September 29, 2023

THOMASVILLE, GA. — Adjusted earnings at Flowers Meals, Inc. grew solely modestly in 2022 regardless of the corporate’s sturdy efficiency within the market and after producing vital financial savings from cost-cutting initiatives. Anticipating substantial additional prices from the continuing replace of its enterprise useful resource planning (ERP) system, the corporate’s executives count on earnings to stay practically flat in 2023.

Flowers Meals web revenue within the 12 months ended Dec. 31, 2022, was $228.4 million, equal to $1.07 per share on the frequent inventory, up 11% from $206.2 million, or 97¢ per share, in 2021. Gross sales have been $4.81 billion, up 11% from $4.33 billion the 12 months earlier than. Adjusted for quite a few particular objects in each years, adjusted earnings per share have been $1.27, up 3%. EBITDA margins have been 10.4%, down 90 foundation factors from 2021.

For the brand new 12 months, Flowers is projecting adjusted earnings per share in a variety of $1.20 to $1.30, versus $1.27. Gross sales in 2023 have been forecast at $5.18 billion to $5.24 billion, up 7.7% to 9.1% from 2022.

In pre-recorded remarks launched Feb. 9, A. Ryals McMullian, president and chief govt officer, mentioned excessive inflation is probably going and a recession is feasible in 2023.

“Regardless of these challenges, we intend to proceed investing in our enterprise, bringing extra innovation to market whereas additionally implementing our digital transformation and provide chain initiatives,” he mentioned. “Whereas these investments will influence our close to‐time period outcomes and contribute to a beneath‐algorithm 12 months, I’m assured that they may improve an already sturdy basis and place us for future development as soon as these headwinds subside.”

In early buying and selling on the New York Inventory Alternate Feb. 10 after the monetary outcomes and 2023 steering have been introduced, Flowers shares have been up as a lot as 2.4%, at $27.97 per share.

Elaborating on the investments Mr. McMullian referenced, R. Steve Kinsey, chief monetary officer, mentioned a big a part of the approaching prices relate to a multi-year upgrade of Flowers’ ERP system. He mentioned the challenge’s prices are working larger than initially projected and that completion is anticipated in 2026.

“We count on the influence of those prices to peak in 2023 as we start to roll‐out the system throughout our community,” he mentioned. “Our adjusted EBITDA steering incorporates roughly $26 million (or roughly 9¢ per share) of incremental prices associated to this challenge. We anticipate these prices to reasonable considerably by challenge completion in 2026.”

All in, the ERP challenge is anticipated to value $350 million, up from the corporate’s earlier estimate of $275 million, Mr. Kinsey mentioned. He defined that the elevated value displays an growth of “the challenge scope as we moved by way of the construct section, and anticipation of larger reliance on exterior sources for implementation and bakery deployments attributable to labor constraints.”

Via the top of 2022, Flowers spent $153 million on the challenge, which Mr. Kinsey mentioned “stays on observe.”

“We’re assured in our capability to implement it as deliberate and inside the up to date monetary steering,” he mentioned.

He mentioned the corporate will spend $80 million to $90 million on the ERP challenge in 2023, which would go away as much as $117 million remaining to be spent between 2024 and 2026.

Turning to working bills, Mr. Kinsey mentioned that whereas flour prices have declined from latest highs, the expense of different inputs has been rising.

“Along with flour, we’re experiencing inflationary stress in just about all main classes of substances, packaging, and pure fuel,” he mentioned.

Mr. McMullian mentioned Flowers is taking steps to “mitigate short-term inflationary pressures” and to reestablish the corporate as a low-cost producer within the baking trade for the long term.

“I’ve challenged our group to redouble their efforts with particular actions to drive financial savings and enhance efficiencies in order that we emerge from this era even stronger,” Mr. McMullian mentioned.

Progress has been made. Mr. McMullian mentioned Flowers has decreased the variety of job openings at its vegetation and that the labor atmosphere has improved.

“Nonetheless, we are going to proceed to spend money on what I consider is the perfect group within the trade and we’re working arduous to make sure that Flowers continues to be acknowledged as a vacation spot office,” he mentioned.

Mr. McMullian additionally cited progress within the rollout of the company’s Bakery of the Future initiative. He mentioned this system was applied in 14 baking vegetation in 2022, and one other 18 vegetation are anticipated to be added in 2023.

“As Bakery of the Future hits important mass, we anticipate the advantages of actual‐time information to start flowing by way of,” Mr. McMullian mentioned. “Importantly, in 2023 we’re dedicated to investing additional in provide chain capabilities to assist these and different initiatives. We count on these added capabilities to drive a larger emphasis on preventative upkeep, waste discount, logistics efficiencies, and total tools effectiveness. Moreover, capital investments to improve tools and improve automation ought to contribute to our features.”

Throughout a dwell name with analysts Feb. 10, Mr. McMullian was requested to flesh out learnings from the Bakery of the Future challenge with information factors.

“A giant one for us is scrap or waste discount,” he mentioned. “And so having larger information insights into how the bakeries are working permits us to be smarter about how we run the traces and cut back that waste. Waste is a giant value for us. So it’s not immaterial in any respect. The opposite factor it helps us do is it helps with preventive upkeep, understanding when breakdowns might happen in order that we will plan for downtime as a substitute of getting unplanned downtime, which is expensive.

“After which there’s an entire notion of micro stops on the road. You might have your regular downtime for cleansing or no matter or when you’ve got a mechanical drawback, it’s the tiny stops, the 10-, 15-, 20-, 30-second, 1-minute stops that construct up day-to-day, week by week, month by month all year long that change into a giant expense as properly. So all this information that we’re capable of collect goes to assist us alongside of management capabilities and course of enhancements, issues like that assist us achieve these efficiencies within the bakeries that we would have liked for a while now.”

Flowers additionally intends to make vital investments in reference to the national rollout of Dave’s Killer Bread bars, introduced in December. Mr. McMullian mentioned it was too early to share preliminary outcomes however mentioned he was excited concerning the product’s potential, noting that “suggestions from retailers and shoppers alike has been constructive.”

“To assist what we consider is step one within the institution of a DKB snack portfolio, we’re putting vital advertising and marketing assist behind the introduction,” he mentioned. “That expense will contribute to the headwinds for 2023 I discussed earlier. Along with the bars, now we have an thrilling pipeline of different modern merchandise, together with DKB Crunchy Snack Bites and Nature’s Personal Breakfast Pastries.”

The latter merchandise already can be found for trial on the corporate’s web site.

Within the fourth quarter ended Dec. 31, Flowers web revenue was $48.6 million, equal to 23¢ per share, up 24% from $39.3 million, or 18¢, a 12 months earlier. Gross sales have been $1.08 billion, up 10% from $983 million. Adjusted earnings per share in the course of the quarter rose 15%. EBITDA margins in the course of the quarter have been 8.9%, down 10 foundation factors from the fourth quarter of 2021.

“Nature’s Personal, Dave’s Killer Bread, and Canyon Bakehouse all maintained unit share within the fourth quarter as shoppers continued to acknowledge their differentiated attributes,” Mr. McMullian mentioned. “That efficiency got here regardless of a difficult atmosphere the place non-public label gained 90 foundation factors of share.”

From a macroeconomic perspective, Mr. McMullian mentioned inflationary pressures and recessionary fears have eaten into client spending.

“Though unemployment stays low, latest indicators level to a rise in layoffs, as larger rates of interest could also be taking a toll on financial development,” he mentioned. “However, because the Fed famous this week, stronger-than-expected job development might trigger inflation to be more durable to tamp down.”

The developments have translated into shoppers buying and selling all the way down to lower-priced merchandise and a shift towards value-focused retailers, Mr. McMullian mentioned. In the course of the fourth quarter, specialty premium bread misplaced 50 foundation factors of unit share, greater than another class inside contemporary packaged bread. White and delicate selection loaf classes have been massive gainers, up 40 and 30 foundation factors, respectively. The mass channel gained 130 foundation factors of unit share within the second half of 2022, whereas the grocery channel misplaced 170 foundation factors.

Non-public label continued to carry out extra strongly in mass channels than in grocery, which Mr. McMullian attributed to a wider worth unfold versus branded product within the mass channel.

“It’s vital to notice that starting in January now we have begun to see the mass channel implement worth will increase in non-public label,” he mentioned. “Value gaps stay wider than in grocery, however we interpret the transfer as a constructive first step for the well being of branded merchandise.”

Including further shade to steering for 2023, Mr. Kinsey mentioned the primary quarter can be the corporate’s “most tough” when it comes to year-to-year comparisons due to notably sturdy ends in the primary quarter of 2022 attributable to extreme storms and a COVID-19 surge.

Mr. McMullian briefly referenced the corporate’s December announcement it might be acquiring Papa Pita Bakery, including that Flowers continues to “actively search potential acquisitions and investments” and that its sturdy steadiness sheet leaves the corporate poised to maneuver “when now we have monetary, industrial and operational conviction.”