Flowers Foods Inc (FLO) 2021 Q1 法說會逐字稿

Hello, everyone, and welcome to the prerecorded discussion of Flowers Foods First Quarter 2021 results. This is J.T.Rieck, SVP of Finance and Investor Relations. As a reminder, we released our first quarter results on May 20, 2021. Along with the transcript of these recorded remarks from our CEO and CFO, you can find the earnings release and related slide presentation in the Investors section of our website. We will host a live Q&A session on Friday, May 21, at 8:30 a.m. Eastern. The details are posted in the Investors section of flowersfoods.com.

Before we get started, keep in mind that the information presented here may include 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. Providing remarks today are Ryals McMullian, President and CEO; and Steven Kinsey, our CFO. Ryals, I'll turn it over to you.

Thanks, J.T. It's a pleasure to welcome everyone to our first quarter call. I'm happy to share our first quarter results with you today. It was an exceptional quarter for us, particularly considering that we run a 16-week first quarter and had to cycle the pantry loading weeks that occurred with the onset of COVID last year.

Our company is as strong as it's ever been, and we look forward to building upon what we've achieved over the last couple of years. The current business environment does present some challenges, but also great opportunities. And we'll talk about how we expect to capitalize on those opportunities and mitigate the challenges all through the lens of our 4 strategic priorities: developing our team, focusing on our brands, prioritizing margins and pursuing smart M&A.

Starting with developing our team, I'd like to begin by once again expressing my appreciation to the entire Flowers team for their continued devotion to producing quality products for our consumers and faithfully serving our markets. Our strong performance continues to be the direct result of their hard work, passion and dedication. On past calls, we've discussed the steps we've taken to strengthen our team. And we continue to focus on building an exceptional team of leaders who bring new capabilities that will add tangible value and help drive our strategic priorities forward.

Our second strategic priority is focusing on brands. Our company has never been in a better position to succeed given the strength of our leading brands and the investments we're making in them. We've been able to capitalize on our #1 low organic and gluten-free market share by successfully extending our product lines into adjacent categories such as breakfast and buns and rolls. For some time now, we've been seeing a shift within the category from traditional loaf to specialty items like breakfast and buns. And we feel very well positioned to capitalize on this shift by continuing to innovate with new items with a distinct point of difference like our perfectly crafted Brioche buns and our DKB breakfast and bun offerings.

As we work to fully stand up our agile innovation function, we're aggressively developing new and innovative products to capture greater wallet share of those consumers who already enjoy many of our existing products. Recent introductions include both Dave's Killer Bread and Nature's Own Perfectly Crafted Rye breads. Nature's Own Perfectly Crafted flat breads and Wonder English muffins that aim to grow our share in product segments where we are underrepresented.

Our entry into rye and flat breads target $300 million and $228 million markets, respectively, where we have been absent until now. Alongside these product introductions, we have ramped up our marketing spend. A particular area of focus for us continues to be in e-commerce, where we currently have a 17.9% market share, slightly above our overall market share of 17.7%. E-commerce now represents 9.6% of our retail sales, up from 4% in the prior year period.

We have a unique opportunity to capitalize on the renewed interest in bakery products triggered by the pedantic, and we're making every effort to attract and retain these additional consumers, and those efforts are paying off. Even with the difficult prior year comparisons of peak pandemic demand, track channel sales of Canyon Bakehouse and Dave's Killer Bread rose, growing approximately 14% and 7%, respectively, versus the prior year period, while Nature's Own declined only 3.5%.

Comparing our first quarter results to the pre-pandemic levels of 2019, Canyon, Dave's Killer Bread and Nature's Own rose approximately 101%, 42% and 16%, respectively. This performance is squarely aligned with our portfolio strategy, which aims to shift our mix to a higher percentage of branded sales. That percentage rose to 66.1% in the first quarter compared to 66% in the prior year period and 59.9% in the first quarter of 2019.

For perspective, in the first couple of months of 2021, we saw strong branded retail levels similar to what we experienced through the back half of last year. In the final months of the quarter, while branded retail moderated somewhat, it did remain elevated well above 2019 levels. And in fact, through the first several weeks of the second quarter, we continue to see elevated levels of branded retail demand despite some marked improvement in foodservice, which gives us confidence that our portfolio strategy is working. Consumers' increasing preference for brands is consistent with industry-wide trends as store brand share continued its long-term decline, falling 40 basis points to 20% in the trailing 12 months and down from 26% in 2015.

When I think about our performance in the quarter, it's exceptional to me that our total sales were up 3% over the first quarter of 2019. Considering the drop in foodservice sales, the amount of SKU rationalization we've done over that 2-year period and the decline in private label. It is further testament to our portfolio strategy and the performance of our team.

Our third strategic priority is margins. And that focus was certainly on display in the first quarter, with sales down 3.5% versus the prior year pandemic inflated quarter. We succeeded in increasing EBITDA margins 30 basis points to 12.4%, primarily driven by improved pricing and mix. We've highlighted our expectations for $30 million to $40 million of portfolio optimization savings in 2021 on top of the $22 million we achieved in 2020. And we remain on track to deliver on that goal.

We've seen progress at some of our lower-performing bakeries such as the Navy Yard and expect continued improvements as we move through the year. I know a particular area of focus for many food companies is commodity inflation. It's no secret that prices for transportation, labor and commodities have increased significantly.

In the shorter term, our buying strategies helped mitigate inflationary pressures. If these higher prices persist over the longer term, we will address them using the levers at our disposal. Price is obviously the most powerful of those levers, and we've been successful in using price to minimize the impact of higher costs. Another lever is trade spend efficiency, which has improved over the last several years as we've leveraged new trade promotion management tools.

And of course, it's always incumbent upon us inflation or no inflation to continue to improve our own efficiencies. Our fourth priority is smart M&A. We have a long and successful track record in this regard, and our solid balance sheet provides the flexibility to be aggressive where we have strong financial, commercial and operational conviction. As the economy reopens, the pace of deal flow is increasing. And as always, we are proactively seeking out potential deals while maintaining our disciplined approach.

Now I'll turn it over to Steve to review the details of the quarter and talk about our guidance for 2021. And then I'll come back later to discuss our outlook for the current business environment. Steve?

Thank you, Ryals, and hello, everyone. I'd like to echo your comments and express my sincere thanks to our incredible team, whose efforts have been nothing short of outstanding.

Now turning to the quarterly results. As Ryals indicated, the pandemic continues to influence our results, though we do see some indications of mix reversion. Our first quarter is 16 weeks, and therefore, our first quarter 2020 comparisons may be more impacted by the pandemic-related demand increase that occurred in March through mid-April than our peers were. That said, we are pleased with our overall sales and mix in Q1 2021.

Because of the uniqueness of that year-over-year comparison in some circumstances, we will also provide comparisons to the pre-pandemic results in the first quarter of 2019. Total sales declined 3.5% from the prior year period but increased 3% compared to the first fiscal quarter of 2019. Lower volumes drove the decline, down 6.9%, due to difficult prior year comparisons in most channels aside from foodservice.

Partially offsetting the volume declines was a 3.4% increase in price/mix across almost all parts of the business, which was split fairly evenly between price and mix. Results were strong compared to pre-pandemic levels throughout the quarter with the exception of Easter timing, which provided a temporary headwind in April that reversed in the second quarter.

Looking at sales by channel. Branded retail sales decreased $29.1 million, or 3.3%, to $861.4 million. As Ryals noted earlier, despite those strong prior year results, both Dave's Killer Bread and Canyon Bakehouse grew meaningfully, partially offsetting volume declines in other branded retail categories. However, compared to the first quarter of 2019, branded retail sales increased 13.7% as our leading brands continue to benefit from pandemic-related demand increases and our initiatives to drive further growth.

New products such as extensions of our Nature's Own Perfectly Crafted line and DKB buns were particularly strong contributors. Store branded retail sales decreased $27.9 million year-over-year, or 14.6%, to $162.9 million as consumers continue to express their preference for more differentiated branded products. Compared to the 2019 first quarter, store-branded sales were down 14.7%. Nonretail and other sales increased $9.8 million, or 3.6%, to $277.9 million as we lap significant pandemic-nduced declines in the prior year period. Nonretail sales benefited from improved price mix, partially due to internal initiatives to improve the profitability of this business.

Foodservice recovery was particularly noteworthy, while institutional and vending sales were weaker. Nonretail and other sales overall remained below pre-pandemic levels with sales down 11.8% compared to the 2019 first quarter. Though fast food is the exception and is higher versus 2019. As nonretail sales continued their recovery, we expect that the work we've done to improve the profitability of this business will result in that recovered business coming back at a higher margin than before. In the quarter, gross margin as a percentage of sales, excluding depreciation and amortization, increased 30 basis points.

Higher ingredient and packaging costs as a percentage of revenue were offset by lower short-term incentive compensation and better overall plant efficiencies. In Q1 2020, we also recorded $1.7 million of start-up costs related to the conversion of our Lynchburg, Virginia facility to an organic bakery. Outside purchases of product were also lower as we streamlined our SKU count.

Selling, distribution and administrative expenses decreased 20 basis points as a percentage of sales in the first quarter. Excluding the items affecting comparability detailed in the press release, adjusted SD&A expenses were unchanged from the prior year period as lower bad debt expense and distributor distribution fees were partially offset by higher e-commerce, marketing expenses and lower sales. GAAP diluted EPS for the quarter was $0.34 per share. Excluding the items affecting comparability detailed in the release, adjusted diluted EPS in the quarter was $0.41 per share, unchanged from the prior year period.

Turning now to our balance sheet, liquidity and cash flow. For the first quarter of 2021, cash flow from operating activities decreased $8.2 million to $98 million compared to the prior year period. Capital expenditures increased $5.6 million to $27.3 million and dividends paid increased $2.2 million to $42.5 million.

Our financial position remains strong. At quarter end, net debt to trailing 12-month adjusted EBITDA stood at approximately 1.2x, down from 1.3x at 2020 year-end. At quarter end, we held approximately $251 million in cash and cash equivalents and had approximately $671 million of remaining availability on our credit facilities.

Importantly, we issued $500 million in 2031 notes. The proceeds of which were partially used to redeem our $400 million notes that would have matured in 2022. We were pleased with the pricing of the notes, particularly given their long-term maturity. We believe the strong investor interest in the offering demonstrates the confidence of the capital markets in our company and our strategic plans.

Now turning to our adjusted outlook for 2021. We are forecasting sales to decline between 2% to 3.5% versus 2020 compared to our prior guidance of down 2% to down 4%. Relative to 2019 results, our guidance implies top line growth of 2.7% to 4.3%. For earnings, we are raising the bottom end of our guidance range to adjusted EPS of $1.10 to $1.17 compared to our prior guidance of $1.07 to $1.17 and 2019 adjusted EPS of $0.96.

Our updated guidance range is now fully within or above our long-term financial target ranges of 1% to 2% sales growth and 7% to 9% EPS growth off the 2019 base, even with the $0.05 headwind from our digital ERP initiatives. As a reminder, 2021 shifts back to 52 weeks, one fewer week than 2020. The additional week in 2020 contributed 1.8% to full year sales and approximately $0.02 to EPS. As we've completed the first quarter and moved into quarter 2, the operating environment has been better than we initially forecasted.

In fact, branded retail constituted 66.1% of our total sales in Q1 compared to 66% in the fourth quarter of 2020 and also the prior year first quarter, which included the peak of pandemic-driven sales. Branded retail has maintained its large percentage of our total sales despite the recovery in our nonretail and other business. Some of the factors we considered when setting guidance, including the impact of the pandemic on the pace of reopening as well as inflationary commodity costs.

Although our 2021 plan did contemplate some inflation, markets have been much more volatile than anticipated. Where possible, we fixed input costs for the remainder of 2021. The cost inputs that do not offer forward buying could cause some inflationary pressures in the second half. While we still have a good bit of 2021 remaining, should commodity prices stay at current levels, we would expect meaningful inflation in 2022.

In a moment, Ryals will share more color on the factors we are watching in 2021. Free cash flow generation is expected to be strong, and our capital allocation priorities and philosophy remain consistent with our focus on maximizing return on invested capital and growing shareholder value. Although our Q1 CapEx spend of $27 million was somewhat below our full year run rate. We do anticipate the pace of investment to pick up over the remainder of 2021 as we support our supply chain optimization and digital transformation initiatives. We continue to expect capital expenditures in the range of $140 million to $150 million for the year.

Thank you. And now I'll turn it back to Ryals.

Thank you, Steve.

I am pleased with the start to our year, and I'm optimistic about the steps we're taking to continue our success well into the future. Steve detailed our guidance for 2021. I'd like to provide you some more color around how we're thinking about the remainder of the year. Last quarter, we highlighted some of the factors that could affect results within our guidance range. And those factors include the timing of the pandemic-related demand reversion, cost inflation, the pace of our long-term growth investments, including digital and our success in achieving operational improvements at a few of our lower-performing bakeries.

With regard to digital, we are off to a solid start. our digital initiatives are on track. And as our plans solidify, we expect to provide further details later in the year. With regard to guidance, we specifically pointed out 3 levers to keep an eye on, mix reversion, commodity inflation and the promotional environment. And I'd like to update you on how these are trending.

With regard to mix reversion, so far, as I mentioned earlier, branded retail has remained strong, solidly ahead of the 2019 levels, while foodservice is recovering, though still below 2019 and store-branded retail continued the weak trends that began well before the pandemic. We are keeping a close eye on the changing dynamics we foresee in the back half of the year as kids return to school.

Commodity inflation is certainly picking up, and we're doing the things we've always done to offset that inflation with cost savings, efficiency improvements, our portfolio strategy and pricing and trade spend optimization where necessary. As I said earlier, we've been successful in using price to minimize the impact of higher costs so far. And we expect that we'll be able to continue to do so when necessary given the combination of our strong brands and the recognition throughout the industry that everyone will need to offset these higher costs.

And then finally, the promotional environment has remained stable so far. Obviously, we'll keep a close eye on this. And I'm confident that with our enhanced capabilities, we'll be able to maximize the effectiveness of our promotional strategies. And finally, I'd just like to note that our company has been in business for almost 102 years. I certainly recognize that the indicators of inflation we're all seeing are foremost on everyone's mind. However, it's important to remember that we've been through similar periods many times before.

We've experienced inflationary environments, deflationary environments, recessions and even depressions, and we've weathered them all. Our core products are staples of the American diet. They are weekly purchases and that consistency has helped drive our strong cash flow over many years. While we recognize and appreciate the potential short-term impact of inflation on our results, we believe we have accounted for that in our 2021 guidance.

Consumers have demonstrated a clear preference for differentiated brands, and we believe our strong brands position us better than ever before to navigate today's environment. So no matter the environment, we are committed to maximizing our performance by driving top line growth and expanding margins. Our leading brands and high-performing team give me great confidence that we're on the right path and well positioned to deliver results in line with our long-term financial targets.

Thank you very much for your time. This concludes our prepared remarks. I'd like to invite you want to listen to our live question-and-answer webcast, which will begin at 8:30 a.m. Eastern Time on Friday, May 21, and will be available for replay on the Investors section of flowersfoods.com. Thank you, and take care.