Flowers Foods : 1Q 2021 Q&A Transcript

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EDITED TRANSCRIPT

FLO.N - Q1 2021 Flowers Foods Inc Earnings Call

EVENT DATE/TIME: MAY 21, 2021 / 12:30PM GMT

OVERVIEW:

Co. reported 1Q21 GAAP diluted EPS of $0.34. Expects 2021 adjusted sales to decline between 2.0-3.5% vs. 2020 and adjusted EPS to be $1.10-1.17.

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MAY 21, 2021 / 12:30PM, FLO.N - Q1 2021 Flowers Foods Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

A. Ryals McMullian Flowers Foods, Inc. - President, CEO & Director

J. T. Rieck Flowers Foods, Inc. - SVP of Finance & Investor Relations

R. Steve Kinsey Flowers Foods, Inc. - CFO & CAO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Faiza Alwy Deutsche Bank AG, Research Division - Research Analyst

Mitchell Brad Pinheiro Sturdivant & Co., Inc., Research Division - Research Analyst

Robert Frederick Dickerson Jefferies LLC, Research Division - MD & Senior Research Analyst

Ryan Blaze Bell Consumer Edge Research, LLC - Research Analyst

William Bates Chappell Truist Securities, Inc., Research Division - MD

P R E S E N T A T I O N

Operator

Good day, and thank you for standing by, and welcome to the Flowers Foods First Quarter 2021 Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, J.T. Rieck, Senior Vice President of Finance and Investor Relations. Please go ahead.

J. T. Rieck - Flowers Foods, Inc. - SVP of Finance & Investor Relations

Thank you, Victor, and good morning. I hope everyone has the opportunity to review our earnings release, listen to our prepared remarks and view the slide presentation. These were 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 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. Victor, we're ready to start the Q&A, please.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions) Our first question will come from Rob Dickerson from [Jefferies] (added by company after the call). You may begin.

Robert Frederick Dickerson - Jefferies LLC, Research Division - MD & Senior Research Analyst

Great, from Jefferies. So look, quarter was a good quarter. It sounds like you have decent conviction in the revenue guidance. It also sounds like or it seems like those consumers that have been consuming at home or continue to consume at home with retail brands still elevated, which is great.

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MAY 21, 2021 / 12:30PM, FLO.N - Q1 2021 Flowers Foods Inc Earnings Call

I would just ask because I think this is kind of the main question for a lot of investors right now, there's a line in the prepared remarks and said, "it seems as if maybe commodity inflation is somewhat manageable for this year. But for next year, right, if prices kind of remain where they are, there could be a bit more pressure." So I would just appreciate any more color on that, color potentially around some of those offsets, including pricing potential in the back half of this year. And then I'll just leave it at that.

R. Steve Kinsey - Flowers Foods, Inc. - CFO & CAO

Sure, Rob. Hey, this is Steve. Obviously, there's a lot of volatility in the commodity markets. Our guidance takes into consideration what we believe will play out for 2021. And as you know, we do hedge and we take coverage usually on the 7- to 9-month time horizon and typically stay on the long end of that. So we do believe we have good visibility for the rest of 2021. There are a few things that we can't cover. They're a little more near term, some in the packaging area, and you are seeing a lot of volatility and volatility and inflation in packaging, particularly around the corrugated area and arena.

But like I say, we do feel like we have decent visibility. Ryals said in his comments, there are several levers we can pull, pricing being one of those, but we are looking at efficiencies across our bakeries as well as other cost initiatives. So I do feel pretty good about the guidance range we have out there. And obviously, due to the volatility and the way things move so quickly, as the year progresses, we'll be able to change any guidance as necessary. But I think given the point we're at, we feel pretty comfortable with that.

Looking into 2022, obviously, we're not prepared to give guidance for 2022. But the reality is when you look at what's driving kind of the commodity inflation, a lot of that is not necessarily weak. I mean the wheat crop is in pretty decent shape but it's other grains like corn and beans. And it's more of a global market. We are seeing China back into that market in a big way. And just as grains turn to feed grains and there's tightness on availability of supply, then that starts to impact things like wheat and other grain crops.

So the reality is that today's prices, if we had to go out and cover, there would be significant commodity inflation, but we still have a lot of runway with regard to the corn crop, the bean crop, and we'll cycle a wheat crop. But we just thought it was important to get that out there from a transparency perspective.

A. Ryals McMullian - Flowers Foods, Inc. - President, CEO & Director

Rob, just to add a couple -- Rob, add a couple of points to that. Steve's spot on across the board. But we've -- as you know, we've been through periods like this many times in the past. Yes, we've been able to adequately cover most of most of the inflation that we've experienced over the years. I would say that I think we're better positioned today perhaps than we've ever been just with the -- if you think about the strength of our branded portfolio now and the focus on it, consumers' obvious desire for branded products with a point of difference. I think that positions us even better as you think about some of the levers we can pull from an inflationary environment standpoint.

Robert Frederick Dickerson - Jefferies LLC, Research Division - MD & Senior Research Analyst

Okay. That makes sense. And just a quick follow-up. Like you said, consumers continue to focus on brands. Your branded business is doing very well, right? You call out in the prepared remarks just the growth overall with DKB and Canyon, which has been phenomenal. And even relative to 2019, right, revenues still remain elevated.

So I guess like the larger question then is as consumers, they start to revert back. Are you seeing kind of 1 of the 3 things you're keeping your eye on, right, is reversed and basically channel reversion? Is there anything that you would say now relative to 12, 18 months ago, that has changed your way of thinking of maybe how to service some of the channels? Like are there benefit to maybe not reverting as much, like just say, okay, we're going to leverage some excess capacity over here a little bit in private label, a little bit in the foodservice. We know what, we've learned through the pandemic this -- or no? Is it just kind of get back to business as usual? And that's all.

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MAY 21, 2021 / 12:30PM, FLO.N - Q1 2021 Flowers Foods Inc Earnings Call

A. Ryals McMullian - Flowers Foods, Inc. - President, CEO & Director

Yes. Thanks, Rob. No, I don't think it goes back necessarily business as usual. As we've said before, I do think there are -- some of these patterns are probably permanent. But we've also consistently said we do expect to see some movement back to prepandemic levels. So I don't think it will go all the way back. I do think that when school starts in August, that should give us a better kind of long-term indication of where these trends are ultimately going to land. Having said all that, no matter what that environment looks like, we believe that we're very well positioned with our branded portfolio, as I mentioned. But also, as you think about foodservice. Coming back, which it already did somewhat in the quarter, we started to see some moves up in foodservice. And the good story there is via our customer strategy work, it is coming back at better margins. So as that mix reverts and foodservice starts to come back, it won't have as significant of an impact as it would have prior to the execution of that strategic work.

Operator

Our next question will come from the line of Bill Chappell from Truist.

William Bates Chappell - Truist Securities, Inc., Research Division - MD

First, a follow-up on pricing. Have you seen any pricing from -- on the competitive landscape? I think we heard on the other day that like Little Debbie and the cake side had already led some pricing. Imagine not all of your competitors are kind of headed the same way you are. So they might be feeling the pinch sooner than later. So I didn't know if you've seen anything there or look to follow it from that standpoint.

A. Ryals McMullian - Flowers Foods, Inc. - President, CEO & Director

Yes, nothing really significant, Bill. The one comment I'd make relative to pricing just in the competitive environment is the promotional cadence. And still consistent with past quarters, we haven't seen really any move relative to promotions, still remain well down, base sales really driving everything, though, obviously down year-over-year just given the pantry loading months but nothing significant. I mean we know that some of the regional players perhaps don't hedge like we do or at least, not as far out. So they're a little bit more exposed to the spot market and that kind of thing, but thus far, nothing notable at this point. Bill, it also could be more of a -- just like for us, it could be more of a back half dynamic than a full half dynamic.

William Bates Chappell - Truist Securities, Inc., Research Division - MD

Yes. Sure. And then on private label, I mean, it's pretty astounding that it's gone from 26% of the category down to 20%, which has got to be one of the lowest in years. And I think I've asked this question before, but since you supply so much of the private label, I mean, at what point can you go in and push more of your branded products on the shelf and show that, "Hey, this is not really a great use of the space." I mean since you do service it with DSD, I would think that, that's something that's pretty apparent to the retailers as well as the industry.

A. Ryals McMullian - Flowers Foods, Inc. - President, CEO & Director

Indeed, it is. Yes, you're right. We've talked about this a little bit on prior calls, but I mean, I think the retailers are seeing the benefit in our category and others, frankly, of consumers' preference for brands. So we have been able to expand our shelf space, particularly with Dave's and Perfectly Crafted's and Canyon, some of those leading items that we have, again, just kind of highlighting the importance of the portfolio strategy overall. But I agree with you, it is pretty amazing to see see how far down it is, but I think that's a reflection of consumer behavior more than anything else. And I'm certain that the retailers are pretty in tune with that.

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MAY 21, 2021 / 12:30PM, FLO.N - Q1 2021 Flowers Foods Inc Earnings Call

William Bates Chappell - Truist Securities, Inc., Research Division - MD

Sure. And then last one for me. Just going back a year ago, you had your 40-ish bakeries being able to, in short period of time, hit a massive surge in sales. And now that we've come -- or we're coming back down or we're normalizing, I mean do you look back and say, "Boy, the supply chain, the number of facilities we have could be streamlined even further? We're really much more efficient than we could or be more efficient and could be even more efficient by cutting out a few plants here or there?" Or is that not the case? Is it, "Hey, let's just continue to operate and grow with it?"

A. Ryals McMullian - Flowers Foods, Inc. - President, CEO & Director

No. To the contrary, look, I mean network optimization has been one of our key areas of focus, as you know. We did convert that Lynchburg bakery. We have some other projects going on this year. And you've seen with the elevated CapEx numbers this year, so still very much a focus point for us. As we often say, it's -- there are a lot of levers you can pull in an inflationary environment, but it's always incumbent upon us to make sure we're being as efficient as possible. So we're constantly evaluating our network from that standpoint.

William Bates Chappell - Truist Securities, Inc., Research Division - MD

Got it. But more just kind of normal process, I mean would you -- I guess -- sorry, would you expect CapEx to be elevated going into 2022? Or is this really the big year of change?

R. Steve Kinsey - Flowers Foods, Inc. - CFO & CAO

Well, Bill, this year, the focus is on kind of the digital initiatives. We have said that the digital is a 2- to 3-year initiative. So while we're not prepared to give guidance on 2022, I would expect you could see some elevated CapEx for the next 2 to 3 years, whether it's digital or whether it's working on our portfolio and optimization, some of those projects.

Operator

Our next question will come from the line of Faiza Alwy from Deutsche Bank.

Faiza Alwy - Deutsche Bank AG, Research Division - Research Analyst

I just wanted to follow up on the inflation point, and I don't know if you're willing to say anything on this. But I'm curious, are you still hedging out into 2022? Because it sounds like are you expecting sort of these prices on wheat, et cetera, to come down into '22? So you'd rather have open positions? Or are you sort of continuing your programmatic hedging program at these current prices?

R. Steve Kinsey - Flowers Foods, Inc. - CFO & CAO

Yes. I mean we wouldn't comment specifically on 2022 at this point. But we tend to stick to our overall hedge strategy, which is the 7 to 9 months. So we do have some visibility into the first quarter of 2022, but the reality is it's still pretty volatile. And beyond that, I probably wouldn't comment much on our particular coverage with regard to the long end of our coverage range. But we do -- we are beginning to think about what we do for 2022.

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