Good morning, everybody. Peter Galbo from the Food and Beverage team here at B of A. We're delighted to be joined at the conference this year by Flowers Foods, I believe first time at the conference. Guys, thanks for being here. Flowers is a $5 billion revenue business, leader in packaged food bakery including brands such as Nature's Own, Dave's Killer Bread, and of course Tastykake. So guys, thanks for being here. Steve Kinsey, CFO, J.T. Rieck, EVP of Finance and IR, and then we have Eric Jacobson from IR as well. Really appreciate you guys being here.
Well thank you, thank you for having us.
So Steve, maybe just to kick off from a very high level if we can kind of get an update from your perspective on the consumer. How are they kind of holding up, particularly as inflation wanes? I know in your probably biggest commodity maybe there's even been some deflation so we can certainly talk about that but would love to kind of get an update from you on where the consumer is.
Sure. Looking at the consumer and kind of thinking about where we are today, and we talked about this when we gave our guidance, we're still pretty or fairly cautious from an overall consumer perspective. When you look at the category and you think about what's happened over the last 12-18 months with pretty significant inflation, you saw the consumer maybe go more to value. We did see private label trends turn somewhat. If you go back pre-COVID, we were seeing private label down pretty sizable in this category. What you saw probably the last year or so is the consumer going maybe shifting back some into private label through value channels. We did see that begin to moderate some in the fourth quarter.
So from that perspective, it would seem like maybe some improvement with the overall consumer but the fact that private label did take a turn does keep us a little more cautious from an overall consumer perspective. Now saying that, our brands have done we believe well throughout this. So we'll continue to watch from that perspective. Traditional grocery brands have done really well. You have not necessarily seen kind of the private label impact that you've seen more in the mass channel. So again, as we said in our guidance, we're really watching the consumer in the first half and there are some signs that maybe things could be potentially improving but we're not really ready to call that yet.
Just being newer to your business, is there a private label impact more to any brand in particular that feels the pressure within the portfolio or is it kind of more broad-based?
I mean, typically private label impacts more your wheat or white bread offerings. From an innovation standpoint or premium standpoint, really there's not typically a comparable product. So you'll see even in our data from a brand perspective more of the impact hit our white offerings or our soft variety which is primarily our wheat offerings.
You spoke a bit about the mass channel dynamics. Just any update too on what you're seeing in grocery, more traditional grocery?
I mean, I'd say traditional grocery—again, it's probably more strategic on how the channels operate. You're just not seeing the private label impact in traditional grocery that you've seen necessarily in mass or kind of more the value channels. Some of that's consumer driven based on probably demographics, who's shopping where. But we feel like across both channels however the brands continue to hold up well.
Maybe you can just give a state of the union across the brands in particular maybe the major brands just what changes you're seeing for at least for the key kind of three or four.
Sure. I mean obviously Nature's Own is kind of our staple. It's been around since the late 1970s. It's been a huge part of our growth. We've made acquisitions and it's been the brand that we took to market and we have had tremendous success with that brand. Again, we've had good innovation there. More recently we've had products like Nature's Own Perfectly Crafted. I'd say the more a little more premium. And what you're seeing with that brand is where we've had innovation, things seem to be holding up well. Again where you have products that compete more directly with private label or with a competitive brand that may be very similar, maybe a little more challenged. Then you move to more a premium channel like with Dave's Killer Bread or Canyon.
We see really good brand performance there when you think about Dave's Killer Bread and what's happened with that brand. It's driving a lot of the category as well, the organic category is. While from a category perspective you're down roughly 2.5%-3% from a unit volume perspective. The reality for us is the premium channel has been up from a volume perspective. Q4 DKB was up almost 10% from volume perspective. The category was down about 2.6%. So it appears that the consumer really is looking for innovation, better for you attributes and products and those products seem to be driving decent volume response. Same thing with Canyon, gluten-free. Again, a premium product for us. We've seen things fairly stable I guess with that product. I'm sure we'll get to it.
We had a backup early in the year. We had an issue with production capacity. All that's behind us. So on the DSD side of the business, beginning to see that ramp back up from a volume perspective. But on the warehouse side of that business, it's a little harder to push things through. So again, when you look kind of at the brand portfolio and you look across kind of traditional loaf and premium, good performance I'd say across the whole, but definitely driven by innovation and better for you type products.
I mean I think a good example of that to add to it is the Nature's Own Keto Loaf which was actually introduced a little bit, maybe a little bit behind some of the others in the category but it's now the best-selling Keto Loaf in the category. It's gained almost 600 basis points for the Nature's Own brand. So I think that's just a great example of how that differentiation is really resonating with the consumer.
Maybe if we just think about your brand performance within the category, how much of that is I guess driven by economic conditions for the consumer or the category versus kind of factors that you can control? So whether that's the innovation you talked about, A&P spending, and the like.
Yeah, I mean, again, just kind of going back to the category, obviously, as I said, we've seen some challenges. The reality is if you look at promotional activity, I'd say things have been pretty rational for the most part over the past few years. We're definitely below pre-pandemic levels within the category with regard to promotions. Coming out of Q4, we did say we started to see some increase from promotional activity. I think the good thing for us is overall promotional and effectiveness I think was good in Q4. More recent track channel data would indicate that continues. So we'll continue to watch that. Hasn't necessarily had an overall impact on volumes from a brand perspective. Again, I think it goes back to innovation and consumer expectations.
The reality is, like I said, we're getting the most volume pull through on products where we've been focused on innovation over the past 12 months or so and products more at that premium level. So I think when I think about kind of category impact, maybe what we can control internally, definitely staying focused and investing with innovation on our products.
Maybe we can switch gears a little bit. I'm looking back to your investor slides. You kind of have an updated portfolio strategy, I think, the kind of four quadrants that you lay out. But maybe you could just give us an update there and expectations of kind of that portfolio strategy shift going forward.
Sure. I mean a few years back we did shift. I'd say prior to 2019 we were brand focused but we were probably just as equally a volume-driven company. As we've shifted our focus more to branded products, shifted more to driving higher margin across the whole portfolio, I think we're seeing pretty good success. When you think about brand profitability and you think about overall profitability for the organization, we've seen really, really good margin improvement more recently through the inflationary period. Obviously there's been volume challenges. We've been working to drive more volume through there but a lot of that volume improvement has been somewhat masked by the inflationary aspect of what's been happening the last couple of years.
Then also, when you think about kind of the non-branded side of the business, been very focused on taking out a lot of the business that maybe doesn't hit our profit profile. If you think about the volume challenges over the last 12-15 months, a lot of that has been intentional as we've taken that business out. As we said in our guidance, we expect to complete the majority of that the first half of 2024. We'll be good to have that behind us and then just really focus on either bringing more branded business across the whole or either bringing back in more non-branded business at an appropriate margin profile.
Wanted to switch over to Dave's. I know, fascinating, fascinating story, fascinating brand history there that we've certainly had to do a little bit of reading on. But I guess just given kind of Dave's very high share of the organic category, just how much more growth runway does that brand have? Is there an ACV metric that you think about or a TDP number that we should kind of be pegging to when we think about that brand?
Sure. I mean Dave's is, I mean it's a phenomenal brand. By all measures it's been a huge success. The acquisition was in 2015. It became a billion-dollar brand last year at retail. So I can't think of many brands that have had that much success in a short period of time. So definitely pleased with the growth and the impact that brand's having on the organization and the category as well. When you look at growth opportunities, obviously when you look at kind of geographically we're very focused on the Northeast and we're very focused on the West Coast with that brand although it grew out of the West Coast. I feel like there's still some white space where the brand's not offered today.
So while the growth has been pretty significant, by no means do we think that opportunities that started, that things are coming to an end. I mean we've taken that brand across category, across segment. It's in breakfast now. We're getting good growth across breakfast with English muffins, bagels. As we've taken it out across the whole, we actually made an acquisition last year to give us more production capacity to allow us to focus on breakfast with the DKB.
And then we've also taken it across category and I'm sure we'll get to this in a minute into bars. So the category seems, I mean the brand seems to have relevance with the consumer. And it's just been amazing how we've been able to take that brand and do things we haven't been able to do with maybe some of our more legacy brands like Nature's Own.
I'm sure that's a good transition to bars. Just maybe an update on bars performance and I guess within that will be helpful. Bars have been relatively challenged as a category as a whole. I guess maybe just the decision to kind of enter bars and then Dave's just performance kind of within that as well.
Sure. The bars came out of, I mean came out of internal innovation. We're very pleased so far with what we're seeing. Last year we launched three flavors kind of across our whole. We had good, we had good sell-through. We've had good acceptance. A lot of it, we are investing heavily but from a velocity standpoint very pleased with what we're seeing. It's a little different from a bar perspective. It's more of a baked bar.
Great taste, great texture. When you look at the ingredient panel, less sugar content than what you traditionally see in the bar aisle. So I think it's something different and it's something the consumer seems to be pulled towards. So we feel good about that. The back half of last year we did test three additional flavors and we added protein content. We are rolling that out across the whole this year.
So far we've been pleased with velocities with that particular item as well. The good thing is we're not seeing significant cannibalization. It appears that there's a consumer set who's pleased with the base bar and then there's a consumer set looking for the protein additive. So we believe that based on what we're seeing that we can continue to see good growth as we get more shelf space and more relevance within the bar category.
I believe there's a Snack Bite launch for this year as well.
Yeah so.
Talk about that.
Yeah, so we also have taken Dave's into a snacking category, snack bite category. It's kind of a cross between a loose granola product and maybe a crunchy cracker. Again, we're testing that the first half of 2024. And then based on the test markets, our plans are to roll that out across the back half. Very excited with that product as well. Seems to be doing well from a test perspective. Again, a couple of SKUs, a couple of flavors.
And it will be merchandised probably nearer to the granola section of the store. But again, it has that DKB packaging that kind of pops, and we feel like again the brand resonates well with the consumer in that segment of the store. So very excited about that launch and really looking forward to see what that product does as well.
Because I think it's just, it just shows how well that brand can go across many different categories within consumer and food. It's exciting to continue to invest in that brand and see what we can come, what can come from it from an innovation perspective.
If we switch over maybe to Canyon, I think you've had some capacity issues there you touched on a little bit, hindering some of the near-term growth. Just an update there in terms of resolution and then maybe to go along with that, maybe when we might start to see that kind of flow through some of the scan channel data.
Sure. I mean, last year we did have some capacity challenge at our facility in Colorado. Those are now fixed. They're behind us. As I said, we're beginning to see the DSD side of the business kind of the fresh velocities pick back up. Things are getting back on track. It's a little easier to push things from a DSD network perspective because that's kind of within our control to manage the inventory and drive distribution. On the frozen, Canyon actually distributed frozen when we made the acquisition. So on the frozen side of the business, a little more, takes a little more time to get product through the kind of through the distribution cycle. But we're seeing, but we believe that will correct itself in the near term. So we're excited about having kind of that issue beside us.
Now we have the ability to go back and focus on growth of that brand as well as innovating in that brand as well. Whereas when we were having the capacity issues, we were more focused on just getting that fixed. But again we believe it's a brand that within that category and segment it resonates really well with the consumer. If you've never tried it, it has very great, it's a very great taste. From a gluten-free perspective believe that that brand could also bode well from an innovation standpoint.
Maybe when we might start to see that kind of come through in the data, some of the takeaway trends start to improve.
I mean, I just think some of it on the DSD side, I think probably more near, probably more back half with regard to kind of the warehouse business as we're pushing product back through the network.
Maybe zooming back out to the category, you spoke a little bit about promotional cadence and what you've seen. I think there's been kind of an increase in products sold on promo. I guess how should we think about over the next six-12 months pace of promotional cadence? Are there, again being newer to the category, are there key promotional windows that matter? Is Memorial Day particularly important for the July? What should we kind of be honing in on as some of the key windows?
Sure. I mean, as we said, we did see Q4 an indication that promotions are starting to increase. And that continues through some of the more recent track channel data. Obviously most of our promotions are planned well in advance of the year with our retailers. And to your point they do, a lot of those come around key holidays like Memorial Day, July 4th, Labor Day especially with regard to our bun business. On the low side of the business, typically those are more evenly spread throughout the year and just how they fit with retailer promotion strategy. But again good visibility in all of that. So we've, that's all in our guidance for the year. But I'd say for particular product segments like buns, the holiday seasons are very, very key and very critical and you'll see that.
You've seen that in the past and as we talk about kind of the summer bun months and summer bun promos, very key for us. One thing we've done to kind of enhance that is we've partnered with the USO. So you'll see in most of the major retailers, you'll see nice displays around certain holidays especially Memorial Day driving overall bun, kind of trying to drive bun volume. And that's been a very successful partnership for us. We're in our third or fourth year of that now and we've really seen that work well. So excited to have that in front of us for this year and looking forward to see that season in particular with regard to buns.
Maybe just two follow-ups on that. One, have you kind of disclosed what buns are as a percent of the portfolio? Is it, I don't know, 5%, 10%?
Oh no, we haven't given. We don't give specifics by, necessarily by category. But buns are pretty significant for us even with regard to brands. And obviously it drives a lot of the food service QSR business.
I think maybe a second follow-up there. If I'm just thinking back to the fall, the retailers were very focused on having baskets available for consumers that were at a certain price point where you could get an entire Thanksgiving dinner for $50. I mean, is that conversation happening or has already happened with the retailers? They're very focused on having a basket of; it's not just buns but hamburgers and ketchup for a certain dollar amount as we go into Memorial Day, as we go into the 4th of July. What's that conversation like?
I mean we have, we're always having conversations with our retail partners obviously. I wouldn't say there's tremendous focus on necessarily baskets of affordability within our segment or category. But you want to make sure from our perspective that the promotions align really well with when the consumers are kind of "shopping" and maybe it makes the most sense. So again we try to strategically align things like the USO promotion with major holidays. And then there'll be good price points as you promote and you drive volume through the holiday season. But I feel good about where we are strategically from that perspective. And like I said most of our promotion cadence is set well in advance with our retailers and I feel like we have a strong promotion calendar and that's an opportunity to drive volume growth.
Maybe an update just on your ERP rollout. ERP seems like a four-letter word to a lot of investors and a lot of companies. But where things stand today and kind of how you see it go forward?
Yeah no, it's not a small task. It seems like most companies go through this every 20 or 30 years. So we're not immune and we're in the midst of it. We've been in it now for a couple of years. A lot of the development that is behind us. And we did start the rollout last year. As we disclosed it's about a $350 million project for us across a four or five year period.
We're scheduled to be fully live in 2026. To date we've spent about $215 million of the $350. Really what we have left is primarily the rollout to our bakery production floor. Through the end of last year we hit a lot of our administrative function, a lot of our sales, a lot of our trade promotion spend programs. And most of that now is behind us.
We're still running two systems in a lot of cases. So as we continue to roll out over the next 12-18 months, hopefully we can consolidate down to one and that'll reduce a lot of complexity. But for now we're on track. We did have, we did roll out to two bakeries last year. And as we called out we had a couple of bumps or challenges.
So we kind of paused the bakery rollout. We've gone back now and we've, we feel like we've gotten all those identified, everything corrected. And the goal is to start back with bakery rollouts in the back half of 2024. So again major project, we feel like we've done a good job mitigating any kind of missteps that typically come with these projects. We didn't miss any days on the market so that's a good thing.
Look forward to getting that behind us in a couple of years.
Maybe just another update, I think you have a California legal settlement. Just any update there, and impact maybe on how you distribute in California?
Yeah, sure. I mean, as we disclosed last year and as we've been working through some of the challenges with our independent operator model, we did in California reach a settlement with regard to the model in that market. The market, that market's a little more challenging I think. When you look kind of at the regulatory environment around independent operators, as we moved through that lawsuit we realized it was probably best to move back to company-operated territories. So that's the goal. We did reach an agreement with the plaintiffs in that case. We're still waiting on the judge to give final approval. We went back early March and we're just a few weeks away hopefully from getting the final order. And once we get that then we can begin to move forward with that transition.
To avoid as much market disruption as possible, we do have a 12-month period that's been approved from that perspective. And that'll allow us to kind of take it in bites and roll out, convert to company-owned territories versus the independent operator model. I mean we operate company-owned routes today in other markets. This would just be a bigger scale. So we're pretty confident from that perspective.
The one thing that we get asked about a lot is kind of the financial impact versus independent operators. Through the rollout and the fact we're having to ramp up staffing and make sure we don't have a misstep, it will be slightly dilutive but we've built that into our guidance. And then as we, as it ramps up and then we're fully operational we believe there'll be a lot of advantages and opportunities on the top line perspective.
More longer term we believe that kind of offsets the near-term cost challenges from the conversion.
Is there a view internally or in the markets where you have company-operated DSD routes, do you see a material difference in performance relative to independence? I know when we speak to the Salty Snack guys, right, there's I guess very strong views on both sides. Some live and die by company-owned because they think the execution and in-store display is better. But I'm just curious kind of how you view it.
Yeah, the reality is it depends. We did this on a smaller scale in the Northeast about 18 months ago. But you do have more control over a company-owned route as far as dictating what has to happen in the store. But the reality is a lot of the IOs are entrepreneurial and they're driven to drive execution because that controls their income. So I mean it's balanced. I wouldn't say necessarily that one is significantly advantaged over the other. Especially given the scale we have right now with IOs. So we'll see how California shapes up. And again a lot of it's driven by the regulatory environment and where it works in a particular geography.
Okay, I wanted to switch to the M&A environment. Obviously, it's been very topical in packaged food in particular, and we've certainly written a lot about it and would have thought we probably would have seen more by now this year. Just kind of curious what you're looking for maybe in terms of acquisition size, category white spaces that you'd be interested in?
Yeah, I mean, obviously if you look at Flowers and you look at our history, we've gone through M&A. I mean, this industry years ago had local baker in every main geography and then there was kind of a roll-up story. So when we talk about M&A we look at that as more traditional. A lot of that was bolt-on. There's still opportunities left with kind of traditional bakery.
Especially when you think about our White Space, Midwest, Northern Midwest, there probably a couple of family-owned bakeries that would fit well with Flowers. It gives us great production capacity. The regional brands are important as well. When you look at some of the regional brands we have today and what they do for the portfolio. So we still see opportunities there. And then obviously we've talked about being more in adjacent categories.
Some of the things you've seen us do with the Dave's brand is what we mean when we talk about adjacencies. They're still truly kind of baking, maybe grain-based focused but not traditional bakery in the sense that we've grown over the years. We feel like there's a good pipeline of opportunities there. If you look at Flowers and the way we've managed that, it's all been relationship-driven over the years.
And we continue to focus on some of the opportunities that we see, making sure that we maintain those relationships. So when they do come to market hopefully we have the opportunity to be the kind of the buyer of choice if you will. And we feel like that's bode well for us for several decades now. So again it's kind of like you in the market, it would be nice to have the opportunity.
But you also know we're very disciplined from that perspective. And I would say we've probably missed opportunities on valuation. But it does seem like valuations have maybe come in slightly. But when you get, again it depends on legacy versus kind of more adjacency or niche-type products. Because usually there's more growth opportunity from a brand perspective with a niche-type acquisition. So excited about kind of what's in the pipeline or what we see. And just hoping that we have the opportunity to participate.
Where would you kind of be willing to take leverage to in a?
Yeah, so when you think about a leverage perspective, if you look at Flowers historically, again I think we've done a good job managing our balance sheet. We're very focused on keeping our investment-grade credit rating. Which takes you to 3x maybe slightly north of that. Which fits well with the type of acquisitions that we consider. They're more bolt-on, kind of tuck-in type acquisitions. And we typically will lever up and then have a pretty clear path to delevering over the next 12-18 months. So again we're going to stay very focused on investment-grade. And we don't mind going up to three or over but our confidence on it is probably more where we are today. Maybe two or less.
I'd be remiss if I didn't ask you this Steve. Obviously we had one of your competitors in the sweet baked goods category that was recently bought. I noticed when I looked through your deck, Tastykake seems to be in the maximized profitability quadrant. Just how do I think about its place in your portfolio? Obviously this other asset had a lot of bidders for it. Seemingly maybe somebody might come knock on your door. I'd be curious just how you think about that. Particularly where it's positioned in the portfolio.
Well, we get a lot of questions about that obviously. That's kind of a loaded question. Someone be very careful not to take the.
I only ask one question.
Take the vague one. No, I mean, Tastykake's been an important part of our portfolio for my career at Flowers. I mean, we've had other brands besides Tastykake. Tastykake is our DSD brand. We made that acquisition in 2011. Probably a little more challenging than some of the other brands in the category. It's very well known in the Mid-Atlantic. We've taken it across our, for the most part, our whole DSD network.
And it's kind of held its own, and it's number three, number four brand in the category. So it does make it a little more challenging from a shelf space perspective. Then an add-on, it's no secret we've talked about the operational challenges we've had with the bakeries and stuff from that perspective. So the last 12 months or so we've been focused pretty heavily on correcting that. We've made good improvement.
We're not where we want to be. So we con tinue to look for margin opportunities on the operation and call side of the business. And then continue to look for opportunities to make that brand more relevant in the market as well. And then we have our warehouse cake brand, which is Mrs. Freshley's, which is kind of more of an economic brand. It also goes through vend. Again that brand has kind of held its own from a positioning perspective. So while yeah I would say there was a nice transaction in that space, we still think Cake has its place in our portfolio. And we'll continue to operate it and drive the margin improvement that we think we need. And then I guess things go from there.
To Mrs. Freshley's is a nice throwback.
Yeah.
Yeah yeah. All right cool. Maybe just in the last few minutes we can touch on guidance that you gave for the year. And I think it was unique in a good way. You're probably the only packaged food CPG company that gave a front half weighted year. So maybe you could talk about the dynamics there, the inverse hockey stick I guess as people would call it. Given that most of the packaged food companies that we cover are very focused on a back half 2024 recovery. Just what kind of drives your confidence in the first half?
Yeah, I mean, I think a couple of things there. When you think about our business more historically, we have a longer first quarter. And then the first half captures some events like we talked about Memorial Day. So that does drive a lot of the performance in the first half. When you look at some of the key factors impacting our guidance for the year, we know we still have some pricing to come in the first half.
Based on what we took in the back half of last year. We also know our cost structure is a little more certain in the first half. Although we said coming out of 2023 we're about 70% covered with regard to our input cost. There's a lot more certainty in the first half of the year than obviously the back half with regard to that.
Then we said we're very cautious on the consumer still. Starting to see, as we said in Q4, some movement and promotional activity in the category. Now that has continued somewhat in the track channel data. This year we just felt like it was more prudent to kind of take a wait and see. What the consumer does, what competition does from an overall promotional cadence. Then as the year builds obviously we'll be able to think more about the back half and where things go.
Do you have a view on kind of wheat cost? I mean I know you said you're probably 70% covered on that. But just kind of the.
Yeah, I mean, obviously there's been a nice pullback. We use primarily hard red winter wheat, which is Kansas City Exchange. Even though things have come back from kind of the inflationary highs a year or so ago, we're still at elevated historical levels from a wheat production, from a wheat cost perspective. So yeah, I mean, it does seem like the crop is going to be a decent crop.
There's not necessarily any export pressure currently with regard to wheat. So we do feel like that it's in kind of a range. Where it lands on that range, who knows. But we don't see anything right now that would indicate it would take a turn and there would be a run back north. So feel pretty good about that. And that actually bodes well for maybe the longer term as well. So we'll continue to watch that.
Great. I think we have a minute or two if there are any questions in the room for anybody?