Earnings Call Transcript
FLOWERS FOODS INC (FLO)
Earnings Call Transcript - FLO Q3 2024
Operator, Operator
Good morning, and thank you for standing by. Welcome to the Flower Foods Third Quarter 2024 Results Conference Call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your opening speaker today, J.T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead.
J.T. Rieck, Executive Vice President 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 session, we may make forward-looking statements about the company's performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. 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're quite pleased with the strong performance of our leading brands in what continues to be a challenging environment. While consumers' 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 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 in 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, Operator
Thank you. Our first question comes from Steve Powers with Deutsche Bank. You may proceed.
Steve Powers, Analyst
Great. Thanks. Can you hear me okay?
Ryals McMullian, Chairman and CEO
Yeah, Steve. Good morning.
Steve Powers, Analyst
Okay. Great. Good morning. I was hoping we could start with the areas of expansion as we think about next year, specifically regarding Dave's Snack Bites and Wonder. Can you provide some insights into the scale of these expansions and the ramp-up you anticipate? Additionally, I would like more details regarding Wonder and your confidence in the sweet baked goods category, which has faced some pressures recently. For Dave's, could you share where you expect to secure placement for those snack bites and offer reassurance that we are not at risk of overextending that brand?
Ryals McMullian, Chairman and CEO
Sure, I can provide an update on the Wonder line. We will likely have more details in February, as we are still in the early stages of introducing it to customers. Initial feedback has been very positive, with retailers expressing a lot of enthusiasm. We highlighted one of the top items at the NAC show recently, and it showcases unique products with excellent quality and appealing packaging. We recognize that the sweet baked goods category needs support; it has been declining, and while we have performed similarly to the category, that's not ideal. The key takeaway is that we are actively working to drive growth in this category, and we are excited to do that with the Wonder brand, especially considering its high unaided awareness. Regarding the DKB snack line, the original three protein bars continue to perform well, and we have plans for more SKU innovation next year. The snack bites are also progressing well, and I don't think we risk overextending ourselves. Shelf space and visibility are crucial for the bars; we started with three SKUs that did well and are now expanding to six and beyond. The snack bites are distinctly different and quite unique in their category, somewhat similar to granola products but with both savory and sweet options. Retailers have welcomed them positively, but it's important to remember that building this brand is a gradual process, similar to a startup. We are bringing new consumers into the DKB fold, which is a positive sign for increasing brand consumption, but it will take time. Overall, we remain very optimistic about the growth potential of our DKB snack business.
Steve Powers, Analyst
Thank you for your insights. I wanted to ask about the capital expenditure reduction for the year. It seems that the ERP side increased slightly. Could you explain what influenced the overall reduction? Should we view this as a sign of improved efficiency, or is it something we need to factor into our capital planning for 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 projects primarily bakery. And a lot of those got pushed so we just weren't able to get to them. So they will roll over to 2025. So you should consider that as you think about next year.
Steve Powers, Analyst
Perfect. Okay. Thanks so much.
Ryals McMullian, Chairman and CEO
Thanks, Steve.
Operator, Operator
Thank you. Our next question comes from Bill Chappell with Truist Securities. You may proceed.
Bill Chappell, Analyst
Thanks. Good morning.
Ryals McMullian, Chairman and CEO
Hi, Bill.
Bill Chappell, Analyst
Just wanted to talk a little bit about the sweet baked goods or the snackie 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 kind of the continued kind of ups and downs of the category for you?
Ryals McMullian, Chairman and CEO
Yes. I think for us it's just more generally – Bill, can you hear me?
Bill Chappell, Analyst
Yes.
Ryals McMullian, Chairman and CEO
Okay. There was a sound interruption there. Yes, it's really just the ups and downs of the category. I think that is more attributable to consumers pulling back on discretionary spend, pulling back on indulgence. You've seen some weakness even in the salty snack category, which has typically been very strong. I think it's temporary. But I do think it relates to consumers' pocketbooks more than anything else.
Bill Chappell, Analyst
Got it. And just to follow up on what – as you've seen this in the past, how long do you think it lasts? Just – this doesn't seem to be a dire financial crisis. It's just pulling back. So do you think you can get back to growth as we move into 2025? Or is it just too early to tell?
Ryals McMullian, Chairman and CEO
Well, I mean I don't have a crystal ball, but I think it's – it would be reasonable to think that at some point next year things start to normalize and the category gets a little bit healthier. I mean, you'll recall among, 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 or 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, Analyst
Got it. And just sorry one more. On the promotional level of the bread line roll business, is it primarily coming from the largest competitor? Or are you seeing it in the smaller regional players as well?
Ryals McMullian, Chairman and CEO
Yes. 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 in 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, Analyst
Got it. Thanks.
Ryals McMullian, Chairman and CEO
Thank you.
Operator, Operator
Thank you. Our next question comes from Robert Dickerson with Jefferies. You may proceed.
Robert Dickerson, Analyst
Great. Thanks so much. Maybe just quick housekeeping. I think you said in the prepared remarks some of the trends and continue in Q3 relative to Q2, but then kind of improved at the end of the quarter. It sounds like maybe a little help from a hurricane. So I'm just curious, I'm not sure if you want to quantify or if you can quantify, how much do 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 of weeks?
Ryals McMullian, Chairman and CEO
Yes. 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. I mean 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 our – 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 in share both of those the largest among competitors in the category. So 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, Analyst
Okay. Great. And then maybe just more broadly speaking, you also had made the comments around the permit of the store doing a little bit better and maybe that's helping certain subcategories of overall bread like buns or tortillas. And 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're using a bun chicken maybe you're going to throw it into tortillas. So maybe there's just kind of a little switch in terms of like traditional sandwich bread relative to some of the other subcategories. And then I guess, just kind of as like a tack on to that, you always kind of comment on M&A, when you say kind of the deal activities out there, right? Are any of those areas, 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, Analyst
Yes. Just like buy a big tortillas brand. Now we have tortillas. We have lunch bread, keto and buns.
Ryals McMullian, Chairman and CEO
Yes. 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 takes up away from home and convenience those sorts of things. So, we're looking across the expanse of Baked Foods, which altogether is a massive total category. In terms of the trends, if you harken back, Rob, the perimeter of the store was sort of a big deal pre-pandemic, right? And 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 to happen? We actually haven'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 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 fight back but obviously, much less impact on the buns and rolls as you mentioned on the Dave's Killer Bread 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, Analyst
Okay, great. That makes sense. I have one last question about the EBITDA guidance. When considering what’s implied for Q4, it appears that at least at the midpoint, there might still be some year-over-year margin improvement. I have a couple of questions regarding this. It seems like the range for the quarters is still a bit wide, which is understandable given the challenging backdrop. I'm curious about what factors could push you toward the higher end of that implied margin guidance for Q4, and what might lead you to the lower end? Also, is part of this approach about being cautious, considering the promotional environment and your thoughts on pricing?
Ryals McMullian, Chairman and CEO
Yes. Overall, we maintain a cautious outlook. As we enter the fourth quarter, it's reasonable to question the lack of better visibility. While we do have some visibility, we want to remain careful given the forecast. At the start of the year, when we provided guidance, we highlighted potential impacts such as increased promotional activity, many of which have occurred. However, we've seen excellent execution in our savings program and strong performance in the marketplace, continuing to grow our bread, butter, and roll units. The challenge for the business lies primarily in the away-from-home sector, especially with quick-service restaurants, which have underperformed our expectations due to the shift towards in-home dining caused by higher prices. We've already discussed the performance issues in the cake segment. The fresh-packaged bread business, on the other hand, is thriving, and there are no concerns there. So, to answer your question, improving performance in the cake and quick-service restaurant segments, along with steady success in our core business, could push us towards the higher end of the range.
Robert Dickerson, Analyst
All right. Great. Thank you so much, Ryals. Appreciate it.
Operator, Operator
Thank you. Our next question comes from Jim Salera with Stephens. You may proceed.
Jim Salera, Analyst
Good morning. Thanks for taking my question. Ryals, I wanted to dig down a little bit on the other category. And you talked about some of the headwinds in food service and certainly the softness in QSR, I think is well known. Can you maybe breakdown how much of a headwind the food service was to other volume relative to the business exits, because 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 have been down? And maybe any color on your private label piece in that category as well would be helpful.
Ryals McMullian, Chairman and CEO
Yeah. So we were finishing out the cycling of the strategic exits in the third quarter. I would say mid-single digits from strategic exits, the rest of it is channel category dynamics if you will, so mostly external factors Jim. But I would also say that 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, Analyst
Is it correct to assume that the private label component of that other segment is performing positively in terms of volume, even though you no longer break out that information for competitive reasons?
Ryals McMullian, Chairman and CEO
Actually, no. If we look at syndicated data, private label is losing market share and our volume in private label has decreased as well. Private label pricing has increased slightly, and the price gaps have narrowed a bit as private label prices rise and branded products have been promoted more. So now we are beginning to see a shift back towards branded products.
Jim Salera, Analyst
Okay, great. And then I think you also mentioned in your prepared remarks, is it 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 faster or slower ramp with new customers, and is there anything that we on the outside can look at that might give us some insight 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, Analyst
Great. I appreciate the stuff guys. I’ll hop back in queue.
Ryals McMullian, Chairman and CEO
Okay. Thanks, Jim.
Operator, Operator
Thank you. Our next question comes from Mitchell Pinheiro with Sturdivant & Company. You may proceed.
Mitchell Pinheiro, Analyst
Yeah. Good morning. So I guess when your fresh bread category gains, we're obviously at the expense I guess a little bit of private label, but like 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
Some of the gains are coming from private label and various regions, although some regions are performing quite well. For instance, Pepperidge seems to have had a strong quarter, and while they're promoting a bit more, they're also experiencing some growth. Overall, the growth is coming from across the category, which isn’t particularly new. As we have discussed, our focus on innovation and delivering unique products is allowing us to capture business from other competitors in the category.
Mitchell Pinheiro, Analyst
I mean, is any of that coming in a geographic market dynamic, like you happen to be winning more than east or west? Or can you talk a little bit about that?
Ryals McMullian, Chairman and CEO
It's been stronger recently in newer markets like the Northeast and Midwest, where we've experienced some share pressure. Mitch has noted that in the Southeast, our most mature market, there's more competitive activity, especially in soft varieties. We've seen a slight erosion in that area, but we're aware of it and taking measures to address it. There are geographical differences, and in the newer markets, we're gaining the most share.
Mitchell Pinheiro, Analyst
It's crucial to grow your share in newer markets. Are there any immediate challenges that might hinder your growth in these areas? What obstacles are you encountering right now?
Ryals McMullian, Chairman and CEO
I'm not really sure. I understand your question about our growth in new geographies. Since you're new to the market, it's essential to build consumer awareness and encourage trial and repeat purchases. We've been discussing our progress in the Northeast for quite some time, and we're continuing to gain market share there. We're newer to the Midwest, having just launched with one of the major retailers in the spring, so we're just beginning our efforts there. While we face competition from some significant players in those markets, we believe that the strength of our leading brands will enable us to maintain steady growth in market share.
Mitchell Pinheiro, Analyst
I was hoping to see quicker share gains. Two years ago, you had a 10% share in the Northeast, and I'm uncertain about your current position there. I understand that gaining share is challenging due to the intense competition, but I wondered if there were any factors hindering your growth rate.
Ryals McMullian, Chairman and CEO
No, there’s nothing specific to mention. You’re absolutely right; this is a competitive category, and building market share takes time. Eventually, capacity could become a limiting factor, but we are planning ahead to avoid being in a situation where we lack the capacity to continue growing. Aside from that, it remains a competitive space. In the Northeast, there are many independents and co-ops, which complicates full penetration. It just requires time to establish ourselves there.
Mitchell Pinheiro, Analyst
Okay. I haven't really checked on this recently, but your capacity utilization, or OEE, used to be in the mid-60s a couple of years ago. I was wondering if there have been any updates on that. It seems to be a significant part of the margin story due to fixed cost leverage as you increase your capacity. Can you provide any updates or details on this?
Ryals McMullian, Chairman and CEO
Sure. So our OEE now is running. It obviously depends on when you look it gets a little bit more pressure in the summer when we're so busy in 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.
Mitchell Pinheiro, Analyst
And so...
Ryals McMullian, Chairman and CEO
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, Analyst
Okay. I understand we're not ready to discuss guidance for 2025, but it seems you're approaching the lower end of the long-term EBITDA margin range of 12% to 14%. Is it premature to suggest that you might reach that lower end next year? While I know you can't provide specific guidance at this time, will we still see progress in EBITDA growth next year? Are there any factors we should 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 certainly, we think it's within reach we think frankly 13% to 14% is in reach. And if you run the long-term algorithm out you can see where we can get there. And that's without including accretive M&A, which obviously we're focused on it as well. So, 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, a lot 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, Analyst
Okay. All right. Well, great. Thank you. Thank you for your question.
Ryals McMullian, Chairman and CEO
Okay. Thanks, Mitch.
Operator, Operator
Thank you. Our next question comes from Max Gumport with BNP Paribas. You may proceed.
Max Gumport, Analyst
Thanks for the question. You're clearly observing an increasingly challenged U.S. spread category as consumers continue to shift to the perimeter of the store. And also as you see a ramp-up in competitive activity in 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 crystal ball but Max we've been through this many, many times before in our history. When the consumer feels a little bit of weakness there's trade down consumption patterns shift primary store all the things that we talked about but they've always proven to be temporary. So we're working hard on the things that we can control. We continue to make sure that we as efficient as we can possibly be that we're delivering the highest quality of the 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, Analyst
Great. And then on Dave's Killer Bread and just 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 feeling 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 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 will. We saw your note and the data. Our data does not match up with yours. Dave's is still positive. It is not down. 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, Analyst
Great. Thanks very much.
Ryals McMullian, Chairman and CEO
Thank you.
Operator, Operator
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, Operator
Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.