delivered outstanding execution of the Memorial day, and fourth of July holidays, resulting in a company record for Bun unit share.

A key part of our portfolio strategy.

That execution is critical during the all important bun season, we expect continued benefits from the restructuring.

Similarly, we're seeing increased focus and better performance from our bakeries, owing to the direct line of accountability and clear Kpis established by supply chain leadership.

As we've discussed for many quarters operational improvement is a major opportunity for us and I am pleased to see our investments in capabilities systems and processes start to pay dividends.

Our second strategic priority is focusing on our brands.

Our brands continue to outperform despite a difficult competitive environment in which private label products gained market share, though at a moderating pace, our leading brands more than held their own.

Nature's own and Canyon Bakehouse, both held unit share flat and the fresh packaged bread category, while Dave's killer bread gained 20 basis points.

<unk> benefited from our commitment to innovation as we initiated nationwide launches of nature zone keto net one loaf nature's own perfectly crafted everything bonds and wonder Hawaiian months and the nationwide rollout of our <unk> snack bars continue.

The bars are currently on the shelf and almost 12000 stores and we expect that number to grow to more than 13000 by year end slightly more than originally planned.

Philosophies have been in line with some of the leading competitors and our team is working hard to drive trial and repeat sales through a multifaceted marketing campaign.

The dk be snack bars are just the first item and a deep pipeline of innovation that we expect to expand our addressable market and meaningfully grow sales outside the bread category or decay be amped up protein bars are in test markets currently with plans for a nationwide launch in 2024.

And our <unk> crunchy snack bites are also in test market as.

As we've discussed the financial benefit of these rollouts will be limited in the near term as we invest in a robust marketing plan, but we are encouraged by the preliminary results.

On the other ends of the spectrum, Although canyon bakehouse held unit share in the overall fresh packaged bread category. It lost 230 basis points of gluten free unit share.

Can you just had a couple of quarters of uncharacteristic weakness in tracked channels, which was caused by two factors.

First our mix shifts to channels that arent comprehensively measured by syndicated data and second a shortage of gluten free capacity to impacted our ability to meet consumer demand.

Additional capacity is expected to come online in the second half of this year and we have aggressive plans to reaccelerate our growth.

We remain optimistic about the potential for canyon, which remained solidly in the number one market share position.

In addition to initiatives to grow its core products. We're also exploring plans to add new products through our agile innovation team.

Our third strategic priority is margins in area, where we saw a progress in the second quarter the.

A combination of foodservice and private label price increases to start the year and selected branded retail pricing and may help to offset inflationary pressures and higher expenses related to our ERP implementation.

Our margin improvement plan goes beyond price increases.

We are also focused on maximizing efficiencies.

In part through our digital initiatives like bakery in the future, which continue to benefit operations.

Cost savings initiatives are on track to meet our savings goal of $20 million to $30 million for 2023, and the path of Peter acquisition also benefited margins as we brought more production in house and expanded our sales footprint.

Lastly, we continue to execute on our portfolio strategy.

Branded retail products increased to 64, 1% of sales up 30 basis points sequentially. Despite continued pressure from private label.

And that branded retail performance was particularly strong in the branded bread category.

Our fourth priority is smart M&A M&A.

M&A has been a key contributor to our growth for decades.

Spanning our geographic coverage is supplementing our brand lineup moving forward. We also expect M&A to help us move into faster growing adjacent categories beyond bread.

We continue to monitor the deal market actively vetting potential acquisitions and investments that could add capabilities brands or products to our robust existing lineup.

Our strong balance sheet positions us well to act when we have financial commercial and operational conviction now I'll turn it over to Steve to review the details of the quarter and then I'll come back a little bit later to discuss our outlook for the current business environment Steve.

Thank you, Rob and Hello, everyone.

Moving on to our results total sales in the <unk>.

Second quarter increased eight 8% from the prior year period.

Improved price mix drove the adjusted year over year increase of 13, 3%, primarily due to price increases to mitigate inflationary pressures.

<unk> decreased six 1%.

Due to targeted sales rationalizations and cake and foodservice.

The pump of Peter acquisition added one 6%.

Gross margin as a percentage of sales, excluding depreciation and amortization increased 90 basis points to 49%.

Comparisons were impacted by inflation, driven pricing actions more than offsetting input cost inflation lower production volumes increased product returns and increased maintenance costs.

Selling distribution and administrative expenses as a percentage of sales were 38, 8% consistent with the prior year period.

Lower consulting costs and distributor distribution fees as a percentage of sales were offset by greater marketing expenses reduced scrap do income and.

And in insurance liability reserve.

Excluding matters affecting comparability.

Adjusted SG&A expenses increased 70 basis points to 38, 2%.

Due to the factors listed above with the exception of the consulting costs.

GAAP diluted EPS for the quarter was <unk> 30 per share compared to 25 soon from the prior year period.

Putting the items affecting comparability detailed in the release.

Adjusted diluted EPS in the quarter was 33 per share.

<unk> from the prior year period.

Turning now to our balance sheet liquidity and cash flow.

For the first half of fiscal 2023 cash flow from operating activities decreased by $54 9 million to $128 9 million, which.

Which included business process improvement cost of $12 8 million related to the ongoing transformation strategy initiatives.

Cash flow from operating activities was affected by working capital increases of $47 million largely due to decreased accounts payable, resulting from higher ERP related capital expenditures in the prior year capital expenditures decreased $29 5 million to $68 4 million and included 90.

$9 1 million for the ongoing ERP upgrade.

<unk> paid increased $4 7 million to $98 $1 million, our financial position remained strong at quarter end net debt to trailing 12 month adjusted EBITDA stood at approximately two one times.

At quarter end, we held approximately $12 million in cash and cash equivalents and had approximately $510 million of remaining availability on our credit facilities.

As Ralph mentioned, we are adjusting our 2023 forecast to reflect the second quarter results.

We are raising the bottom end of our sales adjusted EBITDA and adjusted diluted EPS guidance.

Our updated expectation is for sales in the range of five point <unk> five to 514 1 billion adjusted.

Adjusted EBITDA in the range of 503 million to $528 million and adjusted diluted EPS in the range of $1 18 to $1 25.

Results in the second quarter were roughly in line with our expectations when we adjusted guidance last quarter.

For the remainder of 2023, we expect a quarterly cadence similar to historic trends.

Key factors that could shift results within our guidance range include demand reversion price elasticities consumer resilience and continued inflationary pressure.

We are maintaining the top end of our guidance ranges as overall demand elasticity has been in line with our expectations.

Mining below historical levels.

Key factors that can ship results within our guidance range include demand reversion price elasticities consumer resilience and continued inflationary pressure overall demand elasticity has been in line with our expectations remaining below historical levels.

As a reminder, our adjusted EBITDA guidance incorporates approximately $26 million or <unk> per share of incremental cost related to the ERP project those incremental costs were $2 5 million or <unk> <unk> per share in the second quarter. We anticipate these costs to moderate substantially by project completion in 2026. Additionally.

We expect a 2023 impact of eight to 10 per share from an increase in interest depreciation and amortization expense associated with the ERP implementation and pop a beta acquisition, our ERP program, which went live in the second quarter remains on track and we are confident in our ability to <unk>.

The project within the financial guidance.

In fiscal 2023, we expect costs from the upgrade of our ERP system to be approximately $95 million to $105 million, including $30 million to $40 million expected to be capitalized as of July 15th 2023, we have incurred costs related to the project of approximately $190 million of which $103 million.

Been capitalized approximately 93% of our key raw materials are a covered in 2023 to minimize volatility and provide adequate visibility of the cost we strive to maintain our historical hedging strategy in which we attempt to increase the certainty of our key commodity cost six to 12 months out based on current coverage our guidance incorporate.

It's a moderate decline in commodity costs in the second half of 2023 relative to our initial expectations.

However, inflation remains persistent and we expect continued inflationary pressures into 2024.

We continue to monitor the commodity markets exploring opportunities to extend coverage at lower values that could benefit our future results. Thank.

Thank you and now I'll turn it back to Ross. Thank you Steve.

Now I'd like to discuss some of the trends impacting our current performance and the steps, we're taking to maximize our opportunities in this environment and beyond.

The three primary themes, we've been watching our consumer health and behavior inflationary impacts and the ability to take price to offset cost pressures.

<unk> remain pressured from higher cost and in response, they are trading down to lower priced products and shifting more of their shopping trips to value focused retailers.

Private label sales have benefited from this recent trend gaining 50 basis points of fresh packaged bread unit share in the second quarter.

However, those share gains were confined to loaf and traditional life products. The most commoditized part of the category.

That label lost unit share in specialty premium Loaf, sandwich, buns, and rolls breakfast and dinner breads and rolls.

Areas with greater product differentiation.

Importantly, those share gains continue to be largely concentrated in the mass channel.

Private label products lost 40 basis points of unit share in the grocery channel for.

We're flowers' branded retail bread products gained 20 basis points.

Perhaps most notable private label share gains have slowed throughout 2023 and dropped to the lowest level of the year late in the second quarter.

Our leading brands fared well in this environment Dave's killer bread performance was noteworthy gaining 290 basis points of unit share in the organic category and 20 basis points in the larger fresh packaged bread category as units grew 7%.

As I mentioned earlier nature's own and Canyon bakehouse, each held market share despite taking selective price increases and a tough competitive environment.

Earlier on the call are highlighted data showing improved demand for <unk> products, among lower and middle income customers. Although it's too early to know whether that improvement will continue these data may be signaling a trend reversal from the year ago quarter.

At that time, we noted lower income consumers, reducing their number of purchases and trading down less expensive products.

It's possible that consumers are acclimating to higher price levels and resuming prior purchasing behavior.

Inflation has impacted both consumer demand as I've, just highlighted and our cost structure that.

That cost pressure became acute following the start of the Ukraine more when commodity prices spiked.

While commodity prices, particularly we have decline from those highs they remain elevated relative to recent years more recently other commodities, most notably sugar have seen rapid price increases.

Given our consistent hedging policy such increases are expected to have minimal impact on 2023 results and we caution investors from expecting a downward step change if commodity prices remain at current levels.

I spoke earlier about initiatives, we are taking to mitigate inflation and pricing is one such measure.

Our successful implementation of price increases in the second quarter, despite market concerns about increasing pressure from retailers and consumers highlights our advantage value proposition.

We and our retail customers are particularly sensitive to affordability in the current environment.

But we recognize that mitigating inflationary pressures as necessary to deliver a fair return to our shareholders I believe our leading brands provides significant differentiation.

<unk> combined with the exceptional service, we provide including managing the shelf and retaining inventory risk justifies margin expansion from current levels.

President environment is challenging with consumer shifting more to value.

And with volatile inflationary pressures however.

However, we believe many of these headwinds are temporary and we expect to benefit over the long term from premium position and the continuation of work from home.

I'm confident that we're taking the necessary steps to thrive now and in the future.

Our team is the best in the industry, and we're enabling them to perform even better.

Our leading brands are proving their value holding their own in a tough consumer environment.

We're implementing the right initiatives to improve our margin profile and we will supplement those initiatives with shareholder friendly capital allocation, including our long track record of successful M&A.

I remain extraordinarily confident in our ability to grow shareholder value far into the future. Thank you very much for your time. This concludes our prepared remarks.