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spk07: Good day and thank you for standing by. Welcome to the Flowers Foods second quarter 2021 results call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, Please press star zero. I would now like to hand the conference over to our speaker today, Mr. J.P. Rick, Senior Vice President of Finance and Investor Relations. Sir, please go ahead.
spk01: 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 disclosures 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. Operator, we're ready to start the Q&A, please.
spk07: Thank you, sir. Again, as a reminder, if you would like to ask a question, simply press star, then the number one on your telephone screen. We have our first question from the line of Bill Chappell from TruViz Securities. Your line is now open.
spk03: Thanks. Good morning. Hey, Bill. Hey, just, you know, one of the things we've heard from several or multiple food companies over the past month, month and a half, is that there's been a meaningful, for whatever reason, trade-up from private label to branded thought is happening. stimulus checks or other issues that 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 as a sustainable shift, or do you think that people will move back towards private label, which could put margin pressure as we move back after this year or to next year?
spk02: Yeah, that's a good question, Bill. In our category with private label being historically so overdeveloped, we were actually seeing you know, 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, you know, is continuing and, you know, almost accelerating, really. And it really comes down to, in our category, there's a distinct lack of differentiation in private label. You know, it's, you know, basic white and, you know, wheat bread, you know, 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, the marketing support, et cetera. If you get into... you know, a recessionary situation, you could see some move back to value. But even in the last recession that we saw in, you know, sort of 08, 09, we didn't see that much of a move back to private label even then.
spk03: But I guess, did you see a step change in this current quarter, or is it just more of a continuation of the trend?
spk02: It's really more a continuation of the trend. You know, private label just continues to fall, and branded retail continues to hold up very, very well.
spk03: Great. And then just on the cost front, you know, same thing. Heard a lot of your peers talk about, especially more on freight and incremental costs, you seem to be able to raise EPS guidance for the full year. You know, 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?
spk02: Yeah, partially that's it, and Steve can jump in here too. But, yeah, that's partially it. The DSD, that works a bit more of a closed-loop system, so we're not as exposed to the long-haul freight. And the other thing I would say is with our hedging strategy being four to seven months out, sometimes a little bit longer, Yeah, that gives us good visibility in advance of what our costs are going to be, and we can be proactive about mitigating those costs. Steve, anything you'd add to that?
spk00: 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, inflation in the back has a little heavier, but we think we've taken the right steps to mitigate most of that. And as Ralph said on transportation, we're not immune to the increases, but we feel like for 2021, you know, our contracts have protected us the best they can.
spk03: Got it. Thanks so much for the call. Thank you, Bill.
spk07: Thank you. Our next question is from the line of Mitch Pinero from CertiVent and Company. Please go ahead.
spk05: Hey, good morning. Hey, Mitch. Hey, just following up on Bill's question regarding private label, is the retailer's view of their private label offerings changing as well? I mean, in terms of shelf space allocation, you know, 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 will reallocate shelf space? Can you give us anything
spk02: some color on that? 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 that 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.
spk05: But also as part of your discussions, are they looking to reduce shelf space to private label? I mean, clearly, you know, the dollar value and the gross margin, you know, contribution of the brands versus private label would suggest, I would think, you know, more allocation to the branded shelf space. But is that happening at all or –
spk02: 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 you also have the labor situation that's kind of happening to everybody that somewhat limits the ability to – to provide all the, all the skews. So, I mean, you know, throughout this pandemic and this whole labor situation, you know, we've had to, we've had to, you know, in some cases limit some of our skews. And so that's had some, some effect on the shell space allocation. But as far as the overall private label allocation, there's been no meaningful change really.
spk05: Is there, is there, are there any pricing changes with private labels? Is it, is it, is it a volume decline or is it, Is there pricing going up? Can you talk about that a little bit?
spk02: Yeah, I mean, we have taken some pricing over the last several years in private label, yes.
spk05: In terms of, you know, part of the whole strategy or some of the benefit Flowers gets is from, you know, gaining share in lower penetrated, newer markets, newer for Flowers, that is. and anything you could call out geographically, strengths or weaknesses among your territories?
spk02: Yeah, I mean, we've been calling out the Northeast for the last several quarters as a focus 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 We're super strong in the south. I mean, you know, Mitch, as you know, the big hole or opportunity for us is that whole upper Midwest quadrant.
spk05: Okay. And then just a couple more. In terms of what's happening with snack cakes and Tasty Cake in particular, are you making progress on your profitability?
spk02: Yeah. Yeah, thanks for asking. Really good progress at Navy Yard. You know, again, I'll say we're not, we're still not where we want to be. But the trajectory is really good. The team's done a great job up there. Our automation investments are paying off. You know, scrap rates are coming down. You know, 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, you know, 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, you know, from a price promotion standpoint to make us more competitive there. So, you know, all signs pointing in the right direction. In fact, you know, relative to our internal goals, we're actually ahead of plan there. Okay.
spk05: And then I guess the final question is, you know, when you look longer term and you're looking at, you know, your margin profile, I think you mentioned in the score, you know, well, mix is certainly, you know, a powerful help for you you have productivity and you have your whole network optimization to support further margin improvement. It just seems that the branded versus the non-branded mix is still going to be the most important part of the change and You know, I'm curious as to, A, if you agree with that, and, B, you know, what you're doing, what specifically you're doing to create the positive mix.
spk02: No, absolutely. And I agree with you. I mean, the whole notion of shifting more of our mix to branded retail is the most powerful tool we have to, you know, 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 M&A.
spk05: Okay. And I actually have one more question. Speaking of M&A, can you talk about your pipeline or maybe the environment in M&A right now?
spk02: Yeah, sure. Really no change from last quarter. I mean, deal activity continues to pick up. You know, 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, you know, we're happy with the pipeline. And, Mitch, you know, it's nice to be in the position that we're in, that we've got the balance sheet to act when the timing is right.
spk05: Great. Thank you. I'll get back to you.
spk02: Thanks, Mitch.
spk07: Thank you. Our next question is from Ryan Bell with Consumer Edge Research. Please go ahead.
spk04: Hi, how are you guys? Good morning, Ryan. 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?
spk00: Yeah, I mean, obviously, you know, we're not going to talk about 2022 today. You know, we're not prepared, you know, at this point to give guidance. Although, you know, it is on our mind, given the inflationary environment we're in, you know, we've seen pretty substantial runs like most other companies, regardless of which industry or segment you're operating in. You know, we're all experiencing pretty tremendous inflation. You know, what I would say, you know, for 2021, and I think, you know, we talked about it in our prepared comments earlier, In the back half, we're pretty confident in our overall cost structure and also confident in the measures we've taken to mitigate 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 productivity, and we expect really to use kind of the same tools going into 2022. But beyond that, I can't really comment about beyond this year.
spk02: 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 that 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 an 18 share. We've got Nature's Own, expanded Nature's Own, now with Perfectly Crafted as well. We've got Days, 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 and to help mitigate any rises in cost.
spk04: 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 and 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?
spk02: Yeah, our perspective on that has 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 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 would 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 into question and may push that timeline out a bit now. 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. It's going to be a little bit of a wait and see. I would have thought that back to school 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.
spk04: 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?
spk00: Yeah, I mean, the majority of that will just roll into 2022. I mean, the reality is there's no one, I would say, one specific or large project that was impacted. It's kind of across the whole range. you know, just some delay in timing and getting equipment in for some of the projects.
spk04: Thanks. And then just the last one for me. How would you feel just about the general longer-term impacts of incremental at-home demand? I mean, I think that it's pretty evident at this point that there's going to be incremental work from home relative to 2019. So could you potentially share some of your thoughts about the extent or the potential for this to impact your business over the next few years?
spk02: Yeah, I'd be happy to. Frankly, Ryan, I'm quite optimistic about it. I mean, I think there's been a fundamental shift in several things, you know, some good and some not so good. You know, the good parts are, you know, I think that, you know, the future of work is going to be a lot different. You know, we here at Flowers are going to be doing it differently, permanently. And many of the 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 consumed, 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, you know, I'm frankly really optimistic. On the negative side, you know, 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, you know, we've been able to continue to, you know, serve the market effectively throughout this period. But it is a challenge, and we're having to relook 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's been a systemic change of how work is viewed in this country.
spk04: Great. Thank you, Scott.
spk02: Sure.
spk07: Thank you. Our next question is from the line of Ben. Ben Venue with Stephens. Your line is now open.
spk06: Hey, thanks. Good morning. Hey, Ben. Riles, I want to follow up on that, on the compensation side of things. You talked about reviewing compensation. I'm wondering where you are today in that process. You know, what's considered in your guidance with respect to compensation and benefits for the balance of the year in fiscal 21? And then, you know, you talked about a combination of short- and long-term 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?
spk02: Sure. I mean, you know, for 21, I wouldn't worry about it too much, you know, from a wage standpoint because, for one thing, I think it's more than just wages, right? that are the issue. Now, certainly we'll look at that. We do periodically look at that anyway to make sure that in each of our markets that our bakeries are competitive. But again, the whole dynamics change. What you used to look at as your peer set in manufacturing has changed. 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 the bakeries can be hot. They can be unpleasant in the summertime. What can we do to improve the overall working environment inside the bakeries? You know, we're looking at different uniforms. We're looking at different cooling systems, et cetera, those types of things. But, you know, one of the biggest issues for us, and I've mentioned this before, is scheduling in the bakeries. You know, working in a bakery is a tough job. And, you know, we're running the bakeries really hard, particularly right now with the labor shortage. And, you know, we've had, you know, increases in overtime and things because our folks are working really hard. And, you know, 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 predictable schedules 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, you know, Ben, I don't think that this is a temporary situation.
spk06: Yeah. Okay. It makes sense. And then you noted promotional efficiency contributes to better price mix. Can you talk about what's happening there? Is it that, you know, this kind of return to normal or new normal dynamic around consumer behavior is sustaining volumes better than you thought? Is it you know, 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?
spk02: Yeah, sure. I'll start and Steve can chip in if he has something else. But, you know, the overall promotional environment has been pretty steady for a while now. And it's really, you know, in our category, you know, I would call it at least five-year lows. And that's been pretty steady. And with the demand for branded retail products, 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 kind of the macro environment is supporting this, but also our internal efforts at being more efficient with our promotions is helping. Steve, anything you'd add?
spk00: No, I mean, I think, you know, Ralph's point about systems, you know, really can't be emphasized enough. I mean, the last couple of years we've worked really hard on implementing some new technology, and it gives us great visibility. And, you know, like we talked about in Q1, you know, promotional activity has pulled back quite a bit, so it's really about net getting price. You know, a lot of our inflation comes in the back half, so that's where, you know, when 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.
spk02: 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.
spk06: Yeah, for sure. Okay, very good. Thanks so much, and best of luck.
spk02: Thank you, Ben.
spk07: Thank you. There are no further questions at this time. Mr. Rouse McMullen, please continue.
spk02: 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.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.
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