Avon Protection PLC

LSE:AVON

Hello, everyone. This is J.T. Rieck, EVP of Finance and Investor Relations. Welcome to the prerecorded discussion of Flowers Foods' 2024 Fourth Quarter and Full Year Results. We will host a live Q&A session this morning at 8:30 a.m. Eastern. Further details about the live call, along with our earnings release, a transcript of these recorded remarks, and a related slide presentation, are posted on the Investors section of flowersfoods.com.

Before we get started, keep in mind that the information presented here may include 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.

Providing remarks today are Ryals McMullian, Chairman and CEO; and Steve Kinsey, our CFO. Ryals, I'll turn it over to you.

Thanks, J.T. It's a pleasure to welcome everyone to the call.

Although I'm proud of our team's execution in the fourth quarter and full year of 2024, financial results were mixed. Category weakness drove the lower-than-expected sales, but that pressure was more than offset by margin expansion, which benefited from efficiency initiatives and moderating input costs.

I think it's important to point out for context that we grew dollars and units in tracked channels across our branded bread portfolio in 2024. We've documented for several quarters now a consumer shift away from traditional loaf toward more differentiated and premium items. I'm pleased to report that due to our brand investments, gains in organics, keto, buns and rolls, and gluten-free more than offset softness in those more traditional segments.

Furthermore, while our foodservice volumes were down, mostly due to intentional exits and, to some extent, from weakness in the category, we nevertheless showed respectable dollar growth. And due to our portfolio strategy, our foodservice business turned in substantially improved profits.

The biggest headwind we face from both a revenue and a volume growth standpoint is significant weakness in the sweet baked goods category. However, we're addressing that headwind straight on with the introduction of Wonder snack cakes for which we've received tremendous retailer enthusiasm given the iconic Wonder brand and our superior quality. Overall, we believe our portfolio is well positioned to capitalize on the seeming secular shifts in the category to more premium and better-for-you items.

So turning to weakness in the bread category. The causes are difficult to isolate, but some attribute it to a variety of factors, including an economic slowdown, GLP-1s, and healthier eating trends. As I mentioned, much of the pressure has been focused in sweet baked goods and traditional loaf products like white and wheat bread.

To overcome retail headwinds, we're investing in our brands to meet the needs of an evolving consumer, finding pockets of growth in a slowing bread category. While the category has softened, buns and rolls, breakfast, and premium products have outperformed. And we're targeting our innovation at those more promising areas. That investment is paying off as each of our major bread brands gained or held unit share and dollar share in the fourth quarter.

The away-from-home category has been similarly challenged, but our prioritization of profitability over volume has improved results. We're refilling freed up capacity with higher-margin business, and we see significant opportunity to drive future growth.

While we work to improve near-term results, we're dedicated to enhancing long-term shareholder value. This evaluation includes our brand portfolio, the way we go to market, our distribution model, and supply chain. I'll provide greater detail on some of these initiatives and how we're taking specific actions to drive improved performance.

Ultimately, our goal is to transform Flowers into a faster-growing, higher-margin business that will compound shareholder value over time. Part of that process will be enabled through M&A, such as our announced acquisition of Simple Mills. But we must also optimize our existing business, such as with the introduction of Wonder cake products, which I mentioned earlier.

Now I'll provide an overview of our fourth quarter and full year performance in the context of our 4 strategic priorities: developing our team, focusing on our brands, prioritizing margins, and pursuing smart M&A. Following that, Steve will review the financial results and guidance, and then I'll close with a discussion of key themes moving forward.

Our team, which is our first strategic priority, has been faced with a series of weather events that have impacted them personally and professionally. Last quarter, we discussed the hurricanes that affected much of the southeast and where ongoing recovery efforts continue today.

More recently, fires in California resulted in widespread devastation that touched the lives of many. Thankfully, all of our team is safe, and our warehouse locations have been spared. To help those who are not as fortunate, our team is working with disaster relief organizations to support community members in need. We're also working closely with customers to help provide consumers the products necessary to feed their families.

We have discussed the transition of our business model in California from a partnership with independent distributors to an internal sales team. That process has continued, and despite the fires, we expect to complete the transition on schedule. The California transition is one step we're taking to drive improved long-term results.

Another initiative is a targeted investment in our customer team. To drive even closer relationships with our customers and align our strategic growth plans to maximize sales, last year, we refined our organizational structure and added top-tier external talent. That investment is facilitating strong acceptance of our product innovation, improved and expanded shelf placement, and increased product displays. Over time, we expect these benefits to accelerate the market advantages of our leading brands.

And that focus on our brands is our second strategic priority. In contrast to the weaker category results, where a pressured consumer drove volumes down 1.8% in the quarter, our leading brands continue to outperform. DKB, Wonder, and Canyon grew tracked channel volumes 2.9%, 0.5%, and a staggering 17.8%, respectively, in the fourth quarter. And Nature's Own, which is concentrated in traditional loaf, the area of the market most impacted by the current environment, outpaced the category, down only 1.6%. Nature's Own's more premium Perfectly Crafted line of products increased units 8.5%. That performance translated to strong unit share performance, with DKB, Wonder, and Canyon all gaining 10 basis points, and Nature's Own maintaining share.

Particularly noteworthy was DKB's ability to achieve positive unit growth rates in all income cohorts, which confirms the increasing preference for differentiated better-for-you products. For the year, unit sales among lower-income consumers grew the most, though that trend seemed to reverse in the fourth quarter. DKB's strength demonstrates that even pressured consumers are willing to pay for premium products that offer meaningful perceived value. And that strong consumer perception enabled DKB to achieve record levels of household penetration in 2024, eclipsing even the pandemic-influenced 2020 results.

Canyon is also generating exceptional results. Freed from prior capacity limitations, the brand is successfully gaining new distribution and driving growth, helped by fresh marketing and promotion initiatives. To continue this momentum and capitalize on Canyon's strong consumer loyalty, we are also exploring the addition of new innovative products to the brand lineup.

In the current weak environment, we remain focused on maximizing our current and future growth prospects. Our continued investment in innovation has been a key driver of our strong relative performance. A great example of that is our Nature's Own keto line of products, which gained 410 basis points of unit share to take the #1 spot in the subcategory. We expect to build on that momentum with a robust schedule of on-trend innovation that targets evolving consumer demand. As consumers shift to healthier eating options, we're bolstering our Nature's Own keto lineup with the addition of hotdog buns and a multigrain loaf.

DKB snack bars and protein bars continue to gain distribution, and consumers are singing their praises, with Good Housekeeping awarding us the Best Protein Bars of 2024, while Delicious Living named them their Favorite Nutrition Bar Product. In keeping with the healthier eating trend, we're launching our most unique product yet, DKB snack bites. These poppable and perfect-for-snacking bites are packed with killer taste and whole grain nutrition. Retailers are responding enthusiastically, and we're optimistic that consumers will love them as well.

We're also meeting consumer needs regarding affordability. In this challenging economic environment, consumers have been asking for lower-priced options, and our new small loaves fit that bill perfectly. Coming in at only 12 ounces, small loves carry a more affordable price point and are perfect for the smaller household, or those who want multiple bread flavors or varieties without worrying about throwing any slices away.

Our third strategic priority is margins, an area where we continue to make significant progress. Adjusted EBITDA margins expanded 70 basis points compared to the year-ago quarter, benefiting from the successful execution of our portfolio strategy and savings initiatives.

To further boost margins, we're focused on optimizing our supply chain to provide the highest level of service to our customers in the most cost-efficient manner. Initiatives range from reducing production scrap, improving manufacturing efficiencies, optimizing our transportation network, and rightsizing our transportation equipment base.

Similarly, our procurement team has undertaken several strategic sourcing initiatives to reduce costs. One effort includes reallocating purchases of key commodities to new suppliers at lower cost. Another uses our ERP system to route each spare part order to the supplier with the lowest total cost of ownership. And a third program has significantly reduced lease labor expenses by negotiating lower fees from existing suppliers in addition to adding new lower-cost suppliers. These examples are just a small portion of our company-wide initiatives to increase efficiencies.

Our fourth priority is smart M&A. In January, we announced that we had entered into a definitive agreement to acquire Simple Mills. This acquisition increases our exposure to better-for-you and attractive snacking segments, diversifies our category exposure, and enhances our growth and margin prospects. This transaction is consistent with our clearly defined M&A strategy of seeking compelling brands that complement our existing portfolio and that skew towards better-for-you products. It also leverages our demonstrated ability to grow acquired brands in the better-for-you space. Simple Mills has a loyal customer following, and we see significant opportunity to continue the brand's strong track record of growth by further expanding distribution, developing new innovative products, and increasing velocities.

Slide 11 highlights some of these opportunities. With household penetration well below competitors, Simple Mills has ample growth opportunities by narrowing the gap with legacy players in total distribution points and average items per store. Those opportunities are abundant even in Simple Mills' most mature categories.

Following the deal closing, our capital allocation priority will be debt paydown, something we've done successfully with past acquisitions like DKB and Canyon. We view our M&A capabilities as a key driver of future growth by shifting more of our business towards a growthier, better-for-you nutritional profile. Quickly returning to a more normalized leverage ratio will enable us to explore further opportunities. As always, we'll remain disciplined in our approach and focused on growing shareholder value with an attractive risk-reward balance.

Now I'll turn it over to Steve to review the details of the quarter, and then I'll close with our outlook for the current business environment. Steve?

Thank you, Ryals, and hello, everyone. I am pleased to present our fourth quarter and full year 2024 results.

Net sales decreased 1.6% from the prior year period. Price/mix improved 0.9%, helped by optimization of our non-retail business, most notably foodservice, but was more than offset by volume declines of 2.5%, largely in cake and branded traditional loaf bread.

Gross margin as a percentage of sales, excluding depreciation and amortization, increased 90 basis points to 48.8% over the same quarter last year. Comparisons benefited mostly from moderating ingredient costs and optimization of our non-retail business. Lower production volumes and higher workforce-related costs partially offset the overall improvement.

Selling, distribution, and administrative expenses as a percentage of sales were 40%, a 30 basis point increase over the prior year period. The increase was due to higher workforce-related costs, rent expense, and bad debt expense. These items were partially offset by lower distributor distribution fees and marketing and insurance expenses. Excluding matters affecting comparability, adjusted SD&A expenses were 39.6% of sales, up 20 basis points compared to the prior period.

GAAP diluted EPS for the quarter was $0.20 per share, a $0.03 increase over the prior year period. Excluding the items affecting comparability detailed in the release, adjusted diluted EPS in the quarter increased $0.02 over the prior year period to $0.22.

Turning now to our balance sheet, liquidity and cash flow. For fiscal 2024, cash flow from operating activities increased $63 million to $413 million. Capital expenditures increased $3 million to $132 million and included $6 million for the ongoing ERP upgrade. Dividends paid increased $8 million to $203 million.

We believe our financial position remains strong. At quarter end, net debt to trailing 12-month adjusted EBITDA stood at approximately 1.9x. We held $5 million in cash and cash equivalents and had $564 million of remaining availability under our credit facilities. To enable us to close on the Simple Mills transaction, we entered a binding commitment letter for a 364-day, $795 million term loan. We intend to replace this facility with permanent debt financing in the first quarter.

Now turning to our outlook for 2025, which incorporates an expectation for near-term headwinds from the difficult current economic environment, and the potential impact of new tariffs, combined with actions we are taking to drive long-term performance improvement.

Including the benefit of a partial year contribution of Simple Mills, we expect sales of $5.403 billion to $5.487 billion, adjusted EBITDA of $560 million to $591 million, and adjusted EPS in the range of $1.11 to $1.24. Excluding Simple Mills, we expect sales of $5.180 billion to $5.257 billion, adjusted EBITDA of $526 million to $554 million, and adjusted EPS in the range of $1.18 to $1.28.

Relative to the prior year, results are expected to be stronger earlier in the year, helped by the carryover of new business wins, and savings and pricing initiatives, as well as moderating commodity costs. Our outlook for the back half incorporates the lapping of those benefits, increased commodity cost headwinds, and continued challenging category trends.

The largest swing factor in our guidance is overall category performance. The significant category volatility in recent weeks, which drove lower-than-expected sales, makes forecasting full year results challenging. We are assuming a range of scenarios that anticipate continued category weakness in bread and cake. Other key factors that could shift results within our guidance range include the promotional environment, potential new business wins, the transition of our California distribution, and implementation of our ERP initiative.

Currently, approximately 70% of our key raw materials are covered in 2025. Based on that coverage, our guidance incorporates inflationary pressures compared to the prior year with the benefit in the first quarter transitioning to a headwind for the remainder of 2025. To minimize volatility and provide adequate visibility into cost, we have maintained our historical hedging strategy in which we attempt to increase the certainty of our key ingredient costs 6 to 12 months out.

As previously disclosed, in fiscal year 2023, we reached an agreement to settle distributor-related class action litigation in California. As Ryals mentioned, we are making progress with the process of repurchasing the distribution rights, which is expected to be completed in April in accordance with the settlement agreement.

In the first quarter, we are resuming the bakery rollout of our ERP system, which we had paused to concentrate resources on our California distribution transition. To minimize the risk of operational disruptions, we are proceeding judiciously and are confident in our ability to execute the transition smoothly.

Thank you. And now I'll turn it back to Ryals.

Thank you, Steve. Now I'd like to discuss some of the trends impacting our current performance and the steps we're taking to maximize present and future opportunities. I'll first touch on the consumer trends and then address the competitive environment.

Our 2025 financial outlook incorporates continued caution on the consumer and promotional environment, both of which are relatively consistent with the recent past.

Consumers remain under financial pressure as inflation continues to rise, albeit at moderating rates. In response, consumers have economized in various ways, including what they buy and where they buy it. When those steps have not been sufficient to offset the higher costs, they've used credit cards to make up the difference. Increasing delinquency rates on credit card debt indicate a weakening in consumer health.

Demand for private label products has persisted, though unit share gains turned negative over the last few quarters as private label price increases have outstripped those of branded products.

The shift to eating at home has continued driven partly by price increases in away-from-home channels, which exacerbated the price gap with at-home eating. And more of those at-home purchases have shifted to value channels like mass and club stores. While many low-income consumers transitioned to greater at-home eating several years ago, more recently, we've seen similar behavior among higher-income consumers.

Despite that shift to at-home eating, the center store bread category as measured in tracked channels has been pressured. Consumers have been gravitating more to the store perimeter as they look for restaurant-like experiences and what they consider healthier options. The impact of GLP-1s on this shift is unclear. Research seems to show that consumers who have adopted GLP-1s purchase less food and shift more of their purchases to nutrient-dense items located in the store perimeter. However, that effect seems to wane over time and, for consumers taking GLP-1s specifically for weight loss, research shows the initial impact on purchases reverses and ultimately results in consumers spending even more on center store items than prior to adoption.

In conjunction with the rise of GLP-1s is greater interest in healthy eating, best exemplified by the Make America Healthy Again movement. With its focus on cleaner food labels, we feel well positioned for that shift.

Going back to its introduction in 1977, Nature's Own stood out for its clean label with no artificial preservatives, colors or flavors. Nature's Own has maintained that advantage, and more recently, we've added brands like DKB and Canyon, which offer organic and gluten-free benefits to meet changing consumer demand. Our announcement to acquire Simple Mills takes this shift one step further, adding a leader in the better-for-you space with clean labels and a focus on regenerative agriculture.

We are well positioned to capitalize on the trend towards healthier eating and expect a significant portion of our future growth to derive from better-for-you products.

Turning now to the competitive environment where trends have remained consistent with recent quarters. The lack of category volume growth has raised fears of increased promotional levels. And while tracked channel data show a step-up in promotions, the average category price actually increased slightly in the fourth quarter. As we discussed last quarter, part of the explanation for that trend is a mix shift to premium products, but some is also likely due to a greater percentage of products sold on promotion, though with less promotional intensity.

It's not clear that increased promotional intensity is the solution to volume pressure in the bread category. In areas of the category where promotional levels increased more meaningfully, volume lift does not seem to have benefited commensurate with the level of investment. Guided by our improved trade promotion capabilities, we've remained prudent in our use of promotional spending, carefully monitoring the return on investment. We've been pleased with the effectiveness of our promotional activity, which remains well below pre-pandemic levels.

While always striving to maintain the affordability of our brands, we are also focused on providing greater value to consumers by developing unique quality products from brands they know and trust. In recent years, our innovation team has successfully launched a number of new products, including the Nature's Own keto line of products, brioche rolls, small loaves, and our DKB stacking portfolio, among others. And we have an exciting pipeline of additional products that we expect will continue to meet consumers' evolving demands.

In closing, while I'm pleased with our team's commitment and execution, none of us at Flowers are satisfied with our financial performance. We acknowledge that our guidance is cautious given the volatile environment that we see continuing into at least the first half of 2025. The potential for tariffs, commodities volatility, higher promotional activity, and a continued weak consumer demand influence that cautious outlook. However, at the same time, we have an overall optimistic longer-term outlook given the strength of our brands and their performance in the market, our history of successful innovation, and the addition of Simple Mills to the Flowers portfolio.

So in order to mitigate these negative effects and drive growth and profitability, we have been and will continue to do the following things: number one, aggressively innovate unique, premium products to offset the effects of a declining category, this is a proven strategy evidenced by our market share performance; two, leverage the power of our top brands to move into other faster-growing segments like we have with our DKB snack line; three, use M&A to focus on new growing product segments to enhance our growth and margin profile, with Simple Mills being the latest example; four, stabilize the cake business by leveraging the power of the Wonder brand; and five, optimize our supply chain and path to market to deliver industry-leading operations and service.

In short, we believe that we are very well positioned to take advantage of our opportunities, particularly as the consumer demand environment ultimately stabilizes. We're confident these initiatives will enable us to enhance shareholder value and grow in line with our long-term financial targets.

Thank you very much for your time. That concludes our prepared remarks.