Flowers Foods - Earnings Call - Q2 2019

Transcript

Speaker 0

Welcome to the Flowers Foods Second Quarter twenty nineteen Earnings Conference Call and Webcast. My name is Paulette and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn the call over to J. T. Rick, Treasurer and Vice President of Investor Relations. You may begin.

Speaker 1

Thank you, and good morning, everyone. Our second quarter results were released yesterday evening. The earnings release and updated presentation is posted in the Investors section of the Flowers Foods website. Our 10 Q was filed with the SEC yesterday evening as well. Before we begin, please be aware that our presentation today may include forward looking statements about our company's performance.

Although we believe those statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters we'll discuss during the call, important factors relating to Flowers Foods business are fully detailed in our SEC filings. Participating on the call today, we have Ryals McMullen, Flowers Foods President and Chief Executive Officer and Steve Kinsey, our Executive Vice President and Chief Financial Officer. Ryals, I'll turn the call over to you.

Speaker 2

Thanks, JT. Good morning, everybody, and thanks for joining our second quarter call. So as we approach the ninety day mark since I took over as CEO, I have been spending a great deal of time, visiting with and listening to our team and our customers. Now more than ever, building good relationships with our customers is critical. It's really important to me that I fully understand where our customers intend to take their business and that Flowr stands ready to support their strategic ambitions with our outstanding brands, our quality, our service.

But I think it's equally important for them to hear about where we're headed so that we can work better together towards mutually beneficial outcomes. Visiting with our team members has given me the opportunity to hear about what's most important to them, where they think our challenges and opportunities lie, and how they'd like to see the company develop going forward. It's also given me the chance to reinforce our strategic priorities with them and help to ensure that we're all moving together in the same direction. So I've visited several plants and markets. I've conducted a couple of town hall meetings so far with more to come in the next few months.

And I'm very pleased to say that our team is energized and they're eager for what the future holds. They believe in our strategic direction and they're anxious to contribute their part towards that mission. So in short, this intentional and heightened level of engagement with our team has been very positively received. One the key messages I've tried to consistently communicate is that it's crucial for all of us to constantly seek out opportunities to improve our business and to execute daily on our strategic priorities. That means not only relying upon our team's years of experience, but also also asking different questions in the search for creative new answers.

It also means that although we're focused on the long term earnings power of the company, we must always keep our current results front and center so we have a clear understanding of progress toward our goals. So in the in the spirit of that message, we're gonna shake things up a little bit this morning and start by having our CFO, Steve Kinsey, review this quarter's results and share our outlook for the balance of the year. Hopefully, that'll help to better set the context for my commentary about our operations and strategic priorities. And of course, after our remarks, we'll look forward to answering your questions. Steve?

Speaker 1

Thank you, Ryals, and good morning, everyone. During Q2, we continued to experience solid performance on the top line, driven primarily by sales in the retail channel. In the second quarter, sales increased $34,500,000 or 3.7% year over year. Canyon Bakehouse, our recent acquisition, contributed 1.9%. In the base business, improved pricemix drove 1.9% of the sales increase, while slightly lower volumes impacted the top line by 10 basis points.

Price realizations improved across most of our channels and product classes, which has helped us to partially offset the commodity labor and transportation cost increases we've highlighted in recent quarters. Volumes were primarily impacted in our foodservice and cake businesses. Looking at sales by channel, branded retail sales increased $25,800,000 or 4.6%. The contribution of Canyon Bakehouse branded products accounted for approximately half of these incremental sales dollars. The balance was largely driven by continued growth from Dave's Killer Bread, Nature's Own, and Wonder Products, and the introduction of Sun Maid Breakfast Bread in the third quarter last year.

This growth was partially offset by softer volumes in our branded cake items. Store branded retail sales increased $15,400,000 or 10.5%. Store branded items produced by Canyon accounted for about a third of this increase. The balance of the growth was split between improved pricing and volume growth due to increased distribution. Store brand of the category continues to post volume declines.

Foodservice and other non retail sales decreased by $6,800,000 or 2.9%. Lower volumes drove most of the decline due in part to lost business from the inferior yeast disruption we experienced last year and volume losses in the vending channel of our non retail cake business. In the quarter, gross margin decreased 20 basis points to 47.9%. Improved price realizations did address input cost inflation to some extent, but pricing actions were offset by higher workforce costs and lower manufacturing efficiencies. Excluding the items affecting comparability detailed in the press release, adjusted SD and A expenses decreased 20 basis points as a percentage of sales, primarily due to lower distribution fees and legal fees as a percent of sales, offset by higher workforce costs in our shipping department and bad debt expense.

GAAP diluted EPS for the quarter was $0.25 per share. Excluding the items affecting comparability detailed in the release, adjusted detailed EPS in the quarter was flat compared to the prior year. Our sales were largely offset by elevated labor costs and reduced manufacturing efficiencies. Canyon Bakehouse was accretive to EBITDA and neutral to EPS in the quarter. A few comments on leverage and cash flow.

Year to date, we've generated operating cash flows of $208,100,000 and made capital expenditures of $47,400,000 Accordingly, free cash flows were solid, and we paid $79,600,000 in dividends to shareholders and reduced our total indebtedness by $86,800,000 At quarter end, our net debt to trailing twelve month adjusted EBITDA stood at approximately 2.1 times. Now turning to guidance. For 2019, we continue to target sales growth in the range of 2% to 4%. This includes Canyon Bakehouse sales, which are anticipated to be in the range of 70,000,000 to $80,000,000 accounting for approximately 1.8% to 2% of the total sales growth. We expect base business growth to be driven by improvements in price mix, partially offset by a conservative view on volumes due to broader category softness.

We now expect adjusted EPS in the range of $0.94 to $0.99 per share. Inflationary pressures from commodities, labor and transportation are expected to be approximately 150 basis points as a percent of sales. To mitigate these costs, we are working on a broad set of cost savings and productivity initiatives as well as continuing to evaluate pricing and promotional strategies market by market. We expect Canyon Bakehouse to be accretive to EBITDA and neutral to slightly dilutive to full year EPS. Now I will turn the call back to Ryals.

Speaker 2

Thank you, Steve. So I want to put my comments this morning on the quarter into the context of our four strategic priorities to create shareholder value. So as a reminder, they are very simply focusing on our brands, managing our costs, making smart, disciplined acquisitions, and developing the capabilities of our team. I believe our results this quarter demonstrate that the focus we're putting on our brands is working. Our dollar share of the fresh packaged bread category increased by nearly a full share point, driven by our key national brands, new product introductions, and incremental share from Canyon.

Our unit share also increased as well by 50 basis points. And in fact, we gained dollar share in every segment except their breads and rolls, which as many of you know is a small part of our total business. And importantly, we were able to achieve these results despite higher prices and less promotional activity. So I believe that these results are a great testament to our new strategies, our capabilities, our brands, and of course our team. We're hyper focused on taking what's already a a strong brand portfolio and making it even more powerful.

Our new org structure has been a key enabler in this regard, and our marketing, consumer insights, and brand teams are working with our new ad agency to connect more meaningfully with consumers. We're also gaining greater insight into how our consumers perceive our brands and how to keep them relevant not only today, but going forward in the future. So as a result, we're thrilled with our marketing and innovation pipeline, and we believe we're taking the right steps to build strong national brands. In other parts of the portfolio, the refocus on profitability is well underway. In our cake business, lower sales are the result of a very competitive landscape, but also from planned portfolio optimization.

And the good news here is that we're beginning to see some margin improvement in parts of the cake business. And while we certainly have more to do to improve profitability, we are encouraged by the progress we've made and we're optimistic about the new product introductions that we have slated for the back 2019 and beyond to reignite the top line. Our food service business is being pressured by both difficult year over year comparisons as certain food service customers discontinue limited time product offerings and of course the business lost to last year's yeast issues. But food service remains a vitally important part of our business despite the focus on brands. So we're taking this opportunity to prioritize those customers and product lines that value our high product quality, our broad scale, and our unique distribution capabilities.

Now despite the good top line performance, the inflationary pressures we continue to experience do underline the need for us to aggressively manage cost. And that's why it's one of our four strategic pillars. I don't I don't view managing cost as a tactical exercise designed to manage quarterly results. Rather, I believe it should be embedded into our strategic framework to ensure that we're correctly positioned to achieve our goals and free up resources for growth. The pricing and promotional actions we've taken so far this year have helped to address a portion of these inflationary headwinds without checking the good momentum we're seeing on the top line.

Since the start of project Centennial, we've had our entire operation under the microscope looking for ways to remove complexity and generate cost savings. Furthermore, enhanced analytical capabilities have given us greater transparency into our business and are informing better strategic decision making. So we've had good success with this effort and we've reduced costs in many areas of our operations. And we've been able to reinvest some of those savings into building the new capabilities I mentioned earlier, which are essential for enhancing our growth profile. But make no mistake, we have invested in the business and this does come with a near term cost.

Many of you will remember, originally, the plan was to reinvest a portion of our Centennial savings back into the business and then let the remainder fall to the bottom line. However, greater than anticipated cost increases have offset some of those remaining savings, and so we've not we've not yet been able to fully realize our earnings potential. So in short, one could argue that we're a little heavy on cost due to those investments. Now the easy course of action would be to cut costs in those areas, but that would amount to cutting capabilities, which in turn would come at the expense of future growth. We believe firmly this is a temporary imbalance and that it will ride itself over time as we grow our top performing brand brands and achieve greater efficiency.

But in the meantime, we are working the current opportunities we've we've identified to drive down costs in other areas. Specifically, we're focused on improving workforce productivity and manufacturing efficiencies, which has been impacted by a tight labor market and increased turnover. Now, for this sort of situation, there's no quick fix, but we know the steps that need to be taken to address the root causes and enable our team to reach their full potential. In addition, our team is intensely focused on removing complexities from our supply chain by optimizing the portfolio, shifting production missions, and rationalizing capacity. A recent example of this is the conversion of a conventional bread line in the Northeast to produce Dave's Killer Bread Products.

This not only improves service and availability to the Northeast market, but also significantly reduces transportation cost and complexity. And we intend to take similar network optimizing actions as we go forward. Now given the relatively high fixed cost nature of our supply chain and the innate complexity that comes along with the perishability of our DSD products, we are taking a prudent, data driven approach to these initiatives. We believe the impact of this work can be significant, but because we're taking a cautious approach, it will take some time to see the effect of these efforts in our financial results. Acquisitions.

Acquisitions have always played a large role in our growth story and the same will be true going forward. As we said for a while now, we're looking into areas of the store outside the traditional bread aisle as well as different product segments where we believe we have the right to win. And you've seen us do that recently with the acquisition of Dave's and and Canyon Bakehouse. We've got an attractive pipeline of potential opportunities, and we are being proactive in the m and a market. Importantly, I'm pleased to announce that we recently hired a new VP of corporate development who will be taking over for me and continuing to drive our M and A efforts.

This gentleman brings more than eighteen years of experience in M and A, thirteen of which were spent with another large CPG food company. He's he's set to start in September, and I'm really looking forward to the value he can bring to Flowers. Finally, I think most importantly, it's imperative that we continue to develop the capabilities of our team to bring forth that heightened level of engagement and greater achievement. Our goal is to build a team that can bring a fresh perspective to our business challenges and pursue creative solutions. So we'll do this by investing in the tools and information they need to do their job better, whether that's faster, more efficient, or deeper insight.

We're also working to modernize our benefits packages to be more competitive. If you think about it, only has the business landscape radically changed, but so has the workforce both in composition and what they seek in their careers. Today, it's not just the paycheck they receive that's important, but also the quality of life that comes with it. So in short, we're moving ourselves closer to the desires and needs of today's workforce to make Flowers an even better place to build a career. And so with that, we will turn it over to your questions.

Speaker 0

Thank you. We will now begin the question and answer session. And our first question comes from Amit Sharma from BMO Capital Markets. Please go ahead.

Speaker 3

Hi, good morning everyone.

Speaker 4

Good morning. Good morning.

Speaker 3

Ralph, these are very interesting changes that you outlined. Can you dig into that a little bit? Like what prompted I don't want to call this a rethink, but what prompted this deeper dive into it? And how quickly you think it can lead to a maybe at least a restatement of how you think about the growth outlook on a longer term?

Speaker 2

Amit, are you speaking specifically about supply chain or

Speaker 3

On supply chain and the way you think about how Flowr is positioned as you think about your cost structure or investment, behind key brands?

Speaker 2

Yes. No, absolutely. I I I appreciate the question. Well, look, mean, obviously, on our brands is a is a key priority. We have some of the top performing brands in the country.

And the more that's where the margin of the business comes from, the more resources and talent we can put behind those brands, whether it's through our our new BU structure and our our brand teams that are intensely focused on those brands. That's what gives us good confidence in our growth. And then supplementing that with smart M and A, you you think about the additions of of Bay's Killer Bread and Canyon really being able to enhance our growth profile, also gives us confidence. On on the cost side of the equation, you know, it it it really comes down to a couple of things. It comes down to labor.

Certainly there's some transportation costs in there too, but let's primarily talk about labor here. Not only is the cost of labor up, but with the tight labor market that frankly everyone's experiencing, that manifests itself into into higher turnover, which in turn manifests itself into into lower efficiencies. You're constantly turning over people at the bakeries. You know, you you you tend to have, you know, higher scrap costs, that kind thing. So get getting control of that and doing it both from a quantitative standpoint, but also from a qualitative standpoint.

That's why I talked a lot about, the workforce and how can we improve scheduling and working conditions. It's not just all about pay, it's benefit packages and quality of life. Those are the types of things that if this tight labor market is going to continue, we're going to have to do to make our operations more efficient.

Speaker 3

Got it. And then a little bit tactical. One of your largest competitors did talk about being maybe a little bit more focused on pricing to stem the volume losses or share losses. Can you talk about that a little bit in terms of how or what are you expecting in the marketplace? And how are you positioned if you do see pricing environment get a little bit more promotional?

Speaker 2

Yeah. Well, first of all, I think that's where some of our new analytical capabilities really come into play because we're in a position now where we can analyze where we are from a pricing standpoint market by market. Nothing's really changed there in the sense that this still tends to be a bit of a market by market business, but I think we're better positioned now to make the correct decisions as we go forward. As far as flowers specifically goes, we've been we've been very pleased. You know, we took some pricing actions last year.

We've been very pleased with how our volumes have held up. We did a little less promotion on on branded buns during the holidays. And again, we're very pleased with how our how our volumes held up. So So far, things have gone pretty well in that regard.

Speaker 3

Got it. And just one very quick for Steve. Steve, can you remind us of your hedging positions on the wheat cost? And then recently, there's some chatter that protein quality of the Red Winter may not be quite as good. Can you think about can you just talk about how it impacts your cost going forward?

Speaker 1

Yeah. Sure. If you if you recall, we basically use a hedging strategy to mitigate, you know, wheat flour costs. So we are well within our strategy of hedging four to seven months, and we typically are on the long end of that. So for 02/2018, we pretty much have our cost structure in place, so we feel pretty confident about, you know, knowing our cost for 2000 I mean, sorry, 02/2019.

You are right. There you know, the new crop is coming in. There is some protein concerns. Just like last year, you had a lower protein quality crop, which means eventually you'll have to blend that with higher spring wheat, which typically runs a little higher. But, that'll be a you know, we'll begin to talk about 2020 guidance later in the year.

But for 2019, we feel pretty good about where we are from a cost perspective.

Speaker 3

Got it. Thank you so much.

Speaker 2

Thank you.

Speaker 0

Our next question comes from Bill Chappell from SunTrust. Please go ahead.

Speaker 5

Thanks. Good morning.

Speaker 4

Morning.

Speaker 5

Kind of following up on Amit's questions. Know, Ralph, are you pleased with kind of where the cost structure is at this point, with where Project Centennial is at this point, and kind of what it's doing to quarterly numbers. I say that of, I think some of us, as we've now, what, three, four years into the program, would have expected a little more upside both to the quarter and to the year on the cost structure. I know that's been kind of a key thing you've been working on prior to taking over the CEO role. So maybe kind of help us understand, do you feel like you're going fast enough?

Do you feel like things need to accelerate? Is this kind of where you expected to be?

Speaker 2

It's kind of a tricky question to answer in the sense that as far as Centennial goes, yes, I am pleased. I think we've made tremendous progress with Centennial. What I'm not pleased about is the fact that we haven't been able to drop as much as we originally anticipated to the bottom line. I mean, Centennial fundamentally changed how we operate the company, how we look at the business, and I think those things put us in good stead for the longer term. But the frustrating piece is some of this cost inflation we're having to deal with now that kind of offset, if you will, some of the savings that we were able to generate.

As to whether things are going fast enough, things never go as fast as you want them to. You always wish that you could do things quicker. I said earlier that with regard to the supply chain optimization piece, in particular, we are being intentionally cautious there. We have a high fixed cost network. We've to be very careful about how we make choices around our network and what types of business we want to be in, what types we don't want to be in.

But overall, Centennial itself, yes, I am pleased. But again, the frustrating part is the lack of read through to the bottom line that we're trying to address now.

Speaker 5

Does there need to be another Centennial Plus? Just because I guess this is now the second year where costs have more than masked the Centennial benefits.

Speaker 2

Yeah. We have very structured formal initiatives around, our labor cost, around supply chain optimization. Now we're not laden with consultants like we were when we were undergoing Centennial, but we learned a lot from going through that process as to how to structure disciplined initiatives around discrete topics. So that's how we're handling those pieces going forward.

Speaker 5

Got it. And last one for me. Just on Canyon, any kind of update on on where you are on the the fresh or, I mean, the flat out version of the the product, you know, kind of ACV there?

Speaker 2

Yeah. The the StayFresh. Yeah. So

Speaker 1

can Canyon overall is doing great. I mean, they've they've got

Speaker 2

a fantastic team out there, totally engaged. They're they're excited. The, the business is performing extremely well. The frozen side of the business is actually exceeding our expectations. The stay fresh piece is slightly behind our expectations.

And, Bill, most of that has to do with consumer awareness. You know, a lot of gluten free shoppers aren't necessarily accustomed to to shopping gluten free breads in the bread aisle. And so it's it's taking us a little bit longer than we expected to to to draw them in. Right? But having said that, we are growing the Stay Fresh business and not only is our ACV growing, but so are, our churns in the store.

Speaker 5

Great. Thank you.

Speaker 4

Sure.

Speaker 0

Our next question comes from Tim Ramey from Pivotal Research Group. Please go ahead.

Speaker 6

Thanks so much. First is sort of more a comment than a question because I know you can't answer it. But your payout ratio is, you know, 78%, 79% right now, which I hear what you're saying about wanting to refocus the company on growth. But that's a super high payout ratio for a company that would like to grow and do acquisitions, as you mentioned. So just a comment that seems like that's something that ought to be addressed by the Board.

Where do you want to be? Do you want to be a yield stock? Or do you want to be a growth stock? And then to throw a question on that since I know you can't comment, the cost issues that you're discussing are not that unusual, I don't think. And we've seen this pattern, you know, several years in a row where you'll raise prices early in the year and then not get the volume and, become sort of a negative spiral in the second half of the year.

How is this different from what we've seen in the last two or three years?

Speaker 2

Thank you, Tim. Well, first of all, as I said earlier, maybe one of the things that makes it different is, as I said, we did take some pricing action in the back half of last year and we've been very pleased with how our volumes have held up. Our brands are continuing to perform well. Dave's, Canyon, Nature's Own, Wonder, they're all performing very nicely. And so I think that differentiates it perhaps from years past.

Speaker 6

Okay. Does that mean you feel okay about taking further pricing in the second half? Because I thought I sensed some hesitancy on that.

Speaker 2

I'm not going to comment on future pricing.

Speaker 1

Yes.

Speaker 6

Okay. Hey, thanks for your help.

Speaker 4

Thank you.

Speaker 0

Our next question comes from Mitch Pinheiro with Sturtevant Company. Please go ahead.

Speaker 2

Hey. Good morning. Good morning, Mitch.

Speaker 4

Hey, Ross, I was just curious. So you talked about visiting customers and and, you know, your own employees. But what what are your customers saying about the category and flowers? Anything you can share with us?

Speaker 2

Yes. I I can. Had had several good visits with some with some key, retail partners. I think the the the one constant among them is they're they're really looking for innovation in the in the fresh bread aisle. I mean, you you see the the same category trends that we do, the sort of the softness in that traditional soft variety category.

I think their hunger is really around new innovations. And we've we've certainly given them some of that between Days and Canyon and and Perfectly Crafted, but I think they'd like to see more of that. You know, there's a there's quite a few consumers that have have turned the perimeter of the store. They're seeking pitas and naans and sort of nontraditional type flatbreads, that sort of thing. I think they'd like to see like to see flowers bring more of that their way.

Speaker 4

And so, you know, hearing you know, you've you've mentioned, you know, the cost inflation, you know, throughout the call. And, you know, it it's pretty evident. I mean, your margins, you know, are are are are nice, but, you know, there's certainly room for improvement here with all your competitors facing the same exact challenges. And, you know, here's a chance for the supermarket, you know, the grocery industry to raise the value of the category. I don't see I don't see what the pressure is on on on pricing.

I mean, you know, it just seems to me with a consumer that is seemingly in okay shape from what we hear. I I just don't understand why pricing isn't a little more robust across the entire category. Can you talk about that?

Speaker 2

Yeah. Well, I mean, again, I'm not gonna I'm not gonna comment on future pricing. But I think, you know, for us, you know, ensuring that we are bringing consumers good value, good brands, good quality, and the retailers good service is primarily our focus. We'll worry about the rest as it comes along. That's that's really our focus, Mitch.

We believe we've got the best quality. We think we have the best brands, and we think we have the best service. And and we've gotta we've gotta continue to be that way to protect our brand the brand equity that we have.

Speaker 4

Okay. And then a couple just a couple others. Regarding your store branded, sales, they were up in the quarter. I was surprised that that there's gluten free store brand items. Usually, you know, the innovation is left to the brands and, you know, private label store brands pick up the the more commodity piece of the of the category.

What is there a change here?

Speaker 2

No. No. Not at all. As a matter of fact, that that's with one particular retailer for Canyon, and it it came with the acquisition, so to speak. They had they had had that business for quite a long time.

It's it's primarily just one retailer.

Speaker 4

Okay. Got it. And then and then when it comes to private label, any

Speaker 2

any any

Speaker 4

any change in pricing, on the private label side?

Speaker 2

We we took some pricing last year, Mitch. So yes.

Speaker 4

Okay. And then last question, on Tastykake. I haven't you don't really break out, you know, brands in in that area and how they're doing, but I I obviously, I I see that cake sales have been pressured. Is is it is it in the missus Freshly side? Is it tasty cake?

Is it both? And and what's you know, when do we start seeing I know it seems like things were getting better in this quarter, but when do you start when should we start anticipating some upside there?

Speaker 2

It's it's really it's really in it's really in both. And, again, you know, some of that some of that is, you know, due to the the competitive nature of that of that category and our, frankly, our relative brand positioning there. But some of it's also intentional. We've gotten rid of some really low margin business to turn our attention back to where we can make better margin. And as I said upfront, we've started to see some progress on the margin side of the equation.

And then over the top of that, we have some innovation and new product offerings slated for the back half and then forward that we think will help reignite that top line.

Speaker 4

Okay. You know, I guess one more just follow-up, to Tim's question about, about the dividend versus growth. When I when I calculate your free cash flow, it's fairly robust even that's after dividends. I'm not sure why, investors would think that that Flowers couldn't be a growth company while paying paying a dividend. Can can you speak to that?

Speaker 1

Yeah. This is Steve, Mitch. I mean, I mean, I wouldn't you know, I would would agree with your assessment when you look at our our overall capital allocation and you look at, you know, free cash flow. It continues to be a business that just drives, very strong free cash flow. So we believe with the right balance, that we can continue to pay a nice dividend as well as fund future growth within the company.

Speaker 2

Okay. Thanks for your time. Thank you.

Speaker 0

Our next question comes from Brian Holland from D. A. Davidson. Please go ahead.

Speaker 7

Yes, thanks. Good morning, gentlemen. First question forgive me, hopped on a little bit late, so apologies if you addressed this at all. But just curious, funds and rolls selling season around the July 4, weather seemed a little bit not in your favor. But just curious if there's any callouts there and if there was any, you know, in consideration of where you came in on revenue, was there a little upside left on the table if indeed weather was, a call out at all?

Speaker 2

Yeah. Brian, it's Ryals. The both of the holidays I would describe as as good, but not great. Some of that was certainly, due to the weather. But the the good part about it is our our sales execution this year was outstanding, particularly compared to last year.

I mean, the the sales team did a great job. Our sales were way down. So that sales performance was way up. Our partnership with the USO on the WonderBun promotion was fantastic. And so overall, it was a success.

Speaker 7

Okay. That's helpful. Thank you. And then on the margin side, you know, it's my experience that with your business, it's it's fairly easy, all things being equal, for pricing to flow right through the model. Clearly, that didn't happen this time around.

And I I understand about the brand investment, but I feel like that was part of the that was in the plan. So if I if I if I've got this right, I'm thinking that higher labor particularly was the incremental. I guess what I'm asking is, did labor get sequentially worse and was that the primary call out for why the pricing didn't flow through or is there another piece of this equation that I'm leaving out here?

Speaker 2

No. No. I I think that's I think that's the primary issue. And and, again, it's it's labor it's the it's the pure labor cost, but then it's also the high turnover. And that tends to come out in manufacturing efficiencies, were lower for the quarter, and that has an impact as well.

Speaker 7

Okay. Right. So understood. And then so then do I have that right then that that is that that has gotten sequentially worse, like q one to q two?

Speaker 1

Yeah. I mean, q two was, was slightly down compared to q one.

Speaker 7

Typically Got it.

Speaker 1

Typically, you'll see pretty strong efficiency performance in q one, but it did fall off more than usual in q two this year.

Speaker 7

And so so then if if we play this forward, you know, obviously, savings through 2018 had come in ahead of plan. You know, you couldn't have calculated the magnitude of labor impact. Obviously, freight was another was another issue since you you instituted Centennial. I'm just curious, do is there I mean, the next part that's out there, and it seems to be around supply chain optimization. I understand that you can't quantify this, but do you have something do you have something still left in the bag that you feel like is a significant, sort of catalyst for the trajectory of what we're seeing on margins in excess of what you've already gotten thus far?

Speaker 2

I I do. And and think think about it kind of in in three buckets. One, obviously maintaining the top line is is paramount. Right? That may that means,

Speaker 7

you

Speaker 2

know, making sure we're we're supporting our brands properly. We keep that good brand and growth that we're focusing on the right kind of sales, which means the higher margin type products. And then that then brings in number two, portfolio optimization. Right? Making sure that our mix is correct.

And then three, maximizing that plant plant level efficiency. And that's primarily the labor the labor issue. And then extending that a little bit into, you know, broader supply chain optimization, that's a little bit longer term. As I said, that'll take us a little while to do. We've gotta be very careful there.

But those those are the things that give me confidence that we can reach our long term margin targets.

Speaker 7

Okay. And then last question for me, just kind of on the m and a front. You know, you've done a really good job with Dave's Killer Bread, obviously. Canyon seems like another great opportunity, maybe potentially smaller magnitude, but still, you know, same really exciting opportunity, share growth, etcetera. And and and you're doing a great job of identifying these niches.

I guess two questions. One, when you start thinking about particular niches, is there one that stands out as attractive to you that's a hole in your portfolio, not speaking to any specific asset that may or may not be available? And then second, kind of the quality of assets, high level that are within the parameters of where you'd be looking, valuation, availability, attractiveness, just general thoughts on what that pipeline looks like today and maybe your readiness. And maybe put another way, mean, obviously, you've made the Canyon Bakehouse acquisition late last year. What is the appetite and what is your ability to digest something else in the near term while you integrate Canyon, get it on DSD, and also think about, you know, continuing to to attack, the the the chain, pressures?

Speaker 2

Okay. So I I I don't really wanna comment on specific niches or categories that we're looking at just because I really don't want to tip my hand there. But suffice it to say that we have a really good pipeline. As I said in the opener, we are continuing to be really proactive in the M and A market. So what I mean by that is we're reaching out instead of just relying on inbounds as we used to be able to do, you know, when we were just looking inside the core business.

So I'm really happy with our pipeline. I don't Brian, think you said you joined late. I don't know if you heard me say that we've we've hired a new VP of corporate development who's gonna continue to drive this. So I'm really, really happy about that as well. As far as our our ability to digest, I mean, I don't wanna I don't wanna intimate that that any integration is easy, but the you know, Canyon is is one plan.

It's in Colorado. We we basically integrated that already. You know, our sales team knows how to roll out items d s excuse me, DSD. So, I mean, we're we're we're positioned when the right opportunity comes along.

Speaker 7

Thanks, gentlemen. Best of luck.

Speaker 1

Thank you. That

Speaker 0

concludes the Q and A session. I will now turn the call over to Ryals McMullen for closing comments.

Speaker 2

Thank you. So in summary from this morning, while we definitely have some opportunity in front of us, overall I'm pleased with the actions we've taken so far to improve our performance. With a focus on brands, we're working to maintain our solid top line momentum and then coupled with that, we're zeroed in on a few specific areas of cost containment where if we can execute well, should put us on a solid path to continued bottom line improvement and enhance shareholder value. So thank you for joining us this morning and thank you for your interest in Flowers Foods.

Speaker 0

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.