Q3 2024 Flowers Foods Inc Earnings Call

November 8, 2024

Speaker Change: Good morning and thank you for standing by. Welcome to the Flower Foods third quarter 2024 results conference call.

Please be advised that today's

Speaker Change: Event is being recorded. I would now like to hand the conference over to your opening speaker today

Speaker Change: J.T. Rick, Executive Vice President of Finance and Investor Relations, please go ahead.

Speaker Change: Thank you, Josh, and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation posted earlier on our investor relations website.

Speaker Change: Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker Change: In addition to what you hear in these remarks, important factors relating to Flowers Foods Business are fully detailed in our STC filings.

Speaker Change: 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.

Speaker Change: Joining me today are Riles McMullin, Chairman and CEO, and Steve Kinsey, our CFO. Riles, I'll turn it over to you. Okay, good morning everybody. We're quite pleased with the strong performance of our leading brands in what continues to be a pretty challenging environment.

Riles McMullin: While consumers value seeking behavior, pressured category sales, we did grow dollars and units in fresh packaged breads.

Riles McMullin: And that growth drove the largest share gains in the category which validates our investments in differentiation.

Riles McMullin: In our other segment, execution of our portfolio strategy enabled sales growth as strong pricing initiatives more than offset volume losses.

Riles McMullin: As we look to close out the year and look ahead to 2025, we remain focused on enhancing shareholder value, of course, and delivering results consistent with our long-term financial targets.

Riles McMullin: That process includes maximizing our opportunities in areas that we can control by targeting pockets of growth and branded retail, margining up our private label and away from home businesses, and executing on our cost savings plan.

Josh, with that, we'll open up the floor for questions.

Speaker Change: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for questions.

Speaker Change: Our first question comes from Steve Powers with Deutsche Bank. You may proceed.

Great, thanks. Can you hear me okay?

Speaker Change: Yes, Dave, good morning. Okay, great, good morning. I was hoping we could actually start...

Speaker Change: With the areas of expansion, as we think about next year, both Dave's Snack Bites and Wonder, just give it a little sense for sort of the scale.

of those expansions and the ramp you're expecting.

Speaker Change: You know, and I guess a little bit of a little bit more.

Speaker Change: Detail around on the wonder side your confidence in this week baked goods category, which is obviously

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Speaker Change: a little bit more detail of where you think you're going to get placement for those snack bites and just, you know, signs of confidence that you haven't, we're not at risk of overextending that brand, I guess, is the question.

Speaker Change: Yeah, of course. Let me start with the wonder line. We'll probably have more details for you on that in February. I mean, we're very early in rolling it out to customers. I can tell you that the early returns have been quite good. There's been a lot of enthusiasm from retailers.

Speaker Change: We noted the top 10 item at the NAC show just a few weeks back. The items are unique, the quality is fantastic, the packaging looks great. Honestly, we all know we need some help in the sweet baked goods category. The category has been down.

Speaker Change: We have not, you know, we perform kind of in line with the category, but that's, you know, that's not a good story.

Speaker Change: And so I think the important takeaway is that we are taking proactive steps to inject some growth into that category. And we're quite excited about doing it with the Wunder brand, just given the very high unaided awareness for Wunder.

Speaker Change: In terms of the DKB snack line, the bars continue to do well, the original three, the protein bars.

Speaker Change: We have more SKU innovation in the pipeline to deliver as early as next year. And then of course, as you mentioned, the snack bites as well. Steve, I don't think we're in danger of overextending. I mean, if anything, if you take the bars.

Speaker Change: For example, you know, shelf space and visibility are so important and we were out of the gate with three SKUs, did quite well, but now expanding to six and and then and then beyond on that. And then of course, you know, the snack bites are, you know, completely differentiated from that and in a different category.

Speaker Change: And quite unique for the category. There's really nothing quite like it out there. Most analogous, I would say, is probably some of the granola products.

Speaker Change: that you see out on the shelf. But with three savory items, three sweet items, we're very excited about the prospects for that. Retailer acceptance of it has been great. But I always like to remind you guys that.

Speaker Change: You know, these things take time. I mean, this is very much like a startup, and it takes a while to get the ramp, to build the consumer base. Some of these consumers are not current DKB shoppers, which is great because we're expanding consumption of the brand, but it does take time to do that.

Speaker Change: Having said all that, we remain very bullish on this burgeoning snack business we have for DKB.

Speaker Change: Is that true of efficiency or is that going to be something we should consider as we think about capital planning in 2025?

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Speaker Change: Sure. Steve, this is Steve. I mean, the main reason for the change there is really just kind of the pace of spin for the year. I mean, you're right. It's not necessarily ERP. It's other projects, primarily bakery.

Speaker Change: And a lot of those got, you know, pushed. We just weren't able to get to them. So, you know, they will roll over to 2025. So, you know, you should consider that as you think about next year. Perfect. Okay. Thanks so much.

Thanks, Steve.

Thank you.

Speaker Change: Our next question comes from Bill Chappell with Truist Securities. You may proceed.

Thanks. Good morning.

Thank you. Bye, Bill.

Speaker Change: Just want to talk a little bit about this Sweet Big Goods or the Snack Cake business and just on the declines are you seeing anything different and a year in from Smuckers owning Hostess?

Speaker Change: In terms of more competitive, more promotion, or even pushing down into kind of the store brand type stuff, or is this just kind of the continued kind of ups and downs of the category for you?

Yeah, I think for us it's just more generally.

Bill, can you hear me?

Yep.

Speaker Change: Okay, there was a sound interruption there. Yeah, it's really just the ups and downs of the category. I think that it is more attributable to consumers pulling back on discretionary spend.

Speaker Change: Pulling back on indulgent items, you've seen some weakness even in the salty snack category, which has typically been very strong. I think it's temporary, but I do think it relates to consumers' pocketbooks more than anything else.

Speaker Change: Got it and just to follow up in like what you know as you've seen this in the past

Speaker Change: How long do you think it it lasts just this doesn't seem to be a dire financial crisis It's just pulling back So do you think you'll get back to growth as we move into 25 or is it it was just too early to tell?

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Speaker Change: Well, I mean, I don't have a crystal ball, but you know, I think you know, it's it would be reasonable to think that you know At some point next year things start to normalize and the and the category gets a little bit healthier I mean, you know, you'll recall among

Speaker Change: Before we hit this inflationary cycle, the sweet baked goods category was the strongest of the stacking categories, despite all the health stuff, health and wellness trends going on out there. So I do expect it to return. We're focused on delivering super high quality items to the consumer under great brands.

Tasty Cake is a great, iconic...

Speaker Change: Philadelphia brand, but you know for us, just speaking for us specifically, doesn't play quite as well, you know, outside of that category and I think you, you know, you've seen that, you know, over the last several years, particularly as hostess, you know, got stronger out of bankruptcy. So, you know, pivoting a bit to the to the Wonder brand.

Speaker Change: You know, we think can help us be more competitive with some of those stronger brands in the category, particularly if we deliver on the on the quality promise.

Speaker Change: I'm just sorry one more on the on the promotional level of the of the bread buying role business is it primarily coming from the largest competitor or are you seeing it from the smaller regional players as well?

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Speaker Change: Yeah, I mean, it's, you know, it's fairly broad based. And look, I mean, our promotional activity has increased, too. Now, the intensity of that is not as high, and we're still very well below pre-pandemic levels. But, you know, we've increased our promotions, too. So, you know, it's across the category. However, you know, with our number one and differentiated brands, we are seeing pretty good lift from those promotions. And I think that may be a little bit different than what some others may have said.

Got it, thanks.

Thank you.

Speaker Change: Our next question comes from Robert Dickerson with Jeffries. You may proceed.

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Great, thanks so much.

Maybe just quick housekeeping.

I think you said in the prepared remarks, you know...

Speaker Change: Kind of improved at the end of the quarter. Sounds like maybe a little help from a hurricane.

Speaker Change: So I'm just curious, I'm not sure if you want to quantify or if you can quantify how much you think that might have helped the quarter and then maybe how you kind of saw those trends coming out of the hurricane, even though it's only been a couple weeks.

Speaker Change: Yeah, so some of the stronger category trends that we noted in Q2 didn't continue. It did get a little bit weaker as we moved through the third quarter. The hurricanes had an impact, Rob.

Speaker Change: But not particularly material. Honestly, I mean, it did help. It was positive, of course, but not really that significant in the quarter.

Speaker Change: Again, the important thing to emphasize specifically to flowers in the quarter is that while the category continues to be a bit soft, we're outperforming the category. If you look at fresh packaged breads,

Speaker Change: You know, our units were up some 70 basis points. We gained 20 basis points a dollar share, 20 basis points a unit share, both of those the largest.

Speaker Change: among competitors in the category. So, you know, our innovation, our brands, our differentiated items continue to make a difference, you know, even in the face of a bit of a soft category at the moment.

Speaker Change: Okay, great. And then maybe just more broadly speaking, excuse me,

You know, you also made the comments around

Speaker Change: And I'm just curious, maybe if you could just opine on that a bit. Like, you know, someone's buying chicken on the perimeter of the store. I mean, I guess a burger, you're using a bun, chicken, maybe you're going to throw it in a tortilla.

Speaker Change: So maybe there's just kind of a little switch in terms of like traditional sandwich bread relative to some of the other subcategories and then I guess just kind of as like a tack on to that.

You know, you always kind of comment on M&A.

Speaker Change: and you said kind of the deal, you know, activities out there, right? You know, are any of those areas areas that you actually would like to be bigger in just to kind of diversify that portfolio?

Speaker Change: In terms of the perimeter you mean? Yeah just like you know buy a big tortilla brand. Now we have tortillas, we have lunch bread and keto and buns.

Speaker Change: Yeah, I mean, look, we've said before, you know, we're looking across baked goods. So that picks up the perimeter, that picks up the freezer case, that picks up center store, it picks up, you know, away from home and convenience, those sorts of things. So, you know, we're looking across the expanse.

Speaker Change: of baked foods, which, you know, altogether is a massive total category. In terms of the trends, you know, if you hearken back, Rob, you know, the perimeter of the store was sort of a big deal pre-pandemic, right? Mm-hmm. And I think...

Speaker Change: coming out of the pandemic, one of the questions we would get every single quarter was, when do you expect the reversion to happen?

Speaker Change: When do you expect the reverse that we actually hadn't gotten that question in many quarters But I think that you know, that's a bit of what you're seeing now in terms of shopping patterns but also You know the trend now and to to in-home eating just given the inflationary pressures and and consumers trying to stretch the food their food budget

I do think that that trend

Speaker Change: tends to impact the traditional loaf segment of our business more than the other parts. We've talked in the past how that's arguably the least differentiated piece of our portfolio, that we have plans to increase that level of differentiation there to kind of fight back, but obviously much less impact.

Speaker Change: on the buns and rolls, as you mentioned, on the Dave's Killer breads of the world, on the canyons of the world. So, you know, we continue to beat this drum that innovation and differentiation matter, and that's what's fueling our business overall.

Speaker Change: Okay, great. Makes sense. And then maybe just a quick one, one last one. Just around the guide for EBITDA, if we kind of think about what's implied maybe for Q4, it seems like

Speaker Change: And the range, I guess, for a quarter still seems like a little wide, right, which is fair, right, complicated backdrop. But I'm kind of curious, what could get you to the higher end of that, you know, implied margin guide for Q4? Maybe what gets you at the lower end?

Speaker Change: And then, you know, like it is part of this just also kind of playing it safe, you know, just given the promotional environment all in and kind of how you're thinking about, you know, the, the price piece.

Speaker Change: Yeah, I think I think overall it's just a you know continued conservative outlet look I get that We're you know end of the fourth quarter, and you know we should we should you know on the one hand you think

Speaker Change: You know, why don't you have better visibility? I think that...

Speaker Change: You know, we do have that visibility, Rob, but we're just trying to remain cautious, just given the outlook. You know, we started off the year when we issued guidance, you know, noting the things that could impact the year, including increased promotional activity. You know, some of those things have happened.

Speaker Change: But offsetting that has been fantastic execution on our savings program, great execution of the marketplace, continuing to grow our bread bun and roll units. Thank you.

Speaker Change: The drag on the business is, you know, away from home and primarily the QSR business, which has been a bit weaker than we anticipated honestly just with this shift to in-home, you know, due to elevated pricing.

Speaker Change: And we've already covered, you know, the weakness in the cake business.

The Fresh Packaged Bread business is doing great.

Speaker Change: I mean, there's just there's really, really no issue on that part of the business. It's really those those other pieces. So your question, you know, what could get you to the higher end of the range, a bit better performance out of cake, and QSR and continued strong performance in the core of the business could get you to the upper end of that range.

All right, great. Thank you so much, Ralph. Appreciate it.

Okay.

Thank you.

Speaker Change: Our next question comes from Jim Salera with Stevens. He may proceed.

Hey guys, good morning. Thanks for taking our question.

Speaker Change: Ross, I wanted to dig down a little bit on the other category, and you talked about some of the headwinds in food service and certainly the softness in QSR I think is

well-known.

Can you maybe break out how much of a headwind?

Speaker Change: the food service was to other volume relative to the business exits. I think we still have some of those in the third quarter. So if we just strip those out, how much would the other volume moving down and maybe any color on your private label piece.

Michael O'Brien. Thanks for joining us. I'm Michael O'Brien.

Bye.

Speaker Change: Yeah, so, yeah, we were finishing up the cycling of the strategic exits in the third quarter. I would say.

Jim Salera: Sort of mid single digits from strategic exits. The rest of it is is kind of channel channel or category dynamics if you will So mostly, you know external factors Jim

Jim Salera: But I would also say, you know, the steps that we've taken in terms of pricing to improve the profitability of that business more than overcame the volume losses. That's an important note to take away.

Speaker Change: For sure. And then, so is it safe to say that if I break out, and I realize for competitive reasons you guys don't break out the private label piece anymore, but is it safe to assume that the private label component of that other segment is positive on volume?

Speaker Change: Private label pricing has increased a little bit, Jim, and the price gaps have narrowed a bit as private label is going up and branded has gotten promoted a little bit more. So now you're starting to see that shift back a bit more to branded.

Speaker Change: Okay, great. And then I think you also mentioned in your prepared remarks...

It's possible we could see some incremental benefit if...

Speaker Change: Do you have some new business wins that ramp up faster? And just curious on what would be a driver of kind of a faster or slower ramp with new customers? And is there anything that we on the outside can kind of look at that might give us some insight into, you know, if it's scaling faster or scaling slower?

Speaker Change: Yep, so the new business for the remainder of the year has pretty much already been captured. Now obviously we'll have, you know, we'll have more for 2025.

Speaker Change: But the incremental gains that we expected to get for this year have been captured. So when we get to the end of the year and we come back to you in February, we'll have a much clearer picture on just how well that went.

Speaker Change: But we're off to a good start, service is good, it's great that we're ramping up with some of these customers that we needed to be more strategic with, if you will, and this is going to have a nice added benefit for our branded business as well, reaching more consumers.

Speaker Change: Great. I appreciate the thought guys. I'll hop back into the queue.

Okay, thanks, Jim.

Thank you.

Speaker Change: Our next question comes from Mitchell Venero with Sturtevant & Company. You may proceed.

Yeah, good morning.

Speaker Change: I guess when you, you know, your fresh bread category gains were obviously at the expense, I guess, a little bit of

Speaker Change: private label, but like who's losing share? Is it broad-based? Is it regionals?

Speaker Change: your major national competitors. Where are your gains being picked up from, do you think?

There are coming some from private label.

Speaker Change: They are coming from some of the regionals, although other of the regionals

Speaker Change: are doing pretty well, actually. And, you know, Peppers, for example, looking at syndicated data, look like they had a good quarter. I know they're promoting a bit more, but it looks like they're also getting some lift. So, I mean, it's coming from around the category, but that's...

Speaker Change: That's not really a new story. I mean, you know, we, you know, Mitch, as we continue to talk about, you know, being a leader in innovation and, and, you know, bringing differentiated products to the consumers, you know, that, that

Speaker Change: We're pulling business away from other competitors in the category due to that focus on innovation.

Speaker Change: I mean, is any of that coming in a geographic, you know, market?

Speaker Change: dynamic like you know you happen to be winning more than East or West or can you talk a little bit about that?

Speaker Change: Yeah, sure. So it's been more recently, it's been stronger in, frankly, in newer markets, the Northeast, the Midwest, etc. You know, where we've had a little bit of share pressure, Mitch, has actually been in the Southeast.

So it's our most mature market.

Speaker Change: There's, you know, there tends to be a quite a bit more competitive activity on soft variety. I'm really kind of harping on on soft variety. We're still higher than we were.

Speaker Change: You know, five years ago, but, you know, we've seen a little bit of share erosion there, but obviously, you know, we're aware of it and taking steps to counteract it.

Speaker Change: So there are differences in geography and in the newer geographies, those are the areas where we are gaining the most share.

And what, so I mean it's obviously very important

to kind of grow your share in those newer geographies.

Speaker Change: Are there any near-term obstacles that are out there, you know, what's, why, you know, why wouldn't you be growing, you know, maybe at an accelerated rate in some of those new geographies? What's the challenge that you're seeing right now?

Speaker Change: I'm not really sure I get the gist of your question because we are growing in those new geographies.

Speaker Change: You know, obviously, you're new to the market, you know, you've got to get...

Speaker Change: You know, consumer awareness and get, you know, trial and repeat and all those things. But, you know, we've been talking about the Northeast for a while and we continue to grow share there. You know, we're newer to the to the Midwest. So we just kind of, we just launched into one of the major Midwest retailers in the spring. So we're really just getting started there. But no, I mean, it, it,

Speaker Change: Obviously, there's competitive activity. There are some very big competitors in those markets. But with the strength of our number one brands, we feel very confident that we can consistently grow share.

Speaker Change: Okay, no, I guess I was more looking for a, you know, little, you know,

Speaker Change: Obviously quicker share gains. I don't know exactly where you are today. You were a 10% share in the Northeast.

Speaker Change: say two years ago, I'm not sure where that is today. And I know ShareGains, it's a very, obviously, hyper competitive business. But I just thought perhaps there was something maybe stopping you from growing at a even quicker rate, that's all.

Speaker Change: No, nothing specific. It's just I think you hit it right on the head. I mean, this is a competitive category.

Speaker Change: And it, you know, it takes time to build share, you know, at some point, you know, capacity can become a constraint, but we're

Speaker Change: planning well ahead of that, so that we don't get, you know, in a situation where we don't have enough capacity to continue to grow. But aside from that, it's just, you know, it's a competitive category. You know, the Northeast specifically, you know, there's a lot of independents and co-ops up there, too. It takes time to get, you know, fully penetrated there. So, yeah, it's just things like that.

Okay, and then when...

Speaker Change: I haven't really, you know, looked at this lately, but, you know, you used to have a, you know, your capacity utilization.

Speaker Change: I guess the OEE back a couple years ago was in the mid-60s, and I was curious if there was any update on that.

Speaker Change: Where are you? Because that would seem to be a significant part of the margin story, the fixed cost leverage, and as you increase your capacity. Can you, is there any update or any detail you could provide there?

Speaker Change: It obviously depends on when you look, you know, it gets a little bit more pressured in the summer when we're so busy and full, but you know, call it 70, 71%. Obviously, we want it to be higher than that, but you're right. It's quite a bit better than it has been. So we've made some great strides and we're seeing that.

Speaker Change: in the bottom line. I mean that's a component of the gross margin performance, so it's good to see us operating more effectively there.

Sorry, in terms of

Speaker Change: In terms of overhead coverage, you know, we've talked about before the strategic exits, you know, long-term are certainly the right thing to do because we had some very poor margin business that we jettisoned. But it does leave us with a little bit of fixed overhead stranded. But as we refill that volume,

Speaker Change: We have higher margin business that also is going to have a direct bottom line impact.

Okay, and then, and you know, you know,

Thank you.

Speaker Change: I know we're not ready to talk 25 guidance, but you know you're kind of nipping on the heels, your EBITDA margin on the lower end of, you know, you got 12 to 14 percent sort of range, that the long-term range. I mean is

Speaker Change: Is it too early to call that you can get that lower end next year?

Speaker Change: And I know you're not ready to provide that kind of guidance, but are we still going to see progress in the EBITDA growth next year? Or is there anything out there that you want to call out that we'd have to be, you know?

you know, have to consider.

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Speaker Change: So, yeah, I mean, we're not ready to talk 25 yet, but we can talk long-term, Mitch. And, you know, certainly we think it's, you know, within reach, we think, frankly, 13 to 14% is in reach. And if you, you know, run the long-term algorithm out, you can see where we can get there. And that's, you know, that's without, you know, including accretive M&A, which obviously we're focused on as well.

Speaker Change: So, yeah, I think that we've shown between, you know, the growth of our branded business, the shift in the portfolio.

Speaker Change: Okay. All right. Well, great. Thank you. Thank you for your question.

Okay.

Speaker Change: Thank you and as a reminder to ask a question please press star 1 1 on your telephone. One moment for questions.

Speaker Change: Our next question comes from Max Gumpert with BNP Paribas. You may proceed.

Max Gumpert: Hey, thanks for the question. So you're clearly observing an increasingly challenged U.S. spread category as consumers continue to shift to the perimeter of the store and also as you see a ramp up in competitive activity in this second half.

Max Gumpert: And you noted this headwind is expected to be temporary, which seems reasonable to me given it's largely driven by the consumer feeling.

financial pressure but I'm curious

Max Gumpert: At this point in time, should we be expecting that these category pressures persist through a meaningful portion of 2025? Thanks.

Speaker Change: Yeah, sure. I mean, again, no crystal ball, but Max, we've been through this many, many times before in our history.

Speaker Change: You know, when the consumer feels a little bit of weakness, you know, there's trade down, you know, consumption patterns shift, remember the store, all the things that we've talked about, but they've always proven to be temporary.

Speaker Change: So, we're working hard on the things that we can control.

Speaker Change: We continue to make sure that we are as efficient as we can possibly be, that we're delivering the highest quality to consumers, and that we continue to innovate. And I think that those things are showing up quite nicely in our market share performance and frankly in our bottom line performance as well.

Speaker Change: Great and then on Dave's Killer Bread, I'm talking about the classic bread offering.

Speaker Change: Are you concerned by the slowdown you're seeing and trends for that business? I think in the most recent scanner data it's

Flattish maybe even

Just down slightly in dollar sales terms.

Speaker Change: I realize a lot of that could be pointed at the category filling pressure, but just

Speaker Change: I'm just curious for an update on what you're seeing for Dave's Killer Bread within the bread category, and whether or not it can become the growth engine again that it had been over the past several years. I'll leave it there. Thanks.

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Speaker Change: Yeah, sure. Thanks, Max. And we can talk about this offline, too, if you will. We saw your note and the data. Our data does not match up with yours. Dave's is still positive. It is not down.

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Great, thanks very much.

Thank you.

Speaker Change: Thank you. I would now like to turn the call back over to Riles McMullin for any closing remarks.

Riles McMullin: Okay thanks Josh and thanks everybody for taking time today and joining us for questions. We appreciate your interest in our company and we certainly look forward to speaking with you next quarter. Everybody take care.

Speaker Change: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

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Speaker Change: Good morning and thank you for standing by. Welcome to the Flower Foods third quarter 2024 results conference call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your opening speaker today, J.T. Rick, Executive Vice President of Finance and Investor Relations. Please go ahead.

Speaker Change: 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.

Speaker Change: In addition to what you hear in these remarks, important factors relating to Flowers Foods Business are fully detailed in our STC filings.

Speaker Change: 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.

Speaker Change: While consumers value seeking behavior, pressured category sales, we did grow dollars and units in fresh packaged breads.

Speaker Change: And that growth drove the largest share gains in the category, which validates our investments in differentiation.

Speaker Change: In our other segment, execution of our portfolio strategy enabled sales growth as strong pricing initiatives more than offset volume losses.

Speaker Change: As we look to close out the year and look ahead to 2025, we remain focused on enhancing shareholder value, of course, and delivering results consistent with our long-term financial targets.

Speaker Change: That process includes maximizing our opportunities in areas that we can control by targeting pockets of growth and branded retail, margining up our private label and away from home businesses, and executing on our cost savings plan.

Speaker Change: So, Josh, with that, we'll open up the floor for questions.

Speaker Change: Thank you. As a reminder to ask a question please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question please press star 1 1 again. One moment for questions.

Speaker Change: Our first question comes from Steve Powers with Deutsche Bank. You may proceed.

Great, thanks. Can you hear me okay?

Speaker Change: Yes, Dave, good morning. Okay, great, good morning. I was hoping we could actually start...

Speaker Change: With the areas of expansion, as we think about next year, both Dave's Snack Bites and Wonder, just give it a little sense for sort of the scale.

of those expansions and the ramp you're expecting.

Speaker Change: You know, and I guess a little bit of a little bit more.

Speaker Change: Detail around on the wonder side your confidence in this week baked goods category, which is obviously

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Speaker Change: Yeah, of course. Let me start with the Wonderline. We'll probably have more details for you on that in February. I mean, we're very early in rolling it out to customers. I can tell you that the early returns have been quite good. There's been a lot of enthusiasm from retailers.

Speaker Change: We noted the top 10 item at the NAC show just a few weeks back, so the items are unique, the quality is fantastic, the packaging looks great, and honestly, we all know we need some help in the sweet baked goods category. I mean, the category has been down.

Speaker Change: We have not, you know, we perform kind of in line with the category, but that's, you know, that's not a good story.

Speaker Change: And so I think the important takeaway is that we are taking proactive steps to inject some growth into that category and we're quite excited about doing it with the Wonder brand just giving the given the very high unaided awareness for for Wonder.

In terms of the DKB

Speaker Change: snack line. The bars continue to do well, the original three, the protein bars.

Speaker Change: We have more SKU innovation in the pipeline to deliver as early as next year, and then, of course, as you mentioned, the Snack Bites as well. Steve, I don't think we're in danger of overextending. I mean, if anything, if you take the bars...

Speaker Change: and quite unique for the category. There's really nothing quite like it out there. Most analogous, I would say, is probably some of the granola products.

Speaker Change: Having said all that, we remain very bullish on this burgeoning snack business we have for DKB.

Speaker Change: Okay, great. Thank you. And I'll pass it on, but I did want to ask you, if I could, on the CapEx reduction for the year. It doesn't look like it's the ERP side, because that actually went up a little bit. Can you maybe just talk about what drove the reduction, and is that sort of real, is that true, a kind of efficiency, or is that going to be something we should consider as we think about

Capital Planning in 25.

Speaker Change: Sure, Steve, this is Steve. I mean, the main reason for the change there is really just kind of the pace of spin for the year. I mean, you're right, it's not necessarily ERP, it's other projects, primarily bakery. And a lot of those got pushed, we just weren't able to get to them. So, they will roll over to 2025. So, you should consider that as you think about next year.

Perfect. Okay, thanks so much.

Thanks, Steve.

Thank you.

Speaker Change: Our next question comes from Bill Chappell with Truist Securities. You may proceed.

Thanks. Good morning.

Bye, Bill.

Speaker Change: Just want to talk a little bit about the Sweet Big Goods or the snack cake business and just on the declines are you seeing anything different and a year in from Smuckers owning Hostess?

Yeah, I think for us it's just more generally.

Thank you very much.

Bill, can you hear me?

Yep.

Speaker Change: Got it and just to follow up in like what you know as you've seen this in the past

Speaker Change: How long do you think it lasts? Just this doesn't seem to be a dire financial crisis. It's just pulling back. So do you think you'll get back to growth as we move into 25? Or is it just too early to tell?

Transcription by ESO. Translation by —

Speaker Change: Well, I mean, I don't have a crystal ball, but you know, I think you know It's it would be reasonable to think that you know At some point next year things start to normalize and the and the category gets a little bit healthier I mean, you know, you'll recall among

Speaker Change: Before we hit this inflationary cycle, the sweet baked goods category was the strongest of the snacking categories, despite all the health stuff, health and wellness trends going on out there. So I do expect it to return. We're focused on delivering super high quality items to the consumer under great brands.

Tasty Cake is a great, iconic Philadelphia brand.

Speaker Change: You know, we think can help us be more competitive with some of those stronger brands in the category, particularly if we deliver on the on the quality promise.

Speaker Change: Got it. And just sorry, one more. On the promotional level of the bread bonding role business, is it primarily coming from the largest competitor or are you seeing it from the smaller regional players as well?

www.microsoft.com.ca

Got it. Thanks.

Thank you.

Speaker Change: Our next question comes from Robert Dickerson with Jeffries. You may proceed.

Great, thanks so much.

Um, maybe just quick housekeeping.

I think you said in the prepared remarks,

Speaker Change: Some of the trends didn't continue in Q3 relative to Q2, but then kind of improved at the end of the quarter, sounds like maybe a little help from a hurricane. So I'm just curious, I'm not sure if you want to quantify or if you can quantify how much you think that might have helped the quarter and then maybe how you kind of saw those trends coming out of the hurricane, even though it's only been a couple weeks.

Speaker Change: Yeah, so, you know, some of the stronger category trends that we noted in Q2 didn't continue. It did get a little bit weaker as we moved through the third quarter. The hurricanes, you know, had an impact, Rob.

Speaker Change: But not particularly material. Honestly, I mean, it did help. It was positive, of course, but not really that significant in the quarter. I think, you know, again,

Speaker Change: The important thing to emphasize specifically to flowers in the quarter is that while the category continues to be a bit soft, we're outperforming the category. And if you look at fresh packaged breads,

Speaker Change: You know, our units were up some 70 basis points. We gained 20 basis points a dollar share, 20 basis points a unit share, both of those the largest.

Speaker Change: Okay, great. And then maybe just more broadly speaking, excuse me,

You know, you all said, made the comments around.

You know, you always kind of comment on M&A.

Speaker Change: In terms of the perimeter you mean? Yeah just like you know buy a big tortilla brand. Now we have tortillas, we have lunch bread and keto and buns.

Transcription by ESO. Translation by —

Speaker Change: In terms of the trends, you know, if you hearken back, Rob, you know, the perimeter of the store was sort of a big deal pre-pandemic, right? And I think...

coming out of the pandemic.

Speaker Change: One of the questions we would get every single quarter was when do you expect the reversion to happen?

Speaker Change: I do think that that trend tends to impact the traditional loaf.

Speaker Change: segment of our business more than the other parts. We've talked in the past how that's arguably the least differentiated piece of our portfolio, that we have plans to increase that level of differentiation there to kind of fight back, but obviously much less impact.

Speaker Change: on the buns and rolls, as you mentioned, on the Dave's Killer breads of the world, on the canyons of the world. So we continue to beat this drum that innovation and differentiation matter, and that's what's fueling our business overall.

Speaker Change: Okay, great, makes sense. And then maybe just a quick one, one last one, just around the guide for EBITDA, if we kind of think about what's implied maybe for Q4, it seems like

Speaker Change: Yeah, at least at the midpoint, there could still be a little bit of year over year kind of, you know, margin improvement to kind of a couple questions in here. Just kind of, you know, what.

Speaker Change: And the range, I guess, for a quarter still seems like a little wide, right? Which is fair, right? Complicated backdrop. But I'm kind of curious, what could get you to the higher end of that, you know, implied margin guide for Q4? Maybe what gets you at the lower end?

Speaker Change: And then, you know, like, is part of this just also kind of playing it safe, you know, just given the promotional environment all in and kind of how you're thinking about, you know, the price piece.

Transcription by ESO. Translation by —

Speaker Change: You know, why don't you have better visibility? I think that...

Speaker Change: But offsetting that has been fantastic execution on our savings program, great execution of the marketplace, continuing to grow our bread, bun and roll units.

Speaker Change: The drag on the business is, you know, away from home and primarily the QSR business, which has been a bit weaker than we anticipated, honestly, just with this shift to in-home, you know, due to elevated pricing.

Speaker Change: And we've already covered, you know, the weakness in the cake business. The fresh packaged bread business is doing great.

All right, great. Thank you so much, Ralph. Appreciate it.

Oops.

Thank you.

Speaker Change: Our next question comes from Jim Salero with Stevens. He may proceed.

Hey guys, good morning. Thanks for taking our question.

Speaker Change: Ross, I wanted to dig down a little bit on the other category and you know you talked about some of the headwinds in food service and certainly the you know the softness in QSR I think is

well-known.

Can you maybe break out how much of a headwind?

Speaker Change: The food service was to other volume it relative to the business exits, but I think we still have some of those in the third quarter. So if we just strip those out, how much would would the other volume moving down and maybe any color on your private label piece?

Speaker Change: Michael McGarry, Ph.D.: In that category as well would be helpful.

Speaker Change: Yeah, so yeah, we were finishing up the cycling of the strategic exits in the third quarter. I would say.

Speaker Change: sort of mid-single digits from strategic exits. The rest of it is kind of channel or category dynamics, if you will. So mostly external factors, Jim.

Speaker Change: But I would also say, you know, the steps that we've taken in terms of pricing to improve the profitability of that business more than overcame the volume losses. That's an important note to take away.

Speaker Change #100: For sure. And then, so is it safe to say that if I break out, and I realize for competitive reasons you guys don't break out the private label piece anymore, but is it safe to assume that the private label component of that other segment is positive on volume?

Speaker Change #101: Actually, no. The private label, if you look at the, we can just talk syndicated data, actually, you know, private label is losing share and our volume and private label was down as well.

Speaker Change #102: Private label pricing has increased a little bit, Jim, and the price gaps have narrowed a bit as private label is going up and branded has gotten promoted a little bit more. So now you're starting to see that shift back a bit more to branded.

Speaker Change #103: Okay, great. And then I think you also mentioned in your prepared remarks...

Speaker Change #104: It's possible we could see some incremental benefit if you have some new business wins that ramp up faster. And just curious on what would be a driver of kind of a faster or slower ramp with new customers? And is there anything that we on the outside can kind of look at that might give us some insight into, you know, if it's scaling faster or scaling slower?

Speaker Change #105: Yep, so the new business for the remainder of the year has pretty much already been captured. Now, obviously, we'll have more for 2025.

Speaker Change #105: But the incremental gains that we expected to get for this year have been captured. So when we get to the end of the year and we come back to you in February, we'll have a much clearer picture on just how well that went.

Speaker Change #106: Great. I appreciate the talk guys. I'll hop back in queue.

Okay. Thanks, Jim.

Thank you.

Speaker Change #107: Our next question comes from Mitchell Vennero with Sturtevant & Company. You may proceed.

Transcription by CastingWords

Yeah, good morning.

So, Thank you. Thank you.

Speaker Change #108: I guess when you, you know, your fresh bread category gains were obviously at the expense, I guess, a little bit of

Speaker Change #109: your major national competitors. Where are your gains being picked up from, do you think?

There are coming some from private label.

Speaker Change #110: They are coming from some of the regionals, although other of the regionals

Speaker Change #110: are doing pretty well, actually. And, you know, Peppers, for example, looking at syndicated data, look like they had a good quarter. I know they're promoting a bit more, but it looks like they're also getting some lift. So, I mean, it's coming from around the category, but that's...

Speaker Change #110: That's not really a new story. I mean, you know, we, you know, Mitch, as we continue to talk about, you know, being a leader in innovation and, and, you know, bringing differentiated products to the consumers, you know, that, that

Speaker Change #110: We're pulling business away from other competitors in the category due to that focus on innovation.

Speaker Change #111: I mean, is any of that coming in a geographic, you know, market?

Speaker Change #112: dynamic like you know you happen to be winning more than East or West or can you talk a little bit about that?

Speaker Change #113: Yeah, sure. So it's been, more recently, it's been stronger in, frankly, in newer markets, the Northeast, the Midwest, etc. You know, where we've had a little bit of share pressure, Mitch, has actually been in the Southeast.

So it's our most mature market.

Speaker Change #113: There's, you know, there tends to be a quite a bit more competitive activity on soft variety. I'm really kind of harping on on soft variety. We're still higher than we were.

Speaker Change #113: Five years ago, but, you know, we've seen a little bit of share erosion there, but obviously, you know, we're aware of it and taking steps to counteract it.

Speaker Change #113: So there are differences in geography and in the newer geographies, those are the areas where we are gaining the most share.

And what, so I mean it's obviously very important

to kind of grow your share in those newer geographies.

Speaker Change #114: Are there any near-term obstacles that are out there, you know, what's, why, you know, why wouldn't you be growing, you know, maybe at an accelerated rate in some of those new geographies? What's the challenge that you're seeing right now?

Transcription by ESO. Translation by —

Speaker Change #114: I'm not really sure I get the gist of your question because we are growing in those new geographies.

Speaker Change #114: Obviously, you're new to the market, you've got to get consumer awareness and get trial and repeat and all those things, but we've been talking about the Northeast for a while and we continue to grow share there. We're newer to the Midwest, so we just launched into one of the major Midwest retailers in the spring, so we're really just getting started there.

Speaker Change #114: Obviously, there's competitive activity. There are some very big competitors in those markets. But with the strength of our number one brands, we feel very confident that we can consistently grow share.

Speaker Change #115: Okay, no, I guess I was more looking for like, you know, little, you know,

Speaker Change #116: Obviously quicker share gains. I don't know exactly where you are today. You were a 10% share in the Northeast.

Speaker Change #116: say two years ago, I'm not sure where that is today. And I know ShareGains, it's a very, obviously, hyper competitive business. But I just thought perhaps there was something maybe stopping you from growing at a even quicker rate, that's all.

Speaker Change #117: No, nothing specific. It's just I think you hit it right on the head. I mean, this is a competitive category.

Speaker Change #117: And it, you know, it takes time to build share, you know, at some point, you know, capacity can become a constraint, but we're

Planning well ahead of that.

Speaker Change #117: so that we don't get in a situation where we don't have enough capacity to continue to grow. But aside from that, it's a competitive category. The Northeast specifically, there's a lot of independents and co-ops up there too. It takes time to get fully penetrated there. So yeah, it's just things like that.

Okay, and then when...

Speaker Change #117: I haven't really, you know, looked at this lately, but, you know, you used to have, you know, your capacity utilization.

Speaker Change #118: I guess the OEE back a couple of years ago was in the mid-60s, and I was curious if there was any update on that.

Speaker Change #119: Where are you? Because that would seem to be a significant part of the margin story, the fixed cost leverage and as you increase your capacity. Can you, is there any update or any detail you could provide there?

Speaker Change #120: It obviously depends on when you look, you know, it gets a little bit more pressured in the summer when we're so busy and full, but you know, call it 70, 71%. Obviously, we want it to be higher than that, but you're right. It's it's quite quite a bit better than it has been. So we've made some great strides and we're, you know, we're seeing that.

Speaker Change #120: in the bottom line. I mean that's a component of the gross margin performance, so it's good to see us operating more effectively there.

And so...

Sorry, in terms of

Speaker Change #120: In terms of overhead coverage, you know, we've talked about before the strategic exits, you know, long-term are certainly the right thing to do because we had some very poor margin business that we jettisoned. But it does leave us with a little bit of fixed overhead stranded. But as we refill that volume,

Speaker Change #120: We have higher margin business that also is going to have a direct bottom line impact.

Okay, and then, and you know, you know,

Transcription by ESO. Translation by —

Okay.

Speaker Change #120: on the lower end of, you know, that 12 to 14% sort of range that the long-term range. I mean, is it too early to call that you can get that lower end next year?

Speaker Change #121: And I know you're not ready to provide that kind of guidance, but are we still going to see progress in the EBITDA growth next year? Or is there anything out there that you want to call out that we'd have to be, you know,

you know, have to consider.

Transcription by ESO. Translation by —

Speaker Change #121: So, yeah, I mean, we're not ready to talk 25 yet, but we can talk long-term, Mitch. And, you know, certainly we think it's, you know, within reach. We think, frankly, 13 to 14 percent is in reach. And if you, you know, run the long-term algorithm out, you can see where we can get there. And that's, you know, that's without, you know, including accretive M&A, which obviously we're focused on as well.

Speaker Change #121: So, yeah, I think that we've shown between, you know, the growth of our branded business, the shift in the portfolio.

Speaker Change #121: I'm quite confident that over time we can get to that low teens EBITDA margin level.

Okay. All right. Well, great. Thank you.

Okay.

Speaker Change #122: Our next question comes from Max Gumpert with BNP Paribas. You may proceed.

Max Gumpert: And you noted this headwind is expected to be temporary, which seems reasonable to me given it's largely driven by the consumer feeling financial pressure, but I'm curious.

Speaker Change #123: At this point in time, should we be expecting that these category pressures persist through a meaningful portion of 2025? Thanks.

Speaker Change #124: Yeah, sure. I mean, again, no crystal ball, but Max, we've been through this many, many times before in our history.

Speaker Change #124: You know, when the consumer feels a little bit of weakness, you know, there's trade down, you know, consumption patterns shift, you know, shift, memory of the store, all the things that we've talked about, but they've always proven to be temporary.

Speaker Change #124: So, we're working hard on the things that we can control.

Speaker Change #124: We continue to make sure that we are as efficient as we can possibly be, that we're delivering the highest quality to consumers, and that we continue to innovate. And I think that those things are showing up quite nicely in our market share performance and frankly in our bottom line performance as well.

Speaker Change #125: Great and then on Dave's Killer Bread, I'm talking about the classic bread offering.

Speaker Change #126: Are you concerned by the slowdown you're seeing and trends for that business? I think in the most recent scanner data it's...

Flattish maybe even

Just down slightly in dollar sales terms.

Speaker Change #126: I realize a lot of that could be pointed at the category filling pressure, but just

Speaker Change #127: I'm just curious for an update on what you're seeing for Dave's Killer Bread within the bread category, and whether or not it can become the growth engine again that it had been over the past several years. I'll leave it there. Thanks.

Transcription by ESO. Translation by —

Speaker Change #128: Yeah, sure. Thanks, Max. And we can talk about this offline, too, if you will. We saw your note and the data. Our data does not match up with yours. Dave's is still positive. It is not down.

Transcripts provided by Transcription Outsourcing, LLC.

Great. Thanks very much.

Thank you.

Speaker Change #129: Thank you. I would now like to turn the call back over to Riles McMullin for any closing remarks.

Riles McMullin: Okay, thanks Josh. And thanks everybody for taking time today and joining us for questions. We appreciate your interest in our company and we certainly look forward to speaking with you next quarter. Everybody take care.

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