Earnings Call Transcript
FLOWERS FOODS INC (FLO)
Earnings Call Transcript - FLO Q1 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by. And welcome to the Flowers Foods First Quarter 2020 Results Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, J.T. Rieck, Senior Vice President of Finance, Investor Relations. Thank you. Please go ahead, sir.
J. T. Rieck, Senior Vice President of Finance, Investor Relations
Thank you, and good morning, everyone. Yesterday evening, we released our first quarter results. Our earnings release and quarterly slides presentation are posted on the Investors section of the Flowers Foods website. Our 10-Q is available on the SEC website. Before we begin our discussion, please be aware that it may include forward-looking statements about the Company's performance and other matters such as the impact of the COVID-19 pandemic. 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 the 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 this morning are Ryals McMullian, Flowers Foods' Chief Executive Officer; and Steve Kinsey, Chief Financial Officer. Ryals, I’ll turn the call over to you.
Ryals McMullian, CEO
Okay. Thanks, J.T. Good morning, everybody. I know we're one of your last calls in this, what's been a really hectic earnings season, I'm sure for all of you. So, thanks for joining us today. On behalf of Flowers, I do want to express my hope that you and your family and the ones you care about are staying safe and managing through this as best you can. These are certainly challenging times for everybody. And we've all had to pretty much adjust every aspect of our lives, both at home and at work. Our collective thoughts and prayers are certainly with all of those who have been affected by the virus, including members of our own Flowers family. As we work to manage through the crisis, we've remained committed to three key priorities: First and foremost obviously, it's imperative that we maintain a safe workplace and support our employees in every way possible; second, it's crucial that we fulfill our obligation as a key part of the nation's food supply; and third, as always, we're committed to supporting the communities that we serve. As far as our team goes, it's really difficult to adequately describe how incredibly proud I am to serve them. Across our Company from plant operations, to sales, distribution, head office, and support staff, their performance has been flat out amazing. I firmly believe that our success during the quarter reflects the collective loyalty, commitment, and passion of our team. Our core values of service, integrity and character have always been and always will be our guiding light. And those values served us well as we navigated previously uncharted waters. I'm especially grateful for the hard work, dedication, and personal sacrifices of our frontline workers. Last month, we distributed incremental bonuses to our heroes to recognize their extraordinary efforts. Now, our top priority is ensuring the health and safety of the team. And in the early days of the crisis, we established a pandemic steering committee and a task force led by senior Flowers executives. We carefully followed guidance from health authorities, and we've instituted a number of safeguards for the protection of our employees including enhanced sanitation, wellness and temperature screenings, travel restrictions, Company provided masks, remote work, and of course social distancing. We've also enhanced our benefit programs that are enabling our employees affected by the virus to care for themselves and their families. Despite these efforts, we have had some confirmed cases. And while certainly one affected employee is one too many, we have been fortunate in that we've experienced relatively few cases overall. And I think that robust bakery training, guidance, vigilance, constant communications from our pandemic task force, are largely responsible for this result. So, heartfelt thank you to all the members of the steering committee and the task force, as well as our regional vice presidents, plant general managers, and the broader team for helping us maintain the safe conditions of our facilities. We take very seriously our responsibility to help feed America, and we have an enormous responsibility to ensure our products are readily available to our consumers. Now, because our bakeries are strategically located around the country and close to the markets they serve, we were able to supply the market despite the unprecedented increase in retail demand. During the height of the panic buying in March, we streamlined our product assortment, just like we do in advance of a hurricane, but in this case, we did it virtually nationwide. That allowed us to maximize production by focusing on longer runs of our best-selling items. Furthermore, we were able to reallocate some of our foodservice production to support the growth in the retail channel. Our production teams did an amazing job, keeping up with the changing marketplace and ensuring our customers and consumers had the products they needed. For a number of weeks there, they were literally running around the clock. And our independent distributor partners played a key role and continued to faithfully serve their markets despite the personal risk. And finally, we have a deep connection to the many communities we serve. And as always, we're supporting them during this challenging time. That includes donations of food and supplies from our bakeries throughout the country to their local food banks, hospitals, and first responders. Like many companies, this year, we're conducting our annual shareholder meeting virtually. And so, we made the decision to donate a portion of the funds budgeted for that meeting to Second Harvest of South Georgia, in conjunction with Feeding America. Flowers is a Feeding America mission partner, donating more than $10 million worth of baked goods last year. And this most recent gift enables the provision of approximately 450,000 meals for the hungry right here in South Georgia. Some of our bakeries with underutilized foodservice lines have worked with Feeding America's regional warehouses to provide millions of buns to food kitchens in need. So, these three priorities, maintaining a safe workplace, helping to feed America, and supporting our communities have been our North Star and have helped to guide us through. So, later in the call, I'll discuss the current business environment and the steps we're taking to deal with this extraordinary situation. But first, I want to turn it over to Steve to review the details of the quarter and share our current outlook for 2020. Steve?
Steve Kinsey, CFO
Thank you, Ryals. And good morning, everyone. I’d like to also echo Ryals’ comments and express my sincere thanks to our team whose efforts during this time have been nothing but outstanding. Our quarterly results are important. But, in this unprecedented environment, we think it's even more important to go beyond just reporting the numbers and also provide as much clarity as we can about what drove our performance in the quarter, what we are seeing presently, and what could occur over the remainder of the year. Our look into the future is no better than anyone else. But, we are committing to offering as much transparency as possible, given the uncertain times in which we find ourselves. Now, turning to the quarterly results. Given our first quarter is 16 weeks and includes the first two weeks of April, our results were strongly influenced by COVID-19. Looking at the cadence of our top-line during the quarter, like most food companies, we experienced a soft January. Sales improved through February and early March, prior to the widespread shelter-in-place orders. Once those orders took hold in mid to late March, we saw our retail sales accelerate, as consumers began eating more meals at home. As a result, we generated record earnings and sales, and delivered the second consecutive quarter of adjusted EBITDA margin improvement. Consolidated sales increased $85.5 million or 6.8% quarter-over-quarter. We estimate that sales increased by approximately 6.5% to 7.5% due to the impact of the COVID-19 pandemic in the quarter. Price mix drove 6.2% of the sales increase, with the main factor being the shift in mix to branded retail items due primarily to consumers eating more meals at home. Volumes contributed 0.6% to the overall sales increase with retail channel volume growth offsetting declines in the foodservice and other non-retail channels. Looking at sales by channel. Branded retail sales increased $133.8 million or 17.7%. Our brands continued to thrive with particular strength from Nature's Own, Canyon Bakehouse, Dave's Killer Bread, and Wonder. Store branded retail sales decreased approximately $1 million or 50 basis points. Increases in sales of breads, buns, and rolls were offset by lost store branded breakfast business and lower volumes in store branded cakes. Foodservice and other non-retail sales decreased by $47.3 million or 15%. Lower volumes due to business disruption for most of our non-retail customers caused by the pandemic drove most of the decline. We saw these declines across all categories of our foodservice business, including QSR, broadline distribution, and schools and other institutions. In the quarter, gross margin, excluding depreciation and amortization, increased 190 basis points, as the mix shifted to higher priced branded retail products. Partially offsetting that benefit were $4.1 million related to appreciation bonuses paid to frontline workers, and $1.7 million of startup costs incurred with the ongoing conversion of our Lynchburg, Virginia facility to an Organic bakery. Excluding the items affecting comparability, detailed in the release, adjusted SG&A expenses increased 70 basis points as a percentage of sales. The shift in product mix from non-retail to branded retail resulted in higher distributor distribution fees. Workforce related costs increased primarily due to $2.1 million of appreciation bonuses paid to frontline workers, also due to performance, we recorded higher employee incentive costs. Considering the economic uncertainty, during the quarter, we recorded additional bad debt allowances of $2.7 million for certain foodservice customers. GAAP diluted EPS for the quarter was a loss of $0.03 per share. This loss was driven by a $0.41 non-cash charge related to the termination of a defined benefit pension plan. During the quarter, we transferred the remaining benefit obligations and administrative responsibilities of our largest defined benefit plan to a highly-rated insurance company. This was done as part of our pension risk mitigation strategy, which has helped to significantly reduce our exposure to changes in pension liabilities due to falls in interest rates. We are pleased that this transaction was completed in line with our forecasted financial impact, both cash and non-cash. Excluding this charge and the other items affecting comparability, detailed in the release, adjusted diluted EPS in the quarter was $0.41 per share, up $0.09 compared to the prior year quarter. Based on our best judgment and analysis, we estimate the changes in the marketplace as a result of the pandemic caused GAAP and adjusted EPS to increase by approximately $0.09 to $0.10 per share. Turning now to our balance sheet, liquidity, and cash flow. In the first quarter of fiscal 2020, cash flow from operating activities increased $10 million to $106.2 million, capital expenditures were $21.7 million, and dividends paid were $40.3 million. Our financial position remains strong. At the end of the quarter, net debt for trailing 12-month adjusted EBITDA stood at approximately 1.8 times, down from 2 times at 2019 year-end. Given the significant impact that COVID-19 has had on global financial markets, out of an abundance of caution and to ensure liquidity in this uncertain environment, during the quarter, the Company drew an incremental $200 million on our credit facility. At quarter-end, we held approximately $253 million in cash and cash equivalents and had $266.6 million of remaining availability on the credit line. All told, we have been pleased with how the business has performed in this uncertain environment, and we expect to reduce these excess borrowings over time. Now, turning to our outlook for the rest of 2020. As we think about the year going forward, like most companies, we are navigating an uncertain business environment. And putting together our outlook, we balanced our outsized first quarter results against potential scenarios that could play out over the rest of the year. Based on this analysis and the most likely scenarios, we are forecasting sales growth in the range of 2% to 4%. This includes the 53rd week, which is expected to contribute approximately 1.5%. We are forecasting adjusted EPS to be in the range of $1 to $1.08 per share, which includes the impact of the COVID-19 pandemic. As I said, there are a wide range of outcomes, some of which could result in sales and adjusted EPS outside of the ranges we are providing today. In a moment, Ryals will share more color on the factors we considered when setting guidance. For 2020, we are targeting capital expenditures in the range of $95 million to $105 million, which includes approximately $19 million related to the conversion of our Lynchburg bakery to an organic production facility. We expect continued strong cash flow generation. And our capital allocation priorities and philosophy remain consistent with our focus on maintaining and maximizing return on invested capital and growing shareholder value. Thank you. And now, I'll turn the call back to Ryals.
Ryals McMullian, CEO
Okay. Thank you, Steve. Well, suffice it to say that the current situation is certainly unlike anything we've ever seen. To provide you with some perspective, I'd like to walk you through the environment we saw in the first quarter, how we responded to that and then what we're seeing now so far in the second quarter. As Steve said, the quarter began with sales roughly flat for the first 10 weeks. Like a lot of the food industry, January was particularly weak for us. We were up against a difficult comparison relative to the prior year, primarily due to early SNAP payments and some winter storms that occurred in '19. We saw things begin to recover in February and early March. And then, at the outset of the crisis, we saw a jump in net sales, with our week 11 up approximately 12% as consumers began to stock up on groceries in anticipation of stay-at-home orders, and that performance continued until the last week in the quarter, which was comping in against a really strong Easter a year ago. Sales momentum then resumed in the second quarter, with the first three weeks coming in at approximately 7% to 8% over last year. The primary driver of the sales growth has been our branded retail business, which is experiencing growth far more than we would normally expect under normal circumstances, having increased 17.7% in the first quarter. During the peak of demand in March, our weekly branded retail sales growth exceeded 70% versus the prior year. In the final weeks of the quarter, the rate of growth did moderate but remained elevated at about 20% above prior year. Looking at the overall category. While it showed some nice growth, I am happy to report that we outperformed the category by a large margin. IRI data shows dollar sales of fresh packaged bread in the quarter were up 13% while Flowers branded bread sales grew 21.2% in the track channels. Our top brands performed especially well. Tastykake was up 3%, Nature's Own was up 18%, Wonder was up 30%, Dave's Killer Bread was up 32%, and Canyon Bakehouse was up 77%. As I mentioned earlier, our financial performance in the quarter was primarily due to our ability to quickly respond to marketplace demands. From the very beginning of the crisis, we streamlined production and sped up service to the market, and our customer shelves were in large measure well stocked. Also contributing to market share gains were new products from our leading brands, which continued to attract consumers, and our DSD distribution model. And in times of rapidly increasing demand, like what we saw in the quarter, that advantage becomes even more apparent as our independent distributors work tirelessly to keep product on the shelves. Not only did that distribution advantage result in higher sales in the quarter, but we also benefited from much greater numbers of consumer trials. For example, one major retailer reported that more than 2 million households tried our brands for the first time during the quarter. That's just one retailer. And we attribute that largely to our quality and the availability of our products. So, we certainly hope to retain a number of these new consumers and realize a longer-term benefit as a result. As consumers spend more time at home, their shopping behavior has also changed, with fewer in-store visits and greater use of online shopping. And we think this will continue going forward. So to attract and retain these new digital consumers, we shifted the advertising dollars away from traditional media and increased our e-commerce budget. The result of the shift in consumer activity and our greater emphasis on the e-commerce category was a significant increase in bread sales through that channel in the quarter, much of which occurred in the last six weeks. E-commerce sales and track channels with Nature's Own fresh bread and rolls increased 80%, DKB was up 86%, and Wonder was up 274%. We believe the advantages of powerful brands are even more pronounced in the growing online channel. And we hope to attract many of these new buyers by working to build strong, meaningful connections with them. Now, in contrast to the strong retail sales, foodservice results have been pressured, as many restaurants closed or had to sharply curtail service. The timing of the decline directly corresponds to the much higher retail demand that we saw as the crisis unfolded. As states began to implement stay-at-home orders and other business restrictions, our foodservice results were negatively impacted beginning in mid-March and then worsening into April. So, to give you a sense of the magnitude of that decline, in the final four weeks of our first quarter, non-retail sales were down more than 40% compared to the prior year period. Despite the decline in non-retail sales though, our adjusted EBITDA margins did increase 120 basis points. Again, a primary driver of that margin expansion is the flexibility of our bakeries, many of which can produce a variety of products that serve both retail and non-retail customers. So, as the demand for foodservice price declined, we were able to shift production to our retail products, which obviously were experiencing much greater demand. So, although total volume in the quarter was relatively flat, it was that mix shift combined with lower stale product return that primarily drove the margin expansion in the quarter. Opportunities often come disguised as problems. And our recent results are particularly instructive relative to one of our strategic priorities, portfolio optimization, which we continue to work on, even as we manage through the crisis. Our performance in the quarter illustrates the significant potential of our optimization work. Combining the right portfolio mix with an optimal bakery network structure can drive significant margin improvement. And these results have strengthened our team's resolve to accelerate our work in this area and position ourselves to deliver improved margin performance over time. So, that's really what we saw in the quarter and how we responded. And I certainly hope that you can see from our results the strength and commitment of our team and the steps we've taken to ensure our success going forward. Now, to give you a sense for what we're seeing so far in the second quarter, branded retail sales certainly remained below the peak levels we saw in March but are holding strong with 20%-plus year-over-year growth rates. Foodservice results have improved slightly from the first quarter, but they do still remain depressed. So, as I said, overall, so far in the second quarter, we're seeing total year-over-year weekly sales growth around 7% to 8%. Looking forward, it's really anybody's guess where the market will find equilibrium. As I'm sure many of you have, as I've reviewed white papers and other resources, it seems to me that you can find research to support just about any position you want to take. To paraphrase Churchill, life would be intolerable if we could foresee to any large extent the unfolding course of events. So, at the end of the day, we don't know better than anybody else exactly how or when the market will change, but it does seem reasonable to assume that retail sales will eventually return to more normalized growth as people return to work and school and spend less time eating at home. And when that occurs, we would expect our non-retail business to benefit as restaurants open for more normal service and schools and workplaces, drive cafeteria and vending sales. The real question is the trajectory and the speed of that recovery. On the one hand, you can imagine a large amount of pent-up demand with consumers kind of itching to get back out in the world as things began to reopen. But on the other hand, you can also imagine many consumers remaining cautious for some time to come, until they're convinced that the risk of eating out is acceptable. I think in particular about the travel and lodging industries and how long it might take them to fully recover. Less business travel, in my mind, means a lot less eating out in restaurants. In any event, life is unlikely to return completely to normal right away. Furthermore, summer holiday spending may remain muted to accommodate household-only celebrations. In fact, one-third of consumers already report their Memorial Day plans will be different this year due to the virus. How these changes of plans might affect the summer bun season is just one of the many factors we've taken into account as we think about our outlook for the balance of the year. Given the business shutdowns and the resulting high unemployment, it's also likely that we're already experiencing a recession. We have a diversified portfolio of products that target various price points. But our margins could be impacted if consumers decided to trade down from premium brands. The good news for us is that because the vast majority of our business is fresh DSD, we're able to quickly react to changing market dynamics and adjust our mix to meet whatever the market demands. So, looking ahead, as Steve mentioned, while we did have a very strong start to the year, the reality is that lack of visibility does make predictions very difficult. We've tried to give you at least a sense for what variables both positive and negative could impact our business. Barring extraordinary circumstances, we feel comfortable that our current guidance range is appropriate. While there are certainly scenarios in which our earnings could come in above the range for now, and given the facts available to us, and keeping in mind the summer bun season is still ahead, we expect our results to fall within existing guidance. In summary, we'll do our best to position ourselves to succeed no matter what the environment. Now, as I've consistently reminded our team, while it was vitally important that we manage well through the crisis, it's equally important that we manage well as we come out of the crisis. And that's why we got to keep one eye focused on the future and not lose sight of our four strategic pillars: Focusing on our brands; prioritizing improved margins; pursuing smart M&A; and developing the team. Our brands are strong and they're driving growth. Our margins have improved for two consecutive quarters. And we expect our supply chain and portfolio optimization program to propel further improvement going forward. In fact, we remain committed to the $10 million to $20 million in savings for 2020 that we quoted to you in February, despite the disruption from the virus. And while we can't comment on specific M&A targets, our recent acquisitions continue to generate strong results. And we're actively pursuing similar acquisitions to help drive growth in the future. And finally, our talented and dedicated team is performing exceptionally well under very difficult circumstances. And they've adjusted nicely to remote working, utilizing a variety of technologies to stay connected with each other and the business. In fact, personally, I've been very pleasantly surprised at how well this has worked for us. And like many companies, we will likely consider increased use of these technology platforms and permanent changes to remote work policies going forward. In this period of heightened uncertainty, our business is well-positioned to thrive. With weekly data on sales trends, the ability to shift our production mix quickly, and an advantaged distribution network and a strong liquid capital position, we can capitalize on opportunities as they present themselves. And rest assured, we're doing everything in our power to do just that. With that, Julie, if you're ready, we'll open up the line for questions.
Operator, Operator
And your first question comes from Bill Chappell with SunTrust.
Bill Chappell, Analyst
Thanks. Good morning.
Ryals McMullian, CEO
Good morning.
Bill Chappell, Analyst
I hope you and your families are doing well.
Ryals McMullian, CEO
Thank you. You as well.
Bill Chappell, Analyst
I wanted to discuss foodservice further. Could you remind us of the breakdown between quick-serve and fast-casual, as well as your exposure in foodservice? Specifically, how does this relate to the states that are reopening at different rates, such as California compared to Georgia?
Ryals McMullian, CEO
Sure. Bill, we normally don't break out the foodservice segment into those discrete items, but just speaking overall, it's about 20% of our business overall, foodservice. And we generally serve all the channels within foodservice, whether that be broadline or vending or QSR restaurants, that sort of thing. So, it's fairly broad across all those categories. Obviously, as the lockdowns began and restaurants closed, the effect was pretty immediate on the foodservice business. More recently, we've seen the QSR-oriented folks, the ones that are able to maintain drive-thru service, a little bit on the takeout side, have started to come back a bit. And even within that, in the QSR segment, there are kind of those that are doing better than others. Some of have maintained pretty good base of sales, all things considered, whereas others have experienced a pretty precipitous drop-off in business. Obviously, the sit-down restaurants, the fast-casual type things, they can't host any patrons. They've been significantly affected, which in turn significantly affected our foodservice business.
Bill Chappell, Analyst
Got it.
Ryals McMullian, CEO
Now, as states start to reopen, it's a little too early I think to really tell. As I mentioned in the prepared remarks, we have seen volume starting to come back, but it's been rather slight so far. Just kind of, I would say, over the last maybe two to three weeks, we've seen a little bit of improvement there, but not enough to call it a trend just yet.
Bill Chappell, Analyst
Got it. Regarding costs, particularly for promotions and advertising, how does your promotional schedule or advertising strategy change, especially with ad rates decreasing on TV and possibly in other areas over the next few months? Are there any offsets, such as plans for additional bonuses or similar items included in your guidance?
Ryals McMullian, CEO
Sure. Well, on the promotional side, I mean, we work retailer-by-retailer to basically incorporate the plans that they would like to put in place. Overall, I would say, promotional activity has been a little bit lower during this period. Advertising dollar-wise, as I mentioned, we did have a pretty robust advertising budget set for the year, but we have shifted some of those dollars away from traditional media. And in addition to that, actually implemented some increases, mostly targeted at digital and the e-commerce channel.
Bill Chappell, Analyst
Got it. Okay. Thanks for the color. Stay safe.
Ryals McMullian, CEO
Sure. Thank you.
Operator, Operator
And the next question comes from Rob Dickerson with Jefferies.
Rob Dickerson, Analyst
Great. Thanks so much. Good morning, everyone.
Ryals McMullian, CEO
Good morning.
Rob Dickerson, Analyst
I too hope your families are doing well. It sounds like everyone at Flowers is doing a great job providing bread to the United States. So, thank you for that too. So, I guess, I have a bunch of questions. I'm going to try to keep it short though. In terms of the guidance kind of like you said upfront, you said, you're basically the last of those reporting on a calendar basis. We've had companies lift guidance, keep guidance, increase guidance. You're holding guidance for the year and speaking more specifically to the top-line. But obviously, the first quarter came in very, very strong, given the COVID lift. And then, you have comments around the first few weeks of the quarter, around 7% to 8%. So, I guess, the first question I have is, I'm not sure if you can potentially dimensionalize your base case. And if we think about branded retail versus private label versus foodservice. And I just ask that obviously, because once you ex out the 53rd week, we’re kind of talking, let’s say, 1% to 2% organic. But, the first half of the year, obviously seems fairly strong. So, trying to understand better what could decelerate maybe in that back half? And I know you mentioned, buns this summer, but still, just given what that first half could be, it seemed like a little bun pressure might not be that big of a deal. And then, I have a follow-up.
Ryals McMullian, CEO
Sure. Let me begin, and Steve may want to add some thoughts. We considered various factors when developing our guidance. Ultimately, we decided to maintain our existing outlook. In evaluating potential outcomes for the rest of the year, we took into account the exceptional results from the first quarter while balancing that with the uncertain outlook for the remaining three quarters. We believe it is prudent to stay within our current guidance range, which reflects the most likely scenario based on what we know right now. The main area of uncertainty revolves around how things will stabilize. Specifically, we are curious about how long the elevated retail environment will persist and the pace of recovery in foodservice, as well as how these two elements interact. The nature of the foodservice recovery is also critical. If the quick recovery mostly benefits the quick-service restaurant sector, which has the lowest margins in our foodservice business, it would not be an ideal outcome for us. We also discussed how the summer bun season might be impacted, considering the current restrictions in Florida, where beach rentals are not fully operational and are limited to in-state residents with mandatory waiting periods. These factors could disrupt our important summer bun season. At this point, it’s simply too early to make a definitive statement. We believe that the most cautious approach is to maintain our guidance, as adjusting it seems unnecessary. We are confident in the range we provided, but it’s also too early to consider any further changes. Steve, do you have anything else to add?
Steve Kinsey, CFO
Yes. I would like to add one more point, Rob. The unemployment rate remains a national concern and it affects consumers. Ryals noted in his comments that there is a trend of moving from premium to non-premium products, even in retail. As he mentioned, to meet market demands, we responded as we typically do with hurricanes by producing long runs of products to minimize changeovers. However, as the market stabilizes and we begin to reintroduce some of our product assortment, there is also a risk of shifts in consumer behavior, including dining at home. This factor raises some concerns. When you combine this with the recovery trajectory in foodservice and how the country begins to reopen, we felt it was wise to maintain our current position until we gain more clarity.
Rob Dickerson, Analyst
Okay. That all makes complete logical sense. And just for the follow-up, this is more of a, I guess, kind of a bit of a theoretical question around DSD. You mentioned there was a larger shift to online. So, I guess, one is, just obviously in the near-term there will be no change to your DSD system, but kind of more conceptually, do you need to think about, if there are longer-term effects and how Flowers would address those? And then, really quickly, just any commentary maybe from you Steve, just on the go-forward, mainly in Q2 around any incremental SG&A costs, driven by COVID? Thanks.
Ryals McMullian, CEO
Yes. Good question, Rob. And, it is fascinating to watch these changing market dynamics. The rise in e-commerce, overall it's still pretty small. I mean, we quoted you some pretty high percentage growth numbers, but bear in mind, that's off of a relatively small base. But, we believe that some of these changing behaviors might be permanent. And as consumers were almost forced in a way to adopt a different way to grocery shop, they've gotten more comfortable with it along the way too. I mean, you guys have seen the number of employees that Instacart for example is hiring. I mean, that alone demonstrates just the wild growth of this. And so, as the marketplace changes, we'll have to change with it. Certainly not prepared to comment on any changes to our distribution system. We don't have any plans to do that currently. But, certainly, as the market changes, it's incumbent upon us to evolve with it.
Steve Kinsey, CFO
Yes. Rob, just one final follow-up on Ryals’ comments is that most of the surge buying actually occurred in physical stores, primarily through click-and-pick. This trend drove Instacart and other major retailers, where consumers were ordering online but either picking up their orders or opting for home deliveries. They weren't necessarily reaching out to order online through other channels. Regarding SG&A costs, these will primarily depend on the mix of products going forward, especially when you consider distribution discounts. We also anticipate some increase in workforce-related costs if the growth continues in the 20% range or around the 7% to 8% that Ryals mentioned. So, nothing really out of the ordinary. It’s just some of the same factors we’ve observed historically, although possibly influenced by different conditions than before, but with the increased workforce. Currently, we discussed heightened accounts receivable write-offs, but the truth is our business is so short-term focused that we believe we have a good grasp on that weekly. Unless something catastrophic happens, I don’t expect that to escalate significantly. Therefore, we feel comfortable with that.
Ryals McMullian, CEO
Rob, this is Ryals. I just want to circle real quick back to the guidance question and say one more thing about it. I do want to make sure that it comes across as we are optimistic about the business. We were optimistic before the crisis and we're still optimistic now. But we do need to be responsible and temper that optimism against the lack of visibility that's ahead. But, having said that, we certainly believe in our brands, we believe in the strategies behind the brands, the resources we're deploying behind them, our portfolio and supply chain optimization working, all of these are net positives. And as I mentioned in the prepared remarks, that work has in large measure continued on, even as we manage through this process. So, in very large measure, all that remains on schedule. So, we do still feel very, very good about the business. It's just an unprecedented uncertain environment, simple as that.
Rob Dickerson, Analyst
Great. Doing a great job. Thanks so much.
Ryals McMullian, CEO
Thank you, Rob.
Operator, Operator
And your next question comes from Mitch Pinheiro from Sturdivant & Company.
Mitch Pinheiro, Analyst
Hey, good morning.
Ryals McMullian, CEO
Good morning.
Mitch Pinheiro, Analyst
I have a couple of questions. I'm curious about how you determine the COVID sales benefit to your business. Did you compare your plans to last year? How do you arrive at a figure like that?
Steve Kinsey, CFO
Mitch, we reviewed our performance from January through February and tested several scenarios based on the trends we observed in those months. We also adjusted our projections considering possible outcomes for the second half of the first quarter, particularly during the holiday period. We believe we made a thorough effort in this regard. We approached this analysis through both our insights group and our FP&A and accounting teams, examining different perspectives on sales trends.
Mitch Pinheiro, Analyst
I'm curious about your customers' perspectives during the peak of the lockdowns. When people went to supermarkets, the shelves were empty. I assume your customers would have taken any available product, including fresh bread. At that time, did they keep their usual ordering patterns for your brands and private labels, or did they just accept whatever they could find? Did your team decide to halt private label production? How did that situation unfold, and how is it developing now?
Ryals McMullian, CEO
So, Mitch, I mean, at the end of the day, the retailers want the shelves stocked. Now, even with the exemplary service that we provided, I might have sat here and told you that we didn't have some out of stocks. I mean, the panic buying was so large, particularly around our week 12, which I think was the peak of it for us, it was super hard to keep it fully stocked 24 hours a day. But like I said, we shifted production over from foodservice to help support. And as far as the private label branded mix, in order for us to get that much production out faster, we have to eliminate changeovers. And so, what you want to do is get the longest runs you can of the best-selling items. And that's how you get to the market the fastest. The changeover times, changing different private label bags and things like that eats up so much time during the day that it does impact your ability to get enough products out. So, that's why just like in a hurricane in Florida, that's why you go to that limited SKU assortment, so you can get as much out as possible. Just this time, we did it in virtually every bakery.
Mitch Pinheiro, Analyst
Ryals, you mentioned how you and your team are focused on the right assortment and configuration within your bakeries. This approach has contributed to one of the highest EBITDA margins seen in a long time. How do you plan to sustain that success? Has this experience influenced your perspective on future product mix? Could you elaborate on that?
Ryals McMullian, CEO
Sure. I wouldn't say that it's changed any of our viewpoints, but it certainly solidified the viewpoint that we already have. We understand the value of having the right mix, particularly as we've started to acquire some fast-growing, premium-priced brands. What this did for me and the team is reinforce that our approach is the correct one. This is an extreme example, but as we focus more on branded products and optimize our foodservice business, we hope to see that shift in mix become more permanent and skew towards higher margin branded items.
Mitch Pinheiro, Analyst
Okay. All right. Well thanks for the questions. Everybody stay safe.
Ryals McMullian, CEO
Thank you, Mitch.
Operator, Operator
Your next question comes from Brian Holland with D.A. Davidson.
Brian Holland, Analyst
Thanks. Good morning. I was surprised by the magnitude of share gains, given, I believe most of the competitors realize that DSD are out of the market. So, I was curious if you could just highlight where that shift capture was most acute in the quarter. I mean, was it more pronounced within any brand, price point, category, channel?
Ryals McMullian, CEO
Yes, it was quite widespread. The reason for this, in my view, is what I mentioned in my prepared remarks. Early on, we were able to quickly adjust production, focus on longer runs, and get products distributed. Our exceptional network of independent distributor partners was ready and able to serve the market. We've always managed similar situations, whether it's winter storms or hurricanes. I like to joke that California doesn't experience hurricanes, but the person in charge of that region used to work in Florida, so he knows how to handle such circumstances. Even in California, we have team members who understand the business and how to ensure swift product delivery. In my opinion, this was the primary factor contributing to our share performance this quarter.
Brian Holland, Analyst
Okay. Steve, I wonder if you could provide or Ryals, any context into, how significant kind of the grilling season is as it pertains to your business. And I guess, as you look at insights, and I've read some of the same surveys Ryals referenced. I mean, is there a thought that when we balance out maybe fewer gatherings into the summer holidays versus just the underlying demand surge that continues to persist at above-average levels. I mean, is there a scenario in which that category is flat or down around these holidays? If you could just provide a little more context around that?
Ryals McMullian, CEO
Certainly. Anything is possible, and it just depends on the severity of the situation. On one hand, restrictions on gatherings could lead to fewer holiday celebrations, as I've noted with the measures in Florida. On the other hand, if every household celebrates, there could still be a good bun season. We have taken steps to align our production levels with our best estimates of demand. This year, we are relying less on external copackers for manufacturing than we have in the past. This cautious approach is one reason why we are being conservative in our guidance; we'll have to see how things turn out. I hope that as we progress through the summer, the July 4th holiday will be better. Labor Day is not as significant a holiday for us as it once was, and schools start earlier than they used to. During summer, while children are still at home, many summer camps have been canceled, which means families will spend more time together at home. This could help sustain the high levels of in-home eating.
Brian Holland, Analyst
Thanks. That's helpful color. Last question for me. I mean, M&A landscape, I mean, some reference to it. Just curious, we've heard some commentary from folks, maybe more on the foodservice side about maybe the backdrop sort of opening up here as we come out of this. Maybe your focus would be a little bit more on the branded side. So, just curious what you're hearing or seeing? Is there an increased appetite for folks to sell in this environment, evaluations getting any more palatable? Just curious what you are hearing and seeing there?
Ryals McMullian, CEO
There hasn't really been any change since my last commentary. Starting in the latter half of last year, I noticed a significant drop in M&A activity, with fewer companies showing interest in pursuing transactions. This trend is ongoing, with opportunities coming in slowly instead of the more frequent inquiries we saw up until around June of last year. It's difficult to determine if this has affected companies' willingness to engage in transactions. I haven't observed much change in valuation expectations or actual valuations from completed deals. Regardless of the market conditions, we remain proactive and engaged with interested parties.
Brian Holland, Analyst
I appreciate it. Best of luck everyone.
Ryals McMullian, CEO
Thanks.
Operator, Operator
And your next question comes from Faiza Alwy with Deutsche Bank.
Faiza Alwy, Analyst
Yes. Hi, good morning.
Ryals McMullian, CEO
Good morning.
Faiza Alwy, Analyst
I have a couple of questions. First, I noticed that you still have $10 million to $20 million in sourcing savings or benefits planned for the second half of the year. Last time we spoke, there were additional savings you mentioned that we were supposed to address this year, but I assume that's been pushed aside for now. I'm curious if there's a risk of not achieving these sourcing savings if things don't stabilize by the end of the year. Additionally, how should we view the incremental cost savings we discussed previously?
Ryals McMullian, CEO
Sure. So, on the $10 million to $20 million, obviously we remain committed to that. Everything remains on schedule, amazingly, even with everything else that's going on. So, we feel very good about that $10 million to $20 million. Yes, I do think that there is likely some additional benefit behind that, but we're still in the midst of doing our work around that. I'm not ready to comment any further just yet.
Faiza Alwy, Analyst
Okay. I know you have often discussed enhancing the margin mix in the foodservice sector. I'm curious if the current crisis makes this more challenging for you or if it creates an opportunity to engage with your customers and improve the margin mix moving forward.
Ryals McMullian, CEO
Well, it doesn't make it any easier or any harder. I think, what the crisis has done is kind of strengthened our resolve to go ahead and speed up some of the work which is what we're doing. We were already talking to various customers about the margin profile of their business and how it fits strategically with us and with them frankly going forward. And I think, we can expect to accelerate some of that work and continue to focus on the higher margin foodservice business. The foodservice side of things, while it is overall lower margin than the branded side, it is a very important part of our business in the sense that it does cover a lot of overhead for us. We're a very high fixed cost business. So, it serves a very, very important role there. And then, in addition to that, as we mentioned, when you have extraordinary situations like this, you're able to flex production to retail as well. But, at the end of the day, to answer your question, it doesn't make it any easier, any harder. It's necessary work either way.
Faiza Alwy, Analyst
I understand. For my last question, I wanted to get your perspective on private label products as we consider the remainder of the year. You mentioned that you believe we are already in a recessionary environment. Traditionally, private labels tend to gain market share during recessions, but this time might be different since consumers are not dining out as much. There seems to be an increased demand for at-home consumption, along with a noticeable trend of consumers returning to trusted brands. I'm interested in your thoughts on how this situation might develop over the year. Will consumers prefer to stick with trusted brands, or is there a greater chance that private labels will gain traction?
Ryals McMullian, CEO
Historically, in our category, we have performed reasonably well during past recessions. There may be some trading down, but overall, the branded side of the business has remained strong. It’s important to note that private label has a significant presence in our category compared to others. However, some recent acquisitions, especially Dave's and Canyon, have premium pricing compared to Nature's Own. In a prolonged recession, it’s plausible that consumers might shift from these premium items to Nature's Own. That said, I wouldn’t anticipate much movement from Nature's Own to private label brands.
Faiza Alwy, Analyst
Great. Thank you so much.
Ryals McMullian, CEO
You're welcome.
Operator, Operator
And your last question comes from Ryan Bell from Consumer Edge Research.
Ryan Bell, Analyst
When we look at a meaningful portion of your 1Q, we see less than normal trend. As we get out of the peak stock-up activity, how do you think about the cost impacts that would be seen if we assume that take the latest three or four weeks that you talked about, the trends that we're seeing there are more similar over the next few months?
Steve Kinsey, CFO
Yes. When examining our business, it's clear that we're not in a typical pantry loading category. Due to the shelf life of our product, conditions are quite stable and changes occur rapidly. Therefore, we don't experience usual trends; most of our cost elements are closely linked to our volume. With the retail volume increasing, we noticed some higher costs impacting the overall gross margin. Additionally, we experienced elevated distribution costs linked to our higher-priced items, which mainly moved through DSD. Consequently, in relation to sales, costs should generally follow a similar trend, even if revenue declines somewhat. However, we did observe a notable improvement this quarter regarding our stale product line. As the market responded and shelves were cleared, we saw a significant decrease in our overall stale percentage, which is a cost factor that could behave differently if sales decrease in the coming quarters. We will keep an eye on this, but I realistically do not anticipate any major cost pressures from reduced sales that we haven't already encountered.
Ryan Bell, Analyst
Thanks. That's very helpful. And what types of efforts do you plan to take around encouraging increased retention of the increased household consumption that we've been seeing as we got into a more normalized environment?
Ryals McMullian, CEO
Sure. Well, I mean, as I mentioned earlier, we have increased our e-commerce budget. We already had a very robust plan, marketing plan for this year to continue to support our brands. And if you remember, that's a big difference from two or three years ago. We've raised that overall budget significantly. And frankly, we've seen some very, very nice results from it. I think that's part of the reason that our top-line has performed so well. In addition, we very, very briefly mentioned new product introductions, but we did have several that went out right at the end of the quarter. And so, continue to innovate and bring new exciting products to consumers is another way that we hope to continue to retain their loyalty.
Ryan Bell, Analyst
Great. Thank you. That's it for me.
Ryals McMullian, CEO
Thank you, Ryan.
Operator, Operator
And Mr. McMullian, there are no more questions at this time.
Ryals McMullian, CEO
Okay. Well, thank you all very much for your time today and for your interest in Flowers. And we certainly hope that each and every one of you continue to stay safe. Take care.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.