Flowers Foods, inc (FLO) Q3 2021 Earnings Call Transcript

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Flowers Foods, inc (FLO 3.04%)
Q3 2021 Earnings Call
Nov 12, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Flowers Foods Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, J.T. Rieck, Senior Vice President, Finance and Investor Relations.

J.T. Rieck -- Senior Vice President of Finance and Investor Relations

Thank you, 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 Q&A session, we will 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 detail 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.

Operator, we're ready to start the Q&A please. Operator, we're ready to start the Q&A. Excuse me, I feel we have some technical difficulties, one second please.

Operator

Can you hear me now.

J.T. Rieck -- Senior Vice President of Finance and Investor Relations

Yes, we can.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Bill Chappell with Truist.

Bill Chappell -- Truist Securities -- Analyst

Hey, thanks, good morning.

A. Ryals McMullian -- President and Chief Executive Officer

Good morning, Bill.

Bill Chappell -- Truist Securities -- Analyst

Three, guys, kind of quick questions. One, based on kind of your commentary in the prepared remarks. One, you talk about you're not really -- it's too early to tell what kind of normal looks like in terms of people reverting back to work and to school and the stuff like that, kind of post Delta variant, but you're pretty well exposed in states like Texas and Florida where they kind of move back to normal a little bit faster than the rest of the country. So maybe tell us what you're seeing there and kind of what that tells you for as we look to '22 in terms of kind of consumption?

A. Ryals McMullian -- President and Chief Executive Officer

Sure. I mean, Bill, it's really kind of broad-based across the country. We've been really pleased with how well things have held up particularly on the branded retail side. So nothing really in particular call -- to call out by region except to say overall the brand investments that we continue to make, the innovation we continue to introduce has really helped us hold on to a lot of these -- lot of these consumers. And similarly, we're also seeing further increases in household penetration, velocities are up, repeat buyers are up. So all the signs point in a pretty optimistic direction when you think about what returns to normal ultimately looks like.

Bill Chappell -- Truist Securities -- Analyst

Got it. And then in terms of costs, the comment of you may look to do additional pricing to cover the costs and can you remind us, do you -- are you looking to kind of cover margin or cover profit dollars in terms of gross margin looking forward?

A. Ryals McMullian -- President and Chief Executive Officer

Sure. I mean, obviously the ultimate goal will be to protect both now. At the end of the day, the consumer is going to, going to drive the ultimate results, right? Consumers are experiencing very, very broad-based inflation. We've all read the headlines, 30-year highs, fifth straight month over 5% and that kind of thing. So everything from gasoline to our products is going up. So we'll have to -- have to wait and see how the consumer at the end of the day reacts to that. If we find ourselves in a situation where there is a trade down the value or units drop off, you could -- it's certainly reasonable to assume that there could be some margin compression in the short-term. But what I'd say overall about the inflationary environment is whether you believe it's transitory or whether you think it'll last a little bit longer than that, ultimately these issues are temporary and not completely within our control. So we're focused on what we can control. We will continue to make investments in our brands. We'll continue to make investments in our digital capabilities, etc., that over time will lead to expanded margins.

Bill Chappell -- Truist Securities -- Analyst

Got it. And then lastly for me, you've made the comment in the remarks of, like you're seeing M&A activity pick up. And I guess the question is, why is that the case? I mean, I was under the impression the same kind of key targets you've been talking to for years, if not decades, and so I didn't know why things would start picking up now or -- and maybe some more color around that comment?

A. Ryals McMullian -- President and Chief Executive Officer

Sure. I mean, I think maybe a little bit earlier in the year it may have been driven by some tax issues, now will ultimately see where that -- where that bill fall. It looks like some of that's going to knock [Indecipherable] So that could have been driving some of it. And you're right, we still continue to talk to some of the same targets that we have for a number of years, but the activity has really picked up, Bill, more in the adjacent product categories, some more in the snacking space that kind of thing.

Bill Chappell -- Truist Securities -- Analyst

Okay, great. Thanks so much for the color.

A. Ryals McMullian -- President and Chief Executive Officer

Sure. Thanks, Bill.

Operator

Your next question comes from the line of Ben Bienvenu with Stephens.

Ben Bienvenu -- Stephens -- Analyst

Hey, thanks. Good morning, everybody. So I want to ask about just this continued strength in branded retail, really good results still. I'm sure the mix is still supporting gross margins even in an environment where you're seeing some cost increases. I'm curious if you could talk about, do you think we're at this equilibrium now? Do you think this is an equilibrium that we can grow off of? And to what degree as we continue to see maybe pricing increases, does that influence the shift from branded retail, the store branded retail products?

A. Ryals McMullian -- President and Chief Executive Officer

Yeah, great, great question. I think, I think that's a key point. And as always, I was mentioning in response to Bill a minute ago. I mean, it's all going to be about the consumer and so far even with the pricing actions that we took in July, branded retail units have held up very, very well. I mean, we've seen little to no drop off at all in branded units. Now going forward, as you look into next year with all the inflation in consumer space with stimulus payments coming off that kind of thing, I think it's yet to be seen just how much the consumer is willing to absorb and will be -- that will be a key topic for next year, right? Yeah, we've been through situations like this before most recently and 7/09 [Phonetic] time period. This has held up relatively well. We do offer products across a variety of price points, which certainly helps from the super premium Dave's Killer Bread all the way down to private label with some -- with some with some pricing in between too on Nature's Own and Wonder that kind of thing. So we feel like we're very, very well positioned to do well in any environment. Obviously, we would be most pleased if the current trends that we're -- that we're watching continues, but I think it's really all about the inflationary impact on the consumer and what they'll be able to absorb. But that also makes it more important than ever that we continue to keep up with our [Technical Issues] pressing forward on innovation and we keep developing our capabilities such that eventually this will subside. It always does. And when it does, we'll be positioned even stronger.

Ben Bienvenu -- Stephens -- Analyst

Yeah, perfect, understood. And on the cost side of the equation, how much visibility do you have into the balance of this year, into early next year? And any thoughts that you have on what that looks like and kind of where we are in terms of the curve of cost inflation and how close do you think we are to maybe seeing a light at the end of the tunnel from your vantage point?

R. Steve Kinsey -- Chief Financial Officer and Chief Accounting Officer

Sure, obviously, given where we are in the year and the fact we do no forward buy and adds a lot of our commodity spend, we have full visibility for 2021. So from that perspective, we've been talking about the cadence of inflation for this year. A majority of it is coming in, in the fourth quarter. So, we'll begin to see some of that ramp up and all that is priced into the guidance we gave yesterday when we released. Looking forward 2022, we're not prepared to give guidance today, but obviously you can look out the forward curve is pretty significant inflation and if things stay in the market levels we see today as we said in our -- in our prepared remarks, we expect to see pretty meaningful inflation next year. But as Ryals commented, we're looking at efforts to mitigate that through pricing as well as other cost initiatives, so we anticipate this to be at least another one year cycle and as Ryals just said whether it's truly transitory or not, make -- it could go slightly beyond a year, but right now all indications are that the inflation will hold through most of 2022 and well and hit the cost side.

Ben Bienvenu -- Stephens -- Analyst

Okay, sounds good. Thanks so much for the thoughts and best of luck with the rest of the year.

A. Ryals McMullian -- President and Chief Executive Officer

Thank you, Ben.

Operator

Your next question comes from the line of Steve Powers with Deutsche Bank.

Stephen Powers -- Deutsche Bank -- Analyst

Yeah, hey, thanks. And I guess picking up on what we've already been talking about your prepared -- your prepared remarks and then some of the conversation, just wanted -- just really underscore the uncertainties around, around the pacing of demand migration back toward pre-pandemic levels potentially and just inflation headwinds and other other variables, plus we know that you've got ongoing strategic investments around technology and branding otherwise. So I guess, just in that context I'm hoping you could elaborate on the drivers that, yeah, as I read your presentation, at least the presentation slides and accompanying prepared remarks talk about the confidence and expectation to get on to those long-term, that long-term algorithm in fiscal '22. So maybe -- unless that with a misread on my part, just what are the drivers that despite all uncertainties you feel like you've got confidence of visibility to lock-in those long-term growth targets next year?

A. Ryals McMullian -- President and Chief Executive Officer

Well, sure. I mean, I think we've already alluded to a few and that -- just to reiterate. One, the momentum that we carry into '22. I mean, we have gained a lot of consumers over the past two years. We've invested a lot behind our brands. We're clearly growing our share nationally, but also in very important markets like the Northeast where we're under-penetrated. We have a lot of new innovation items, some of which we're testing right now, some of which will be forthcoming next year. We're quite excited about to continue to drive topline growth. I mean, you're right. We are making significant investments in our ERP platform and other digital capabilities that over the long haul and will enable us to stay on that long-term, long-term algorithm. And then of course, Steve, we also have taken a look at the balance sheet. We're obviously poised for acquisition activity should the right opportunity come along. So all those things put together give us confidence that we can -- that we can stay on our long-term algorithm using 2019 as the best year.

Stephen Powers -- Deutsche Bank -- Analyst

Okay, OK, great. And I guess, maybe just sort of slightly different topic, just on your -- on your manufacturing footprint. Obviously, a diverse footprint of bakeries and I'm assuming that gives you a pretty good amount of flexibility to help navigate different supply chain challenges, but, so maybe you can elaborate that on, just kind of talk about that generally, but I'm also hoping just for some visibility into how variable operating conditions are across your bakery footprint? Are things relatively similar across the board or are there -- is there a lot of -- are there other kind of flash points where you're having more, more challenges? I'm kind of thinking particularly from a labor perspective. But any color you have there would be great. Thanks.

A. Ryals McMullian -- President and Chief Executive Officer

Sure, not so much by region of the country. I mean, the labor challenges are pretty consistent, pretty consistent across the company and we do have a few areas where we've had somewhat less issues than other areas. But generally speaking, it's pretty consistent across the country. Now, we have been able to manage through that, I think pretty well just given the challenges that we're -- that we're all facing, but it's still a challenge, and it does -- it does impact our efficiency. You've got -- you read the short hand or do you have a lot of new people on bakery, for example, that increases your scrap, lowers your efficiency that kind of thing. The one call I would -- the one call I would make, it has been a bit more intense in the cake bakeries, but those are more labor intensive operations to begin with, you just -- you have more people, particularly in packaging there. So still a little bit more acute there, but not the same token. We've been able to manage through it pretty well.

Stephen Powers -- Deutsche Bank -- Analyst

Okay, that's great color. Thank you very much.

A. Ryals McMullian -- President and Chief Executive Officer

Sure. Thank you.

Operator

Your next question comes from the line of Mitch Pinheiro with Sturdivant and company.

Mitchell Pinheiro -- Sturdivant & Co. -- Analyst

Good morning.

A. Ryals McMullian -- President and Chief Executive Officer

Good morning, Mitch.

Mitchell Pinheiro -- Sturdivant & Co. -- Analyst

So you have you defined what you're inflation rate has been on cost of goods for 2021?

R. Steve Kinsey -- Chief Financial Officer and Chief Accounting Officer

We have not given that specific measure. I mean, because of the way we hedge, we don't want, obviously coming into 2021 is really what you begin to see the inflation ramp, so it was more back half-driven, but we haven't given a specific percentage, just maybe for competitive reasons.

Mitchell Pinheiro -- Sturdivant & Co. -- Analyst

Okay, and then...

R. Steve Kinsey -- Chief Financial Officer and Chief Accounting Officer

You can do -- you can do the math with the input cost, it would be pretty much in line, but beyond that we haven't disclosed it.

Mitchell Pinheiro -- Sturdivant & Co. -- Analyst

Okay. When you -- with the branded growth surging, I'd love to hear more about your brand building efforts, I mean, in particular is -- obviously, some of this is driven by the consumer looking for -- the branded growth looking, looking for premium products, looking for higher quality and more diverse set of baked goods. But I was wondering whether you're looking to capitalize and market your way with gross more so that in the past and I love to hear what you're doing and how you're spending is allocated? Is it being shifted more to TD [Phonetic] like I've seen in the Dave's Killer Bread or is it a digital e-commerce initiative, it look you're a little more on that?

A. Ryals McMullian -- President and Chief Executive Officer

Sure, Mitch, happy to. And you can just take a look at our marketing spend and see over the last several years how much we granted out to support the portfolio strategy, growing our branded business at a faster rate. You touched on a lot of them already. I mean, a lot of it is being allocated toward -- toward our aggressive growth brands, will that Canyon, Nature's Own, DKB, it's been more intense in parts of the country where we're under penetrated, like in Northeast, that's why you're seeing some of the commercials up your way. And you're also correct on digital. E-commerce is about 8% of our sales right now, which is roughly in line with the category we want to continue to grow that. I think e-commerce is going to continue to be a bigger and bigger part of the picture and we need to have that, that digital presence.

But on the other side, we're also investing in consumer insights. We have to -- we have to understand our consumers such that we can continue to deliver the innovation that they want in the category. So some of that spend is going into -- into that and continued investments in R&D. And I think you'll -- you'll start to see some of that as we go forward with some of the newer innovation items that we're coming out with that are -- that are not in the bread category, put it that way.

Mitchell Pinheiro -- Sturdivant & Co. -- Analyst

In that when comes to Dave's Killer Bread, what's driving the growth there. Obviously, you have new products. I was -- would be curious to hear a bit more about either any particular channels you'd like to call out products and their distribution gains happening. I'd love to understand more what's driving DKB rather, more than just -- there's just strong demand for organic product.

A. Ryals McMullian -- President and Chief Executive Officer

Yeah, sure. I think, at the end of the day. First of all, it all starts with quality. There are other organics that are out there, but Dave has a commanding 70 [Phonetic] share per region of this. It's the best tasting, the best quality, best consistency. We're continuing to grow in the Northeast, Mitch, which is a big part of the puzzle there, bringing on Lynchburg last year to support that growth has been a huge thing for us in Dave's evolution. We continue to come out with new products with Dave's. We're testing some new products right now with them. There'll be more coming next year. So increasing awareness is a big one. I've talked about this before. When you look at the great success of Dave's that we're all very proud of, of course. But then you compare with household penetration to that of Nature's Own, it's roughly half that of Nature's Own. So even with the great growth we've experienced, we feel like that brand still has a ton of runway ahead of it, both within it's current categories and in other categories. So because I think the brand is strong enough now to begin playing across different categories, which we're obviously very excited about.

Mitchell Pinheiro -- Sturdivant & Co. -- Analyst

And then just final question with any update on your cake business as far as the manufacturing side. Are we -- is a lot of that solved or is it still work in progress in 2022?

A. Ryals McMullian -- President and Chief Executive Officer

Yeah, Mitch, not solved yet, but great progress this year. We're ahead of pace actually, which we're very pleased about. But as I said on the past several calls, though we are pleased with the progress, we still have some ways to go, but the improvement this year has been material.

Mitchell Pinheiro -- Sturdivant & Co. -- Analyst

Okay. Okay, thank you very much.

A. Ryals McMullian -- President and Chief Executive Officer

Thank you, Mitch.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back to Ryals McMullian.

A. Ryals McMullian -- President and Chief Executive Officer

Thank you very much, everybody. I appreciate your interest in the company and we'll look forward to speaking with you again next quarter. Everybody, take care.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

J.T. Rieck -- Senior Vice President of Finance and Investor Relations

A. Ryals McMullian -- President and Chief Executive Officer

R. Steve Kinsey -- Chief Financial Officer and Chief Accounting Officer

Bill Chappell -- Truist Securities -- Analyst

Ben Bienvenu -- Stephens -- Analyst

Stephen Powers -- Deutsche Bank -- Analyst

Mitchell Pinheiro -- Sturdivant & Co. -- Analyst

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