Good day and thank you for standing by, and welcome to the Flowers Foods First Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. 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. I would now like to hand the conference over to your speaker today, J.T. Rieck, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, operator and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation. These were 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. Joining me today are Ryals McMullian, President and CEO; and Steve Kinsey, our CFO. Victor, we're ready to start the Q&A, please.

Our first question comes from the line of Rob Dickerson from Jefferies. You may begin.

Great, thank you. Good morning everyone. Q1 was a good quarter, it sounds like you have decent conviction in the revenue guidance plus it sounds like those consumers that have been consuming at home continue to consume at home with retail brands still elevated, which is great. I would just ask because I think this is kind of the main question for a lot of investors right now. There's a line in the prepared remarks that says, it seems as if maybe commodity inflation is somewhat manageable for this year, but for next year if prices kind of remain where they are, there could be a bit more pressure. So, I would just appreciate any more color on that color potentially around some of those offsets including pricing potential in the back half of this year? And then obviously leave it at that. Thanks a lot.

Good morning, Rob. Certainly, there is considerable volatility in the commodity markets. Our guidance reflects our expectations for 2021. We typically hedge and cover within a seven to nine month timeframe, leaning towards the longer end of that range. We are confident in our visibility for the remainder of 2021. There are some immediate issues we cannot cover, particularly related to packaging, where we are seeing significant volatility and inflation, especially in corrugated materials. However, we feel we have strong visibility. Ralph mentioned several levers we can utilize, one of which includes improving efficiencies in our bakeries alongside other cost initiatives. I am feeling positive about our guidance range. Due to market volatility and rapid changes, we can adjust our guidance as the year unfolds, but for now, we are comfortable with it. Looking ahead to 2022, we are not ready to provide guidance yet. It's important to note that much of the current commodity inflation is not primarily due to wheat. The wheat crop looks decent, but other grains like corn and soybeans are influenced by global market dynamics. China is actively participating in the market again, and as grains shift to feed grains, supply tightness can affect wheat and other grain crops. Currently, if we had to secure coverage, we would face significant commodity inflation, but we have ample room regarding the corn and bean crops, and we will cycle through the wheat crop. We wanted to share this for transparency.

Rob, just to add a couple of points to that, Steve is absolutely correct across the board. We've experienced similar periods in the past and have successfully managed most of the inflation we've faced over the years. I believe we are in a better position today than we have ever been. Considering the strength of our branded portfolio and our focus on it, along with consumers' clear preference for branded products that stand out, I believe this positions us even more favorably as we look at the options available to us in response to the inflationary environment.

Okay, that makes sense. And just a quick follow-up. Like you said, consumers continue to focus on brands, your branded business is doing very well. You called out in the prepared remarks just the growth overall with BKP and Canyon, which is doing phenomenal. And, even relative to 2019, revenues still remain elevated. So, I just think the larger question then is as consumers, they start to revert back, as you say kind of one of the three things you're keeping your eye on, right is reverse, basically channel reversion. Is there anything that you would say now relative to 12 to 18 months ago that has changed your way of thinking of maybe how to service some of the channels, like are there benefits to maybe not reverting as much, but just say, okay, we're going to leverage some excess capacity over here, a little bit private label, a little bit in food service, what we've learned through the pandemic, yes or no, is it just kind of get back to business as usual and that's all this time? Thank you.

Thanks, Rob. I don't think things will return to business as usual. Some of these changes may be permanent, but we anticipate some movement back to pre-pandemic levels. However, it won’t fully revert. I believe that when school starts in August, we will have a clearer long-term perspective on these trends. Regardless of the environment, we feel very well-positioned with our branded portfolio. Additionally, food service is already showing signs of recovery, and we expect that this will return with better margins thanks to our customer strategy work. As food service begins to improve, its impact will be less significant than it would have been before we executed that strategy.

Okay, interesting. I'll follow-up on that. Thank you very much.

Thanks, Rob.

Thank you. Our next question comes from the line of Bill Chappell from Truist. You may begin.

Thanks. Good morning.

Good morning, Bill.

First, I would like to follow up on pricing. Have you noticed any pricing changes in the competitive landscape? I think we recently heard that there hasn't been much pricing activity. I assume not all of your competitors are approaching this the same way, so they might be feeling the pressure sooner rather than later. I was wondering if you have observed anything regarding this or if you have plans to investigate further.

Yeah, nothing really significant, Bill. The one comment I'd make relative to pricing just in the competitive environment is the promotional cadence and still consistent with past quarters we haven't seen really any movement relative to promotions. Still remain constant day sales really driving everything, though, obviously down year-over-year just given the pantry loading months. But nothing significant. I mean, we know that some of the regional players perhaps don't hedge like we do or at least not as far out. So, they're a little bit more exposed to the spot market and that kind of thing. But, thus far nothing, nothing notable at this point.

Got it.

Bill, also it will be more of us, just like for us it could be more of a back half dynamic that of course has yet to fully develop.

Yeah, sure. And then on private label, I mean, it's pretty astounding that it's gone from 26% of the category down to 20%, which is going to be one of the lowest in years. And I think I've asked this question before, but since you supply so much of the private label, I mean at what point can you go in and push more of your branded products on the shelf and show that, hey, this is not really a great use of the space. I mean, since you do service it with DSB, I would think that that's something that's pretty apparent to the retailers as well as the industry?

Yeah, indeed it is, you're right. We've talked about this a little bit on prior calls. But I mean, I think the retailers are seeing the benefit in our category and others, frankly, of consumers preference for brands. So, we have been able to expand our shelf space, but particularly with Dave's and perfectly crafted and Canyon some of those leaning items that we have, we again just kind of highlighted the importance of the portfolio strategy overall. But I agree with you, it is pretty amazing to see how far balanced it is, but I think that's a reflection of consumer behavior more than anything else, and I'm certain that the retailers are pretty in tune with that.

Sure, and then last one for me, just going back a year ago, you had your 40ish bakeries being able to in a short period of time hit a massive surge in sales. And now that we've come or we're coming back down or normalizing, I mean do you look back and say, boy, the supply chain, the number of facilities we have could be streamlined even further, if we were really much more efficient than we could or more efficient and could be even more efficient by cutting out a few plants here or there, or is that not the case, is it, hey, let’s just continue to operate and grow with it?

To the contrary, look I mean, network optimization has been one of our key areas of focus as you know. We did convert that bakery, we have some other projects going on this year and are seeing with the elevated CAPEX numbers this year. So, still very much a focus point for us. As we often say, there are a lot of levers you can pull in an inflationary environment, but it's always incumbent upon us to make sure we're being as efficient as possible. So, we're constantly evaluating our network from that standpoint.

Got it, but more just the normal process, would you expect CAPEX to be elevated going into 2022 or is this really the big year of change?

Well Bill, this year the focus is on kind of the digital initiatives. We have said the digital isn't a two to three year initiative. So while we're not prepared to give guidance on 2022, I would expect you could see some elevated CAPEX for the next two to three years, whether it's digital or whether it's working on our portfolio and optimization on some of those projects.

Got it, great. Thanks so much.

Thank you, Bill.

Our next question will come from the line of Faiza Alwy from Deutsche Bank. You may begin.

Yes. Hi, good morning. So I just wanted to follow-up on the inflation point and I don't know if you're willing to say anything on this, but I'm curious are you still hedging out into 2022 because it sounds like are you expecting sort of these prices on wheat etcetera to come down into 2022 so you rather have open positions or are you sort of continuing your programmatic hedging program at these current prices?

We are not ready to comment specifically on 2022 at this time, but we generally adhere to our strategy of hedging six to nine months in advance. We do have some insight regarding the first quarter of 2022, but the situation remains quite volatile. As for the longer-term aspects of our coverage, I won't provide much detail at this stage. However, we are starting to think about our strategies for 2022.

Okay, that's helpful. Thank you. And then just secondly, you talked about improving the profitability of the non-retail segment and I know you've talked about this previously, but I wonder if there's more color, are there numbers that you can put around that, just more details around how much of an impact this could have going forward or has had so far?

Yeah, well Faiza, I mean, obviously, food service on a relative basis remains pretty depressed particularly if you compare it back to 2019. So, it's just starting to recover. The quick serve business has been the fastest to recover. I think that's actually up a bit over 2019, with the balance of the food service business still being a little bit off. We haven't quantified it before, but it's something that we measure internally. We have set new margin thresholds for our food service business and the way we're approaching it is, if we cannot get a piece of food service business to that acceptable margin threshold via price or our own efficiencies or whatever levers maybe out there for us to pull, then we have a decision to make about whether or not that's some business that we want to continue. And so far, we've been pretty successful in getting a nice piece of that business up to those margin thresholds. Having said that we're not done yet. I mean, we've still got a long way to go. We've only been executing on this for nine months or so. But early returns have been really good. And as I said, as that business has come back, it has come back at an overall higher margin level. So as we go forward, yeah, I expect it to be a meaningful contributor to the overall. We've said in the past that food service is never going to be at the margin level of branded retail, but there's certainly a lot of room for improvement. And I think, in years past our food service team and we have, I believe the best one in the industry. There was a bit of a different strategic vision for food service that was based more on volume and sales gains than margin. But that team has now been given permission if you will to go get that margin even if it means walking away from some business from time to time. Not all of it's going to fit, but there is a lot of opportunity out there in food service that we think can be nicely additive to the overall. Hopefully that helps give you a little bit more color.

Yes, absolutely. Thank you. Lastly, regarding the digital initiatives, have you made any investments so far? My understanding from your comments is that you're not quite there yet, but you remain committed to the $0.05 of funding you mentioned. Should we anticipate those investments to come in the latter half of the year, or have you already begun making them?

We have already started. A lot of it is on the front end, working with our outside partners during the planning and design phases. The funding for the year is still secure, but it will be more focused on the latter half as we begin to implement our plan. Later this year, we will also provide more details about our digital strategy.

Perfect. Thank you very much.

Thank you.

Our next question will come from the line of Mitch Pinheiro from Sturdivant. You may begin.

Good morning. So, couple of questions here. First, back to private label for a second, is it a remarkable drop when you look at the trend from just several years ago, and you talked about it being sort of consumer behavior led. Is any of this retailer led?

I don't think so. I think it is consumer led. If you think about the category overall Mitch and just back up, let's just call it five years ago just to use a round number. Yeah, there wasn't nearly as much innovation, if you will, in our category. You didn't have DKB nationwide, certainly that was basically a West Coast phenomenon until we bought it. Had the same thing with Canyon, that was all in Costco or in the freezer case, etcetera. And since then, I mean, we'll even talk about our competitors. I mean, certainly coming out with new items, us coming out with Perfectly Crafted and then obviously later on DKB and Canyon. I think a lot of the innovation on the Bread Wall is driving this too. And as you know, in our category there's not much differentiation among private label items in our category. It's basically white and wheat bread. Similarly, within the category, we've seen a shift from kind of your traditional lows, still a lot sold, but your hopes at whole wheats or honey wheat to these specialty items, buns, breakfast in particular there's kind of been a mix shift in the category that we've been watching for some time. And obviously with our new items in both of those sub segments we've benefited. I think that's the primary driver Mitch.

Thank you. Looking at your growth, you achieved 3% for this quarter compared to the first quarter of 2019. Over two years, that's slightly above your long-term growth rate. Regarding your revenue guidance for the remainder of the year, it seems you anticipate this level of growth to continue. Is that correct?

Yeah, we actually feel pretty good about that, Mitch. I mean, our branded retail business is actually up 13.7%. I believe it was JT over 19. So we're really pleased with the overall trajectory. Frankly, to me it's even more acceptable considering the fact that private labels off as much as it is, plus we've done quite a bit of skew right over that period of time, too. So you've taken all that complexity out of the portfolio, really focusing on the winners. I think, we're showing that that's paying some nice dividends and we see that through the rest of the year. We're quite optimistic there.

Have you ever defined your skew rationalization drag? Okay. Regarding the growth in adjusted EBITDA from the 19th quarter to this current quarter, is it purely due to a positive mix shift, or are there any additional factors involved, such as cost of goods savings?

Yeah, no, there absolutely is. We had our $10 million to $20 million in portfolio optimization savings last year. We actually beat the top end of that. So you've got that piece of it and that's a mix of procurement savings, overhead savings, SG&A savings. So it's kind of a broad cost basket. We have a target of 30 million to 40 million out there for this year, in many of those same categories. And we're on track to deliver on that as well. And then Mitch, if you think about the bakery efficiencies and some of the underperforming bakeries, making some really nice progress at Navy yard, which I know you'll be happy to hear things like that. Our efficiency was up in the first quarter of those. Those add meaningfully to the bottom line as well.

Okay, great. For the last question, your market share in bread has been gradually increasing over the past year or two. Have you noticed any differences in regional market share gains or losses during this time?

Mitch, not really. Overall, the share trends have been positive, though slightly down compared to last year due to substantial gains. However, we have seen an increase from Q4, which is encouraging. There has been considerable discussion about people relocating from the Northeast to Florida or from California to Texas, among other places. We've examined that, but there's nothing specific to highlight except for the Northeast. That area has been a focus for us over the past few quarters as we are somewhat under-penetrated there, but we are making significant share gains while prioritizing this important market. So, that's the key region I wanted to mention.

Well, thank you for your time.

Thanks Mitch.

Our next question comes from the line of Ryan Bell from Consumer Edge Research. You may begin.

Good morning everyone. Can I get a benchmark of your non branded business from what we can team track channel trends and how should we think about that going forward, in general, I mean, we've been seeing private label across your categories declining. Given your intentional emphasis on your branded products, we have been seeing software growth from your private label business relative to what we've seen track channels. Is that something that we should expect to see for the foreseeable future.

Well I mean, I think it's yet to be seen, right. I mean, obviously we're focusing on our brands and as I've said, I think the consumer is driving a lot of this. So there's again the shift to brand, the differentiation in brand that you don't find in private label. I think it is driving a lot of that. We are making some decisions about select pieces of our private label business, kind of the same way that we're looking at food service to the extent it's underperforming or under-delivering relative to what it should. I mean, private label is what it is. We have made some decisions to exit certain pieces of business, but yeah, I wouldn't describe that in terms of magnitude as being the primary driver. The primary driver is consumer driven.

Thanks. That's helpful. And then you talked about M&A being your fourth strategic priority. Would you be able to provide any updated thoughts about the current M&A landscape just in terms of availability of the assets and valuations overall?

Absolutely. Things are really heating up. Since the beginning of the year, many people took a break last year, and there are a lot of assets available right now. I'm sure you're aware of some of the more public ones. There's significant opportunity out there. The challenge, as it has been for the past few years, is valuation. We're dedicated to maintaining our disciplined approach. We certainly have the resources to pursue opportunities where we have high conviction, but we will only act in a sensible manner, and there are limits to how far we will go while keeping to our disciplined strategy. I'm happy to see opportunities returning. We remain active and I expect this year to be quite dynamic in the food sector. There is a lot of capital out there looking for investment.

Okay. Thank you. And, uh, I think this is the last one for me, in terms of the organic growth side, you talked about some innovations in flatbread. Could you maybe talk about the opportunity or how fast you'd see some of that expansion?

Absolutely. Yeah, we're really pleased with the flatbreads that we introduced in the Northeast, obviously continuing to innovate with Dave's, the rise out there it's doing great, right on target. Great reception from consumers. If you haven't tried it, I suggest you do. It's a great loaf of rye bread. And then further out, I mean, we're standing up our agile innovation team. It's early days, we're just getting wrapped up. But the early prototypes they've shown me of some of the things that we're looking at are just outstanding. So there's a lot of great things to come, and we all know how important innovation is going to be for us to continue to grow our top line in line with the long-term targets.

Great. Thank you for that.

Thanks Ryan.

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