Q3 2023 Flowers Foods Inc Earnings Call - Q&A

November 10, 2023

Yeah.

Okay.

Good day and thank you for standing by welcome to the flowers Foods third 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. Reg Executive Vice President of Finance and Investor Relations. Please go ahead.

Thank you Liz and good morning hope everyone had the opportunity to review our earnings release listened to our prepared remarks and view. The slide presentation are all posted yesterday evening on our Investor Relations website.

During today's call Hi, I'm.

I'm sorry 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 joy.

Joining me today are Ross Macmillan, Chairman, CEO, and President and Steve Kinsey, Our CFO Ross I'll turn it over to you alright, great. Thanks, J T. Good morning, everybody I appreciate you joining our third quarter call.

We're very pleased with our strong third quarter results, we generated record quarterly revenues and maintained our unit share despite inflationary pressures.

Sales benefitted from strategic pricing initiatives that are designed to mitigate inflation and improved volume trends.

Our leading brands continue to perform well.

We're investing in innovation and marketing to maintain that momentum.

We also continue to make progress in our digital and cost savings initiatives, which are helping to improve our efficiencies.

Despite the strong results revenues did come in a little bit less than expected due to business rationalizations that materialized.

Sooner than we expected and a lower than normal amount of storm activity.

It is important to note that all of the timing can be unpredictable. These business exits are an integral part of our portfolio with our strategy.

We aim to improve the profitability of our foodservice business we.

We've made great progress in that regard and we expect continued improvement moving forward.

Remain extremely confident in our prospects and Ive never been more confident in our ability to grow shareholder value overtime.

Before we move to questions I also want to acknowledge that today is veterans day, and so we would like to express our heartfelt gratitude to all the men and women in service.

Chosen to risk their lives to protect our freedoms here at home.

So thank you very much for your service.

With that Liz we are ready to take questions.

If you'd like to ask a question at this time. Please press star one one on your Touchtone telephone and wait for your name to be announced.

To withdraw your question. Please press star one one again.

Please standby, while we compile the Q&A roster.

Our first question will come from the line of Bill Chappell with <unk> Securities.

Thanks, Good morning.

Hey, Bill.

Yes.

Maybe summarizing your comments and I just want to make sure I'm looking at this right as is.

Is it fair to say it kind of you feel like the turbulence of the business post pandemic kind of bottomed out over the summer and you're well you're not meaningfully changed from from in the third quarter things are starting to at least.

Timber back up and the only real change was just that the exit of some of your businesses happen a lot faster than you expected is that the best way to summarize kind of the quarter.

Yes, I think it's a great way to summarize I mean, frankly, we're really pleased with the results in the quarter.

Yes, the loss of.

The foodservice business that we mentioned did impact the quarter and impacted the guidance, but I mean that was going on that was going to come anyway. These are planned exits. This is low margin business highly complex business.

This particular case actually we're yes, we're actually getting some benefit from some reduced transportation costs because this was.

A bit of a difficult customer to serve.

But then the strength of the underlying business is where the focus should be at least in our minds and.

And in that regard, we're really pleased I mean, you look at.

Bill you look at mix in the quarter.

Actually ticked up a little bit from a branded mix standpoint, so that's good.

The volumes sequentially on the retail side continues to improve and then of course the share performance on top of that so.

I think the way you framed it is accurate.

We're starting to see things stabilize and I think we also mentioned you're even looking into the first few weeks of the fourth quarter, though its early.

We continue to see that.

<unk> unit share performance continues.

Great.

And then just maybe a little bit more color on the settlement in California.

Not necessarily the legal but but that youre converting it to an employee model I guess.

I don't remember, if you've disclosed how big California's anyways, but does that alter the margins going forward and is there a chance that other states have to go to an employee model down the road.

Yes, so just remember that California is a unique legal environment. Unfortunately.

And so we're kind of in this position due due to that legal environment. So it is unique this is not something I would extrapolate across the across the country. We did have one other settlement.

In Maine.

This was on a much smaller scale, but we also converted to a company owned model.

In that state as well.

With regards to California, you are right, we will be over the next year or so whenever the settlement comes through kind of expecting that early next year.

We'll in phases convert the independent model to a to a company owned model.

So it does and Steve can speak to us a little more if you like.

But it will shift some some costs around a little bit.

And generally speaking.

Obviously, we're not providing any guidance in 'twenty four we can put a little finer point on this probably in February.

But generally speaking, it's a little bit more expensive to run the company owned model than it is an independent distributor model. However.

Yes, there are some advantages to having.

For lack of a better word having some control back when you think about.

Store level service display execution days of service et cetera.

We actually see a little bit of upside as well that we would expect to offset those incremental costs.

Got it thanks, so much.

Thank you Bill.

Our next question will come from the line of Steve powers with Deutsche Bank.

Hey, Good morning can you hear me.

Yeah, Steve Good morning, Okay, great sorry, operator cut out there for a second.

Yeah.

Two questions. The first one is on the on the ERP program and progress there.

And how things have gone since the since that rollout started if I'm not mistaken.

23 projected costs dropped from about $100 million at the midpoint to 75 this quarter.

Capitalized costs.

From.

It also drops.

Embedded in adjusted EBITDA went from 26 million to $17 million quarter over quarter. So is that.

First of all hopefully those numbers are right tell me, if they're not but if they are does that.

Constitutes savings that youre, finding or is that early delays in the rollout and how should we think about that as we as we as we look forward. Thank you.

Yes, Steve its really more of a shift in cadence.

Overall, the total cost of the project is still estimated in the range. We've disclosed in the Q, which I think is around $3 50.

$250 million or so on average.

Completion of the project is still scheduled for.

2026.

No.

Total costs remain the same but you are right we did.

Did shift that.

Part of that was driven by the fact, if you recall, we rolled out ERP to two bakeries.

We're trying we're pretty close to.

Getting through all working on all of the kind of the bugs. If you will on the rollout will pick back up with other bakery. Starting next year. We did have some scheduled for the back half of this year, but we decided to change the cadence slightly in that regard and then also if you go back to Bill's question on California, we're having to shift a few resources.

Within <unk> in the business to working through that.

The model will be.

<unk>.

In California, so that we thought it was more prudent.

And to shift the cadence of ERP given that focus.

That way hopefully, we can do both project as well.

Okay. Okay that makes sense. Thank you for that and then the second question I had was was actually.

On Terry Thomas his appointment as Chief growth Officer back in August.

So Terry reports to <unk>, but.

Well a little bit more.

Respective on what's his team looks like and how.

He has integrated himself and his broader role or how the how the company has.

Just within broader business operations.

How does the chief growth officer sort of interface with the rest of the business and how does that change planning in.

Just day to day.

Execution as the company goes forward.

Yes. Good question. So we're really excited about this role this was a direction that I haven't wanted to head eventually.

And frankly, Fortunately for us the opportunity came along we will sooner than I, even thought it did.

So the makeup of Terry's team essentially.

Over the older brand teams marketing consumer insights.

Innovation revenue growth management, so really all of the all of the growth levers that we have or are under Terry's per view and of course, <unk>, President and Chief operating officer.

Has all the operations of the business firmly under his under his umbrella and so those two gentlemen will obviously be working very very closely together.

Yes, you mentioned planning processes I don't think anything is going to change immediately.

But we are working on improved processes relative to planning.

<unk> only going to help us just overall from a sales execution standpoint, as well as a demand planning standpoint.

And then finally of course, Terry I'll be working closely with me on.

Finding new revenue streams, both organically and via M&A.

He is a very accomplished executive as you can see from us from his CV and.

We couldnt be more thrilled to have him on board.

Okay. Thanks, Ralph Thanks, Steve as well.

Yes take care Steve.

Our next question will come from the line of Mitchell Pinheiro with Sturtevant <unk> company.

Hey, good morning.

Hey, Mitch.

Okay.

So a couple of questions.

First why do you think.

The promote the promo activity is below average.

With the consumer kind of getting pressured.

I think grocery and retail would be a little more interested in.

In seeing some volume.

<unk>.

Turned positive in the category so.

Why do you think it's sort of down or below average and wouldn't you anticipate.

Down the road here in a quarter or two to see a little more heightened activity.

So Mitch.

It is a little bit.

I think in the prepared remarks, we indicated that.

It was up for the category still remains below pre pandemic levels. So your comment about it sort of being below average certainly rings true. The primary reason that we're seeing for that for that in our.

Research is theres, just not much left to be had the category.

It has historically been mainly driven by base sales, but they are.

There was also a historically some increments available via promotion what we're seeing now is that you.

You're really not getting much lift.

When you do promote.

<unk> said before I think that that kind of to your point that does somewhat indicate a pressured consumer in.

To the extent that.

The opportunity for expandable consumption is not really there right now consumers are buying what they need and thats. It.

Now going forward.

I expect to see some some higher promotions, maybe as we look into next year, we will have to say, it's a very tough it's a very tough thing to predict.

I just.

Yeah.

Looking at the overall macro environment and the consumer I would've thought that we might have already seen a little bit more of an uptick, but we really haven't.

I think thats largely due to the fact that there's just not a lot of return available right now on promotion.

Okay, and then what's driving the higher scale rates that you mentioned as it related to margins.

Yes, so a lot of that is.

Retailers are very keen on.

Minimizing out of stocks due to the growth of e-commerce, and so keeping a little bit more on shelf can obviously impact your impact your sale.

Bit.

Okay.

And is that across is that in all categories, meaning is.

Is it just in traditional loaf, where you're seeing it broadly into the organic.

Subcategories.

No I would say, it's more centered in traditional loaf I mean, the stale rates for <unk> and things like that are trending about where they were.

Okay and then.

Sort of final sort of a bigger picture question is your market share and Brad.

It's relatively it's been relatively stable.

Up and down couple of basis points over the last couple of years.

And so I'm curious like what it's going to take.

At 17% share of the category, 18% share.

It's still relatively modest, especially for being number two player in the in the category and I am curious when it's going to take to get that from 17 to 19 to 21.

Yes, it's a great question I mean, obviously, one element that we're dealing with right now of course is the.

A resurgence of private label, while the consumers under pressure, though.

I do think it's important to note that continues to moderate as we go forward. So that's one factor.

The other thing that's going to impact our growth is further penetration into underdeveloped territories.

We continue to grow very nicely in the northeast.

We also have a decent chunk of the country that we don't cover and then upper Midwest area. So.

Gaining access to that market at the right point in time.

Also be nicely accretive to overall share and look we continue to innovate as well.

And bringing we've proven that consumers will pay a premium price for differentiated items that really leaned in heavily on quality and taste right.

And.

Our innovation efforts, whether that's in our core category are now moving outside the category with snacks is focused on that.

And that should also help us drive share going forward.

Also call out breakfast until we brought forth Dave's killer bread into the breakfast category, we virtually have no presence there.

So and we're experiencing some nice growth there now we have.

Peter online out west were able to deliver fresher muffins to that part of the territory and are picking up.

Some some distribution that we lost due to quality issues shipping across the country. So you will all of these things are important and ultimately add up to improve share overtime.

Okay, well thanks for the answers.

I'll pass it along thank you.

Our next question comes from the line.

Conor rattigan with consumer edge.

Hey, guys. Good morning, Thanks for the question.

Morning Connor.

Yes, So I guess first things first on the business exits that you mentioned I guess I'm still a little bit confused as to why these were a headwind to full year guidance.

When he's not scheduled to occur until 2020 or was it maybe more of an opportunistic cost savings decision in spring.

Great.

Yes. So this one would have occurred probably either right towards the end of the year in phases or into 'twenty. Four so the fact that occurred when it did.

Accounts for the impact that it had in the third quarter and for the rest of the year.

But again I just want to reiterate that.

It fell this was planned.

It's a smart exit believe me.

And we will be a lot better off for it.

If you think about R. R.

Our portfolio strategy and what we're trying to do just to reiterate is to.

Either margin up.

Two are our targets or exit this low margin foodservice business and the good news is it's working.

We've been able to increase the profitability of our foodservice business.

Even though we've made it smaller and those efforts.

Efforts will continue.

If we cannot through price or distribution or otherwise get this business up to our target then fine we're more than happy to keep it and grow with the customers if not.

Then we're also more than happy to exit and help them transition to a new supplier.

Got it makes sense and then also as far as the call out on the storm activity as a headwind in <unk>. So I was wondering I can say I'm very thankful for the limited storm activity this year, but as far as it relates to us.

As it relates to the business.

I guess, we're still typically thought of hurricane activity as more of like a demand pull forward, rather rather than like a structural increase in demand in any given year I mean, like just kind of a line of thinking right like if you buy bread for a storm, you're probably not eating all of it like a one to three day span I guess am I thinking about that correctly.

Yes, you are looking at <unk>.

A factor.

Certainly not the factor obviously storms are very hard to plan for.

But just for in terms of year over year comparisons. There was a lot of I think there were like 13 named storms or something last year I don't think that many made landfall, but yes. This year significantly less activity than even the historical average would suggest so it was unusual.

To have this little storm activity in the third quarter.

But again, that's that's a very difficult thing to try to plan for but it was it was a factor.

Got it 13 strikes too many thanks Ralph.

Okay. Thanks, Scott.

Our next question will come from the line.

Of Jim <unk> with Stephens.

Hi, guys. Good morning, Thanks for taking my question.

Maybe as a quick follow up to the last question on the storm activity.

Is there any way you can size up the impact I don't know if you guys had like an internal estimate based on.

What you might have thought or just kind of give us a sense for how much of an impact that was in the quarter.

Yes, I mean, we can internally that's not something that we typically disclose I would just I would say that.

If we hadn't had the.

Unexpected.

Foodservice eggs, if we'd have had a more normal full amount of the storm activity.

That would've affected reasonably populated areas, we would have been a lot closer to where we got it.

Okay, that's fair.

When you talked about unit share in the prepared remarks.

I don't think <unk> share gain it's surprising just given the strength of that brand heads up but I was a little bit surprised that wonder gained while nature's own loss, if anything I, probably would've thought it would be the inverse. So can you just offer some color around the divergence between wonder nature.

Yes, we've actually talked a little bit about this before but I'm glad you asked we can put a finer point on it so.

Wonder share gains are largely going to be in the sandwich buns and rolls segment, where we've we've actually hit some unit share highs.

With our focus on and execution with our Wonder brand program.

You still call it another holiday in that quarter with Labor day.

Our partnership with the USO, etc.

So that accounts for a lot of the wonder share increase, which we're really happy to see because.

Before we bought the <unk> brand, we didn't have a national sandwiched bought enroll brand that we can compete with across the country right, but we do know and we've really made some nice progress there from a from a share standpoint on the on the nature's own side as we said before remember the segment other portfolio that is most susceptible.

To private label trade down is that traditional loaf category.

Nature's own is a big player in.

While we're number one and we have the number one SKU in all that which is great.

It is the least differentiated piece of the portfolio.

And there and therefore more success susceptible excuse me to private label trade down so that accounts for the drop there having said that the relative performance of nature zone has been has been quite good.

On a relative basis, I know, it's been down and pressure on our <unk>.

Relative basis, we're pretty pleased with where we are and we expect the trends to continue to improve as we kind of come out of this.

Pressured consumer cycle.

Great that's all very helpful.

Maybe one more question on on kind of the share dynamics I know, we will see when consumers trade channels from grocery to mass that they will also trade down to private label as kind of a manifestation of that value seeking behavior do you anticipate I know, there's a little bit.

Order to call, but just kind of.

Hydraulically when the consumer comes back to grocery from mass.

It will also shift backup to branded or is it a slower transition where they come back to grocery but still by private label.

No I think you're spot on it's a matter of fact, if you look at private label in grocery so ex mass channel private label still losing share.

And that's been that's been a trend I think pretty much all all year trying to term or back, but I'm pretty sure. That's been the case all year. The private label trends have really been centered in the mass channel. So to the extent that consumers that are still shopping and grocery are still shopping more premium or still shopping more differentiated et cetera.

Less private label those that have shifted channels to mass Youre correct.

Looking more at private label, but I would also tell you that the private label share gains and mass are also coming.

Down.

Theres still a lot, but the gains are starting to moderate and Furthermore.

Our overall share in mass has been improving all year.

We were down 80 bps in the first quarter 30.

<unk> 30 in the second and only 10 in the most recent.

So again another indicator of these trends are starting to reverse themselves and get better which is varian.

Very encouraging.

Great. Thanks for the color guys I'll pass along.

Okay. Thanks.

I'm showing no further questions in queue at this time I would like to turn the call back to Myles Mcmullan for closing remarks.

Alright, Thanks, Louis just want to thank everybody for taking time today and joining us for questions as always we appreciate your interest in our company and we look forward to speaking with you in February take care.

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

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Q3 2023 Flowers Foods Inc Earnings Call - Q&A

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