Flowers Foods Inc (FLO) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Flowers Foods Third Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, J.T. Rieck, Senior Vice President, Finance and Investor Relations.

Thank you, 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 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. Operator, we're ready to start the Q&A.

Excuse me, it feels we have some technical difficulties. One second please.

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Can you hear me now?

Yes, we can.

Thank you. (Operator Instructions) Your first question comes from the line of Bill Chappell with Truist.

Three, I guess, kind of quick questions. One, based on kind of your commentary in the prepared remarks. One, you talked about you're not really -- it's too early to tell what kind of normal looks like in terms of people reverting back to work and to school and the stuff like that kind of post-Delta variant. But you're pretty well exposed at states like Texas and Florida, where they've kind of moved back to normal a little bit faster than the rest of the country. So maybe tell us what you're seeing there and kind of what that tells you for as we look to '22 in terms of kind of consumption.

Sure. I mean, Bill, it's really kind of broad-based across the country. We've been really pleased with how well things have held up, particularly on the branded retail side. So nothing really in particular to call out by region, except to say overall, the brand investments that we continue to make, innovation we continue to introduce has really helped us hold on to a lot of these consumers. And similarly, we're also seeing further increases in household penetration, velocities are up, repeat buyers are up. So all the signs point in a pretty optimistic direction when you think about what return to normal ultimately looks like.

Got it. And then in terms of costs, the comment that you may look to do additional pricing to cover the cost. Can you remind us, do you -- are you looking to kind of cover margin or cover profit dollars in terms of gross margin looking forward?

Sure. I mean, obviously, the ultimate goal would be to protect both. Now at the end of the day, the consumer is going to drive the ultimate results, right? Consumers are experiencing very, very broad-based inflation. We've all read the headlines, 30-year highs, [good] straight month over 5%, that kind of thing. So everything from gasoline to our products is going up. So we'll have to wait and see how the consumer, at the end of the day, reacts to that.

If we find ourselves in a situation where there's a trade down to value or units drop off, you could -- it's certainly reasonable to assume that there could be some margin compression in the short term. But what I'd say overall about the inflationary environment is whether you believe it's transitory or whether you think it will last a little bit longer than that, ultimately, these issues are temporary and not completely within our control. So we're focused on what we can control. We'll continue to make investments in our brands. We'll continue to make investments in our digital capabilities, et cetera that, over time, will lead to expanded margins.

Got it. And then last one for me. You've made the comment in the remarks of like you're seeing M&A activity pick up. And I guess the question is why is that the case? I mean I was under the impression that the same kind of keen key targets you've been talking to for years, if not decades. And so I didn't know why things would start picking up now? Or -- and maybe some more color around that comment.

Sure. I mean I think maybe a little bit earlier in the year, it may have been driven by some tax issues. Now we'll ultimately see where that bill falls. It looks like some of that's going to not end up in the bill. So that could have been driving some of it. And you're right, we still continue to talk to some of the same targets that we have for a number of years, but the activity has really picked up, Bill, more in the adjacent product category, so more in the snacking space, that kind of thing.

Your next question comes from the line of Ben Bienvenu with Stephens.

So I want to ask about just this continued strength in branded retail, really good results still. I'm sure the mix is still supporting gross margins even in an environment where you're seeing some cost increases. I'm curious if you could talk about, do you think we're at this equilibrium now? Do you think this is an equilibrium that we can grow off of? And to what degree, as we continue to see maybe pricing increases, does that influence a shift from branded retail to store-branded retail products?

Yes, Ben. Great question. I think that's a key point. And as I was mentioning in response to Bill a minute ago, I mean it's all going to be about the consumer. And so far, even with the pricing actions that we took in July, branded retail units have held up very, very well. I mean we've seen little to no drop-off at all in branded units.

Now going forward, as you look into next year with all the inflation consumers face, with stimulus payments coming off, that kind of thing, I think it's yet to be seen just how much the consumer is willing to absorb, and that will be a key topic for next year, right?

we've been through situations like this before, most recently in kind of '07, '09 time period. The business held up relatively well. We do offer products across a variety of price points, which certainly helps from the super premium Dave's Killer Bread, all the way down to private label, with some pricing in between 2 on Nature’s Own and Wonder, that kind of thing. So we feel like we're very, very well positioned to do well in any environment.

Obviously, we would be most pleased if the current trends that we're watching continue, but I think it's really all about the inflationary impacts on the consumer and what they'll be able to absorb. But that also makes it more important than ever that we continue to keep up with our (inaudible)[pressing] forward on innovation that we keep developing our capabilities such that eventually, this will subside. It always does. And when it does, we'll be positioned even stronger.

Yes. Perfect. Understood. And on the cost side of the equation, how much visibility do you have into the balance of this year and into early next year? And any thoughts that you have on what that looks like and kind of where we are in terms of the curve of cost inflation? How close do you think we are to maybe seeing a light at the end of the tunnel from your vantage point?

Sure. I mean, obviously, particularly where we are in the year and the fact we do forward buy and hedge a lot of our commodity spend, we have full visibility for 2021. So from that perspective, we've been talking about the cadence of inflation for this year. Majority of it is coming in, in the fourth quarter. So we'll begin to see some of that ramp up, and all that is placed into the guidance we gave yesterday when we released.

Looking forward to 2022, we're not prepared to give guidance today, but obviously, when you can look at it a forward curve, it's pretty significant inflation. And if things stay at the market levels we see today, as we said in our prepared remarks, we expect to see a pretty meaningful inflation next year. But as Ryals has commented, we're looking at efforts mitigating that through pricing as well as other cost initiatives. So we anticipate this to be at least another 1-year cycle. And as Ryals just said, depending on whether it's truly transitory or not, it make -- it could go slightly beyond a year. But right now, all indications are that the inflation will hold through most of 2022 as well on the cost side.

Your next question comes from the line of Steve Powers with Deutsche Bank.

And I guess picking up on what we've already been talking about, your prepared remarks and then some of the conversations this morning just really underscore the uncertainties around the pacing of demand migration back towards pre-pandemic levels potentially and just inflation headwinds and other variables. Plus, we know that you've got ongoing strategic investments around technology and branding and otherwise.

So I guess just in that context, I'm hoping you could elaborate on the drivers that, as I read your presentation, at least the presentation slides of the company in the prepared remarks talk about confidence and expectation to get on to those long-term -- that long-term algorithm in fiscal '22. So maybe -- unless that was a misread on my part, just what are the drivers that despite all those uncertainties you feel like you've got confidence and visibility to lock in those long-term growth targets next year?

Well, sure. I mean I think we've already alluded to a few of them. But just to reiterate, one, the momentum that we carry into 2022. I mean we have gained a lot of consumers over the past 2 years, Steve. We've invested a lot behind our brands. We're clearly growing our share nationally, but also in very important markets like the Northeast where we're underpenetrated.

We have a lot of new innovation items, some of which we're testing right now, some of which will be forthcoming next year that we're quite excited about to continue to drive top line growth. And you're right, we are making significant investments in our ERP platform and other digital capabilities that, over the long haul, will enable us to stay on that long-term algorithm.

And then, of course, Steve, we also have -- taking a look at the balance sheet, we're obviously poised for acquisition activity should the right opportunity come along. So all those things put together give us confidence that we can stay on our long-term algorithm using 2019 as the base year.

Okay. Okay. Great. And I guess maybe just sort of slightly different topic, just on your manufacturing footprint, obviously, a diverse footprint of bakeries. And I'm assuming that gives you a pretty good amount of flexibility to help navigate different supply chain challenges. But so maybe you can elaborate that on -- just kind of talk about that generally. But I'm also hoping just for some visibility into how variable operating conditions are across your bakery footprint? Are things relatively similar across the board? Or are there -- is there a lot of -- are there other kind of flash points where you're having more challenges? I'm kind of thinking, particularly from a labor perspective, but any color you have there would be great.

Sure. Not so much about a region of the country. I mean the labor challenges are pretty consistent across the company. I mean we do have a few areas where we've had somewhat less issue than other areas. But generally speaking, it's pretty consistent across the country.

Now we have been able to manage through that, I think, pretty well just given the challenges that we're all facing, but it's still a challenge. And it does impact our efficiency. You've got a -- you're either shorthanded or you have a lot of new people in a bakery, for example, that increases your scrap, lowers your efficiency, that kind of thing.

The one call I would -- one call out I would make, it has been a bit more intense in the cake bakeries, but those are more labor-intensive operations to begin with. So you just -- you have more people, particularly in packaging there. So it's been a little bit more acute there but by the same token, we've been able to manage through it pretty well.

Your next question comes from the line of Mitch Pinheiro with Sturdivant & Co.

So have you defined what your inflation rate has been on cost of goods for 2021?

We have not given that specific measure. I mean, because of the way we hedge, we're not going to -- obviously, your coming into 2021 is really when you begin to see the inflation ramp. So we're more back half driven, but we haven't given a specific percentage just maybe for competitive reasons.

Okay. And then...

And you could do the math with the Q input costs. It would be pretty much in line. But beyond that, we haven't [exposed] it.

Okay. When you -- with the branded growth surging, I'd love to hear more about your brand-building efforts. I mean, in particular, is -- obviously, some of this is driven by the consumer looking for -- the branded growth looking for premium products looking for higher quality and more diverse set of baked goods. But I was wondering whether you're looking to capitalize and market your way to growth more so than in the past. And I'd love to hear what you're doing and how your spending is allocated. Is it being shifted more to TV like I've seen in the Dave’s Killer Bread? Or is it a digital e-commerce initiative? I'd love to hear a little more on that.

Sure, Mitch. Happy to. And you can just take a look at our marketing spend and see over the last several years how much we've ramped it up to support the portfolio strategy of growing our branded business at a faster rate. You touched on a lot of them already. I mean a lot of it is being allocated towards our aggressive growth brands, whether that be Canyon, Nature's Own, DKB. It's been more intense in parts of the country where we're underpenetrated like the Northeast. That's why you're seeing some of the commercials up your way.

And you're also correct on digital. E-commerce is about 8% of our sales right now, which is roughly in line with the category. We want to continue to grow that. I think e-commerce is going to continue to be a bigger and bigger part of the picture, and we need to have that digital presence.

But on the other side, we're also investing in consumer insights. We have to understand our consumers such that we can continue to deliver the innovation that they want in the category. So some of that spend is going into that and continued investments in R&D. And I think you'll start to see some of that as we go forward with some of the newer innovation items that we're coming out with that are not in the brand category, put it that way.

And when it comes to Dave’s Killer Bread, what's driving the growth there? Obviously, you have new products. I was curious to hear a little bit more about either any particular channels you'd like to call out products? Is there distribution gains happening? I'd love to understand more what's driving DKB rather more than just -- there's just strong demand for organic product.

Yes, sure. I think at the end of the day, first of all, it all starts with quality. There are other organics that are out there. But Dave's has a commanding [70] share for a reason because it's the best tasting, the best quality, best consistency.

We're continuing to grow in the Northeast, Mitch, which is a big part of the puzzle there. Bringing on Lynchburg last year to support that growth has been a huge thing for us in Dave's evolution. We continue to come out with new products with Dave's. We're testing some new products right now with them. There'll be more coming next year. So increasing awareness is a big one. I've talked about this before.

When you look at the great success of Dave’s that we're all very proud of, of course, but then you compare its household penetration to that of Nature’s Own, it's roughly half that of Nature’s Own. So even with the great growth we've experienced, we feel like that brand still has a ton of runway ahead of it, both with Dave’s current categories and in other categories, just because I think the brand is strong enough now to begin playing across different categories, which we're obviously very excited about.

And then just final question. What -- any update on your cake business as far as the manufacturing side? Are we -- is a lot of that solved? Or is it still work in progress in 2022?

Yes. Mitch, not solved yet, but great progress this year. They're ahead of pace, actually, which we're very pleased about. But as I've said on the past several calls, though we are pleased with the progress, we still have some ways to go. But the improvement this year has been material.

I'm showing no further questions at this time. I would now like to turn the conference back to Ryals McMullian.

Thank you very much, everybody. I appreciate your interest in the company, and we'll look forward to speaking with you again next quarter. Everybody, take care.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may now disconnect.