Q2 2024 Flowers Foods Inc Earnings Call - Pre-Recorded
As a result, we will host a live Q&A session. This morning at 830 a M eastern.
Further details about the live call along with our earnings release, a transcript of these recorded remarks and a related slide presentation are posted on the investors section of flowers foods Dot com.
Before we get started keep in mind that the information presented here may include 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.
In addition to what you hear in these remarks important factors relating to flowers foods' business are fully detailed in our SEC filings.
<unk>: Providing remarks today, <unk>, chairman and CEO and Steve Kinsey, our CFO browse I'll turn it over to you.
Browse: Thanks, J T. It's a pleasure to welcome everyone to our call.
Speaker Change: Our strong second quarter results reflect the successful execution of our strategic plan.
Speaker Change: By our portfolio strategy, we're driving growth and taking market share in our higher margin branded bread products.
Simultaneously, improving the profitability of our private label and away from home businesses.
Speaker Change: This building momentum bolsters, our confidence that we will deliver results in line with our 2020 for guidance.
Speaker Change: Second quarter financial performance was highlighted by growth in our retail businesses and strong sequential margin improvement aided by the successful execution of savings initiatives.
Speaker Change: Sales came in slightly better than we expected helped by improving volume trends in the fresh packaged bread category, which turned positive towards the end of the quarter.
Speaker Change: We believe this improvement was influenced by consumers shifting more spending to at home eating as they look to economize.
Speaker Change: And we are capitalizing on that shift driving unit growth of one 5% and the fresh packaged bread category.
Speaker Change: That growth spurred share gains as our branded bread products continue to outperform the overall category, gaining 40, and 20 basis points, respectively of dollar and unit market share the most of any competitor.
Speaker Change: For the second consecutive quarter, we grew both dollars and units in tracked channels, while the bread category was largely flat.
Speaker Change: Momentum built through the quarter with unit share gains, peaking in the final four weeks up 40 basis points.
Speaker Change: Particular areas of strength include Sandwich, buns, and rolls breakfast and Loaf, where we gained 80 30 and 20 basis points of unit share respectively.
Accordingly, our performance improved in both the mass and grocery channels.
Speaker Change: Brent is a mature and stable category, but we're outperforming by focusing on subcategories that offer noteworthy growth potential for us such as specialty premium sandwich, buns and rolls and breakfast.
Speaker Change: And the mix shift within our branded retail bread sales is benefiting margins.
From a geographic perspective performance was particularly strong in underpenetrated regions, such as the northeast mid Atlantic and upper Midwest.
Speaker Change: Where new business wins and strong market execution drove continued growth.
We're also making substantial progress in our away from home and private label businesses as we continue to margin up existing accounts and replace business exits with newer higher margin accounts profitability has improved meaningfully and we've narrowed the margin gap relative to branded retail.
Speaker Change: Our confirmed new business wins and pipeline of potential additional wins give us confidence for continued improvement in the second half of the year and beyond.
Speaker Change: Further the headwinds from deliberate exits are waning the impact of those exits peaked in the first quarter and will diminish significantly in the second half of the year with virtually no effect in the fourth quarter.
Speaker Change: 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 guidance and then I'll close with a discussion of key themes moving forward.
Speaker Change: The strength of our second quarter performance is the direct result of the hard work of our team.
Speaker Change: Im, particularly proud of their ability to grow our market share in a dynamic and challenging environment and successfully execute on our strategy to reduce cost and drive margin expansion.
Speaker Change: As we adapt our team to the evolving competitive landscape with an eye toward becoming a best in class selling organization, we made exciting changes to our retail customer sales team.
Speaker Change: The new structure employs a channel focused approach that allows us to better align with and service our largest customers.
Speaker Change: Leading our restructured retail customer team is Meredith winter ASCII, who has joined flowers as senior Vice President and Chief customer Officer.
Speaker Change: She is responsible for retail customer strategy and accountable for growing our revenue market share profitability and reputation.
Speaker Change: With more than 26 years of sales experience Meredith. Most recently served as vice president of retail sales for Pepsico beverages, North America North Division.
Speaker Change: I'm excited about the benefits, we expect from Meredith and her team and believe these changes will help position us to drive sustainable profitable growth are.
Speaker Change: Our second strategic priority is focusing on our brands, which we are a critical component of our strong second quarter performance.
Speaker Change: Our leading brands posted exceptional results with wonder Dk, B and canyon growing units, 10%, 7% and 5%, respectively and nature's own maintaining its unit sales that performance drove the largest dollar and unit share gain of all companies in the category.
Speaker Change: With each of our national bread brands, gaining or maintaining dollar share.
Speaker Change: Dave's killer bread and wonder each gained 20 basis points of dollar share while nature zone gained 10 basis points.
Speaker Change: Nature's own success is particularly noteworthy given the impact of inflationary pressures on consumers.
Speaker Change: The brand's focus on the consumer's desire for both differentiation and value drove improved results despite that environment.
Consumers are flocking to our keto products with dollar share in the subcategory up 710 basis points.
Speaker Change: We expect the introduction of keto bonds to maintain that momentum.
Speaker Change: Recognizing the consumer desire for increased value, we introduced nature's own small loans, which are off to a great start. These new products have helped the brand grow units versus the year ago period, and six of the last seven weeks.
Speaker Change: And with the benefit of recent capacity additions Canyon Bakehouse is reigniting its growth increasing dollar share in the gluten free category by 260 basis points.
Speaker Change: Innovation is a key part of our growth strategy and our new products are driving strong results.
The original dk be snack bars continue to receive solid support from consumers take.
Taking brands and new categories is rarely easy, but <unk> track record of successfully entering adjacencies like breakfast sandwich buns and rolls gives us confidence that it can further extend into snacking.
Speaker Change: Early results at top accounts, where velocities are in excess of the category average highlight the potential upside as we replicate best practices at other retailers.
Speaker Change: The nationwide launch of decay be amped up protein bars is underway and we're executing a soft launch of decay be snack bites with the goal of more than 2000 points of distribution by the end of 2024, we expect to expand distribution nationwide in 2025, and I remain excited about the potential of these new and innovative products.
Our third strategic priority is margins in area, where we made significant progress we spoke last quarter about the need to further improve our cost structure to better leverage our solid topline results and deliver increased profitability.
Speaker Change: As part of that process, we redoubled, our efforts and increased our expectations for savings initiatives for the year from 30 to 40 million to $40 million to $50 million.
Specific actions included select workforce reductions reduced third party spend enhanced effectiveness of marketing investments improvements in lease labor and indirect procurement spend and efficiencies in our DSD network among others that work resulted in a significant sequential improvement in SG&A cost as a percentage of sales.
Speaker Change: In addition to savings initiatives, we're improving our branded retail mix by successfully executing our portfolio strategy growing premium brands like Dk, BN Canyon, and adding innovative products like Quito and core brands like nature's own.
Speaker Change: We've also improved the profitability of our away from home and private label businesses through a deliberate process of ensuring each account meets our margin targets, which I touched on earlier our.
Our second quarter performance highlights, our growing culture of ownership and accountability.
We're successfully instituting a mindset of continuous productivity improvement related to cost across the organization.
Speaker Change: Our fourth priority is smart M&A 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.
Speaker Change: We see compelling brands that complement our existing portfolio and that skew towards a better for you nutritional profile our.
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.
Steve Kinsey: Thank you Ralph and good morning, everyone.
Steve Kinsey: Let me Echo Ralph on congratulating the team on an outstanding quarter.
Speaker Change: We are pleased to present, our solid second quarter results.
Steve Kinsey: Total sales decreased 2% from the prior year period.
Steve Kinsey: Mix improved 1% driven primarily by mix it was more than offset by volume declines of one 2%.
Steve Kinsey: Those declines were largely due to targeted sales rationalizations and <unk> market weakness.
Steve Kinsey: Branded retail volumes were flat with continued growth in bread products offset by declines in cake.
Steve Kinsey: Gross margin as a percentage of sales, excluding depreciation and amortization increased 90 basis points to 49.9% over the same quarter last year compares.
Steve Kinsey: Comparisons benefited from moderating ingredient and packaging cost improved sales price mix and decreased product returns the impact of lower production volumes higher workforce related and bakery maintenance cost and increased outside purchases of product, partially offset the overall improvement.
Steve Kinsey: Selling distribution and administrative expenses as a percentage of sales were 38, 5% a 30 basis point decrease over the prior year period, lower distributor distribution fees marketing expense and consulting cost.
Steve Kinsey: And in insurance liability claim in the prior period were partially offset by increased workforce related costs amortization of cloud based applications higher rent expense and lower scrap related income.
Steve Kinsey: Excluding matters affecting comparability adjusted SG&A expenses were 38, 2% of sales flat with the prior period.
Steve Kinsey: GAAP diluted EPS for the quarter was 32 cents per share a two cent increase over the prior year period.
Steve Kinsey: Excluding the items affecting comparability detailed in the release adjusted diluted EPS in the quarter increased three cents over the prior year period to 36 cents.
Steve Kinsey: Turning now to our balance sheet liquidity and cash flow year.
Year to date through the second quarter of fiscal 2024 cash flow from operating activities increased by 40 million to $168 million.
Steve Kinsey: Capital expenditures decreased 7 million to 61 million and included $3 million for the ongoing ERP upgrade.
Steve Kinsey: Dividends paid increased $4 million to $102 million.
Steve Kinsey: We believe our financial position remains strong at.
Steve Kinsey: At quarter end net debt to trailing 12 month adjusted EBITDA stood at approximately two times, we held approximately $7 million in cash and cash equivalents and had approximately $517 million of remaining availability on our credit facilities now.
Steve Kinsey: Now turning to our outlook for 2024.
Steve Kinsey: Ralph said, we are maintaining our previously issued guidance, which calls for sales to be flat to up one 6%.
Ralph: Adjusted EBITDA of $524 million to $553 million in.
Ralph: And adjusted EPS in the range of $1 20 to $1 30.
Speaker Change: We are updating our expectations for depreciation and amortization interest expense and share count which are detailed in our earnings release and slide presentation.
Speaker Change: We are pleased with the results of our cost saving initiatives and expect those benefits. In addition to new business wins to build as we move into the fourth quarter.
Speaker Change: As Ralph noted the effect of business exits remains a headwind in the third quarter and will be fully lapped by the end of the quarter based on those factors, we are comfortable with the middle of our guidance range Keith.
Keith: Key factors that could shift results within our guidance range include the potential impact of an uncertain economy on the consumer and promotional environment.
Keith: And the transition of our California distribution.
As previously disclosed in fiscal year 2023, we reached an agreement to settle distributor related class action litigation in California, We are making progress repurchasing the distribution rights, which is expected to be completed in 2025 in accordance with the settlement agreement Approx.
Speaker Change: Approximately 95% of our key raw materials are covered in 2024 based on that coverage our guidance incorporates a moderation in ingredient cost in 2024 relative to the prior year to minimize volatility and provide adequate visibility in the cost we have maintained our historical hedging strategy in which we attempt to <unk>.
Speaker Change: Greece, the certainty of our key ingredient cost six to 12 months out.
Speaker Change: Our ERP rollout went live in the second quarter of 2023, and we are proceeding deliberately embed implementation to ensure we continue to effectively meet market demand with our traditional hot service levels.
Speaker Change: As noted previously we have paused the bakery rollout to concentrate resources on our California distribution transition.
Speaker Change: In fiscal 2024, we expect cost for the upgrade of our ERP system to be approximately 25 to 35 billion, including $3 million to $6 million unexpected to be capitalized.
Speaker Change: Cost related to the project year to date or $12 8 million of which $3 4 million has been capitalized.
Speaker Change: Total cost for the life of the project are $226 million of which 115 million has been capitalized.
Trials: And now I'll turn it back to trials.
Trials: Steve now I'd like to discuss some of the trends impacting our current performance and the steps, we're taking to maximize present and future opportunities.
First touch on the consumer trends and then address the competitive environment.
Similar trends in the second quarter remained consistent with the recent past.
Speaker Change: To maximize the value of their spending consumers have shifted more of their purchases to food at home and specifically to value channels like mass and club stores areas, where we have a strong presence and within the store bread, which appeals to those seeking value is outperforming the overall food category with unit sales down only 0.2% compared to food category.
Speaker Change: Units, which declined 7% as shown on slide nine.
Speaker Change: We continue to see encouraging trends in the bread category premium products are performing well as consumers seek differentiation best exemplified by <unk> strong results subcategories with more differentiated offerings, such as dinner bread and rolls sandwich, buns, and rolls, especially premium outperform the less differentiated traditional loaf.
Speaker Change: At the lower end of the market Slide 10 highlights that private label lost unit share in the quarter as price gaps with branded products compressed.
Speaker Change: Private label prices continue to increase at faster rates than the category and consumers responded well to incremental promotion of branded products.
And as private label unit performance has deteriorated slide 14 highlights that we grew branded retail bread volume in tracked channels for the second consecutive quarter up one 5%.
Speaker Change: Those results significantly outpaced the category, which declined 2% as shown on slide nine.
Speaker Change: Consistent with our portfolio strategy. The result of that growth is that our branded retail category increased to 64, 5% of sales in the quarter up 40 basis points from the year earlier period.
Turning now to the competitive environment, which remains rational with promotions below pre pandemic levels.
Speaker Change: As economic pressure drives many consumers to see greater value. There response to promotions has increased though off of a low base due to the pandemic impact.
Speaker Change: And in that environment, we have increased our promotional level somewhat resulting in a higher percentage of products sold on promotion.
Speaker Change: However, we're leveraging our trade promotion management capabilities to do so more efficiently and with attractive returns on investment.
Speaker Change: In addition to seeking greater value consumers are also looking for differentiated products and that desire is manifesting itself in the strong performance of our leading brands consumers are clearly recognizing our brand's differentiation driving the largest dollar and unit share gain of any company in the category.
Speaker Change: We're investing to increase that differentiation further aligning our brand portfolio with the consumer.
Speaker Change: In closing I am pleased with the improvement demonstrated by our second quarter results, even as we acknowledge the potential impact that an uncertain economy could have on consumer behavior and the promotional environment. We continue to execute our portfolio strategy investing in our brands and improving our mix.
Speaker Change: To better leverage our topline performance, we improved our cost structure significantly enhancing our margins.
Speaker Change: And we're leveraging technology to improve data visibility and drive better strategic decisions, while investing in our team to advance overall execution.
Speaker Change: Results in the quarter demonstrated progress towards our long term goals and we will continue working to drive further improvements I look forward to continuing our progress throughout 2024.
Speaker Change: You very much for your time that concludes our prepared remarks.
Speaker Change: Yes.