Flowers Foods, Inc. (NYSE:FLO) Q3 2023 Earnings Call Transcript

Flowers Foods, Inc. (NYSE:FLO) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Good day, and thank you for standing by. Welcome to the Flowers Foods Third Quarter 2023 Results Conference Call. Please be advised that today’s event is being recorded. I would now like to hand the conference over to your speaker today, J.T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead.

J.T. Rieck: Thank you, Liz, 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 call. I’m sorry — 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, Chairman, CEO and President; and Steve Kinsey, our CFO. Ryals, I’ll turn it over to you.

Ryals McMullian: All right, great. Thanks, J.T. Good morning everybody. Appreciate you joining our third quarter call. We’re very pleased with our strong third quarter results. We generated record quarterly revenues and maintained our unit share despite inflationary pressures. Sales benefited from strategic pricing initiatives that are designed to mitigate inflation and improve volume trends. Our leading brands continue to perform well and we’re investing in innovation and marketing to maintain that momentum. We also continue to make progress in our digital and cost savings initiatives, which are helping to improve our efficiencies. Despite the strong results, revenues did come in a little bit less than expected due to business rationalizations that materialized sooner than we expected and a lower-than-normal amount of storm activity.

It’s important to note that although the timing can be unpredictable, these business exits are an integral part of our portfolio strategy as we aim to improve the profitability of our food service business. We’ve made great progress in that regard and we expect continued improvement moving forward. I remain extremely confident in our prospects and I’ve never been more confident in our ability to grow shareholder value over time. Before we move to questions, I also want to acknowledge that today is Veterans Day, and so we would like to express our heartfelt gratitude to all the men and women in service, that have chosen to risk their lives to protect our freedoms here at home. So, thank you very much for your service. With that, Liz, we’re ready to take questions.

Operator: [Operator Instructions] Our first question will come from the line of Bill Chappell with Truist Securities.

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Q&A Session

Bill Chappell: Thanks. Good morning.

Ryals McMullian: Hey, Bill.

Bill Chappell: Just maybe summarizing your comments, and I just want to make sure I’m looking at this right. Is it fair to say kind of, you feel like the turbulence of the business post-pandemic kind of bottomed out over the summer, and while you’re not meaningfully changed from — in the third quarter, things are starting to at least temper back up. And the only real change was just that the exit of some of your businesses happened a little bit faster than you expected. Is that the best way to summarize, kind of the quarter?

Ryals McMullian: Yes. I think it’s a great way to summarize. I mean, frankly, we’re really pleased with the results in the quarter. Yes, the loss of the food service business that we mentioned did impact the quarter and impacted the guidance. But I mean, that was going to come anyway. These are planned exits. This is low margin business, highly complex business. In this particular case, actually, we’re actually getting some benefit from some reduced transportation costs because this was a bit of a difficult customer to serve. But then the strength of the underlying business is where the focus should be at least in our minds. And in that regard, we’re really pleased. I mean, you look at — Bill, you look at mix in the quarter actually ticked up a little bit from a branded mix standpoint.

So that’s good. The volume sequentially on the branded retail side continues to improve and then, of course, the share performance on top of that. So, I think the way you framed it is accurate. We’re starting to see things stabilize. And I think we also mentioned even looking into the first few weeks of the fourth quarter, though it’s early, we’ve continued to see that strong unit share performance continue.

Bill Chappell: Great. Now that helps. And then just maybe a little bit more color on the settlement in California, not necessarily the legal, but that you’re converting into an employee model. I guess I don’t remember, or if you’ve disclosed how big California is anyways, but does that alter the margins going forward? And is there a chance that other states have to go to an employee model down the road?

Ryals McMullian: Yes. So just remember that California is a unique legal environment, unfortunately. And so, we’re kind of in this position due to that legal environment. So it is unique. This is not something I would extrapolate across the country. We did have one other settlement in Maine. Now this was on a much smaller scale, but we also converted to a company-owned model in that state as well. With regards to California, you’re right. We will be over the next year or so whenever the settlement comes through, kind of expecting that early next year, we’ll in phases convert the independent model to a company-owned model. So with that — and Steve can speak to this a little more if you like, but it will shift some costs around a little bit.

And generally speaking, obviously, we’re not providing any guidance in 2024. We can put a little finer point on this, probably in February. But generally speaking, it’s a little bit more expensive to run the company own model than it is an independent distributor model. However, there are some advantages to having for lack of a better word, having some control back when you think about store-level service, display execution, days of service, et cetera. We actually see a little bit of upside as well that we would expect to offset those incremental costs.

Bill Chappell: Got it. Thanks so much.

J.T. Rieck: Thank you, Bill.

Operator: Our next question will come from the line of Steve Powers with Deutsche Bank.

Stephen Powers: Hey, good morning. Can you hear me?

J.T. Rieck: Yes, Steve. Good morning.