Flowers Foods, Inc. (NYSE:FLO) Q4 2023 Earnings Call Transcript

Flowers Foods, Inc. (NYSE:FLO) Q4 2023 Earnings Call Transcript February 9, 2024

Flowers Foods, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and thank you for standing by. Welcome to the Flowers Foods Fourth Quarter and Full Year 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 opening speaker today, J.T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead, sir.

J.T. Rieck: Thank you, Norva, and good morning. I hope everyone have 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 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.

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 Riyals McMullian, Chairman and CEO; and Steve Kinsey, our CFO. Riyals, I’ll turn it over to you.

Riyals McMullian: Okay. Thanks, J.T. Good morning, everybody. Thanks for joining the fourth quarter call. We’re proud of our team’s accomplishments in the challenging consumer environment we’re facing. Our brands performed very well, gaining unit and dollar share for the first since the first quarter of 2022. Dave’s Killer Bread was a particular standout, reaching $1 billion in retail sales and growing unit volume 10%, while the overall bread category declined 2.6%. We’re excited about the multitude of future growth prospects for Dave’s and our other brands, and we are investing in marketing and innovation to capitalize on that potential. Our 2024 forecast calls for continued solid results despite these category headwinds. We expect these results to be first half weighted, benefiting from wraparound pricing and branded retail, new pricing and selected food service accounts and moderating commodity costs.

Our second half forecast incorporates more caution due to the uncertain consumer and promotional environment. We remain focused on the significant longer-term opportunities we see ahead of us, filling in white space and geographic and product adjacencies while leveraging innovation to push into new categories. I’ve never been more confident in our long-term potential, and I look forward to building on our strong base throughout 2024. So with that, Norma, we can open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Robert Dickerson with Jefferies.

Robert Dickerson: Just a couple of quick questions. I guess — kind of just first piece, maybe this is more for Steve. As we think through the year kind of especially kind of first half — second half, how are you feeling about gross margin progression, just given some of the pullback in your inputs, but then also maybe some ongoing kind of promotional reinvestment potential?

Riyals McMullian: Yes, Rob, let me start, and Steve can certainly fill in. So from a gross margin standpoint, we expect better results. We saw a nice gross margin increase in the fourth quarter, and we expect that to continue. A couple of other factors, though, to think about impacting bottom line performance. One, we are investing in the business. So whether that’s ERP or our marketing investments, et cetera, behind Dave’s and Nature’s Own and the new bar launches and everything, we are spending more marketing dollars investing in the business. So that will somewhat pressure margins from an EBITDA or bottom line standpoint. But obviously, those were intended to fuel future growth and our investments we’re happy to make. But we would expect some improvement in gross margin.

But one other thing to note, somewhat offsetting that, we talked in the prepared remarks about stranded overhead from the strategic exits. That does, particularly from a labor standpoint effect those margins somewhat. However, the exciting thing about that for us is the opportunity we have ahead to refill that capacity with higher margin volume, which was the intention all along. Now obviously, that will come all at once. It will take a little bit of patience. But we’ve got a really significant opportunity ahead of us to refill that extreme low margin business that we’ve exited with much more profitable business. Steve, do you want to add?

Steve Kinsey: Yes. I mean, as Riyal commented and as you saw in the script too, we are being a little more cautious on the consumer in the back half. So when you think about overall cadence currently kind of in the guidance range, we do see stronger performance in the first half. A lot of that, as Riyal said, will be driven by some positives and negatives, specifically to some of the I’d say, commodity moderation pressure. If you think about last year, the first half was tougher than the back. So from an overall comp perspective, that will be driving some of the improvement in the first half as we’ve seen things pull back somewhat. We do expect first half of 2024 to benefit more than the back half with regard to overall commodity inputs.

Robert Dickerson: All right. And I guess just secondly, I think inherent in the guide is potential for ongoing volume declines. Clearly, I understand little pressure consumer backdrop, clearly, a decent amount of pricing going through. Dave’s is doing well, but I guess that’s a little different. So I’m just curious like if we listen to a number of other companies that are all kind of going through some form of volume pressure, there is kind of this expectation, so to speak, that as we get through the back half of ’24, the probability should increase that volumes actually start to grow again, partially just driven by lower base and easier comp in the back half of ’23. So I mean it sounds like you’re being a little bit more cautious and maybe you’re a bit more rational than others.

So kind of the straight question is just kind of why not you do forecast a little bit more on the positive volume side as you get through the year? Or maybe that could play out. It’s just you don’t really know if it does, and that’s probably realistic.

Riyals McMullian: Yes. Look, it’s a fair point. And it’s clearly obvious the category continues to be under pressure and with private label trade down. But if you look at our market share performance, it’s been quite admirable what we’ve been able to do even in this environment. Now certainly, we understand that market share performance in a declining category doesn’t necessarily translate in the bottom line profitability, but it does show the investments that we’re making in our brands enable us to continue relative strong performance in a pressured category. Now as to the volume outlook for the year, I don’t disagree with you. I mean there’s certainly a possibility as the market adjusts to sort of post-pandemic reality that the category finds it’s equilibrium, which is what I think it’s trying to do.

And we could see more positive volume performance in the second half. But at the same time, part of our reason for caution is the offset of what a higher promotional environment could look like in that circumstance. I mean if the category in order to drive unit volume, decides it needs to become more promotional, then that could be an offset. The other thing that I would note though is our volume performance continued to improve throughout ’23. And we finished the year with branded retail volume only down 30 basis points, which was a substantial improvement and overall volume improved. We were down, I think, 2.4 in the fourth quarter as opposed to 4.1 if you look back to the third quarter. So the sequence has been good, and so that’s certainly a reason for optimism, which I think we’re capturing at the upper end of guidance.