Earnings Call Transcript
FLOWERS FOODS INC (FLO)
Earnings Call Transcript - FLO Q2 2020
Operator, Operator
Welcome, everyone, and good morning. Thank you for joining our investor update. Today our CEO, Ryals McMullian, and other members of the leadership team will discuss our second quarter 2020 performance and outline our strategic priorities and long-term growth targets. At any time, you may submit questions using the Q&A function in the Zoom platform. After the prepared remarks, we'll go through the Q&A. Also, this webcast is being recorded and will be available in the Investor Relations section of flowersfoods.com. We'll also post the slides. Finally, please note that as part of this presentation, we will make some forward-looking statements about our future performance. While we believe these statements to be reasonable, actual results may differ materially due to the risks and uncertainties. These and other important factors relating to our business are fully detailed in our SEC filings. Thank you for your attention, and now I'll turn it over to Ryals.
Ryals McMullian, CEO
Good morning, everyone, and welcome to our first virtual Investor Day. I hope you're all doing well. It's been a challenging year, and during my drive from Florida this morning, I reflected on the early news from China and the subsequent spread of the virus across the country. I hope you and your families are coping during these times. Last night, we released our second quarter earnings, and this morning, we shared updates on our strategic focus and long-term targets. We initially planned to hold our July Investor Day in New York, but COVID changed those plans. As CEO for over a year, I find it important to connect with you and for you to get to know our management team better. We're glad you're with us today and are here to answer any questions regarding the quarter or the upcoming year, primarily focusing on our future direction. We aim to provide a clear understanding of our company, culture, and plans ahead. We will discuss why Flowers is a strong investment opportunity, give updates on our long-term targets, and explain how we intend to meet those targets. I will begin, and you will also hear from various members of our management team, who I believe are the best in the industry. I appreciate this opportunity for you to hear from them today. Before we delve into our strategic priorities, I want to recognize our dedicated team, as they are crucial to achieving our objectives. The pandemic has introduced new challenges for many companies, and we're thinking of all those affected, including some in our Flowers team. COVID has impacted our operations, leading to the temporary closure of a couple of bakeries. However, the flexibility of our bakery network and our team's commitment have allowed us to serve our markets without interruption during this crisis. Our top priority remains the safety and wellness of our team members, who have shown remarkable dedication. I want to address the recent tragic events that have sparked nationwide discussions on racial injustice and discrimination. These events have prompted our leadership team and many at Flowers to reflect on our own attitudes toward race. We acknowledge that we can strive to better represent the communities and consumers we serve. At Flowers, we have always valued respect and kindness. If there’s a chance to improve, we must take it. Therefore, Flowers is committing to enhancing our values and contributing to the solution. We are establishing a program in partnership with an external consulting firm to promote a truly diverse workforce. Additionally, we’re forming a committee of diverse leaders from across the company to help build that culture. This year, we’ve donated $1.5 million to organizations focused on racial equality and education, and we plan to continue this support moving forward. Our focus on inclusion and diversity is serious, and the actions we take today reflect that commitment, which I believe will strengthen our company. Now, regarding our second quarter performance. Our strategic update comes at a unique time for our communities and markets, but the Flowers team has risen to the occasion. The adaptability of our bakery network has allowed us to serve our markets without interruption during the pandemic. Our quarterly earnings reflect the ongoing impact of the pandemic, with a 5.1% increase in sales. The positive shift toward branded retail has driven cost leverage and margin improvements, resulting in a 32% increase in adjusted earnings per share compared to the same quarter last year. Steve will provide further details on this performance later this morning. The results hint at our plans to shift our portfolio toward a higher branded mix, which will ultimately improve margins. Most credit for these results goes to the Flowers team, whose extraordinary work during this period has been commendable. They have consistently supported our customers and consumers, and we owe them a debt of gratitude. We recognize that as the pandemic's effects diminish, some current market dynamics may change. The strategic plans we will outline today are designed to position Flowers for thriving, innovation, growth, and efficiency, ultimately enhancing shareholder value in any operating environment moving forward. I want to highlight what sets Flowers apart. We are a leader in a significant category with robust growth potential and stability across economic cycles. Our portfolio strategy emphasizes value-added branded retail products expected to drive top-line improvements and enhance margins. We believe that an optimized portfolio will lead to market share gains via targeted growth segments and innovative new products. To counter inflationary pressures, we are continuing our supply chain optimization program established under Project Centennial, focusing on efficiency improvements and cost reduction plans. We take pride in our solid record of dividends and growth, and as many of you know, mergers and acquisitions will remain integral to our growth strategy. Our strong liquidity provides the flexibility to pursue such opportunities as they arise. Today, we will provide more details on these initiatives, but our long-standing commitment to delivering long-term shareholder value is paramount. Over the past decade, we've grown from a $2.5 billion company to over $4 billion, reflecting a compound annual growth rate of about 5.2%. During the same period, we delivered annual total shareholder returns of approximately 11.4%. We have consistently shown our ability to generate strong returns, and I am confident that through our strategies discussed this morning, we can maintain that momentum. Let’s focus on our four strategic priorities that form the core of today's discussions: developing our team, concentrating on our brands, prioritizing our margins, and proactively seeking disciplined acquisitions. When we announced Project Centennial in 2017, we set a target EBITDA margin goal of 13% to 14%, mainly through cost savings. While we have made significant progress in cutting costs, inflationary pressures from labor, ingredients, packaging, and transportation have hindered translating those savings to the bottom line. Nevertheless, Centennial has succeeded culturally, fostering a consumer-focused organization committed to delivering innovative products. Many initiatives we will discuss today, particularly around portfolio and supply chain optimization, are only possible due to our dedicated team focused on understanding consumers and driving real innovation with a renewed focus on cost management. We believe these four core priorities will drive a new long-term growth algorithm that we will present today. Our plans are realistic and achievable, and we expect them to generate meaningful shareholder value over time. Today's goal is to help you understand these plans and our path to growth and margin expansion. Before detailing the new algorithm, let’s review each strategic priority, as they lay the foundation for our future endeavors. Recognizing our team’s essential role in achieving our goals, we have implemented an organizational restructuring to maximize our brands' potential and enhance product innovation. As part of Centennial, we transitioned to a business unit structure a few years ago, which has served us well, but we have learned a lot since then. Following a thorough review, we made further changes, notably consolidating two business units into a single function responsible for all brands, led by Mark Courtney as Chief Brand Officer. This consolidation will improve our focus on brand performance and collaboration across our portfolio. Debo Mukherjee, our Chief Marketing Officer, will lead a new capability focused on innovation to deliver exciting offerings to consumers beyond line extensions. This new function will work closely with our corporate development team to identify acquisition and investment opportunities aligned with our overall strategy. Innovation is vital to our growth plan, and Debo will share more about this function and its focus areas. The appointment of David Roach, an experienced executive knowledgeable in our cake business, as President of Cake Operations underscores our commitment to enhancing cake operations, especially in our Navy Yard bakery, which will boost efficiency and profitability. Our foodservice business will join our sales function to better utilize excess capacity at acceptable margins. I believe organizations should continually assess their structural effectiveness to align with strategy and enable success. We have done this, and these changes will help us achieve our objectives while maximizing opportunities within our portfolio strategy. Our second strategic priority is brand focus. Today, Flowers holds a strong position in various market areas. Nature's Own is the leading soft variety bread brand in the U.S., with estimated retail sales of around $1.2 billion in 2020. DKB is the top organic loaf brand, with about $760 million in retail sales. Canyon Bakehouse has quickly grown to be the leading gluten-free brand, generating over $120 million in premium sales in just two years. Wonder has also established itself firmly in the white loaf segment. With leading brands across key categories, we are in a position of strength and are committed to building on this by emphasizing branded growth through targeted strategies and efficient resource allocation. We've enhanced our capabilities to better understand consumers and leverage insights to strengthen our brands through innovation and marketing investments. Prioritizing margins forms our third strategic priority and is inherently linked to brand-building efforts. Our portfolio strategy aims to shift our sales mix toward a higher percentage of branded retail, leading to improved margins. We anticipate achieving branded growth through share gains in underdeveloped regions and segments while investing in marketing to introduce significant innovations and pursuing selective M&A aligned with our strategy. Recent results illustrate the considerable impact that this mix shift can have on margins. Our recent organizational changes, along with reallocating capacity to support branded products and stepping back from low-margin businesses, should enhance our progress. Cost management and efficiency are also vital components of our plan to improve margins. We previously indicated that our portfolio and supply chain initiatives could yield $10 million to $20 million in cost reductions. I believe we will exceed the top of that range this year and see ongoing benefits into 2021, allowing us to minimize fixed costs and leverage our cost base more effectively as we improve margins. We have multiple initiatives underway to enhance operations at underperforming bakeries, driving further cost reductions through efficiencies and automation to restore those bakeries to excellence. Our network optimization strategy ensures we operate the right assets in the right locations, supporting the right products and adding further efficiencies. While cost containment remains essential, the most significant driver for future success and margin improvement will be growth, specifically the right kind of growth. We're focused on shifting toward branded retail and investing in growth and share while gradually reducing exposure to underperforming businesses. This transition will be supported by innovation and strategic M&A. M&A has been and will continue to be a vital part of our growth narrative. We have conducted over 100 acquisitions since going public, significantly transforming from a regional to a national entity. Opportunities remain in our core segments, though they may be more limited than in the past. Nonetheless, there are plenty of prospects in underdeveloped segments and adjacent categories. Our success with brands like Dave's Killer Bread and Canyon illustrates our commitment to sustained growth. Our restructuring has fostered an exciting collaboration between Corporate Development and our innovation teams to explore opportunities beyond our primary business that enhance growth and margins. I look forward to Mark Gerrish, our new Vice President of Corporate Development, sharing these plans with you later this morning. All the initiatives I’ve mentioned have been in progress for some time, and we are optimistic about the early results and what this work means for the future. More details will be shared as we continue today, but I want to express our excitement and optimism regarding this outlook. Now, let’s discuss the new long-term algorithm outlined on the slide. Our aim is to achieve organic sales growth of 1% to 2%, EBITDA growth of 4% to 6%, and earnings per share growth of 7% to 9% in the long term. We expect this approach to deliver meaningful total shareholder returns through a combination of top-line growth and bottom-line margin expansion. Importantly, the sales and EBITDA forecasts reflect organic growth, while the EPS target incorporates potential future M&A and opportunistic share repurchases. We anticipate that sales growth will stem from branded retail while offset by revenue declines as we exit specific underperforming segments. The EBITDA and EPS growth model includes advantages from a higher branded retail mix and enhanced cost management, despite some contribution losses from exiting lower-margin businesses over time. This plan aligns with our strategic priorities, centered on pursuing the right type of growth to enhance revenues while focusing on our branded business. If we're successful in shifting our mix toward our most profitable products, we expect significant margin improvements to follow. We plan to grow our share in underdeveloped markets and segments where our leading brands can thrive by leveraging innovation and managing less profitable areas. Furthermore, we will prioritize margins by continuing our cost management initiatives and executing our supply chain optimization program. Ensuring our capacity serves its most effective and productive use will positively impact our margins. While some segments will need to manage down excess capacity over time, achieving these goals is realistic. Our new algorithm provides a clearer path toward our margin goals. M&A will be an incremental aspect of this model. As we identify attractive acquisition opportunities, we see additional potential for growth. We have an excellent track record in M&A, as highlighted today. Our primary aim is to show how we will achieve our targets, and we want you to leave this session with a complete understanding of the strategies that will drive Flowers’ future success. This environment demonstrates that with the right product portfolio, cost structure, talented individuals, and focused efforts, our goals are not only realistic but attainable. We are committed to optimizing all aspects of our business going forward. With that, I will hand it over to Brad Alexander, our Chief Operating Officer, who will discuss our growth imperatives and supply chain optimization efforts. Brad?
Brad Alexander, COO
Thanks, Ryals, and good morning. Today, I'm going to discuss three key priorities: first, the margin benefit potential offered by our work in optimizing the portfolio and our supply chain. Next, focusing on building our brands. Lastly, how our portfolio strategy informs our supply chain optimization work to reduce fixed costs and drive operating leverage. Ryals mentioned our initiatives related to the portfolio strategy, which focuses on value-added branded retail products expected to drive top-line and improve margins. Those initiatives are in their early stages. However, the current environment offers a glimpse into the impact our initiatives have on our long-term results. In the second quarter, we saw greater demand for our brands, as increased at-home eating and consumer shifts to trusted brands drove a favorable mix shift for us. As a result, margins increased significantly despite a volume decline since our profitable branded retail products comprised a larger portion of our sales. Combining the right portfolio mix with an optimal bakery network can produce significant margin improvement. These results have strengthened our team's resolve to accelerate work in this area and position ourselves to deliver improved margin performance over time. Two key operational priorities include: focusing on brands and improving our margins. Many of our brands have strong and growing market shares, and we are concentrated on sustaining that growth by remaining relevant to changing consumers. An important part of improving relevance is innovating products that are meaningful to our consumers and marketing those products to the appropriate segments. Debo will soon address our efforts in that regard. After Debo, Mark will discuss brand presence and our strategies to make our brands available in the right markets and segments. As you will hear, we expect our portfolio strategy to help drive margin improvement through mix shift. But first, let's talk about our supply chain optimization initiatives. Supply chain optimization is more than just cutting costs; it's linked to our portfolio strategy. As we shift sales to a more profitable mix of products, we must adjust our asset base to produce that mix efficiently. Our network is flexible, and our goal is to utilize each part of it to its highest and best use. Most of our bakeries create a variety of items, including bread, buns, and rolls. This versatility allows us to alter our mix to meet changing consumer demands, whether due to a hurricane or the current pandemic. Our flexible supply chain, with depots and independent distributor partners, efficiently distributes various products to the market. While our production and distribution costs may vary, many of them remain largely fixed. Given our network flexibility and the fixed asset base, our portfolio strategy informs the brands and segments we target. By pivoting capacity to our most powerful brands, we maximize our revenue and margin expansion potential. A good example of this is our network optimization work in Lynchburg, Virginia. Historically, Lynchburg produced standard portfolio products. However, with Dave's Killer Bread's substantial growth in the area, we needed additional capacity, especially in the Mid-Atlantic and Northeast. Instead of building a new bakery, we are converting Lynchburg to an organic facility to meet demand and reduce transportation costs. Our bakery network's flexibility allows us to shift production from Lynchburg to nearby sister bakeries, improving their capacity utilization. Moreover, we are consolidating depots as part of our optimization process. The graphic details our production and distribution process, where goods are produced at bakeries, transported to depots, and distributed to retailers and customers by independent distributors. An example of removing excess capacity is our depot consolidation, often reducing transportation costs. Our portfolio optimization will enhance this process as we focus our product range and potentially free up additional network capacity. One key benefit of our portfolio and supply chain initiatives is an increase in sales. Through better ordering and SKU rationalization, we have lowered costs and increased realized capacity. We've reduced production amounts converting to sales enough to equate to one new bakery. Each bakery has a particular product mix of branded retail, store brands, and foodservice production. As we increase the production of branded retail products, as we did in Lynchburg, we can be more selective about the type and quality of other business we accept. This approach not only reduces store brand and foodservice products we manufacture, but also allows us to negotiate better pricing and terms on the business we keep. The final outcome is a higher mix of branded retail products and a more profitable store brand and foodservice business, which is expected to help us meet our updated sales and EBITDA growth targets. With that, I'll turn it back over to Ryals.
Ryals McMullian, CEO
Thank you, Brad. Building on Brad's discussion, we'll now turn to Debo Mukherjee, who will provide more detail on our marketing and innovation efforts. Debo?
Debo Mukherjee, CMO
Good morning, everyone. Thank you, Ryals. As Brad mentioned, we assess our growth through two main areas: brand relevance and brand presence. I will concentrate on brand relevance, while my colleague, Mark Courtney, will address brand presence. Brand relevance begins with a vibrant category, so let me share some insights. The bread category is valued at $24 billion and continues to grow. It's important to note that 98% of American households, approximately 128 million, purchase bread about every 12 days. This category is large and dynamic, affecting many households with frequent purchases. Notably, this category is increasingly focused on brands; the market share of brands compared to private labels is growing, showing a consumer preference for brands with unique offerings. This creates a favorable growth environment as consumers are willing to pay more for a brand that offers distinct benefits. Now, let’s discuss how we create brand relevance. We visualize a funnel, where the top section represents the 128 million households I just mentioned. Our goal is to ensure that our brand promise and positioning resonate meaningfully with consumers, influencing their decisions. The first step is to generate awareness, which consists of two parts: aided awareness—recognizing names like Nature's Own—and more crucially, unaided awareness, where consumers independently remember a brand when considering bread options. This is where we aim to excel. If we’ve communicated our brand promise effectively, consumers might be encouraged to try our products, leading to initial purchases. If our brand promise is validated by product performance, we foster loyalty and repeat purchases. So how do we understand consumer needs? We start by identifying their expressed needs, gaps, and opportunities, as well as exploring emotional benefits that remain unaddressed—understanding what consumers want to express through their choices. We compile that information to develop our brand architecture, defining the brand’s identity and promise. In this context, we understand that mothers aim to please their families. They care about health, and for health-conscious mothers who want to balance happiness and wellness, we represent Nature's Own, capturing both functional attributes and the emotional promise of joy. Similarly, our approach to the Wonder brand differs; instead of focusing on white bread, we encourage imagination in children, summarized in the tagline “inspiring child-like wonder.” With this backdrop, we categorize consumers based on geo-demographics and socioeconomics, delving into their lifestyle behaviors and motivations. Particularly, we highlight busy budgeters—those managing an active lifestyle while caring for a family and wanting to express love and connection through food. A key insight is that freshness is vital in conveying care, and our innovation addresses their needs with the message 'from scratch to shelf in 48 hours.' Our marketing strategy revolves around increasing awareness among consumers while remaining adaptable to their behaviors in real-time. Thus, the key to our growth is enhancing awareness, focusing both on prompted and unaided recall. Currently, we know that Nature's Own has a 15% unaided awareness level, while aided awareness surpasses 70%. Improved unaided awareness leads to greater sales potential and fosters deeper customer loyalty, which we are actively seeking to improve. As we evaluate our performance, especially in the Southern U.S. where Nature's Own is well-established, we see a household penetration of over 52%, above the national average of 33%. This gap presents a significant opportunity for incremental growth. However, we must recognize that consumer behavior has changed dramatically due to COVID-19. E-commerce food purchases have surged, now making up about 13% of bread purchases. To compete effectively in this space, we focus on two key areas: awareness and optimizing online search capabilities. Awareness is vital for remaining top-of-mind among consumers. Alongside our incremental awareness strategy, we are building digitization capabilities within our organization. Throughout this process, we ensure that consumer selection and retention remain our top priorities. To illustrate our messaging, let me share a clip featuring our Nature's Own 30-second advertisement adapted to a 6-second format for digital platforms. With messaging that conveys 'goodness in our nature' and the promise of freshness, we demonstrate how Nature's Own can be relevant to our consumers. In conclusion, while our growth is rooted in brand relevance, I will now hand it over to Mark to discuss our portfolio and growth strategies.
Mark Courtney, Chief Brand Officer
Thank you, Debo, and good morning. Today, I will emphasize our portfolio strategy and how we can profitably grow our business by expanding brand presence in underdeveloped markets and segments, while closely aligning with our retail partners. The fresh packaged bread category has experienced a sales boost since the pandemic began. The shift from foodservice to retail has driven category growth of 14%. I am pleased to report we have outperformed the category growth by 420 basis points, introducing our brands to 3.5 million additional households in just this last quarter. Our current challenge is to maintain engagement with these consumers by increasing our brand presence wherever and however they shop. To that end, we have clarified the roles for each of our brands and businesses, which we intend to leverage to drive branded growth and meaningful margin expansion. Our portfolio contains some of the strongest brands in the category, appealing to a broad percentage of the population. It includes influential regional brands as well as our ensemble of well-known mainstream brands. Wonder allows consumers to choose a national brand over store brands, and Nature's Own, as the #1 loaf bread in the U.S., offers quality products at mainstream prices. Our premium brand, Dave's Killer Bread, has driven category growth for the last five years, while Canyon Bakehouse has quickly risen to become the leading gluten-free bread. We have developed growth maps for our brand portfolio to maximize revenue and margin growth, guiding our resource investment prioritization efforts. Our growth maps align closely with our network optimization strategies to ensure we have the right capacity for the right products in the appropriate markets and minimal capital investment. Moreover, we have sunsetted two brands this year and streamlined our assortment, eliminating 20% of our products. We will continue to leverage our portfolio to delight consumers across demographics while driving sales and margin expansion for retailers, independent distributors, and shareholders. One key growth opportunity is to drive market expansion. We hold a 17.5% national share, but growth opportunities vary by market. Our strengths are apparent in the South with a 30% share, while we have significant growth potential in populated markets such as the Northeast and the Midwest. We're strategically targeting these markets to invest adequately and drive brand presence to capture high-potential opportunities. While we dominate the loaf bread segment, with over a 30% share, we also see significant potential for expanding into non-loaf segments by introducing products that cater to meals at breakfast and dinner. Our Dave's Killer Bread consumers advocate for killer nutrition and taste across other types of bread. Thus, over three years, we've expanded the Dave's product line, including bagels and English muffins, to over a $100 million business while increasing our market share by 420 basis points. This year, we've made a concerted effort to grow the dinner meal occasion, specifically through sandwich buns. While we have sold buns for many years, growth has previously been limited by dedicating much of our bun capacity to non-branded varieties and a fragmented sales approach across regional brands. The portfolio strategy provides clarity as we have defined branded retail as the first priority for line capacity, rallying our efforts around Wonder, the iconic brand. We have also launched premium and super-premium innovations, such as Nature's Own perfectly crafted brioche buns and the new Canyon Bakehouse Burger buns for gluten-free consumers. Early results from our branded bun segment show a remarkable growth of 29%, with an 80 basis point share improvement in the $3.5 billion sandwich bun segment. Lastly, I want to discuss our relationship with retail partners. Our retailers have performed admirably in a rapidly changing environment. They have adapted to shifting consumer behaviors at an unprecedented pace, reconfiguring their businesses into hybrid retail and fulfillment centers. They face numerous challenges, including workforce-related issues stemming from the pandemic and an uncertain economy. I'm proud to say our team is recognized as a reliable supplier during these times. Retailers can depend on us to serve them well, keeping shelves stocked with our in-demand brands. Additionally, our brands command a premium price point, driving higher sales and profits for retailers. We will continue working strategically with our retail partners as they evolve to meet changing consumer needs and preferences. Thank you, and I'll turn it back to Ryals.
Ryals McMullian, CEO
Thank you, Mark. I hope you can see that our marketing efforts, innovation initiatives, and portfolio strategies are the backbone of everything we will be doing moving forward, and hopefully it resonates with you. Now turning towards M&A, I'd like to introduce Mark Gerrish. Mark is the new Vice President of Corporate Development and is leading all of our M&A efforts. Mark, please take us through.
Mark Gerrish, VP of Corporate Development
Thank you, Ryals. Good morning, everyone. I will discuss our corporate development program. Earlier, Debo discussed leveraging consumer insights for opportunities within our core business. Similarly, these insights are crucial for our M&A strategy. Our growth ambitions through M&A are clear, and we are well positioned for this growth. We plan to take a structured approach, collaborating with our innovation team to identify opportunities in both our core and grain-based adjacencies. As Ryals mentioned earlier, M&A is one of our four strategic priorities to enable long-term growth. With a robust balance sheet and healthy free cash flow, we are poised to invest in growth. However, we are not simply asserting that we have cash and capacity. We also bring substantial experience, capability, and commitment, paired with a strong history of delivering M&A success. Our two most recent deals—Dave's Killer Bread and Canyon Bakehouse—have generated significant profitable growth. These brands have a long runway, and we expect continued growth from them. A structured M&A approach is critical for ensuring Flowers’ long-term success. Our well-defined, repeatable process includes a clear set of acquisition criteria. We view M&A as a capability, not a one-off project aimed at a specific target. We are developing a capability to generate a steady stream of potential growth drivers. To demonstrate our commitment, I joined Flowers as a dedicated resource in September 2019. I operate within our Corporate Strategy Department to ensure a tight link between strategy and M&A. Leveraging our defined M&A criteria, we will identify, assess, prioritize, and cultivate relationships with potential partners. Our structured approach extends beyond the screening and acquisition phases to incorporate effective integration, which is crucial to the success of acquisitions. We aim to develop dedicated resources by aligning internal functions across the company. Ryals previously mentioned our commitment to what we call Smart M&A. Smart M&A means adopting a disciplined process informed by our strategic and innovation goals. Our acquisition targets will focus on developing new brands and products, both in-house and through partnerships. We are looking to solidify our core business while also exploring growing underdeveloped segments with innovative brands and capabilities. My collaboration with our corporate strategy, brand, and R&D teams will inform target areas. From an operational perspective, our approach will vary by deal. However, similar to the Dave's Killer Bread acquisition, we expect to leave a substantial portion of the acquired organization intact while driving significant growth by leveraging our industry expertise alongside innovation, as highlighted earlier. In addition to flexibility with target types, we are also considering various transaction structures. We remain open to alternative deal structures such as joint ventures, minority investments, and strategic partnerships. Our disciplined yet flexible approach will enable us to achieve long-term success through what we label as Smart M&A. Thank you for your attention. I look forward to updating you on our progress and results. Now, I'll turn it back over to Ryals.
Ryals McMullian, CEO
Thank you, Mark. As we've emphasized in previous calls, M&A has always played a fundamental part in our growth story, and it will continue to do so in the future. The approach might look a bit different moving forward, as we've opened our lens not only to the types of companies we’re interested in, but also to the various deal structure types we're considering—remaining open to minority investments to encourage innovation from external sources. We've discussed supply chain optimization, portfolio strategy, and marketing innovation. Now, let’s hear from our Chief Financial Officer, Steve Kinsey, who will synthesize our efforts and discuss our financial progress alongside the long-term algorithm. Steve?
Steve Kinsey, CFO
Thank you, Ryals, and good morning, everyone. Although I'm very excited about the technology that allows us to gather today virtually, I definitely look forward to meeting in person soon. Today, I will address several key topics. First, our business is performing well. Based on our first half performance and outlook for the rest of the year, we have a positive view for 2020. Second, the business continues to generate strong free cash flow. Our capital allocation policies align with the priorities you've heard about today. Finally, I will provide some color on our updated long-term targets and the roadmap to reach them. Turning to second quarter results, Ryals stated that we released earnings late yesterday and filed our 10-Q with the SEC. From that release, we see strong quarterly performance regarding both sales and margins. Sales were driven by solid brand performance. Elevated in-home eating serves our brands well. Top-line sales grew 5.1%, while adjusted EBITDA growth increased 21.4%. Adjusted EBITDA margins expanded 170 basis points to 12.5% of sales. Adjusted earnings per share grew 32% to $0.33 per share, marking a record second quarter for adjusted EPS. I want to briefly point out a few items excluded from adjusted results, primarily related to our focus on brands and optimization work. First, we incurred two significant impairment charges: a $4.6 million charge related to surplus property and equipment we are selling, and a $4.6 million charge associated with discontinuing the Alpine Valley brand, as it faced challenges due to Dave's Killer Bread's performance. By reallocating resources to our strongest organic products, we expect to drive continued growth in this important segment. Secondly, in July, we announced an organizational restructuring that resulted in recognizing a $1.5 million charge related to employee termination benefits. We also anticipate an additional $7 million charge in the third quarter for the same reason. Looking at guidance, based on strong year-to-date performance, we have increased our full-year outlook. We now expect sales to grow in the range of 4% to 5% and adjusted EPS between $1.15 and $1.25. This range is wider than usual as there are several key factors that could influence our results in the second half. Food-at-home consumption is still elevated, but as more consumers acclimate to external circumstances, we will monitor the impact on our mix. While trends suggest some consumers may return to dining out or using carry-out services, overall in-home consumption remains a significant driving force. Given the rising coronavirus cases, we will continue to assess how these changes affect consumer behavior and expectations. If the patterns shift back as case numbers decline, we anticipate a certain percentage of our non-branded business returning, which could influence our mix. This uncertainty accounts for the wider guidance range we've established at this point. Back-to-school and returning to work timelines will also determine how our sales mix trends, but these timelines remain unclear. While a range of scenarios exists, we are confident that our business will maintain strong performance this year. We continue generating solid, consistent cash flow, with operating cash flow up approximately 32% year-to-date. This cash flow not only supports a growing dividend but also generates discretionary free cash flow, which we'll strategically invest to expand into new markets and growing product segments like organic and gluten-free breads. Our disciplined cash flow generation allows us to maintain a strong balance sheet while being consistent in our capital allocation decisions. We are committed to directing capital expenditures towards core business growth, targeting $85 million to $95 million for capital expenditures in 2020. We aim to manage our debt to maintain our investment-grade credit rating and pay a healthy dividend as a critical component of total shareholder returns. As you heard from Mark, we emphasize identifying acquisitions in grain-based foods to introduce faster-growing brands to our portfolio. Finally, we consider making opportunistic share repurchases with excess cash. Our strong free cash flow has enabled us to maintain a solid financial position. We remain committed to our investment-grade credit rating and have a track record of quickly reducing leverage following our recent acquisitions. Over the last decade, we have demonstrated the ability to grow Flowers through both organic and acquisition-driven strategies, yielding solid mid-single-digit top-line growth over the long term. We have translated business growth into enhanced shareholder value, achieving low double-digit total shareholder returns over the last ten years. Today, with Ryals and team’s discussions of our strategic priorities, we hope you gain insight into our steps towards delivering on our targets. Focusing on leading brands and shifting our mix to more profitable products, we'll strive for sales growth of 1% to 2%. This top-line growth, primarily driven by our higher-margin branded products, should deliver adjusted EBITDA growth in the range of 4% to 6%. This is crucial to ensuring our cost management, as noted by Brad, is a vital component of our overarching strategy. Additionally, our adjusted EBITDA growth target of 7% to 9% recognizes that, in conjunction with EBITDA growth, there are significant opportunities within grain-based food markets that will enhance our growth potential. It’s crucial to note that we do not view our long-term targets as annual guidance; instead, they serve as guideposts to understand what we consider normalized annual results over several years. We’re currently in a unique environment, providing strong performance this year, likely surpassing our long-term targets. Given our expectations for substantial demand this year, fiscal 2021 will witness a 53rd week, estimating an uplift of 1% to 2% in sales and adjusted EPS by $0.01 to $0.02 per share. However, keep in mind that fiscal 2021 will have one less week, and we expect some demand reversion as pandemic effects fade, which will be a headwind to our growth algorithm in the upcoming year. We expect the environment to normalize somewhat by 2022 and anticipate delivering on our long-term targets. You've heard our commitment to executing our clear strategic priorities, and our team is dedicated to achieving these goals. I’ll now turn it back over to Ryals. Thank you.
Ryals McMullian, CEO
Thank you, Steve. Before we conclude, I want to highlight the strength and longevity of Flowers as a company. We've been in business for over 100 years. In fact, the original Thomasville Bakery, just down the street from where we are, is still operational and is a great example of why Flowers presents a solid long-term investment. We have cultivated a passionate team committed to delivering shareholder value throughout our history. Our products hold an emotional connection; fresh bread is a nutritious staple and the foundation of many everyday meals, all while being economical per slice. We cater to diverse consumer preferences across various tastes and textures, providing innovative brands the opportunity to engage meaningfully with consumers, leading to brand loyalty over time. Lastly, we see significant competitive advantages for leading operators like Flowers. The combination of strong brands and logistical scale from our nationwide bakery network supports consistent cash flows, as Steve stated, while also yielding appealing returns on capital. We have opportunities to grow through product adjacencies, innovation, and Smart Acquisitions, as Mark and Debo outlined. With our new organizational structure, our vision has never been clearer. I'm excited to unleash the power of our brands and introduce new and exciting products for consumers in years to come. In summary, I believe in what we are doing, and I hope today’s presentation has made you believe as well. Thank you for joining us today. We will now open the floor for questions.
Operator, Operator
Let's begin the Q&A session. Our first question is from Bill Chappell with Truist Securities. Bill, are you on the line?
Bill Chappell, Analyst
Yes, can you hear me?
Operator, Operator
Yes.
Bill Chappell, Analyst
Fantastic. I have a few questions. First, Ryals, can you help us understand the long-term growth expectation of around 1% to 2%? What do you anticipate from the category? Specifically, can you achieve that? What are your expectations for the core business growth beyond Dave's Killer Bread and Canyon, particularly in the specialty area? Do you require pricing changes to make this happen, or is this growth primarily driven by volume?
Ryals McMullian, CEO
Yes, that's a great question. Bill, as you know, the overall category, excluding COVID, has been pretty flat over the past several years. However, we've managed to achieve growth above the category average, thanks in part to acquisitions and some of our core products. This is why I place such a strong emphasis on innovation; it's essential for introducing new and unique items to consumers and sustaining that above-category growth. Regarding pricing, we've factored it into our models and guidance, planning to raise prices whenever feasible to counteract inflation pressures. Moreover, you heard about our potential for growth in new regions as well. We still hold a relatively low market share in critical areas like the Northeast, where we currently have only an 8% share and are just beginning our efforts there. The future opportunity is evident.
Bill Chappell, Analyst
And I guess a follow-on to that, I mean, what are you expecting from your largest competitor? Because, I mean, part of the issue as we look to Project Centennial, the benefits never really fell to the bottom line, was because your competitor remained aggressive on promotions and pricing. So it was difficult to see those benefits. Are you expecting a more rational environment from here forward?
Ryals McMullian, CEO
I think it's hard to say. The promotional environment has been down for many food companies due to high demand. I would expect as trends normalize that may come back some, but Bill, I can’t control what competitors do. I can control how we run our business. We remain confident that we can grow the top line at that forecast rate, especially with an embedded pullback on lower-margin business.
Bill Chappell, Analyst
Got it. And just two more for me. Since you were part of spearheading Project Centennial, why are many of these changes happening now? Why weren't they part of Project Centennial or done 4-5 years ago?
Ryals McMullian, CEO
That's a good question. The supply chain piece was always in the plan. When we started Centennial, we executed it back in 2017, we were more focused on the SD&A line, knowing we would get to the supply chain piece later. Looking back, one of the faults with Centennial was we probably tried to do too much simultaneously, causing a loss of focus in a couple of areas. Now, we are making organizational tweaks after learning from it. We are more focused on our portfolio strategy, supply chain optimization strategies, marketing investments, and innovation.
Bill Chappell, Analyst
Got it. And last one: any more color on what you mean by grain-based acquisitions? Does that include snacks? Does that include cookies and crackers? I can go on with other grain-based products. What does that mean?
Ryals McMullian, CEO
When you expand the lens to the industry from a wider perspective than just fresh sliced bread, you present a broader range of opportunities. It's a tough question to answer because I don't want to reveal too much. However, I will say we are looking beyond fresh bread.
Ryan Bell, Analyst
As you have increased frequency and household penetration recently due to COVID, could you elaborate on your efforts to retain those increased households? And can you speak about the specific niches within baked goods that you want to target for innovations and future M&A?
Ryals McMullian, CEO
Yes, certainly. We have reached many more households, and this chance to retain them is crucial. Let me turn it over to Debo to provide more details about our approach to retaining these new consumers.
Debo Mukherjee, CMO
Great question. Consumers' habits are changing based on the situation. We need to understand their practices closely and identify the sources they're relying on for information, ensuring our relevance. We are studying consumer behaviors intensely and pinpointing where they obtain recipe ideas and usage inspiration. We want to leverage those insights as part of our media mix and adapt nimbly as necessary.
Ryan Bell, Analyst
That was very helpful. Could you detail the specific niches within bread and baked goods that you potentially want to target for innovations or future M&A?
Ryals McMullian, CEO
Certainly, we have shown our efforts, especially in the gluten-free category. It's a smaller category. However, it continues to grow for various reasons. We're also introducing breakfast items. Our Dave's Killer Bread breakfast items have performed well. While still small compared to competitors, we are on a positive trajectory. We're also eyeing the introduction of new, smaller, innovative, and differentiated brands. Currently, larger brands are thriving again, which I hope is a permanent trend since we own some large brands. Regarding SKU rationalization, you can expect an ongoing effort. We've already eliminated 20% of our SKUs. We will continue reviewing the portfolio for items that are underperforming or creating complexity while ensuring that innovation is a priority. The thesis here is to increase the mix. The strong results demonstrated that margin improvement is attainable.
Mitch Pinheiro, Analyst
I got you, yes. You there?
Ryals McMullian, CEO
Yes.
Mitch Pinheiro, Analyst
First question is on snack cake. Why is it a priority to get back to optimal performance? Snack cakes have historically presented challenges, even beyond Tastykake and Hostess. Why not divest it?
Ryals McMullian, CEO
Mitch, cake has been part of our company for a long time. It has not been easy, and you're right; we have a brand that's not one of the top ones outside of the core Philly market. However, we have really great quality products. Our focus is on operational improvements to enhance our Navy Yard bakery, allowing us to see the substantial profit opportunity if we can elevate that efficiency.
Mitch Pinheiro, Analyst
In the second quarter, how did the Snack Cake business perform?
Ryals McMullian, CEO
Tastykake had a strong performance and was well received.
Mitch Pinheiro, Analyst
Looking forward, do you expect that in five years, we will revert to a lower-margin foodservice environment? Will we still witness this negative mix? Or how do we see that playing out?
Ryals McMullian, CEO
Yes, your insight is valid. We might see a mix shift as branded retail grows slower than foodservice and private label. But, if we can further elevate our branded retail business growth rate and strategically reduce lower-margin sectors, we should still see favorable mixes. Our goal is to achieve shareholder value by developing strategic partnerships with our customers.
Mitch Pinheiro, Analyst
Regarding M&A deal structures, could you clarify why atypical deal structures would be necessary? Are you referring to larger acquisitions requiring such structures, or are you considering smaller organic businesses?
Ryals McMullian, CEO
Yes, we're mostly considering smaller-scale deals. Perhaps not in larger acquisitions such as the past Keebler transaction that began as a minority investment. However, we're aiming to secure smaller stakes to foster innovation and growth.
Operator, Operator
That concludes our Q&A session and our investor update. Thank you for your interest in our company, and we look forward to sharing our third-quarter results in November. Be well, and goodbye.