Q3 2024 Flowers Foods Inc Earnings Call - Pre-Recorded

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 the 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. It 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 addition to what you hear in these remarks important factors relating to flowers foods' business are fully detailed in our SEC filings, providing remarks today, our Ross Macmillan, Chairman and CEO and Steve Kinsey.

Ross Macmillan: <unk>, our CFO Ross I'll turn it over to you. Thanks, J T. It's a pleasure to welcome everyone to the call.

Ross Macmillan: Our third quarter performance was highlighted by strong execution in a challenging environment.

Ross Macmillan: We achieved notable margin improvement and drove strong bottom line growth. Despite topline pressure that was largely due to external factors are leading brands continue to outperform the competition and we're making significant progress in improving profitability in our other category.

Ross Macmillan: Shifting consumer spending patterns have led to headwinds and fresh packaged breads as a result category sales declined in both units and dollars.

Ross Macmillan: The encouraging volume trends, we noted last quarter did not persist the results improved towards the end of the third quarter, partly due to the impact of Hurricane Helene.

Ross Macmillan: In contrast to the category flowers grew both unit and dollar sales that growth led to superior share performance, gaining 20 basis points of unit and dollar share the largest increases in the category, we're investing in innovation and marketing to maintain that outperformance.

Our cake business has also been hampered by weak category trends, although we maintained share in the quarter unit sales in tracked channels declined 5% in line with the category.

Ross Macmillan: We're taking action to overcome this pressure, including the extension of our wonder brand in the sweet baked goods, which I'll cover in more detail later on the call.

Strong execution of our portfolio strategy drove improved performance in our other category sales benefited from pricing, which more than offset lower volumes across the business. The.

Ross Macmillan: The impact from business exits diminished in the quarter and is now largely complete.

Ross Macmillan: Headwinds in certain end markets, particularly <unk> are expected to continue as consumers shift more of their consumption to at home occasions.

Ross Macmillan: Now I'll provide an overview of our third 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.

For more than 100 years, the willingness and ability of our team to rise to the occasion when called has been a hallmark of flowers.

Ross Macmillan: Attributes are evident across our business and I'd like to highlight two examples the recent hurricanes and the transition of our distribution model in California, I am grateful to inform you that no flowers' team members reported any serious injuries or loss of life from Hurricanes Helene or Milton.

Ross Macmillan: Though our bakeries emerged mostly unscathed that was not the case for many of the communities. We serve some of which suffered unimaginable tragedies in keeping with our history and culture, we banded together to ensure that consumers were supplied with necessary products both in preparation for and following the storms and.

Ross Macmillan: And we're partnering with nonprofit organizations and customers to continue delivering food to those in need as always I'm awed by our team's commitment. The second example is shifting our business model in California from a partnership with independent distributors to an internal sales team and undertaking that requires significant coordination and collaboration.

Ross Macmillan: Since last year, a large cross functional group of Flowers' team members has worked together to plan and set the framework for our future and state legal sales human resources sales enablement.

Ross Macmillan: Procurement finance and many others have been collaborating to make this transition as seamless as possible for our team members and our customers I am happy to report that we're making great progress and have successfully reached a major milestone completing more than half of our transition.

Ross Macmillan: That progress would not be possible without the dedication of our flowers team and I'd like to commend all of those involved for their efforts.

Ross Macmillan: Our second strategic priority is focusing on our brands and they continue to perform well despite the challenging environment.

Ross Macmillan: Category, where units in dollars declined each of our primary bread brands grew dollars and units in tracked channels.

For example, nature's own units increased 2% decay be 4% wonder, 3% and canyon, a stunning 11% that performance translated to market share gains as each of these brands grew unit and dollar share canyons performance was particularly noteworthy expanding its leadership position in the gluten free category by 360 <unk>.

Ross Macmillan: 340 basis points of unit and dollar share respectively.

Robust pipeline of innovative products is contributing to our strong performance.

Ross Macmillan: Nature's own keto love maintained its tremendous momentum, gaining 730, and 770 basis points of unit and dollar share respectively.

Ross Macmillan: Despite launching only last year, it's rapidly approaching number one market share in its sub category.

Ross Macmillan: We're building on that momentum as we execute our national launch of keto Hamburger bonds and plan for the upcoming launch of keto Hotdog bonds next spring.

Ross Macmillan: Capitalizing on our innovation capabilities and our lineup of strong brands, we're extending into adjacencies and even new categories.

<unk> snack products are one example of that strategy.

Having moved dk be successfully into breakfast buns and rolls, we further expanded and snacking, our snack bars are making good progress growing dollars and units as we apply best practices throughout our network.

And we're ramping up distribution of our snack bites as we prepare for the national launch in 2025.

Ross Macmillan: Similarly, we're capitalizing of wonders extensive brand awareness among consumers by expanding into the sweet baked goods category.

Ross Macmillan: We're excited about the strong momentum building around the upcoming launch retailers are responding enthusiastically and even voted wonder a top 10 cool new products at the recent National Association of convenience stores Tradeshow.

Ross Macmillan: These exciting new products will launch nationally in the spring of 2025, Needless to say, we see tremendous potential for our innovation pipeline our.

Our third strategic priority is margins in area, where we continue to make significant progress.

Ross Macmillan: Adjusted EBITDA margins expanded 110 basis points compared to the year ago quarter benefiting from the successful execution of our portfolio strategy and our savings initiatives. We've made great strides in improving the profitability of our away from home and private label businesses by ensuring that each account meets our margin targets.

Ross Macmillan: That process has resulted in a temporary under absorption of overhead costs as we called low margin business. However, we're beginning to see the benefit of the strategy with higher margins on existing business and new business wins.

Ross Macmillan: We're also using innovation to shift more of our sales to higher margin products as we grow premium brands like <unk> and canyon and add innovative products like Quito and core brands like nature's own.

Ross Macmillan: Savings initiatives are also contributing to the improved margins as we execute on our $40 million to $50 million target for 2024.

Ross Macmillan: To enable the operating leverage implied by our long term financial targets, we're undergoing a robust process focused on offsetting inflationary pressures in labor shipping commodities and other areas. Our fourth priority is smart M&A. The deal market is active and we are carefully evaluating potential acquisitions with the goal of strengthening our position in core.

Categories, and finding new revenue streams across the bank foods category.

Ross Macmillan: We see compelling brands that complement our existing portfolio and that skew towards a better for you nutritional profile or.

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

Ross Macmillan: As always we will remain disciplined in our approach and focused on growing shareholder value with an attractive risk reward balance.

Ross Macmillan: Although we may consider acquisitions that require premium multiples as we paid for Dk b.

Ross Macmillan: Such a premium would require greater conviction in our ability to generate strong growth and a compelling return on investment now.

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 Ross and Hello, everyone.

Steve Kinsey: I'm pleased to present, our third quarter results.

Steve Kinsey: Net sales decreased 7% from the prior year period price mix improved 1.7% helped by optimization of our non retail business, most notably foodservice.

More than offset by volume declines of two 4% largely in cake foodservice and institutional sales gross margin as a percent of sales, excluding depreciation and amortization increased to 130 basis points to 49, 8% over the same quarter last year comparisons benefited from improved sales price mix.

Steve Kinsey: Moderating ingredient and packaging cost and decreased product returns.

Steve Kinsey: The impact of lower production volumes higher workforce related costs and increased outside purchases of product, partially offset the overall improvement selling distribution and administrative expenses as a percentage of sales were 38, 7% 1100, and 70 basis point decrease over the prior year period. The decrease was due to.

Steve Kinsey: Lower legal settlements and related cost as well as lower distributor distribution fees marketing expense logistics and freight costs and consulting costs.

Steve Kinsey: These items were partially offset by increased workforce related costs higher rent expense and lower scrap though income excluding matters affecting comparability. Adjusted SG&A expenses were 38, 6% of sales up 20 basis points compared to the prior period GAAP diluted EPS for the quarter was 31.

Steve Kinsey: <unk> per share of <unk> 53 soon increase over the prior year period, excluding the items affecting comparability detailed in the release adjusted diluted EPS in the quarter increased four cents over the prior year period to 33.

Steve Kinsey: Turning now to our balance sheet liquidity and cash flow year.

Steve Kinsey: Year to date through the third quarter of fiscal 2024 cash flow from operating activities increased by 25 million to $292 million capital expenditures decreased $10 million to 87 million and included $5 million for the ongoing ERP upgrade dividends paid increased $6 million.

Speaker Change: $153 million.

Speaker Change: We believe our financial position remained strong at quarter end net debt to trailing 12 month adjusted EBITDA stood at approximately two times, we have $15 million in cash and cash equivalents.

Speaker Change: Had $531 6 million of remaining availability on our credit facilities now.

Now turning to our outlook for 2024, we are narrowing the range of our previously issued financial guidance. Our forecast now calls for sales to be up <unk>, 5% to one 1%.

Speaker Change: Adjusted EBITDA of $530 million to $542 million and adjusted EPS in the range of $1 24 to $1 28, we are reducing our expectation for capital expenditures to $130 million to $140 million due to the timing of projects key factors that can ship results within our guidance range.

Speaker Change: Include the consumer a promotional environment, the speed at which new business wins ramp up.

The transition of our California distribution and implementation of our savings initiatives as previously disclosed in fiscal year 2023, we reached an agreement to settle distributor related class action litigation in California.

Speaker Change: As Ralph noted, we are making progress with the process of repurchasing the distribution rights, which is expected to be completed in 2025 in accordance with the settlement agreement approximately 100% of our key raw materials are covered in 2024.

Speaker Change: Based on that coverage our guidance incorporates a moderation in ingredient cost in 2024 relative to the prior year the year over year benefit from lower raw material cost is expected to moderate significantly as we progress through the fourth quarter to minimize volatility and provide adequate visibility of the cost we have maintained our historical hedging strategy.

Speaker Change: We attempt to increase the certainty of our key ingredient cost six to 12 months out.

Speaker Change: Our ERP rollout, which is expected to improve data management inefficiencies, while automating many of our processes went live in the second quarter of 2023, we are preceding deliberately that implementation to ensure we continue to effectively meet market demand with our traditional high service levels. As noted previously we have paused the bakery rollout.

Speaker Change: 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 $25 million to $30 million, including $5 million to $7 million expected to be capitalized cost related to the project year to date or $18 1 million of which $4 9 million has been capitalized.

Speaker Change: Total cost for the project to date, our $232 million of which $117 million has been capitalized. Thank you and now I'll turn it back to Ralph Thank.

Speaker Change: Thank you, Steve now I'd like to discuss some of the trends impacting our comp performance and the steps, we're taking to maximize present and future opportunities I'll first touch on consumer trends and then address the competitive environment.

When we provided our initial 2024 financial outlook. It included a cautionary note regarding the uncertain consumer and promotional environment.

Speaker Change: While trends in those areas remained relatively consistent with the recent past we have detected some shifts in consumer behavior and year over year increases in promotional activity have continued.

Speaker Change: As we discussed last quarter 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.

Speaker Change: That home shift is particularly strong at the lower end of the income spectrum. Despite that positive shift at home eating the bread category is measured and tracked channels has been pressured as consumers gravitate more to the store perimeter meal preparation ingredients like protein spices and oils have showing particular strength consistent with this theme notable pockets of growth with.

Speaker Change: Bread include tortillas, and buns and rolls.

Speaker Change: Since the pandemic, we've seen a slow reversion of share gains in perimeter of bread, though not back to prior levels.

Speaker Change: We expect this shift to meal preparation items to be temporary.

But we're leveraging consumer trends to help grow the overall category through innovation, providing consumers appealing new options such as our keto products.

Speaker Change: Those actions drove continued outperformance growing bread unit and dollar sales in tracked channels for the third consecutive quarter as shown on slide 13.

Speaker Change: Slide nine shows that private label continues to lose units here down 40 basis points in the quarter sales were hurt by narrowing price gaps as branded retail products increased promotions and private label prices Rose two 7%.

Speaker Change: Private label sales in traditional grocery have been particularly pressured perhaps as those consumers seeking value shift more of their spend to mass and club stores.

Turning now to the competitive environment, which remains rational with promotions below pre pandemic levels.

Speaker Change: As I mentioned in the second half of the year, we have seen a notable increase in promotional activity. However, despite the greater promotional levels. The average category price was flat versus the year ago period part of the explanation for that trend as a mix shift to premium products, but some is also likely due to a greater percentage of products sold on promotion, though with less.

Speaker Change: Promotional intensity.

Speaker Change: Consumers are responding well to promotions and we continue to effectively leverage our enhanced trade promotion management capabilities.

Speaker Change: For example, rather than simply focus on price, we've been emphasizing display execution to better highlight our brands for consumers.

Speaker Change: Similarly, because consumers are responding well to differentiation, we continue to invest in innovation to meet their evolving needs.

Speaker Change: In closing I'm pleased with our strong relative performance in this challenging environment, we're maximizing our opportunities in areas that we control by targeting pockets of growth in branded retail margining up our private label and away from home businesses and executing on our cost savings plan. These initiatives give me great confidence that we're positioning flowers for growth in line with our long term.

Speaker Change: Financial targets.

Speaker Change: You very much for your time and that concludes our prepared remarks.