Flowers Foods Q2 2024 Prepared Remarks Earnings Call Transcript

Quartr
Provided by Quartr
August 16, 2024

There are 3 speakers on the call.

Operator

Hello, everyone. This is J. C. Rieck, EVP of Finance and Investor Relations. Welcome to the pre recorded discussion of Flowers Foods' 2024 Second Quarter Results.

Operator

We will host a live Q and A session this morning at 8:30 am 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 flowersfoods.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 addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our SEC filings.

Operator

Providing remarks today are Ryals McMullen, Chairman and CEO and Steve Kinsey, our CFO. Ryals, I'll turn it over to you.

Speaker 1

Thanks, J. T. It's a pleasure to welcome everyone to our call. Our strong second quarter results reflect the successful execution of our strategic plan. Guided by our portfolio strategy, we're driving growth and taking market share in our higher margin branded bread products, while simultaneously improving the profitability of our private label and away from home businesses.

Speaker 1

This building momentum bolsters our confidence that we will deliver results in line with our 2024 guidance. 2nd quarter financial performance was highlighted by growth in our retail businesses and strong sequential margin improvement aided by the successful execution of savings initiatives. 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. We believe this improvement was influenced by consumers shifting more spending to at home eating as they look to economize. And we are capitalizing on that shift, driving unit growth of 1.5% in the fresh packaged bread category.

Speaker 1

That growth spurred share gains as our branded bread products continue to outperform the overall category, gaining 40 20 basis points, respectively, of dollar and unit market share, the most of any competitor. For the 2nd consecutive quarter, we grew both dollars and units in tracked channels, while the bread category was largely flat. Momentum built through the quarter, with unit share gains peaking in the final 4 weeks, up 40 basis points. 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. Importantly, our performance improved in both the mass and grocery channels.

Speaker 1

Bread 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. 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, 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 1

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. Further, the headwinds from deliberate exits are waning. The impact of those exits peaked in the Q1 and will diminish significantly in the second half of the year with virtually no effect in the Q4. Now I'll provide an overview of our Q2 performance in the context of our 4 strategic priorities: developing our team, focusing on our brands, prioritizing margins and pursuing smart M and 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 1

The strength of our 2nd quarter performance is the direct result of the hard work of our team. I'm 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. 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. The new structure employs a channel focused approach that allows us to better align with and service our largest customers. Leading our restructured retail customer team is Meredith Wiktorowski, who has joined Flowers as Senior Vice President and Chief Customer Officer.

Speaker 1

She is responsible for retail customer strategy and accountable for growing our revenue, market share, profitability, and reputation. 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. 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. Our second strategic priority is focusing on our brands, which were a critical component of our strong Q2 performance. Our leading brands posted exceptional results, with Wonder, DKB, and Canyon growing units 10%, 7%, and 5%, respectively, and Nature's Own maintaining its unit sales.

Speaker 1

That performance drove the largest dollar and unit share gain of all companies in the category, with each of our national bread brands gaining or maintaining dollar share. Dave's Killer Bread and Wonder each gained 20 basis points of dollar share, while Nature's Own gained 10 basis points. Nature's Own success is particularly noteworthy given the impact of inflationary pressures on consumers. The brand's focus on the consumers' 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 7 10 basis points.

Speaker 1

We expect the introduction of keto buns to maintain that momentum. Recognizing the consumer desire for increased value, we introduced Nature's Own Small Loaves, which are off to a great start. These new products have helped the brand grow units versus the year ago period and 6 of the last 7 weeks. 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. Innovation is a key part of our growth strategy and our new products are driving strong results.

Speaker 1

The original DKB snack bars continue to receive solid support from consumers. Taking brands into new categories is rarely easy, but DKB's track record of successfully entering adjacencies like breakfast and sandwich buns and rolls gives us confidence that it can further extend into snacking. 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. The nationwide launch of DKB Amped Up Protein Bars is underway, and we're executing a soft launch of DKB Snack Bites with a goal of more than 2,000 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.

Speaker 1

Our 3rd strategic priority is margins, an area where we made significant progress. We spoke last quarter about the need to further improve our cost structure to better leverage our solid top line results and deliver increased profitability. As part of that process, we redoubled our efforts and increased our expectations for savings initiatives for the year from $30,000,000 to $40,000,000 to $40,000,000 to $50,000,000 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 SD and A cost as a percentage of sales. In addition to savings initiatives, we're improving our branded retail mix by successfully executing our portfolio strategy, growing premium brands like DKB and Canyon and adding innovative products like Keto in core brands like Nature's Own.

Speaker 1

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 2nd 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. Our 4th priority is smart M and 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 1

We seek compelling brands that complement our existing portfolio and that skew towards a better for you nutritional profile. Our strong balance sheet positions us well to act when we have financial, commercial and operational conviction. 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?

Speaker 2

Thank you, Ryals and good morning everyone. Let me echo Ryals on congratulating the team on an outstanding quarter. We are pleased to present our solid second quarter results. Total sales decreased 0.2% from the prior year period. Price mix improved 1%, driven primarily by mix and was more than offset by volume declines of 1.2%.

Speaker 2

Those declines were largely due to targeted sales rationalizations and QSR market weakness. Branded retail volumes were flat with continued growth in bread products offset by declines in cake. Gross margin as a percentage of sales, excluding depreciation and amortization, increased 90 basis points to 49.9% over the same quarter last year. 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 costs and increased outside purchases of product partially offset the overall improvement.

Speaker 2

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 and an 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. Excluding matters affecting comparability, adjusted SD and A expenses were 38.2 percent of sales, flat with the prior period. GAAP diluted EPS for the quarter was $0.32 per share, a $0.02 increase over the prior year period. Excluding the items affecting comparability detailed in the release, adjusted diluted EPS in the quarter increased $0.03 over the prior year period to $0.36 Turning now to our balance sheet liquidity and cash flow.

Speaker 2

Year to date through the Q2 of fiscal 2024, cash flow from operating activities increased by $40,000,000 to $168,000,000 Capital expenditures decreased $7,000,000 to $61,000,000 and included $3,000,000 for the ongoing ERP upgrade. Dividends paid increased $4,000,000 to $102,000,000 We believe our financial position remains strong. At quarter end, net debt to trailing 12 month adjusted EBITDA stood at approximately 2 times. We held approximately $7,000,000 in cash and cash equivalents and had approximately $517,000,000 of remaining availability on our credit facilities. Now turning to our outlook for 2024.

Speaker 2

As Ryle said, we are maintaining our previously issued guidance, which calls for sales to be flat to up 1.6%, adjusted EBITDA of $524,000,000 to $553,000,000 and adjusted EPS in the range of $1.20 to $1.30 We are updating our expectations for depreciation and amortization, interest expense and share count, which are detailed in our earnings release and slide presentation. 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 Q4. As Ryals noted, the effect of business exits remains a headwind in the Q3 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. Key factors that could shift results within our guidance range include the potential impact of an uncertain economy on the consumer and promotional environment and the transition of our California distribution.

Speaker 2

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. 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 into cost, we have maintained our historical hedging strategy in which we attempt to increase the certainty of our key ingredient cost 6 to 12 months out.

Speaker 2

Our ERP rollout went live in the Q2 of 2023 and we are proceeding deliberately in 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 to concentrate resources on our California distribution transition. In fiscal 2024, we expect cost for the upgrade of our ERP system to be approximately $25,000,000 to $35,000,000 including $3,000,000 to $6,000,000 expected to be capitalized. Costs related to the project year to date are $12,800,000 dollars of which $3,400,000 has been capitalized. Total costs for the life of the project are $226,000,000 of which $115,000,000 has been capitalized.

Speaker 2

Thank you. And now I'll turn it back to Ryals.

Speaker 1

Thank you, 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. I'll first touch on the consumer trends and then address the competitive environment. Consumer trends in the Q2 remain consistent with the recent past. 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.

Speaker 1

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 units which declined 0.7%, as shown on Slide 9. We continue to see encouraging trends in the bread category. Premium products are performing well as consumers seek differentiation, best exemplified by DKB's strong results. Subcategories with more differentiated offerings such as dinner bread and rolls, sandwich buns and rolls, and specialty premium outperformed the less differentiated traditional loaf. 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 1

Private label prices continued to increase at faster rates in 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 2nd consecutive quarter, up 1.5%. Those results significantly outpaced the category, which declined 0.2%, as shown on slide 9. Consistent with our portfolio strategy, the result of that growth is that our branded retail category increased to 64.5 percent 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 1

As economic pressure drives many consumers to seek greater value, their response to promotions has increased, though off of a low base due to the pandemic impact. And in that environment, we have increased our promotional levels somewhat, resulting in a higher percentage of products sold on promotion. However, we're leveraging our trade promotion management capabilities to do so more efficiently and with attractive returns on investment. 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 brands' differentiation, driving the largest dollar and unit share gain of any company in the category.

Speaker 1

We are investing to increase that differentiation, further aligning our brand portfolio with the consumer. In closing, I am pleased with the improvement demonstrated by our 2nd 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. To better leverage our top line performance, we improved our cost structure, significantly enhancing our margins. And we're leveraging technology to improve data visibility and drive better strategic decisions, while investing in our team to advance overall execution.

Speaker 1

Results in the quarter demonstrated progress towards our long term goals, and we'll continue working to drive further improvements. I look forward to continuing our progress throughout 2024. Thank you very much for your time. That concludes our prepared remarks.

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Flowers Foods Q2 2024 Prepared Remarks
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