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spk02: Please be advised that today's event is being recorded. I would now like to hand the conference over to your opening speaker today, J.T. Rick, Executive Vice President of Finance and Investor Relations. Please go ahead.
spk06: Thank you, Josh, and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation posted earlier on our Investor Relations website. After today's Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session, we may make forward-looking statements about the company's performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our STC 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, Chairman and CEO, and Steve Kinsey, our CFO. Riles, I'll turn it over to you.
spk07: Okay. Good morning, everybody. We're quite pleased with the strong performance of our leading brands in what continues to be a pretty challenging environment. While consumers' value-seeking behavior pressured category sales, we did grow dollars and units in fresh packaged breads. And that growth drove the largest share gains in the category, which validates our investments in differentiation. In our other segment, execution of our portfolio strategy enabled sales growth as strong pricing initiatives more than offset volume losses. As we look to close out the year and look ahead to 2025, we remain focused on enhancing shareholder value, of course, and delivering results consistent with our long-term financial targets. That process includes maximizing our opportunities in areas that we can control by targeting pockets of growth and branded retail, margining up our private label and away-from-home businesses, and executing our cost savings plan. So, Josh, with that, we'll open up the floor for questions.
spk02: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions. Our first question comes from Steve Powers with Deutsche Bank. You may proceed.
spk09: Great, thanks.
spk01: Can you hear me okay?
spk09: Yes, Dave. Good morning.
spk01: Okay, great. Good morning. I was hoping we could actually start with the areas of expansion as we think about next year, both Dave's Snack Bites and Wonder. Just give a little sense for sort of the scale of those expansions and the ramp you're expecting. And I guess a little bit more detail around on the Wonder side, your confidence in the Sweet Baked Goods category, which has obviously faced some pressure of late. And on the Dave side, just a little bit more detail of where you think you're going to get placement for those snack bites and just signs of confidence that we're not at risk of overextending that brand, I guess, is the question.
spk07: Yeah, of course. Let me start with the Wonderline. We'll probably have more details for you on that in February. I mean, we're very early in, you know, rolling it out to customers. I can tell you that, you know, the early returns have been quite good. There's been a lot of enthusiasm from retailers. We noted the top 10 item, you know, at the NAC show just a few weeks back. So, the items are unique. The quality is fantastic. The packaging looks great. And, you know, I've Honestly, we all know we need some help in the sweet baked goods category. I mean, the category has been down. We have not, you know, we perform kind of in line with the category, but that's, you know, that's not a good story. And so I think the important takeaway is that we are taking proactive steps to inject some growth into that category. And we're quite excited about doing it with the Wonder brand, just giving the very high unaided awareness for Wonder. In terms of the DKB snack line, The bars continue to do well, the original three, the protein bars. We have more SKU innovation in the pipeline to deliver as early as next year. And then, of course, as you mentioned, the snack bites as well. Steve, I don't think we're in danger of overextending. I mean, if anything, if you take the bars, for example, you know, shelf space, and visibility are so important. And we were out of the gate with three SKUs, did quite well, but now expanding to six and then beyond on that. And then, of course, the snack bites are completely differentiated from that and in a different category and quite unique for the category. There's really nothing quite like it out there. Most analogous, I would say, is probably some of the granola products that you see out on the shelf. But with three savory items, three sweet items, We're very excited about the prospects for that. Retailer acceptance of it has been great. But I always like to remind you guys that these things take time. I mean, this is very much like a startup. And it takes a while to get the ramp, to build the consumer base. Some of these consumers are not current DKB shoppers, which is great because we're expanding consumption of the brand, but it does take time to do that. Having said all that, we remain very bullish on this burgeoning snack business we have for DKB.
spk01: Okay, great. Thank you. And I'll pass it on, but I did want to ask you if I could on the CapEx reduction for the year. It doesn't look like it's the ERP side because that actually went up a little bit. Can you maybe just talk about what drove the reduction and is that true kind of efficiency or is that going to be something we should consider as we think about capital planning in 2025?
spk03: Sure. Steve, this is Steve. I mean, the main reason for the change there is really just kind of the pace of spin for the year. I mean, you're right. It's not necessarily ERP. It's other projects, primarily bakery. And a lot of those got pushed. We just weren't able to get to them. So they will roll over to 2025. So you should consider that as you think about next year.
spk02: Perfect.
spk03: Okay. Thanks so much. Thanks, Steve.
spk02: Thank you. Our next question comes from Bill Chappell with Truist Securities, you may proceed.
spk09: Thanks. Good morning. Hi, Bill.
spk08: Just want to talk a little bit about the Sweet Big Goods or the snack cake business and just on the declines. Are you seeing anything different kind of year in from Smucker's owning Hostess in terms of more competitive, more promotion, or even pushing down into kind of the store brand type stuff? Or is this just the kind of the continued growth kind of ups and downs of the category for you?
spk07: Yeah, I think for us it's just more generally. Bill, can you hear me? Yeah. Okay, there was a sound interruption there. Yeah, it's really just the ups and downs of the category. I think that it is more attributable to consumers pulling back on discretionary spend, pulling back on indulgent items. You know, you've seen you know, some weakness, you know, even in the salty snack category, which has typically been very strong. I think it's temporary, but I do think it, you know, it relates to, you know, consumers' pocketbooks more than anything else.
spk09: Got it.
spk08: And just to follow up in, like, what, you know, as you've seen this in the past, how long do you think it lasts? Just... this doesn't seem to be a dire financial crisis. It's just pulling back. So do you think you'll get back to growth as we move into 25, or is it just too early to tell?
spk07: Well, I mean, I don't have a crystal ball, but I think it would be reasonable to think that at some point next year, things start to normalize and the category gets a little bit healthier. I mean, you'll recall among Before we hit this inflationary cycle, the sweet baked goods category was the strongest of the snacking categories, despite all the health stuff, health and wellness trends going on out there. So I do expect it to return. We're focused on delivering super high quality items to the consumer under great brands. And that's why we're excited about this Warner brand. Tasty Cake is a great iconic Philadelphia brand. But for us, just speaking for us specifically, it doesn't play quite as well outside of that category. And I think you've seen that over the last several years, particularly as Hostess got stronger out of bankruptcy. So pivoting a bit to the Wonder brand, we think can help us be more competitive with some of those stronger brands in the category, particularly if we deliver on the quality promise.
spk08: Got it. And just, sorry, one more. On the promotional level of the bread, bun, and roll business, is it primarily coming from the largest competitor, or are you seeing it from the smaller regional players as well?
spk07: Yeah, I mean, it's fairly broad-based, and look, I mean, our promotional activity has increased too. Now, the intensity of that is not as high, and we're still very well below pre-pandemic levels, but We've increased our promotions too, so it's across the category. However, with our number one and differentiated brands, we are seeing pretty good lift from those promotions, and I think that may be a little bit different than what some others may have said. Got it. Thanks. Thank you.
spk02: Thank you. Our next question comes from Robert Dickerson with Jefferies. You may proceed.
spk05: Great. Thanks so much. Maybe just quick housekeeping. I think you said in the prepared remarks some of the trends in continuing Q3 relative to Q2, but then kind of improved at the end of the quarter. Sounds like maybe a little help from a hurricane. So I'm just curious. I'm not sure if you want to quantify or if you can quantify how much you think that might have helped the quarter and then maybe how you kind of saw those trends coming out of the hurricane. even though it's only been a couple weeks?
spk07: Yeah, so some of the stronger category trends that we noted in Q2 didn't continue. It did get a little bit weaker as we moved through the third quarter. The hurricanes had an impact, Rob, but not particularly material, honestly. I mean, it did help. It was positive, of course, but not really that significant in the quarter. I think you know, again, the important thing to emphasize specifically to Flowers in the quarter is that, you know, while the category continues to be a bit soft, we're outperforming the category. And, you know, if you look at, you know, fresh packaged breads, you know, our units were up some 70 basis points. We gained 20 basis points a dollar share, 20 basis points a unit share, both of those the largest among competitors in the category. So, You know, our innovation, our brands, our differentiated items continue to make a difference, you know, even in the face of a bit of a soft category at the moment.
spk05: Okay, great. And then maybe just more broadly speaking, excuse me, you know, you also made the comments around the perimeter of the store doing a little bit better. Maybe that's, you know, helping you. certain subcategories of overall bread, like buns or tortillas. And I'm just curious, maybe if you could just opine on that a bit. Like, you know, someone's buying chicken on the perimeter of the store. I mean, I guess a burger, you're using a bun, chicken, maybe you're going to throw it in a tortilla. So maybe there's just kind of a little switch in terms of like traditional sandwich bread relative to some of the other subcategories. And then I guess just kind of as like a tack on to that, You know, you always kind of comment on M&A and you say kind of the deal, you know, activities out there, right? You know, are any of those areas areas that you actually would like to be bigger in just to kind of diversify that portfolio?
spk07: In terms of the perimeter, you mean?
spk05: Yeah, just like, you know, buy a big tortilla brand. Now we have tortillas and we have lunch bread and keto and buns.
spk07: Yeah. I mean, look, we've said before, we're looking across baked goods. So that picks up the perimeter, that picks up the freezer case, that picks up center store, picks up away from home and convenience, those sorts of things. So we're looking across the expanse of baked foods, which altogether is a massive total category. In terms of the trends, if you harken back, Rob, the perimeter of the store was sort of a big deal pre-pandemic, right? And I think you know, coming out of the pandemic, you know, one of the questions we would get every single quarter was, you know, when do you expect the reversion to happen? When do you expect the reversion to happen? We actually hadn't gotten that question in many quarters, but I think that, you know, that's a bit of what you're seeing now in terms of shopping patterns, but also, you know, the trend now to in-home eating, just given the inflationary pressures and consumers trying to stretch their food budget. I do think that that trend... tends to impact the traditional loaf segment of our business more than the other parts. We've talked in the past how that's arguably the least differentiated piece of our portfolio, that we have plans to increase that level of differentiation there to kind of fight back, but obviously much less impact on the buns and rolls, as you mentioned, on the days killer breads of the world, on the We continue to beat this drum that innovation and differentiation matter, and that's what's fueling our business overall.
spk05: Okay, great. Makes sense. And then maybe just a quick one, one last one. Just around the guide for EBITDA, if we kind of think about what's implied maybe for Q4, it seems like, you know, at least at the midpoint, there could still be a little bit of year-over-year kind of, you know, margin improvement. So kind of a couple questions in here, just kind of, you know, what – And the range, I guess, for a quarter still seems like a little wide, right? Which is fair, right? A complicated backdrop. But I'm kind of curious, what could get you to the higher end of that implied margin guide for Q4? Maybe what gets you to the lower end? And then, you know, like, is part of this just also kind of playing it safe, you know, just given the promotional environment all in and kind of how you're thinking about, you know, the price piece?
spk07: Yeah, I think overall it's just a continued conservative outlook. Look, I get that we're into the fourth quarter, and on the one hand, you would think, why don't you have better visibility? I think that we do have that visibility, Rob, but we're just trying to remain cautious, just given the outlook. We started off the year when we issued guidance, noting the things that could impact the year, including increased promotional activity. Some of those things have happened. But offsetting that has been fantastic execution on our savings program, great execution in the marketplace, continuing to grow our bread, bun, and roll units. The drag on the business is away from home and primarily the QSR piece of the business, which has been a bit weaker than we anticipated, honestly, just with this shift to in-home due to elevated pricing. And we've already covered the weakness in the cake business. The fresh packets bread business is doing great. I mean, there's really no issue on that part of the business. It's really those other pieces. So your question, you know, what could get you to the higher end of the range, a bit better performance out of cake and QSR and continued strong performance in the core of the business could get you to the upper end of that range.
spk05: All right, great. Thank you so much, Ralph. Appreciate it.
spk02: Thank you. Our next question comes from Jim Solero with Stevens. He may proceed.
spk04: Hey, guys. Good morning. Thanks for taking our question. Ross, I wanted to dig down a little bit on the other category. And, you know, you talked about some of the headwinds in food service and certainly the, you know, the softness in QSR I think is well known. Can you maybe break out how much of a headwind the food service was to other volumes? relative to the business exits? I think we still have some of those in the third quarter, so if we just strip those out, how much would the other volume have been down? And maybe any color on your private label piece in that category as well would be helpful.
spk07: Yeah, so we were finishing up the cycling of the strategic exits in the third quarter. I would say sort of mid-single digits from strategic exits The rest of it is kind of channel or category dynamics, if you will. So mostly external factors, Jim. But I would also say the steps that we've taken in terms of pricing to improve the profitability of that business more than overcame the volume losses. So that's an important note to take away.
spk04: For sure. And then, so is it safe to say that If I break out, and I realize for competitive reasons you guys don't break out the private label piece anymore, but is it safe to assume that the private label component of that other segment is positive on volume?
spk07: Actually, no. The private label, if you look at the, we can just talk syndicated data, actually, you know, private label is losing share, and our volume in private label was down as well. Private label pricing has increased a little bit, Jim. and the price gaps have narrowed a bit as private label has gone up and branded has gotten promoted a little bit more. So now you're starting to see that shift back a bit more to branded. Okay, great.
spk04: And then I think you also mentioned in your prepared remarks, it's possible we could see some incremental benefit if you have some new business wins that ramp up faster. And just curious on what would be a driver of kind of a faster or slower ramp with new customers? And is there anything that we on the outside can kind of look at that might give us some insight into if it's scaling faster or scaling slower?
spk07: Yeah. So the new business for the remainder of the year has pretty much already been captured. Now, obviously, we'll have more for 2025, but the incremental gains that we expected to get for this year have been captured. So You know, when we get to the end of the year and we come back to you in February, you know, we'll have a much clearer picture on just how well that went. But we're off to a good start. Service is good. It's great that we're ramping up with some of these customers that we needed to be more strategic with, if you will. And, you know, this is going to have a nice added benefit for our branded business as well, reaching more consumers. Great.
spk04: I appreciate the thoughts, guys. I'll hop back into the queue. Okay. Thanks, Jim.
spk02: Thank you. Our next question comes from Mitchell Panero with Sturdivant and Company. You may proceed.
spk10: Yeah, good morning. So I guess when you, you know, your fresh bread category games were obviously at the expense, I guess, a little bit of private label games. But who's losing share? Is it broad-based? Is it regionals, your major national competitors? Where are your gains being picked up from, do you think?
spk07: They are coming some from private label. They are coming from some of the regionals, although other of the regionals are doing pretty well, actually. And, you know, Pepperidge, for example, looking at syndicated data, looked like they had a good quarter. I know they're promoting a bit more, but it looks like they're also getting some lift. So, I mean, it's coming from around the category, but that's not really a new story. I mean, you know, we, you know, Mitch, as we continue to talk about, you know, being a leader in innovation and, you know, bringing differentiated products to the consumers, you we're pulling business away from other competitors in the category due to that focus on innovation.
spk10: I mean, is any of that coming in a geographic market dynamic? Like, you know, you happen to be winning more than East or West, or can you talk a little bit about that?
spk07: Yeah, sure. So it's been more recently, it's been stronger in, frankly, in newer markets, the Northeast, the Midwest, etc., where we've had a little bit of share pressure, Mitch, has actually been in the southeast. So it's our most mature market. There tends to be quite a bit more competitive activity on soft variety. I'm really kind of harping on soft variety. We're still higher than we were five years ago, but we've seen a little bit of share erosion there, but obviously we're aware of it and taking steps to counteract it. So there are differences in geography, and And, you know, in the newer geographies, you know, those are the areas where we are gaining the most share.
spk10: And so, I mean, it's obviously very important to kind of grow your share in those newer geographies. Are there any near-term obstacles that are out there? You know, what's why wouldn't you be growing maybe at an accelerated rate in some of those new geographies? What's the challenge that you're seeing right now?
spk07: I'm not really sure I get the gist of your question because we are growing in those new geographies. Obviously, you're new to the market. You've got to get consumer awareness and get trial and repeat and all those things, but we've been talking about the Northeast for a while and we continue to grow share there. We're newer to the Midwest, so we just launched into one of the major Midwest retailers in the spring, so we're really just getting started there. Obviously, there's competitive activity. There are some very big competitors in those markets, but you know, with the strength of our number one brands, we feel very confident that we can consistently grow share.
spk10: Okay. No, I guess I was more looking for like, you know, a little, you know, obviously quicker share gains. You know, you were, I don't know exactly where you are today. You were a 10% share in the Northeast, say two years ago. I'm not sure where that is today. And I know share gains, it's a very, you know, obviously hyper competitive business, but I just thought perhaps, you know, there was something maybe stopping you from growing at an even quicker rate. That's all.
spk07: No, nothing specific. It's just I think you hit it right on the head. I mean, this is a competitive category. And, you know, it takes time to build share. You know, at some point, you know, capacity can become a constraint, but we're planning well ahead of that so that we don't get, you know, in a situation where we don't have enough capacity to continue to grow. But aside from that, it's just, you know, it's a competitive category. You know, the Northeast specifically, you know, there's a lot of independents and co-ops up there, too. It takes time to get, you know, fully penetrated there. So, yeah, it's just things like that.
spk10: Okay. Okay. And then when – I haven't really, you know, looked at this lately, but, you know, you used to have, you know, your capacity utilization, I guess, the OEE back a couple years ago was in the mid-60s. And I was curious if there was any update on that. Where are you? Because that would seem to be a significant part of the margin story, the fixed cost leverage as you increase your capacity. Is there any update or any detail you could provide there?
spk07: Sure. So our OEE now is running, obviously it depends on when you look, you know, it gets a little bit more pressure in the summer when we're so busy and full, but you know, call it 70, 71%. Obviously we want it to be higher than that, but you're right. It's, it's quite, quite a bit better than it, than it has been. So we've made some great strides and we're, you know, we're seeing that, um, in the bottom line. I mean, you know, it's a component of the gross margin, uh, performance. So it's good to see us operating, uh, uh, more effectively there. And, and so, sorry, in terms of, uh, in terms of overhead coverage, you know, we've talked about before the strategic exits, you know, long-term are certainly the right thing to do because we had some very poor margin business that we jettisoned. But it does leave us with a little bit of fixed overhead stranded. But as we refill that volume with higher margin business, that also is going to have a direct bottom line impact.
spk10: Okay. And then, you know, I know we're not ready to talk 25 guidance, um, but you know, you're, you're kind of nipping on the heels, your EBITDA margin, uh, on, on the lower end of, uh, you know, you got 12 to 14% sort of range that the longterm range, I mean, is, is, is, is it too early to call that you can get that lower end next year? Um, And I know you're not ready to provide that kind of guidance, but are we still going to see progress in the EBITDA growth next year? Or is there anything out there that you want to call out that we'd have to be, you know, have to consider?
spk07: So, yeah, I mean, we're not ready to talk 25 yet, but we can talk long-term, Mitch. And, you know, certainly we think it's, you know, within reach, we think, frankly, 13 to 14% is in reach. And if you run the long-term algorithm out, you can see where we can get there. And that's without including accretive M&A, which obviously we're focused on as well. So I think that we've shown between the growth of our branded business, the shift in the portfolio, the cleaning up of the portfolio, the jettisoning of low-margin business, all of our savings initiatives, the OEE we talked about, all these things factor in, network optimization, etc., not to mention a creative M&A, we feel quite confident that over time we can get to that low teens EBITDA margin level. Okay.
spk10: All right. Well, great. Thank you. Thank you for your question.
spk07: Okay. Thanks, Mitch.
spk02: Thank you. And as a reminder, to ask a question, please press star 1-1 on your telephone. One moment for questions. Our next question comes from Max Comfort with BNP Paribas. You may proceed.
spk00: Hey, thanks for the question. So you're clearly observing an increasingly challenged U.S. spread category as consumers continue to shift to the perimeter of the store and also as you see a ramp up in competitive activity in the second half. And you noted this headwind is expected to be temporary, which seems reasonable to me given it's largely driven by the consumer feeling financial pressure, but I'm curious at this point in time, should we be expecting that these category pressures persist through a meaningful portion of 2025? Thanks.
spk07: Yeah, sure. I mean, again, no crystal ball, but, you know, Max, we've been through this many, many times before in our history. You know, when the consumer feels a little bit of weakness, you know, there's trade down, You know, consumption patterns shift, remember the store, all the things that we've talked about, but they've always proven to be temporary. So, you know, we're working hard on the things that we can control. You know, we continue to make sure that we're as efficient as we can possibly be, that we're delivering the highest quality to consumers, and that we continue to innovate. And I think that those things are showing up quite nicely in our market share performance and, frankly, in our bottom line performance as well.
spk00: Great. And then on Dave's Killer Bread, I'm talking about the classic bread offering. Are you concerned by the slowdown you're seeing in trends for that business? I think in the most recent scanner data, it's slattish, maybe even just down slightly in dollar sales terms. I realize a lot of that could be pointed at the category filling pressure, but just curious for an update on what you're seeing for Dave's Killer Bread within the bread category and whether or not it can become the growth engine again that it had been over the past several years. I'll leave it there. Thanks.
spk07: Yeah, sure. Thanks, Max. And, you know, we can talk about this offline, too, if you will. We saw your note and the data. Our data does not match up with yours. Dave's is still positive. It is not down, both in terms of dollars and units. It's up. You know, sequentially, it's down from last quarter, but there's always seasonality. If you go back and look, as you get towards the back half of the year, there is a little bit of seasonality in our category. But Dave's is still growing, dollars and units.
spk00: Great. Thanks very much. Thank you.
spk02: Thank you. I would now like to turn the call back over to Riles McMullen for any closing remarks.
spk07: Okay, thanks, Josh, and thanks, everybody, for taking time today and joining us for questions. We appreciate your interest in our company, and we certainly look forward to speaking with you next quarter. Everybody take care.
spk02: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
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