Earnings Labs

Flowers Foods, Inc. (FLO)

Q3 2019 Earnings Call· Thu, Nov 7, 2019

$8.98

+0.34%

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Transcript

Operator

Operator

Welcome to the Flowers Foods Third Quarter 2019 Results Conference Call and Webcast. My name is Paulette and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to J.T. Rieck, Treasurer and Vice President of Investor Relations. You may begin.

J.T. Rieck

Analyst

Thank you, Paulette, and good morning, everyone. Our third quarter results were released yesterday evening. The earnings release and our updated investor presentation is posted in the Investors section of the Flowers Foods website. Our 10-Q was filed with the SEC yesterday evening as well. Before we begin please be aware that our presentation today may include forward-looking statements about our company's performance. Although we believe those statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters, we'll discuss during the call important factors relating to Flowers Foods business are fully detailed in our SEC filings. With that I'll make some introductions. Participating on the call today we have; Ryals McMullian, Flowers Foods President and Chief Executive Officer; and Steve Kinsey, our Executive Vice President and Chief Financial Officer. Ryals, I will turn the call over to you.

Ryals McMullian

Analyst

Thanks J.T. Good morning and welcome to our third quarter call. We're very happy today. We report record sales ahead of our forecast and reiterate our outlook for fiscal 2019 adjusted EPS. Regarding our four strategic pillars, focusing our brands, prioritizing margin, pursuing smart M&A and developing our team, we're pleased to say good momentum in several of them. We continue to make nice progress growing our portfolio of top brands, the DKB and Canyon acquisitions have been resounding successes. And although it's harder to see from a quantitative standpoint, we are doing some great things for the development of our team. But as we said in yesterday's release, we are still facing some margin headwinds. Now for five months to see I've had the opportunity to assess where we are, and what we need to do to improve our profitability while maintaining the great top line momentum we've enjoyed this year. And I'm looking forward to sharing that with you on the call today. However, before I do that and like we did last quarter. I want to call Steve Kinsey first to review the financial results and give our outlook for the remainder of the year and set the context for what we'll talk about a few minutes. That of course will set the tone for your questions. Steve?

Steve Kinsey

Analyst

Thank you, Ryals and good morning everyone. For the third quarter, we continued to experience solid performance on the top line, driven primarily by sales and the retail channel. Validated sales increased 43.1 million or 4.7% year-over-year. Canyon Bakehouse, acquired in late 2018 contributed 2.2% and the baked business improved price mix drove 2.1% of the sales increase, while higher volumes benefited the top line by 40 basis points. Price realizations improved across most of our channels and product classes, which has helped to partially offset the commodity, labor and transportation cost increases we've experienced in recent quarters. Overall, volume performance and our key brands and store brands was strong. However, we did see lower volumes of food service and store branded cake and breakfast items. Looking at sales by channel, bread and retail sales increased 36.7 million or 6.7%. Canyon Bakehouse's branded products accounted for less than half of these incremental sales dollars. The balance was largely driven by continued growth from Dave's Killer Bread and Nature's Own and Sun-Maid breakfast breads which were introduced in the third quarter of last year. Branded retail cake was flat as compared to the prior year. Store branded retail sales increased 12.1 million or 8.7%, slightly less than half of the sales increase is attributed to the acquired Canyon Bakehouse store brand business. The balance of the growth was split between improved pricing mix and volume growth in store brand, buns and rolls due to increased distribution with the existing customers. All set to the lower volumes in our store branded breakfast business. Food service and other non-retail sales decreased by 5.7 million or 2.4%. Lower volumes drove most of decline due in part to loss of business for the inferior yeast disruption in 2018 and volume offers in the vending channel…

Ryals McMullian

Analyst

Thank you, Steve. So look, although there were some issues that affected the quarter. The underlying fundamentals of the business were strong. We've got a solid foundation to build upon. And while there are certainly areas for improvement, I believe the trajectory of the business is quite positive. Our branded retail business is thriving, and we believe this is largely attributable to the order changes put in place a couple of years ago and the resulting focus and higher marketing support for our high potential national brands. Nature's Own, Dave's Killer Bread, Wonder all are significantly driving our top line and all three gained unit dollar share in the quarter as they have each quarter this year. Also in the third quarter DKB became the number two specialty loaf in retail dollars, and Canyon Bakehouse became the number one gluten free bread brand in the country, and it continues to grow in distribution and velocity. Furthermore, our focus on omni channel is starting to pay off. In fact, syndicated data shows us that ecommerce sales of fresh packets, breads, buns and rolls have almost doubled in the last year, and our branded sales have increased by 55%. That's still relatively small base, but establishing a presence for our brands on the digital shelf is critical for growth in the future as more households buy groceries online and home delivery expands. Having said that, we recognize there's room for improvement and we still have work to do to improve our margin performance. Over the past several months I have taken the time to evaluate our current situation and challenge our senior leadership team, working collaboratively, we've honed our focus around the issues we face, we better frame the questions we need to be asking ourselves and focused on the development of…

Operator

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we have a question from Mitch Penn Yarrow from Sturtevant Company. Please go ahead, Mitch.

Mitch Penn Yarrow

Analyst

Hi. Good morning.

Ryals McMullian

Analyst

Hey, Mitch.

Mitch Penn Yarrow

Analyst

So first question is regarding stage two here, project Centennial and the supply chain optimization. I mean, I know you said something, but I missed it in your remarks. But how long is this review going to take? I would have thought that phase two would have been planned out as things wasn't going along. But now it seems like it's a discreet stop and then start and then you have this phase two analysis and then phase implementation. Like, what's the timeline on it?

Ryals McMullian

Analyst

Yeah. So Mitch, I mean, the whole thing is kind of the next step in the evolution under Centennial right. I mean, we had a lot of order changes that came about in the first phase that we wanted to make sure we got bedded down and all in place, and all that frankly is settled out now. But I think more importantly, Mitch, we've been thinking about this for a long time. I mean, you know, this industry pretty well. And this is something you got to be pretty careful and deliberate about. And so we took a quite a bit of time to do our internal reviews, and frankly learned quite a bit. And I mentioned in my prepared remarks that one of the reasons we did that is we wanted to come out on the other side of that internal review with a very, very detailed and tight scope of work. Obviously, for economies we went through a lot of stuff with Centennial that won't be repeated here. This is much a much smaller scale. But we wanted both our internal and our outside resources to be fully prepared going in on the front end, so that we could keep that scope really tight, clearly understand what outcomes we were after, and then perform the formal work.

Mitch Penn Yarrow

Analyst

And when you look at this, is there – are you looking at your portfolio profitability optimization? I mean, is there any – are we going to see sales being cold in a material way? Or I mean would it be a drag on revenue growth in a material way I guess is the question?

Ryals McMullian

Analyst

Yeah. I mean, look, I mean, there's an element of ski rationalization involved here. Obviously, I can't quantify that for you today that'll come later on, but it's much more than that. I mean, this is a much more holistic approach that is rooted in portfolio optimization, but it's also about the network right and making sure that we're operating as efficiently as possible, and then we'll have more details on it as we go through the process and not ready to answer that today. But there will be some element of ski rationalization involved and then that's probably pretty obvious.

Mitch Penn Yarrow

Analyst

Okay. And then when it comes to the tight labor as it affects efficiency, is that the inability to fill second ships or what would – can you talk about that a little bit?

Ryals McMullian

Analyst

Yeah. Mitch, it's really turn over. The turnover has been the biggest problem and to address that we're doing some short-term things and then obviously, the portfolio and supply chain network stuff is a little longer term. But we're trying to do some accretive things with scheduling as a fresh perishable DSD business we basically run every day. And so we don't have the luxury of building inventories and sort of having more predictable scheduling. So we're doing some things with chefs to try to give people more certainty to their schedule, more instances of consecutive days off, which is historically a rarity in our industry, so overall trying to make it a more attractive place to work. And furthermore, we're moving back away in some of our plants from outsourced labor back to permanent labor to create that more of that one team atmosphere. We've done that in a couple bakeries so far. And I can't say that we've seen significant financial returns from that yet, but we have seen the turnover start to fall. Once that happens and takes hold. One would expect – once those folks are trained up for those manufacturing efficiencies to start coming back up the historical levels.

Mitch Penn Yarrow

Analyst

Okay, I will thank you. I'll get back in the queue.

Ryals McMullian

Analyst

Thank you, Mitch.

Operator

Operator

We have no further questions at this time. That concludes the Q&A session. And I will now turn the call over to Ryals McMullian for closing comments.

Ryals McMullian

Analyst

Well, we appreciate you joining our call today. Thanks for your interest in Flowers and we look forward to speaking again in February. Thank you.

Operator

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.