Q1 2024 Flowers Foods Inc Earnings Call - Pre-Recorded

Speaker Change: While this focus has always been ingrained in our DNA, we're increasing our emphasis going forward instituting a mindset of continuous productivity improvement related to cost across the organization.

Speaker Change: Our fourth priority is smart M&A M&A has been a key contributor to our growth for decades, expanding our geographic coverage and supplementing our brand lineup.

Speaker Change: In addition to strengthening our position in core categories by expanding our geographic reach and gaining share in underdeveloped markets. We're also focused on finding new revenue streams across the baked foods category, we see compelling brands that complement our existing portfolio and skew towards a better for you nutritional profile.

Speaker Change: The M&A market is showing signs of improvement and we remain encouraged by the developing pipeline of potential opportunities.

Our strong balance sheet positions us well to act when we have financial commercial and operational conviction.

Speaker Change: Now I'll turn it over to Steve to review the details of the quarter and then I'll close with our outlook for the current business environment Steve.

Stephen Robert R. Powers: Thank you, Rob and Hello, everyone total sales of the first quarter increased two 8% from the prior year period improved price mix drove the year over year increase up three 1% primarily due to pricing actions taken in the prior year to mitigate inflationary pressures.

Stephen Robert R. Powers: Volume decreased 8% largely due to targeted sales rationalizations and away from home.

Stephen Robert R. Powers: Notably branded retail volumes increased 3% the pop up Peter acquisition added <unk>, 5%.

Stephen Robert R. Powers: Gross margin as a percentage of sales, excluding depreciation and amortization.

Stephen Robert R. Powers: Increased 160 basis points to 49, 4% over the same quarter last year.

Stephen Robert R. Powers: Comparisons benefited from pricing actions taken in the prior year and lower ingredient and packaging cost, partially offset by volume declines related to business rationalizations.

Stephen Robert R. Powers: Selling distribution and administrative expenses as a percentage of sales were 39, 7%.

Stephen Robert R. Powers: 110 basis point increase over the prior year period.

Stephen Robert R. Powers: Increased labor and technology expenses were partly offset by lower distributor distribution fees as a percentage of sales excluding matters affecting comparability. Adjusted SG&A expenses were 39, 3% of sales 130 basis point increase due to the factors listed above.

Stephen Robert R. Powers: GAAP diluted EPS for the quarter was 34 cents per share compared to 33 cents in the prior year period.

The items affecting comparability detailed in the release adjust.

Stephen Robert R. Powers: Adjusted diluted EPS for the quarter was 38 cents per share consistent with the prior year period.

Stephen Robert R. Powers: Turning now to our balance sheet liquidity and cash flow.

Stephen Robert R. Powers: Cash flow from operating activities of the first quarter increased by $47 million to $105 million.

Stephen Robert R. Powers: Capital expenditures decreased $1 billion to $33 million and included $2 million for the ongoing ERP upgrade.

Dividends paid increased $2 billion to $51 million.

We believe our financial position remains strong at quarter end net debt to trailing 12 month adjusted EBITDA stood at approximately two times, we held approximately $16 million in cash and cash equivalents and had approximately $541 6 million of remaining availability on our credit facilities now.

Stephen Robert R. Powers: Now turning to our outlook for 2024.

Speaker Change: As Ralph said, we are largely maintaining our previously issued guidance, which calls for sales to be flat to up one 6% EBITDA of 524 to 553 billion and adjusted EPS in the range of $1 20 to $1 30.

Speaker Change: The one change is an increase in capital spending related to supply chain optimization.

Speaker Change: Guidance reflects our expectation for continued volume improvement, while acknowledging an uncertain economy.

Speaker Change: Its potential impact on consumer behavior, and the promotional environment for.

Speaker Change: Full year results are also expected to benefit from an expansion of our savings initiatives and new business wins.

Key factors that could shift results within our guidance range include the consumer and promotional environment. The transition of our California distribution and implementation of our savings initiatives. Other factors expected to impact full year results include a higher tax rate and increased net interest expense.

Speaker Change: <unk> added with funding payments related to the California legal settlement the.

Speaker Change: The ongoing ERP project and decreased interest income.

Speaker Change: As previously disclosed we reached an agreement to settle distributor related class action litigation in California.

Speaker Change: Settlement received final court approval on March 18th 2024.

Speaker Change: We have started the process of repurchasing the California distribution rights, which is expected to be completed during the first quarter of fiscal 2025. Once completed we plan to serve as the California market with a deployment model.

Speaker Change: Approximately 83% of our key raw materials are covered in 2024 based.

Speaker Change: Based on that coverage our guidance incorporates a moderation and ingredient cost in 2024 relative to the prior year.

Speaker Change: To minimize volatility and provide adequate visibility of the cost we have maintained our historical hedging strategy, which we intend to increase the certainty of our key ingredient cost six to 12 months out our ERP rollout went live in the second quarter of 2023, and we continued to make progress in that implementation. So we have paused the bakery rollout.

To concentrate resources on our California distribution transition it's.

Speaker Change: In fiscal 2024, we expect cost for the upgrade of our ERP system to be approximately 25% to 35 million.

Speaker Change: Including $3 million to $6 million is expected to be capitalized as of quarter end, we have incurred costs related to the project of approximately $223 million of which $114 million has been capitalized.

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

Speaker Change: Thank you Steve.

Ross Macmillan: 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 I'll first touch on consumer trends and then address the competitive environment.

Ross Macmillan: Consumer purchasing behavior in the first quarter remained consistent with the recent past the market is somewhat bifurcated with premium products performing well as some consumers seek differentiation and less expensive products appealing to those looking for greater value.

Ross Macmillan: Private label products continue to gain share, though that trend is moderating as I noted earlier in fact private label actually lost unit share towards the end of the quarter and as private label unit growth moderated our branded retail volume inflected positively growing in the quarter for the first time since 2020.

Ross Macmillan: That shift continues the positive trend that we highlighted last quarter as shown on slide 12.

Ross Macmillan: Consistent with our portfolio strategy. The result of that growth is that our branded retail mix increased to 64, 4% of sales in the quarter up 50 basis points from the year earlier period, and up 440 basis points from the first quarter of 2019.

Ross Macmillan: Consumer spending remains somewhat inconsistent.

Ross Macmillan: Data shows that fast food traffic is declining while overall at home food and beverage units also trended negatively towards the end of the quarter at.

Ross Macmillan: At the same time bread category trends had been improving with notably better sequential unit performance in the quarter as highlighted on slide nine we continue to monitor these trends closely.

Ross Macmillan: Turning now to the competitive environment, which remains rational and consistent with recent periods, although economic pressure is driving many consumers to seek greater value lifts from promotion remain below pre pandemic levels.

Ross Macmillan: Research from Chicago offer several possible explanations for the seeming anomaly.

Ross Macmillan: Following significant price increases to offset inflation consumers perceive discounts off those higher prices as less of a value compared to lower our pre inflationary prices.

Ross Macmillan: Second lower income consumers with stretched budgets, who previously may have capitalized on promotions by stocking up on product may not be able to afford to do so now and third more consumers are planning their purchases ahead of store visits and not straying from their list while in store minimizing the number of impulse purchases.

Ross Macmillan: Given that environment to drive greater efficiencies in our promotions, we are leaning even further on our enhanced internal digital tools.

Ross Macmillan: Last quarter, we noted that the percentage of our products sold on promotion group as our promotional activity increased slightly and consumer response to promotions reverted somewhat to more historical levels.

Ross Macmillan: In the first quarter, we saw a similar trend with higher levels of products sold on promotion compared to the prior year, though at a smaller percentage increase.

Ross Macmillan: That said our promotions remained significantly below pre pandemic levels.

It's also important to note that our average selling price rose versus the prior year quarter validating our selective use of promotions in combination with enhanced display execution and new trade promotion management capabilities. We will continue to selectively use promotions, where warranted, including to drive trial of new and innovative products, but.

Ross Macmillan: Only where we expect a net positive return on investment beyond promotions, we remain focused on bringing greater perceived value to consumers through innovation and highlighting that value and our marketing for.

Ross Macmillan: For example, our new nature zone small Lowe's offer the same great taste texture and quality of our traditional lows, but at a lower price point with less product waste for smaller households.

Ross Macmillan: We expect our innovation team to continue their work of developing unique products that expand the potential market for our leading brands.

Ross Macmillan: So in closing I'm pleased with the improvement demonstrated by our first quarter results maintaining a focus on long term opportunities requires patients as change takes time to implement and progress can be uneven.

Ross Macmillan: Short term fixes that generate quick wins can be tempting, but often don't go far enough to maximize long term value. If theres one thing that I hope everyone will take away from this call is that we're doing exactly what we said we would do.

Ross Macmillan: Executing our portfolio strategy by exiting low margin business and refilling that capacity with margin accretive new business.

Ross Macmillan: Improving our cost structure investing in our brands to drive volume and share gains and improve our mix.

Ross Macmillan: Leveraging technology to improve data visibility and drive better strategic decisions and investing in our team to improve overall execution.

Ross Macmillan: While we're not yet where we want today, our progress is becoming increasingly apparent.

Ross Macmillan: We will continue to push forward with a focus on achieving our long term financial targets I'm extremely.

Ross Macmillan: Fully confident in our growth potential and I look forward to continuing our progress throughout 2024. Thank.

Ross Macmillan: Thank you very much for your time that concludes our prepared remarks.