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spk07: Good day and thank you for standing by. Welcome to the Flowers Foods first quarter 2021 results conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today. J.T. Rick, Senior Vice President of Finance and Investor Relations. Please go ahead.
spk02: Thank you, Victor, and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation. These were 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 Riles McMullen, President and CEO, and Steve Kinsey, our CFO. Victor, we're ready to start the Q&A, please.
spk07: All right, ladies and gentlemen. As a reminder to ask a question, you will need to press star 1 on your telephone. And to withdraw your question, press the pound key. Please stand by. We compile the Q&A roster. Our first question will come from Rob Dickerson from, sorry, Rob Dickerson. You may begin. Great.
spk06: Thank you. From Jeffers. Good morning, everyone. Good morning, Rob. So, look, you know, quarter was a good quarter. It sounds like you have decent conviction in the revenue guidance. It also sounds like or seems like, you know, those consumers that have been consuming at home or continue to consume at home with retail brands still elevated, which is great. I would just ask, because I think this is kind of the main question for a lot of investors right now, there's a line in the prepared remarks that says it seems as if maybe commodity inflation is somewhat manageable for this year, but for next year, right, if prices kind of remain where they are, there could be a bit more pressure. So I would just appreciate any more color on that, color, you know, potentially around some of those offsets, including inflation. pricing potential in the back after this year. And then I'll just leave it at that. Thanks a lot.
spk01: Sure, Rob. Hey, this is Steve. You know, obviously there's a lot of volatility in the commodity markets. You know, our guidance takes into consideration what we believe will play out for 2021. And as you know, we do hedge and we take coverage usually on that seven to nine month time horizon and typically stay on the long end of that. So You know, we do believe we have good visibility for the rest of 2021. You know, there are a few things that we can't cover. They're a little more near term, some in the packaging area. And you are seeing, you know, a lot of volatility and volatility and inflation, you know, in packaging, particularly around the corrugated area and arena. But like I say, you know, we do feel like we have, you know, decent visibility. You know, Ryle said in his comments, there are several levers we can pull. Pricing being one of those, but we are looking at, you know, efficiencies across our bakeries as well as other cost initiatives. So, you know, I do feel pretty good about the guidance range we have out there. And, you know, obviously due to the volatility and the way things move so quickly, The reality is when you look at what's driving kind of the commodity inflation, a lot of that is not necessarily wheat. I mean, the wheat crop is in pretty decent shape, but it's other grains like corn and beans. And it's more of a global market. We are seeing China back into that market. So the reality is that today's prices, if we had to go out and cover, there would be significant commodity inflation. But we still have a lot of runway with regard to the corn crop, the bean crop. We'll cycle a wheat crop. But we just thought it was important to get that out there from a transparency perspective. Rob, just to add a couple points to that.
spk03: But as you know, we've been through periods like this many times in the past. We've been able to adequately cover most of the inflation that we've experienced over the years. I would say that I think we're better positioned today perhaps than we've ever been. Just if you think about the strength of our branded portfolio now and the focus on it, consumers' obvious desire for branded products with a point of difference environment standpoint.
spk06: Okay. That makes sense. And just a quick follow-up. You know, like you said, consumers continue to focus on brands. Your brand of business is doing very well. You call out in the preparatory marks just the growth overall with DKB and Canyon, which has been phenomenal. And, you know, even relative to 2019, right, revenues still remain elevated. So I guess, like, the larger question then is as consumers continue They start to revert back, right? You say kind of one of the three things you're keeping your eye on, right, is reversion, basically channel reversion. Is there anything that you would say now relative to 12, 18 months ago that has changed your way of thinking of maybe how to service some of the channels? Like are there benefits to maybe not reverting as much? Like just say, okay, we're going to leverage some excess capacity over here a little bit prior to label, a little bit of food service. You know what? We've learned through the pandemic this. Or no, is it just kind of get back to business as usual? And that's all this time. Thank you.
spk03: Yeah, no, thanks, Rob. No, I don't think it goes back necessarily to business as usual. As we've said before, I do think there are some of these patterns are probably permanent. But, you know, we've also consistently said, you know, we do expect to see, you know, some movement back to pre-pandemic levels. So I don't think it will go all the way back. I do think that when school starts in August, that should give us a better kind of long-term indication of where these trends are ultimately going to land. Having said all that, you know, no matter what that environment looks like, you know, we believe that we're very well positioned with our branded portfolio, as I mentioned. But also, as you think about food service coming back, which it already did somewhat in the quarter, we started to see some moves up in food service. And the good story there is you know, via our customer strategy work, it is coming back at better margins. So, you know, as that mix reverts and food service starts to come back, it won't have, you know, as significant of an impact as it would have prior to the execution of that strategic work.
spk06: Okay, interesting. I'll follow up on that. Thank you very much.
spk03: Thanks, Rob.
spk07: Thank you. Our next question will come from Bill Chappell from Truist. You may begin.
spk04: Thanks. Good morning. Hi, Bill. First, follow-up on pricing. Have you seen any pricing on the competitive landscape? I think we heard the other day that Little Debbie and the Cakes had already led some pricing. I imagine not all of your competitors are kind of head the same way you are, so they may be feeling the pinch sooner than later. So I didn't know if you've seen anything there or looked to follow from that standpoint.
spk03: Yeah, nothing really significant, Bill. The one comment I'd make relative to pricing just in the competitive environment is the promotional cadence. And still consistent with past quarters, we haven't seen really any move relative to promotion. Still remain well down base sales, really driving everything, though obviously down year over year just given the pantry loading months. But nothing significant. I mean, we know that some of the regional players perhaps don't hedge much. like we do, or at least not as far out. So they're a little bit more exposed to the spot market and that kind of thing. But, um, you know, thus far, nothing, nothing notable at this point.
spk04: Got it.
spk03: Bill, it also could be more of a, just like for us, it could be more of a back half dynamic than a, than a front half dynamic.
spk04: Yeah, sure. And then on, on private label, I mean, it's pretty astounding that it's gone from 26% of the category down to 20, which that, yeah, it's gotta be one of the lowest in, in years. Um, And I think I've asked this question before, but since you supply so much of the private label, I mean, at what point can you go in and push more of your branded product on the shelf and show that, hey, this is not really a great use of the space? I mean, since you do service it with DSD, I would think that that's something that's pretty apparent to the retailers as well as the industry.
spk03: Indeed it is. Yeah, you're right. We've talked about this a little bit on prior calls, but, I mean, I think preference for brands. So, you know, we have been able to, you know, expand our shelf space, you know, particularly with Dave's and Perfectly Crafted and Canyon, some of those leading items that we have, you know, again, just kind of highlighting the importance of the portfolio strategy overall. But I agree with you. It is pretty amazing to see how, you know, see how far down it is. But I think that's a reflection of consumer behavior more than anything else. And I'm certain that the retailers are pretty in tune with that.
spk04: Sure. And then last one for me, just going back a year ago, you had your 40-ish bakeries being able to, in a short period of time, hit a massive surge in sales. And now that we're coming back down or we're normalizing, do you look back and say, boy, the supply chain, the number of facilities we have could be streamlined even further now? you know, we're really much more efficient than we could, or more efficient and could be even more efficient by cutting out a few plants here or there, or is that not the case? Is it, hey, let's just continue to operate and grow with it?
spk03: No, to the contrary. Look, I mean, network optimization, you know, has been one of our key areas of focus, as you know. You at Lynchburg Bakery. We have some other projects going on this year. You've seen with the elevated CapEx numbers this year. So still very much a focus point for us. As we often say, there are a lot of levers you can pull in an inflationary environment, but it's always incumbent upon us to make sure we're being as efficient as possible. So we're constantly evaluating our network from that standpoint.
spk04: Got it. But more of just kind of normal process. I mean, would you, I guess, sorry, I'm just Would you expect CapEx to be elevated going into 2022, or is this really the big year of change?
spk01: Well, Bill, you know, this year the focus is on kind of the digital initiatives. We have said that the digital is a two- to three-year initiative. So, you know, while we're not prepared to give guidance on 2022, portfolio and optimization, some of those projects.
spk04: Got it. Great. Thanks so much.
spk01: Thank you, Bill.
spk07: Our next question on the call line, Faiza, all the way from Deutsche Bank. You may begin.
spk08: Yes. Hi. Good morning. Hi. I just wanted to follow up on the inflation point, and I don't know if you're willing to say anything on this, but I'm curious, are you still hedging out into 2022? Because it sounds like, you know, are you expecting sort of these prices on wheat, et cetera, to come down into 2022? So you'd rather have, you know, open positions? Or are you sort of continuing your, you know, programmatic hedging program at these current prices?
spk01: Yeah, I mean, you know, we wouldn't comment specifically on 2022 at this point. But, you know, we tend to stick pretty true to our overall hedge strategy, which is the seven to nine months. So, you know, we do have some, you know, visibility into the, you know, the first quarter of 2022. But, you know, the reality is it's still pretty volatile. And, you know, beyond that, I probably wouldn't comment much on our particular coverage with regard, you know, to the long end of our coverage range. But, you know,
spk08: Okay, that's helpful. Thank you. And then just secondly, you know, you talked about improving the profitability of the non-retail segment. And I know you've talked about this, you know, previously, but I wonder if there's more color or there, you know, numbers that you can put around that, you know, just more details around, you know, how much of an impact this could have going forward or has had so far.
spk03: Yeah, well, obviously, food service on a relative basis remains pretty depressed, particularly if you compare it back to 2019. So it's just starting to recover. The quick serve business has been the fastest to recover. I think that's actually up a bit over 19, with the balance of the food service business still being a little bit off. We haven't quantified it before, but it's something that we measure internally. We have set new margin thresholds for our food service business. And the way we're approaching it is if we cannot get a piece of food service business to that acceptable margin threshold via price or our own efficiencies or whatever levers may be out there for us to pull, that we have a decision to make about whether or not that's some business that we want to continue. And so far, we've been pretty successful in getting a nice piece of that business up to those margin thresholds. Having said that, we're not done yet. I mean, we've still got a long way to go. We've only been executing on this for nine months or so, but early returns have been really good. And as I said, as that business has come back, it has come back at an overall higher margin level. So as we go forward, I expect it to be a meaningful contributor to the overall. We've said in the past that food service is never going to be at the margin level of branded retail, but there's certainly a lot of room for improvement. And I think in years past, our food service team, and we have, I believe, the best one in the industry, there was a bit of a difference strategic vision for food service that was based more on, you know, volume and sales gains than margin. But that team has now been given permission, if you will, to go get that margin, even if it means walking away from some business from time to time. Not all of it's going to fit, but there is a lot of opportunity out there in food service that we think can be nicely additive to the overall. Hopefully that helps give you a little bit more color. Yeah.
spk08: Yes, definitely. Thank you. And then just last one for me just on the digital initiative. Have you have you made any of these investments so far? Because just my reading of your comments was that you're sort of you're not there yet, but you're still committed to the five cents of spending that you've talked about. Are those more should we expect those to come through more in the back half? Or have you already sort of started making these investments?
spk03: Yeah, no, we have already started. I mean, a lot of it on the front end is, you know, working with our outside partners for the planning and design phases. But, you know, the nickel is still good for the year, though that will be a little more heavily weighted in the back half as we start executing on the plan, at which time also later this year we'll be giving you guys some more detail on where we're headed from a digital strategy standpoint.
spk08: Perfect. Thank you very much. Thank you.
spk07: Our next question will come from Mitch Pinero from Stradivant.
spk05: Mitch, good morning. Good morning. So a couple questions here. First, back to private label for a second. It is a remarkable drop when you look at the trend from, you know, just even several years ago. You talked about it being sort of consumer behavior-led. Is any of this retailer-led?
spk03: I don't think so. I think it is consumer-led. If you think about the category overall, Mitch, and just back up, let's just call it five years ago, just to use a round number. There wasn't nearly as much innovation, if you will, in our category. You didn't have... DKB nationwide, certainly, that was basically a West Coast phenomenon until we bought it. Kind of the same thing with Canyon. That was all in Costco or in the freezer case, et cetera. And since then, I mean, we'll even talk about our competitors. I mean, Sarah Lee coming out with Artesano, us coming out with Perfectly Crafted, and then obviously layering on DKB and Canyon. I think a lot of the innovation on the bread wall is driving this too. And as you know, in our category, there's not much difference. Similarly, within the category, we've seen a shift from kind of your traditional loaves, still a lot sold, but your 100% whole wheats or honey wheat, to these specialty items, buns, breakfast in particular. There's kind of been a mixed shift in the category that we've been watching for some time, and obviously with our new items in both of those subsegments, we've benefited. I think that's the primary driver, Mitch.
spk05: Okay. Thank you. Okay. And then, you know, looking at your two-year stacked growth, you did 3% in this quarter versus 2019's first quarter. That's, you know, looking at that, you know, over two years, obviously it's a little above your long-term growth rate. Is that – and looking at your sort of revenue guidance for the remainder of the year, it looks like you expect to see – this type of stack growth for the remainder of the year. Is that accurate?
spk03: Yeah, we actually feel pretty good about that, Mitch. I mean, our branded retail business is actually up 13.7%, I believe it was, JT, over 19. So we're really pleased. Plus, we've done quite a bit of skew around over that period of time, too. So taking all that complexity out of the portfolio, really focusing on the winners, I think we're showing that that's paying some nice dividends, and we see that through the rest of the year. We're quite optimistic there.
spk05: Have you ever defined your skew rationalization drag?
spk03: I'm sorry, Mitch. Say that one more time.
spk05: Have you ever defined or given us any color on what the skew rationalization drag was in percentage terms on your growth rate?
spk03: No, I don't think so.
spk05: Okay. I mean, how meaningful is it? Is it in the most single digits, or is it less than 1%? I mean, how meaningful is skew rat to these numbers?
spk03: Yeah, well, I'd have to go back and look at that, Mitch. I don't have that in front of me.
spk05: Okay. And then as it relates on the same thing on – looking at your growth in, in adjusted EBITDA from 19th quarter to this, the current quarter, how is it, is it, is it all mixed or is there anything else in there? Any, any, any cost of goods savings in there? Any, anything else in there besides just the positive mix shift?
spk03: Yeah, no, there absolutely is. You know, we had our, we had our, $10 to $20 million in portfolio optimization savings last year. We actually beat the top end of that, so you've got that piece of it. And that's a mix of procurement savings, overhead savings, SC&A savings, so it's kind of a broad cost basket. We have a target of $30 to $40 million out there for this year in many of those same categories, and we're on track to deliver on that as well. And then, Mitch, if you think about the bakery efficiencies and some of the underperforming bakeries making some really nice progress at Navy Yard, which I know you'll be happy to hear, things like that, our efficiency was up in the first quarter. Those add meaningfully to the bottom line as well.
spk05: Okay, terrific. And then last question, you know, so your market share has been, you know, creeping up in bread recently. you know, over the last, you know, year or two. And is there, you know, have you seen anything to call out among regional differences there? I mean, are you – I don't see the regional scanner data, but is that – any noteworthy changes in any, you know, regional market share gains or losses there? over the last year or so?
spk03: Mitch, not really. Overall, the share trends have been good. Obviously, a little bit down over the quarter last year, just given the massive gains, but sequentially up from Q4, which is great to see. you know, there's been a lot of talk about, you know, geographic shifts and people moving out of the northeast to Florida or out of California to Texas, whatever it might be. We've looked at that, but there's nothing specific to call out except for one region, which is the northeast, and that's the one that, you know, that we've been focused on. We've been talking about that for the last few quarters where we're, you know, kind of underpenetrated there and making some nice share gains as that's just one that I would call out to you. Okay.
spk05: All right. Well, thank you for your time.
spk03: Thanks, Mitch.
spk07: And as a reminder, that's style one for questions. Our next question comes from Ryan Bell from Customer Edge Research. You may begin. Good morning, everyone.
spk00: Hi, Ryan. If we're trying to get a benchmark of your non-branded business from what we can see in track channel trends, And how should we think about that going forward? In general, I mean, we've been seeing private label across your categories declining. Given your intentional emphasis on your branded products, we've been seeing softer growth from your private label business relative to what we see in traffic channels. Is that something that we should expect to see for the foreseeable future?
spk03: Well, I mean, I think it's yet to be seen, right? I mean, So, again, the shift to brand, the differentiation in brand that you don't find in private label, I think, is driving a lot of that. Now, we are making some decisions about select pieces of our private label business, kind of the same way that we're looking at food service, to the extent it's underperforming or underdelivering relative to what it should. I mean, private label is what it is. We have made some decisions to – driver is consumer driven.
spk00: Thanks. That's helpful. And then you talked about M&A being your fourth strategic priority. Would you be able to provide any updated thoughts about the current M&A landscape, just in terms of availability of the assets and valuations overall?
spk03: Absolutely. Yeah, things are, in short, things are really heating up. I mean, since the first of the year, people sort of took a break, largely last year. And it's, you know, there's a lot of books flying around out there right now. I'm sure you guys have read about some of the more public ones. But, you know, there's quite a bit of opportunity. Ryan, the challenge, as it has been for the past few years, is valuation. You know, we're committed to maintaining our disciplined approach. We certainly have the balance sheet to lean in where we've got, you know, high conviction rates. but we're only going to do so in a reasonable way. You know, and there's only so far we'll go, you know, and maintain our disciplined approach. So I'm pleased to see the opportunities start to come back. You know, certainly we're active. We remain active. And I think it'll be a – I think overall it will be a very active year in the food space. There's just a lot of – there's a lot of money sloshing around out there trying to find a place to land.
spk00: Okay, thank you. And I think this is the last one for me. In terms of the organic growth side, you talked about some innovations in rye and flatbread. Could you maybe talk about the opportunity or how fast you see some of that expansion?
spk03: Absolutely, yeah. We're really pleased with the flatbreads that we introduced in the Northeast. Obviously, continuing to innovate with Dave's, the rye is out there. It's doing great, right on target, great reception from consumers. If you haven't tried it, I suggest. It's a great loaf of rye bread. And then further out, I mean, we're standing up our Agile Innovation team. You know, it's early days. We're just getting wrapped up. But the early prototypes they've shown me of some of the things that we're looking at are just outstanding. So there's a lot of great things to come. And we all know how important innovation is going to be for us to continue to grow our top line in line with the long-term targets.
spk00: Great. Thank you.
spk03: Thanks, Ron.
spk07: And once again, that's star one for questions. I'm not showing any current questions in the queue.
spk02: Okay. Well, thank you very much, everyone, for your interest in flowers, and we look forward to speaking to you next quarter. Take care.
spk07: This concludes today's conference call. Thank you for participating you may now disconnect.
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