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Flowers Foods, Inc. (FLO) Q2 2021 Earnings Call Transcript

FLO Earnings Call - Final Transcript

Flowers Foods, Inc. (NYSE: FLO) Q2 2021 earnings call dated Aug. 13, 2021

Corporate Participants:

J.T. Rieck — Senior Vice President of Finance and Investor Relations

A. Ryals McMullian — President and Chief Executive Officer

R. Steve Kinsey — Chief Financial Officer and Chief Accounting Officer

Analysts:

Bill Chappell — Truist Securities — Analyst

Mitchell Pinheiro — Sturdivant & Co. — Analyst

Ryan Bell — Consumer Edge Research — Analyst

Ben Bienvenu — Stephens — Analyst

Presentation:

Operator

Good day, and thank you for standing by. Welcome to the Flowers Foods Second Quarter 2021 Results Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. J.T. Rieck, Senior Vice President of Finance and Investor Relations. Sir, please go ahead.

J.T. Rieck — Senior Vice President of Finance and Investor Relations

Thank you, operator, and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks and view the slide presentation that were all posted yesterday evening 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, President and CEO; and Steve Kinsey, our CFO.

Operator, we’re ready to start the Q&A please.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] We have our first question from the line of Bill Chappell from Truist Securities. Your line is now open.

Bill Chappell — Truist Securities — Analyst

Thanks. Good morning.

A. Ryals McMullian — President and Chief Executive Officer

Hey, Bill.

Bill Chappell — Truist Securities — Analyst

Hey. Just one of the things we’ve heard from several or were multiple food companies over the past month, month and a half is that there has been a meaningful for whatever reason trade-up from private label to branded. Thought is, stimulus checks or other issues, though no one can quite figure it out. And clearly, that had some impact or continues to have some positive impact on your business. So I guess, the question is, do you see this is a sustainable shift or do you think that people will move back towards private label, which could put margin pressure as we move into back half of this year or into next year?

A. Ryals McMullian — President and Chief Executive Officer

Yeah. It’s a good question, Bill. In our category with private label being historically so over developed, we were actually seeing these private label declines even prior to the pandemic, and I think we’ve mentioned that on a couple of prior calls. We’ve actually done a fair bit of research, consumer insights research into why that trend was continuing and almost accelerating really. And it really comes down to, in our category, there is a distinct lack of differentiation in private label. It’s basic white and wheat bread and buns, whereas in the category, and Flowers has participated in this obviously, you have a lot of differentiation with the new Perfectly Crafted brioche rolls with things like Dave’s Killer Bread and Canyon. And that’s driven a bit of a premiumization process up to branded from private label.

As to whether it’s sustainable or not, I actually think it is. And that’s why we’re making all the investments we’re making behind our brands and marketing support, etc. If you get into a recessionary situation, you could see some move back to value. But even in the last recession that we saw in sort of ’08, ’09, we didn’t see that much of a move back to private label even then.

Bill Chappell — Truist Securities — Analyst

I guess, did you see a step change in this current quarter or is it just more of a continuation of the trend?

A. Ryals McMullian — President and Chief Executive Officer

It’s really more a continuation of the trend. Private label continues to fall and branded retail continues to hold up very, very well.

Bill Chappell — Truist Securities — Analyst

Great. And then just on the cost front, same thing, heard a lot. Your peers talk about especially more on freight and incremental cost that you seem to in April, to raise EPS guidance for the full year. It seems like it’s less of an impact. Is that largely due just to the way your supply chain distribution works or is there something else that’s helping you offset these costs?

A. Ryals McMullian — President and Chief Executive Officer

Yeah. Partially that’s — and Steve can jump in here too. But yeah, that’s partially the DST. That work is a bit more of a closed loop system. So we’re not as exposed to the long-haul freight. And then the other thing I would say is, with our hedging strategy being four to seven months out, sometimes a little bit longer, that gives us good visibility in advance of what our costs are going to be and we can be proactive about mitigating those cost.

Steve, anything you’d add to that?

R. Steve Kinsey — Chief Financial Officer and Chief Accounting Officer

No. I mean, I think as we said earlier, Bill, in the year we know we had pretty good visibility into our overall cost structure for this year. Obviously, the inflation in the back half is a little heavier, but we think we’ve taken the right steps to mitigate most of that. And as Ryals said on transportation, we’re not immune to the increases, but we feel like for 2021 our contracts have protected us the best they can.

Bill Chappell — Truist Securities — Analyst

Yeah. Thanks so much for the color.

A. Ryals McMullian — President and Chief Executive Officer

Thanks, Bill.

Operator

Thank you. Our next question is from the line of Mitch Pinheiro from Sturdivant & Company. Please go ahead.

Mitchell Pinheiro — Sturdivant & Co. — Analyst

Hey, good morning.

A. Ryals McMullian — President and Chief Executive Officer

Hey, Mitch.

Mitchell Pinheiro — Sturdivant & Co. — Analyst

Hey. Just following up on Bill’s question regarding private label. Is the retailers’ view of their private label offerings changing as well, I mean, in terms of shelf space allocation? Are they looking to premiumize private label to a greater extent trying to keep private label or is that really not one of their strategies and they’re willing to let the market go where it goes and/or reallocate shelf space? Can you give us any — some color on that?

A. Ryals McMullian — President and Chief Executive Officer

Yeah. I mean, we’ve had some isolated discussions about that, but nothing broadly in the market. We’re not hearing much about wanting to premiumize private label or anything like that to this point. Probably the one exception for us, the one area of private label to continues to do well is Canyon’s private label gluten-free. That’s probably the one call out in private label that’s actually showing some growth in our portfolio.

Mitchell Pinheiro — Sturdivant & Co. — Analyst

And also as part of your discussions, are they looking to reduce shelf space to private label? I mean, clearly, the dollar value and the gross margin contribution of the brands versus private label would suggest I would think more allocation to the branded shelf space. But is that happening at all or…

A. Ryals McMullian — President and Chief Executive Officer

Again, I would say that it has happened to some extent, but we haven’t seen any broad sort of market-wide moves to take shelf space down. But there have been some isolated customers where that’s been reduced. And then you also have the labor situation that’s kind of happening to everybody that limits — somewhat limits the ability to provide all the SKUs. I mean, throughout this pandemic and this whole labor situation, we’ve had to in some cases limit some of our SKUs. And so that’s had some effect on the shelf space allocation. But as far as the overall private label allocation, there has been no meaningful change really.

Mitchell Pinheiro — Sturdivant & Co. — Analyst

Is there — are there any pricing changes with private label? Is it a volume decline or is it — is there pricing going up? Can you talk about that a little bit?

A. Ryals McMullian — President and Chief Executive Officer

Yeah. I mean, we have taken some pricing over the last several years in private label, yes.

Mitchell Pinheiro — Sturdivant & Co. — Analyst

In terms of — part of your — part of the whole strategy or some of the benefit Flowers gets is from gaining share in lower penetrated newer markets, newer to Flowers that is? And any bakery [Phonetic] to call out geographically there are strengths or weaknesses among your territories?

A. Ryals McMullian — President and Chief Executive Officer

Yeah. I mean, we’ve been calling out the Northeast for the last several quarters as a focused market for us. We continue to make investments up there. And the good news is, we’re seeing share gains there. We had a good quarter in the Northeast. We continue to gain share on the West Coast, another really strong market for us. Obviously, we’re super strong in the south. I mean, Mitch, as you know, the big hole or opportunity for us is that whole upper Midwest quadrant.

Mitchell Pinheiro — Sturdivant & Co. — Analyst

Okay. And then just a couple more. In terms of what’s happening with snack cake and Tastykake, in particular? Any — you’re making progress on your profitability?

A. Ryals McMullian — President and Chief Executive Officer

Yeah. Thanks for asking. Really good progress at Navy Yard. We’re not — we’re still not where we want to be, but the trajectory is really good. The team has done a great job up there. Our automation investments are paying off. Scrap rates are coming down. Labor in the cake markets — in the cake plants rather continues to be a bit of a challenge. It’s just the nature of the cake bakeries with more people in there. But overall, we’ve been able to manage through it really well. We’ve also done some things on the commercial side, Mitch, from a price promotion standpoint, to make us more competitive there. So all signs pointing in the right direction. In fact, relative to our internal goals, we’re actually ahead of plan there.

Mitchell Pinheiro — Sturdivant & Co. — Analyst

And then, I guess, final question is, when you look longer term and you look at your margin profile, I think you mentioned that I think either in this quarter, mix is certainly a powerful help for you, you have productivity and you have your whole network optimization to support further margin improvement. But I mean, how — it just seems that the branded versus the non-branded mix is still going to be the most important part of the change. And I’m curious as to, A, if you agree with that? And B, what you’re doing? What are the specifics specifically you’re doing to create the positive mix going forward?

A. Ryals McMullian — President and Chief Executive Officer

No, absolutely, and I agree with you. I mean, the whole notion of shifting more around mix to branded retail is the most powerful tool we have to improve our overall margin profile. But all the other things you mentioned, whether it’s network optimization, whether it’s our marketing investments, whether it’s our digital transformation are all intended to support that mix shift to branded retail. So it all rolls up to the same strategy of over time shifting more of our mix to brands, both the brands we have today and hopefully the brands we’ll have tomorrow with future in that.

Mitchell Pinheiro — Sturdivant & Co. — Analyst

Okay. And just — I actually just had one more sort of a question speaking of M&A is, can you talk, A, about your pipeline or maybe the environment in M&A right now?

A. Ryals McMullian — President and Chief Executive Officer

Yeah, sure. Really no change from last quarter. I mean, it’s — deal activity continues to pick up. We’re looking at quite a few things right now, which is a welcome change from last year when it really kind of dried up. So we’re happy with the pipeline. And Mitch, it’s nice to be in the position that we are in, that we’ve got the balance sheet to act when the timing is right.

Mitchell Pinheiro — Sturdivant & Co. — Analyst

Okay. Thank you. I’ll get back in the queue.

A. Ryals McMullian — President and Chief Executive Officer

Thanks, Mitch.

Operator

Thank you. Our next question is from Ryan Bell with Consumer Edge Research. Please go ahead.

Ryan Bell — Consumer Edge Research — Analyst

Hi. How are you guys?

A. Ryals McMullian — President and Chief Executive Officer

Good morning, Ryan.

Ryan Bell — Consumer Edge Research — Analyst

Good morning. So just touching maybe a little bit more on the inflationary environment and the impacts of the rising costs. Can you talk about maybe your ability to take pricing as we get into the end of the year in 2022?

R. Steve Kinsey — Chief Financial Officer and Chief Accounting Officer

Yeah. I mean, obviously, we’re not going to talk about 2022 today. We’re not prepared at this point to give guidance. Although it is on our mind given the inflationary environment we’re in, we’ve seen pretty substantial runs like most other companies. Regardless of which industry or segment you’re operating in, we’re all experiencing pretty tremendous inflation. What I would say for 2021, and I think we talked about in our prepared comments, in the back half, we’re pretty confident in our overall cost structure and also confident in the measures we’ve taken to mitigate the inflation the way we have whether that was pricing, I think you’ll see promotional efficiency, which we saw in Q2. A lot of our projects are on track with regard to efficiencies and kinds of productivity. And we expect really to use kind of the same tools going into 2022. But beyond that, no, I can’t really comment about beyond this year.

A. Ryals McMullian — President and Chief Executive Officer

Hey, Ryan. One thing that I would add to it and we mentioned this a bit in our prepared remarks, is if you think back to the last inflationary period, significant inflationary period that we saw sort of the ’07, ’08 period, we were a much different company back then. Our market share was a lot lower. We really only had one sort of quasi national brand in Nature’s Own. And then you fast forward to today, and we’ve got — roughly in ’18 share. We’ve got Nature’s Own and expanded Nature’s Own now with Perfectly Crafted as well, We’ve got Dave’s, We’ve got Canyon, We’ve got Wonder. And so the brand portfolio, if you will, is quite a bit stronger than it was, which also gives us greater confidence that we can pull that lever to the extent necessary to help mitigate any rises in cost.

Ryan Bell — Consumer Edge Research — Analyst

Okay. Thank you. That’s helpful. And then could you talk about how you’re thinking of the back-to-school season in terms of your guidance? What you’re assuming about the season? And sort of what would change potentially to your base case given some of the variability that we would see with the delta variant and the back-to-school and other types of getting back to normal?

A. Ryals McMullian — President and Chief Executive Officer

Yeah. Our perspective on that is changed markedly since the first of the year when we first issued guidance. And then with the vaccine rollout, we were kind of planning for what that was going to look like and how that was going to affect the market dynamics. And now here we find ourselves right at the beginning of back-to-school season, we’ve got this delta variant that’s surging significantly across the country.

So our perspective has changed as the dynamics out there have changed. And obviously, it’s hard to say. We had originally expected that the back-to-school season will give us a really good indication of what the new normal might look like in a more steady state going forward. I think the rise of the delta variant has brought that somewhat in the question and may push that timeline out a bit now. And obviously, in our results through Q2 and even the beginning of Q3, we’re continuing to see very strong branded retail performance in line with what we’ve been seeing for the first part of the year.

So yeah, it’s going to be a little bit of a wait and see. I would have thought that back-to-school would have — and people starting to return to office would have given us a better indication, but I think that’s gotten pushed out a little bit now.

Ryan Bell — Consumer Edge Research — Analyst

Thanks. That’s helpful. And would you be able to provide maybe a little bit more detail about some of the shifts in your capex guidance this year? I know you took it down a little bit and you said that it was largely due to delays from the pandemic. Is the expectation for that just to shift out to next year?

R. Steve Kinsey — Chief Financial Officer and Chief Accounting Officer

Yeah. I mean, the majority of that will just roll into 2022. I mean, the reality is there is no one I would say one specific or large project that was impacted. It’s kind of across the whole. Just some delay in timing and getting equipment in for some of the projects.

Ryan Bell — Consumer Edge Research — Analyst

Thanks. And then just the last one for me. How would you feel just about the general longer term impacts as incremental at-home demand — I mean, I think that it’s pretty evident at this point that there is going to be incremental work from home relative to 2019. So could you potentially share some of your thoughts about the extent of the potential for this to impact your business over the next few years?

A. Ryals McMullian — President and Chief Executive Officer

Yeah, I’d be happy to. Frankly, Ryan, I’m quite optimistic about it. I mean, I think there has been a fundamental shift in several things, some good and some not so good. The good parts are I think that the future of work is going be a lot different. We here at Flowers are going to be doing it differently permanently. And many other companies, as you read, are doing the same thing. And I think that shift or that change in mindset really only benefits our business with more people eating at home, more sandwiches consume, whatever it might be, I think we’re very well positioned. Coupled with that our commitment to innovation and continuing to bring new and exciting offerings to the consumer, that’s going to continue to be really important for us to drive future growth. So I’m frankly really optimistic.

On the negative side, the labor situation continues to be difficult. As we read across every industry, whether service manufacturing or otherwise, it’s a difficult situation. It’s tough to attract and retain people right now. So far we’ve done a really good job of managing through it. It has not been easy, but we’ve been able to continue to serve the market effectively throughout this period. But it is a challenge and we’re having to re-look at how we view labor in the bakeries, and we’ll probably have to make both some short-term and long-term changes to how we approach that, because I think it’s more than just extended unemployment benefits. I think there has been a systemic change of how work is viewed in this country.

Ryan Bell — Consumer Edge Research — Analyst

Great. Thanks a lot.

R. Steve Kinsey — Chief Financial Officer and Chief Accounting Officer

Sure.

Operator

Thank you. Our next question is from the line of Ben Bienvenu with Stephens. Your line is now open.

Ben Bienvenu — Stephens — Analyst

Hey, thanks. Good morning.

A. Ryals McMullian — President and Chief Executive Officer

Hey, Ben.

Ben Bienvenu — Stephens — Analyst

Ryals, I want to follow-up on that — on the compensation side of things. You talked about you’re reviewing compensation, I’m wondering where you are today in that process? What’s considered in your guidance with respect to compensation and benefits for the balance of the year in fiscal ’21? And then you talked about a combination of short and long-term, it sounds like you’re being holistic with how you approach this and more surgical. Can you talk about your mindset and kind of what you’re seeing today relative to normal? And how you feel about your ability to kind of ameliorate those dynamics?

A. Ryals McMullian — President and Chief Executive Officer

Sure. I mean, for ’21, I wouldn’t worry about it too much from a wage standpoint, because the one thing I think it’s more than just wages that are the issue. Now certainly we’ll look at that, we do periodically look at that any way to make sure that each of our markets our bakeries are competitive. But the — again, the whole dynamics change. What you used to look at as your peer set in manufacturing has changed and we used to look at other food companies or warehouses. Well, now you’re competing against Amazon, you’re competing against Tesla. And with all the government payments coming in, you’re competing with the government too. So it makes it pretty difficult.

So you’re right, we’re taking a holistic look because I don’t believe it’s only about compensation, it could be to some extent, and we want to remain competitive. But I think the quality of life factors are even more important. And what I mean by that is, bakeries can be hot, they can be unpleasant in the summer time, what can we do to improve the overall working environment inside the bakeries. We’re looking at different of uniforms, we’re looking at different cooling systems, etc., those types of things. But one of the biggest issues for us, and I’ve mentioned this before, is scheduling in the bakeries.

Working in a bakery is a tough job. And we’re running the bakeries really hard, particularly right now with the labor shortage. And we’ve had increases in overtime and things, because of that our folks are working really hard, and that’s not a situation that you want to sustain for too long. So what can we do from a scheduling standpoint to give more consecutive days off, more predictive or predictable rather schedule so that people can plan their childcare or doctor visits or whatever it might be in daily life that they need to do. So we’re looking at a myriad number of things to help mitigate this. And I’m glad that we are because I don’t think that this is a temporary situation.

Ben Bienvenu — Stephens — Analyst

Yeah, okay. It makes sense. And then you noted promotional efficiency contributed to better price mix. Can you talk about what’s happening there? Is it that this kind of return to normal or new normal dynamic around consumer behavior is sustaining volumes better than you thought? Is it initiatives that you have in place? Maybe just help us understand what’s going on there and kind of the glide path associated with that? How repeatable is that dynamic?

A. Ryals McMullian — President and Chief Executive Officer

Yeah, sure. I’ll let — I’ll start and Steve can chip in if he has something else. But yeah, the overall promotional environment has been pretty steady for a while now. And it’s really in our category, I would call it, at least five year lows, and that’s been pretty steady. And with the demand for branded retail price, I don’t see that changing anytime soon. We also internally do a much better job with our TPM system than we did historically at managing our promotions and only pursuing those that have a high return associated with them. And so both the kind of the macro environment is supporting this, but also our internal efforts are being more efficient with our promotions is helping.

Steve, anything you’d add?

R. Steve Kinsey — Chief Financial Officer and Chief Accounting Officer

No. I mean, I think Ryals’ point about systems really can be emphasized enough. I mean, in the last couple of years we’ve worked really hard on implementing some new technology, and it gives us great visibility. And like we talked about in Q1, promotional activity has pulled back quite a bit. So it’s really about that getting priced. A lot of our inflation comes in the back half. So that’s where the more true pricing would show up I would say. So we’ve been really pleased kind of with the promotional environment and the levels we’ve seen, and that’s been a big part of the margin equation.

A. Ryals McMullian — President and Chief Executive Officer

Yeah. And Ben, the only thing I would add to it is, we did implement a price increase right at the beginning of Q3. And while it’s early days, we’ve been really pleased with how volume has held up with that price increase. So that’s encouraging certainly.

Ben Bienvenu — Stephens — Analyst

Yeah, for sure. Okay, very good. Thanks so much, and best of luck.

A. Ryals McMullian — President and Chief Executive Officer

Thank you, Ben.

Operator

Thank you. There are no further questions at this time. Mr. Ryals McMullian, please continue.

A. Ryals McMullian — President and Chief Executive Officer

Okay. Well, thank you very much everybody for your interest in the company. And we’ll look forward to speaking with you again next quarter. Take care everybody.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

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