Flowers Foods - Q3 2024 (Q&A)

Transcript

Operator (participant)

Good morning and thank you for standing by. Welcome to Flowers 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. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead.

J.T. Rieck (EVP of Finance and Investor Relations)

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. After today's Q&A session, we will also post an audio replay of this call.

Please note that in this Q&A.

As 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. In addition to what you hear in these remarks, important factors relating to Flowers Foods' business are fully detailed in our SEC filings. 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. Joining me today are Ryals McMullian, Chairman and CEO, and Steve Kinsey, our CFO. Ryals, I'll turn it over to you.

Ryals McMullian (Chairman and CEO)

Okay. Good morning, everybody. We are quite pleased with the strong performance of our leading brands in what continues to be a pretty challenging environment. While consumer value-seeking behavior pressured category sales, we did grow dollars and units in fresh packaged breads, and that growth drove the largest share gains in the category, which validates our investments in differentiation. In our other segment, execution of our portfolio strategy enabled sales growth as strong pricing initiatives more than offset volume losses. 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.

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

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Steve Powers with Deutsche Bank. You may proceed.

Steve Powers (Equity Research Analyst)

Great, thanks.

Can you hear me okay?

Ryals McMullian (Chairman and CEO)

Yes, Steve, good morning.

Steve Powers (Equity Research Analyst)

Okay, great. Good morning. I was hoping we could actually start with the areas of expansion. As we think about next year, both Dave's Snack Bites and Wonder just give a little sense for sort of the scale of those expansions and the ramp you're expecting. And I guess a little bit more detail around on the Wonder side, your confidence in the sweet baked goods category, which has obviously faced some pressure of late. And on the Dave side, just a little bit more detail of where you think you're going to get placement for those snack bites and just signs of confidence that you haven't. We're not at risk of overextending that brand, I guess, is the question.

Ryals McMullian (Chairman and CEO)

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 the early returns have been quite good. There's been a lot of enthusiasm from retailers. We noted the top 10 item at the NACS 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. 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.

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. Given the very high unaided awareness for Wonder. In terms of the DKB snack line, the bars continue to do well. The original three, the protein bars, 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, for example, 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 then beyond on that.

And then, of course, the snack bites are completely differentiated from that and in a different category 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 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, you know, these things take time. I mean, this is very much like a startup and, you know, it takes a while to get the ramp to build the consumer base. Some of these, you know, 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.

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

Steve Powers (Equity Research Analyst)

Okay, great. Thank you. And I'll pass it on. But I did want to ask Steve 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 true kind of efficiency or is that going to be something we should consider as we think about capital planning in 2025?

Steve Kinsey (CFO)

Sure, Steve.

This is.

Steve, I mean, the main reason for the change there is really just kind of.

The pace of spend for the year.

I mean, you're right, it's not necessarily ERP.

It's other.

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 into 2025, so you know, you should consider that as you think about next year.

Steve Powers (Equity Research Analyst)

Perfect.

Okay, thanks so much.

Steve Kinsey (CFO)

Thanks, Steve.

Operator (participant)

Thank you. Our next question comes from Bill Chappell with Truist Securities. You may proceed.

Bill Chappell (Managing Director)

Thanks.

Ryals McMullian (Chairman and CEO)

Good morning, Bill.

Bill Chappell (Managing Director)

Just want to talk a little bit about the sweet baked goods or the snack cake business. And just on the declines, are you seeing anything different kind of year in from Smucker's owning Hostess in terms of more competitive, more promotion or even pushing down into kind of the store brand type stuff? Or is this just the kind of, the continued kind of ups and downs.

Of the category for you?

Ryals McMullian (Chairman and CEO)

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

Speaker 10

Please hold.

Ryals McMullian (Chairman and CEO)

Bill, can you hear me?

Bill Chappell (Managing Director)

Yeah.

Ryals McMullian (Chairman and CEO)

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, pulling back on indulgent items. You've seen some weaknesses, you know, 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.

Bill Chappell (Managing Director)

Got it. And just to follow up.

As you've.

Seen this in the past, how long do you think it lasts? This doesn't seem to be a dire financial crisis. It's just pulling back. So do you think you will get back to growth as we move into 2025 or is it just too early to tell?

Ryals McMullian (Chairman and CEO)

I mean, I don't have a crystal ball, but I think it would be reasonable to think that at some point next year things start to normalize and the category gets a little bit healthier. You'll recall 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 and that's why we're excited about this Wonder brand. Tastykake is a great iconic Philadelphia brand, but for us, just speaking for us specifically doesn't play quite as well outside of that category. And I think you've seen that over the last several years, particularly as Hostess got stronger out of bankruptcy.

So pivoting a bit to the Wonder brand, we think can help us be more competitive with some of those stronger brands in the category, particularly if we deliver on the quality promise.

Bill Chappell (Managing Director)

Got it.

Sorry, one more.

On the promotional level of the bread bun and roll business, is it primarily coming from the largest competitor or are you seeing it from the smaller regional players as well?

Ryals McMullian (Chairman and CEO)

Yeah, I mean, 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 we've increased our promotions too. So it's across the category. However, 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.

Bill Chappell (Managing Director)

Got it.

Thanks.

Ryals McMullian (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Robert Dickerson with Jefferies. You may proceed.

Robert Dickerson (Managing Director)

Great. Thanks so much. Maybe just quick housekeeping. I think you said in the prepared remarks 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 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.

Ryals McMullian (Chairman and CEO)

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 move through the third quarter. The hurricanes had an impact, Rob, but not particularly material. Honestly. It did help. It was positive, of course, but not really that significant in the quarter. I think 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. And if you look at fresh packaged breads, our units were up some 70 basis points. We gained 20 basis points of dollar share, 20 basis points of unit share. Both of those the largest among competitors in the category.

Our innovation, our brands, our differentiated items continue to make a difference even in the face of a bit of a soft category at the moment.

Robert Dickerson (Managing Director)

Okay, great. And then maybe just more broadly speaking, you all said made the comments around the perimeter of the store doing a little bit better. Maybe that's helping certain subcategories of overall bread, like buns or tortillas. I'm just curious, maybe if you could just opine on that a bit, like someone's buying chicken on the perimeter of the store. I mean, I guess a burger you use in a bun, chicken, maybe you're going to throw it in a tortilla. 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 onto that. You always kind of comment on M&A and you say kind of the deal activities out there.

Right.

Are any of those areas that you actually would like to be bigger in just to kind of diversify that portfolio?

Ryals McMullian (Chairman and CEO)

In terms of the perimeter, you mean?

Robert Dickerson (Managing Director)

Yeah, just like buy a big tortilla brand now. We have tortillas, we have lunch bread and keto and buns.

Ryals McMullian (Chairman and CEO)

Yeah, I mean, look, we've said before we're looking across baked goods. So that picks up the perimeter, that picks up the freezer case, that picks up center store, picks up away from home and convenience, those sorts of things. So we're looking across the expanse of baked foods, which all together is a massive total category in terms of the trends. If you hearken back, Rob, the perimeter of the store was sort of a big deal pre-pandemic.

Right.

I think coming out of the pandemic, one of the questions we would get every single quarter was when do you expect the reversion to happen? When do you expect the reversion? We actually hadn't gotten that question in many quarters, but I think that that's a bit of what you're seeing now in terms of shopping patterns, but also the trend now to in home eating, just given the inflationary pressures and consumers trying to stretch their food budget. I do think that that trend 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 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.

Robert Dickerson (Managing Director)

Okay, great. Makes sense. And then maybe just a quick one, one last one just around the guide for EBITDA. If we think about what's implied, maybe for Q4, it seems like at least at the midpoint, there could still be a little bit of year over year margin improvement. A couple questions in here. The range for a quarter still seems a little wide, which is fair complicated backdrop. But I'm curious what could get you to the higher end, that implied margin guide for Q4. Maybe what gets you at the lower end and then is part of this just also kind of playing it safe just given the promotional environment all in and kind of how you're thinking about the price piece?

Ryals McMullian (Chairman and CEO)

Yeah, I think overall it's just a continued conservative outlook. Look, I get that we're into the fourth quarter and we should. On the one hand, you think, why don't you have better visibility? I think that we do have that visibility, Rob, but we're just trying to remain cautious just given the outlook. We started off the year when we issued guidance noting the things that could impact the year, including increased promotional activity. Some of those things have happened, but offsetting that has been fantastic execution on our savings program. Great execution of the marketplace, you know, continuing to grow our bread and roll units.

The drag on the business is, you know, away from home and primarily the QSR, the business which has been a bit weaker than we anticipated, honestly, just with this shift to in home, you know, due to elevated pricing and we've already covered, you know, the weakness in the cake business, the fresh packaged bread business is doing great. I mean, there's just, there's really, really no issue on that part of the business. It's really those other pieces. So your question, 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.

Robert Dickerson (Managing Director)

All right, great.

Thank you so much, Ryals. Appreciate it.

Operator (participant)

Thank you. Our next question comes from Jim Salera with Stephens. You may proceed.

Jim Salera (Research Analyst)

Hey guys, good morning.

Thanks for taking our question, Ryals.

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 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 move down and maybe any color on your private label piece in that category?

Well, would be helpful.

Ryals McMullian (Chairman and CEO)

Yeah. So yeah, we were finishing up the cycling of the strategic exits in the third quarter. I would say sort of mid single digits from strategic exits. The rest of it is kind of channel category dynamics, if you will. So mostly external factors, Jim, but I would also say the steps that we've taken in terms of pricing to improve the profitability of that business more than overcame the volume losses. So that's an important note to take away.

Jim Salera (Research Analyst)

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?

Ryals McMullian (Chairman and CEO)

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 in private label was down as well. Private label pricing has increased a little bit, Jim, and the price gaps have narrowed a bit as private label has gone 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.

Jim Salera (Research Analyst)

Okay, great.

And then I think you also mentioned in your prepared remarks it's possible we could see some incremental benefit if you have some new business wins that ramp up faster.

Just curious on what would be a.

Driver of kind of a faster or.

Slower ramp with new customers.

Is there anything that we on the outside can kind of look at that might give us some insight into if it's scaling faster or scaling slower?

Ryals McMullian (Chairman and CEO)

Yeah. So the new business for the remainder of the year has pretty much already been captured. Now, obviously we'll have more for 2025, 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. 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.

Jim Salera (Research Analyst)

Great.

I appreciate the thoughts, guys.

I'll hop back in the queue.

Ryals McMullian (Chairman and CEO)

Okay, thanks, Jim.

Operator (participant)

Thank you. Our next question comes from Mitchell Pinheiro. It's Sturdivant and Company. You may proceed.

Mitchell Pinheiro (Senior VP and Director of Research)

Yeah, good morning. So I guess when you, you know, your fresh bread category gains.

We're obviously.

At the expense, I guess a little bit of private label. But who's losing share? Is it broad based? Is it regionals, your major national competitors? Where are your gains being picked up from? Do you think?

Ryals McMullian (Chairman and CEO)

They are coming some from private label? They are coming from some of the regionals, although other of the regionals.

Are.

Doing pretty well, actually, and Pepperidge, for example, looking at syndicated data, look like they had a good quarter. I know they're promoting a bit more, but looks like they're also getting some lift, so, I mean, it's coming from around the category, but that's not really a new story. I mean, Mitch, as we continue to talk about, you know, being a leader in innovation and bringing differentiated products to the consumers, you know, that, you know, we're pulling business away from other competitors in the category due to that focus on innovation?

Mitchell Pinheiro (Senior VP and Director of Research)

I mean, is any of that coming in a geographic, you know, market dynamic like, you know, you happen to be winning more than east or west or? Can you talk a little bit about that?

Ryals McMullian (Chairman and CEO)

Yeah, sure. So it's been more recently, it's been stronger in, frankly in newer markets, the Northeast, the Midwest, et cetera, 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. There's, you know, there tends to be quite a bit more competitive activity on soft variety. I'm really kind of harping on soft variety. We're still higher than we were, 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. So there are differences in geography and you know, in the, in the newer geographies, you know, we're, that's that those are the areas where we are gaining the most share and what.

Mitchell Pinheiro (Senior VP and Director of Research)

So I mean, it's obviously very important.

To kind of grow your share in those newer geographies.

Are there any near-term obstacles that?

Are out there, 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?

Ryals McMullian (Chairman and CEO)

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

Mitchell Pinheiro (Senior VP and Director of Research)

Okay.

No, I guess I was more looking for a little obviously quicker share gains. I don't know exactly where you are today. You were a 10% share in the Northeast, say two years ago. I'm not sure where that is today. I know share gains, it's a very, you know, obviously hyper competitive business. I just thought perhaps, you know, there was something maybe stopping you from growing at a even quicker rate.

That's all.

Ryals McMullian (Chairman and CEO)

No, nothing specific. It's just, I think you hit it.

Right on the head.

I mean, this is a competitive category and 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 so that we don't get, you know, in a situation 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.

Mitchell Pinheiro (Senior VP and Director of Research)

Okay.

And then when I haven't really, you know, looked at this lately, but you know, you used to have, you know, your capacity utilization. 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?

Where are you?

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

Ryals McMullian (Chairman and CEO)

Sure.

So our OEE now is running obviously depends on when you look, it gets a little bit more pressured in the summer when we're so busy and full. But 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 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's.

Sorry. In terms of overhead coverage we've talked about before, the strategic exits 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 with higher margin business, that also is going to have a direct bottom line impact.

Mitchell Pinheiro (Senior VP and Director of Research)

Okay, and then, you know, you know.

I.

Now we're not ready to talk 2025 guidance, but you know, you're kind of nipping at the heels of your EBITDA margin on the lower end of, you know, you got 12%-14% sort of range that's the long-term range. I mean.

Is it too early to?

Call that you can get that lower end next year? 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?

Ryals McMullian (Chairman and CEO)

So yeah, I mean, we're not ready to talk 2025 yet, but we can talk long term, Mitch. And you know, certainly we think it's, you know, within reach. We think frankly 13%-14% is in reach. And if you 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. So yeah, I think that we've shown between the growth of our branded business, the shift in the portfolio, the cleaning up of the portfolio, the jettisoning of low margin business, all of our savings initiatives, the OEE we talked about, all these things, factor in network optimization, et cetera, not to mention accretive M&A, we feel quite confident that over time we can get to that low teens EBITDA margin level.

Mitchell Pinheiro (Senior VP and Director of Research)

Okay, all right, well great.

Thank you. Thank you for your questions.

Ryals McMullian (Chairman and CEO)

Okay, thanks Mitch.

Operator (participant)

Thank you. And as a reminder to ask a question, please press Star one one on your telephone. One moment for questions. Our next question comes from Max Gumport with BNP Paribas. You may proceed.

Max Gumport (Director of Equity Research)

Hey, thanks for the question.

So you're clearly observing an increasingly challenged U.S. bread category as consumers continue to shift to the perimeter of the store. And also as you see a ramp up in competitive activity in the second half. 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, at this point in time, should we be expecting that these category pressures persist through a meaningful portion of 2025? Thanks.

Ryals McMullian (Chairman and CEO)

Yeah, sure. I mean, again, no, no crystal ball. But you know, Max, we've, we've been through this many, many times before in our history. You know, when the consumer feels a little bit of weakness, you know, there's, there's trade down, you know, consumption patterns shift, you know, shift perimeter of the store. All the things that we've talked about, but they've always proven to be, be temporary. So we're, we're working hard on the things that we can control. 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.

Max Gumport (Director of Equity Research)

Great.

And then on Dave's Killer Bread, I'm talking about the classic bread offering. Are you concerned by the slowdown you're seeing in trends for that business? I think in the most recent scanner data, it's flattish, maybe even just down slightly in dollar sales terms. I realize a lot of that could be pointed at the category inflation pressure, but 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, it had been over the past several years. I'll leave it there.

Thanks.

Ryals McMullian (Chairman and CEO)

Yeah, sure. Thanks, Max. And we can talk about this offline too if you all. We saw your note and the data, our data does not match up with yours. Dave's is still positive. It is not down both in terms of dollars and units. It's up sequentially. It's down from last quarter, but there's always seasonality. If you go back and look as you get towards the back half of the year, there is a little bit of seasonality in our category, but Dave's is still growing dollars and units.

Max Gumport (Director of Equity Research)

Great, thanks very much.

Ryals McMullian (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. I would now like to turn the call back over to Ryals McMullian for any closing remarks.

Ryals McMullian (Chairman and CEO)

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.

Operator (participant)

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