Good day. Thank you for standing by. Welcome to the Flowers Foods First Quarter 2021 Results Conference Call. I'd 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, Victor. 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 will come from Rob Dickerson. You may begin. Great. Thank you. From Jefferies. Good morning, everyone. Good morning, Rob. Look, quarter was a good quarter. It sounds like you have decent conviction in the revenue guidance. It also sounds like or seems like those consumers that have been consuming at home are continuing consuming at home with retail brands still elevated, which is great. I would just ask, because I think this is the main question for a lot of investors right now. There's a line in the prepared remarks that said, it seems as if maybe commodity inflation is somewhat manageable for this year, but for next year, right, if prices remain where they are, there could be a bit more pressure. 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. I'll just leave it at that. Thanks a lot. Sure, Rob. Hey, this is Steve. Obviously, there's a lot of volatility in the commodity markets. Our guidance takes into consideration what we believe will play out for 2021. As you know, we do hedge and we take coverage usually on that seven to nine-month time horizon and typically stay on the long end of that. We do believe we have good visibility for the rest of 2021. There are a few things that we can't cover. They're a little more near-term, some in the packaging area, you are seeing a lot of volatility and inflation in packaging, particularly around the corrugated area and arena. Like I say, we do feel like we have decent visibility. Ryals said in his comments there's several levers we can pull, with pricing being one of those, but we are looking at the efficiencies across our bakeries as well as other cost initiatives. I do feel pretty good about the guidance range we have out there. Obviously, due to the volatility and the way things move so quickly, as the year progresses, we'll be able to change any guidance as necessary. I think given the point we're at, we feel pretty comfortable with that. Looking into 2022, obviously, we're not prepared to give guidance for 2022. The reality is, when you look at what's driving the commodity inflation, a lot of that is not necessarily wheat. I mean, the wheat crop is in pretty decent shape, but it's other grains like corn and beans. It's more of a global market. We are seeing China back into that market in a big way. As grains turn to feed grains and there's tightness on the availability of the supply, then that starts to impact things like wheat and other grain crops. The reality is that today's prices, if we had to go out and cover, there would be significant commodity inflation. We still have a lot of runway with regard to the corn crop, the bean crop. We'll cycle a wheat crop. We just thought it was important to get that out there from a transparency perspective. Okay. Rob, to add a couple points to that. Steve's spot on across the board. As you know, we've been through periods like this many times in the past. We've been able to adequately cover most of the inflation that we've experienced over the years. I would say that I think we're better positioned today perhaps than we've ever been. If you think about the strength of our branded portfolio now and the focus on it. Consumers' obvious desire for branded products with a point of difference. I think that positions us even better as you think about some of the levers we can pull from an inflationary environment standpoint. Okay. That makes sense. Just a quick follow-up. Like you said, consumers continue to focus on brands. Your brand of business is doing very well. You call out in the prepared remarks just the growth overall with DKB and Canyon, which has been phenomenal. Even relative to 2019, revenue still remains elevated. I guess the larger question then is as consumers start to revert back, you say one of the three things you're keeping your eye on is reversion, basically channel reversion. Is there anything that you would say now relative to 12, 18 months ago, that has changed your way of thinking of maybe how to service some of the channels? Are there benefits to maybe not reverting as much? Just say, okay, we're going to leverage some excess capacity over here a little bit in private label, a little bit in food service. You know what? We've learned through the pandemic this or no? Is it just kind of get back to business as usual? That's all this time. Thank you. Yeah. No, thanks, Rob. No, I don't think it goes back necessarily to business as usual. As we've said before, I do think some of these patterns are probably permanent. We've also consistently said we do expect to see some movement back to pre-pandemic levels. I don't think it'll go all the way back. I do think that when school starts in August, that should give us a better long-term indication of where these trends are ultimately going to land. Having said all that, no matter what that environment looks like, we believe that we're very well-positioned with our branded portfolio, as I mentioned. Also as you think about food service coming back, which it already did somewhat in the quarter, we started to see some moves up in food service. The good story there is, via our customer strategy work, it is coming back at better margins. As that mix reverts and food service starts to come back, it won't have as significant of an impact as it would have prior to the execution of that strategic work. Okay, interesting. I'll follow up on that. Thank you very much. Thanks, Rob. Thank you. Our next question will come from the line of Bill Chappell from Truist. You may begin. Thanks. Good morning. Hi, Bill. Hey, first a follow-up on pricing. Have you seen any pricing on the competitive landscape? I think we heard on the other day that Little Debbie on the cake side has already led some pricing. I imagine not all of your competitors are kind of hedged the same way you are, so they may be feeling the pinch sooner than later. Didn't know if you'd seen anything there or looked to follow up from that standpoint. Yeah. Nothing really significant, Bill. The one comment I'd make relative to pricing just in the competitive environment is the promotional cadence. Still consistent with past quarters, we haven't seen really any move relative to promotions. Still remain well down base sales, really driving everything, Bill, obviously down year-over-year just given the pantry-loading months. Nothing significant. 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, that kind of thing. Thus far, nothing notable at this point. Got it. Bill, Just like for us, it could be more of a back half dynamic than a front half dynamic. Sure. Yeah. Sure. On private label, it's pretty astounding that it's gone from 26% of the category down to 20%, which that, yeah, has got to be one of the lowest in years. I think I've asked this question before, but since you supply so much of the private label, at what point can you go in and push more of your branded product on the shelf and show that, hey, this is not really a great use of the space. Since you do service it with DSD, I would think that that's something that's pretty apparent to the retailers as well as the industry. Indeed, it is. Yeah, you're right. We've talked about this a little bit on prior calls, but I think the retailers are seeing the benefit, in our category and others, frankly, of consumers' preference for brands. We have been able to expand our shelf space, particularly with Dave's and Perfectly Crafted and Canyon, some of those leading items that we have. Again, just kind of highlighting the importance of the portfolio strategy overall. I agree with you, it is pretty amazing to see how far down it is. 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. Last one for me, just going back a year ago, you had your 40-ish bakeries being able to, in a short period of time, hit a massive surge in sales. Now that we're coming back down or we're normalizing, do you look back and say, boy, the supply chain, the number of facilities we have could be streamlined even further? We're 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? No, to the contrary. Look, network optimization has been one of our key areas of focus, as you know. We did convert that Lynchburg bakery. We have some other projects going on this year. You've seen with the elevated CapEx numbers this year. 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. We're constantly evaluating our network from that standpoint. Got it. More of just 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 the digital initiatives. We have said that the digital is a two to three-year initiative. 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, some of those projects. Got it. Great. Thanks so much. Thanks, Bill. All right, next question comes from the line of Faiza Alwy from Deutsche Bank. You may begin. Yes. Hi, good morning. Good morning. Hi. 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? Are you expecting these prices on wheat, et cetera, to come down into 2022, so you'd rather have open positions? Or are you continuing your programmatic hedging program at these current prices? I wouldn't comment specifically on 2022 at this point. We tend to stick pretty true to our overall hedge strategy, which is the seven to nine months. We do have some visibility into the first quarter of 2022. The reality is it's still pretty volatile, and beyond that, I probably wouldn't comment much on our particular coverage with regard to the long end of our coverage range. We are beginning to think about what we do for 2022. Okay, that's helpful. Thank you. 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 this, just more details around how much of an impact this could have going forward or has had so far? Well, obviously, food service on a relative basis remains pretty depressed, particularly if you compare it back to 2019. 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, be it price or efficiencies or whatever levers may be 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. 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. We've still got a long way to go. We've only been executing on this for nine months or so. Early returns have been really good. As I said, as that business has come back, it has come back at an overall higher margin level. As we go forward, I expect it to be a meaningful contributor to the overall. We 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. 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. 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. 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, definitely. Thank you. Just last one from me, just on the digital initiatives. Have you made any of these investments so far? Just my reading of your comments was that you're not there yet, but you're still committed to the $0.05 of spending that you've talked about. Should we expect those to come through more in the back half, or have you already started making these investments? Yeah, no, we have already started. A lot of it on the front end is working with our outside partners for the planning and design phases. The nickel is still good for the year, though that'll be a little more heavily weighted in the back half as we start executing on the plan. At which time, also later this year, we'll be giving you guys some more detail on where we're headed from a digital strategy standpoint. Perfect. Thank you very much. Thank you. All right, next question will come from the line of Mitchell Pinheiro from Sturdivant. You may begin. Hi. Good morning. Morning, Mitch. A couple questions here. First, back to private label for a second. It is a remarkable drop if you look at the trend from just even several years ago. You talked about it being 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. 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. Kind of the same thing with Canyon, that was all in Costco or in the freezer case, et cetera. Since then, we'll even talk about our competitors. Sara Lee coming out with Artesano, us coming out with Perfectly Crafted, and then obviously layering on DKB and Canyon. I think a lot of the innovation on the bread wall is driving this too. 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 your traditional loaves, still lots sold, but your 100% whole wheats or honey wheat to the 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. Obviously with our new items in both of those sub-segments, we benefit. I think that's the primary driver, Mitch. Okay. Thank you. Looking at your stack growth, the 3% in this quarter versus 2019's first quarter. Looking at that over two years, obviously it's a little above your long-term growth rate. Looking at your revenue guidance for the remainder of the year, it looks like you expect to see this type of stack growth for the remainder of the year. Is that accurate? Yeah, we actually feel pretty good about that, Mitch. Our branded retail business is actually up 13.7%, I believe, it was J.T. over 2019. We're really pleased with the overall trajectory. Frankly, to me, it's even more exceptional considering the fact that private label's off as much as it is. We've done quite a bit of SKU rationalization over that period of time too. Taking 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 SKU rationalization drag? I'm sorry, Mitch, say that one more time. Have you ever defined or given us any color on what the SKU rationalization drag was in percentage terms on your growth rate? No, I don't think so. Okay. How meaningful is it? Is it in the low single digits or is it less than 1%? How meaningful is SKU rationalization to these numbers? Yeah, I'd have to go back and look at that, Mitch. I don't have that in front of me. Okay. As it relates on the same thing on looking at your growth in adjusted EBITDA from 2019's quarter to the current quarter, is it all mix or is there anything else in there? Any cost of goods savings in there? Anything else in there besides just the positive mix shift? Yeah. No, there absolutely is. We had our $10 million-$20 million in portfolio optimization savings last year. We actually beat the top end of that, so you've got that piece of it. That's a mix of procurement savings, overhead savings, SG&A savings. It's kind of a broad cost basket. We have a target of $30 million-$40 million out there for this year in many of those same categories, and we're on track to deliver on that as well. 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. Those add meaningfully to the bottom line as well. Okay, terrific. Last question. Your market share has been creeping up in bread over the last year or two. Have you seen anything to call out in among regional differences there? I don't see the regional scanner data, but any noteworthy changes in any regional market share gains or losses over the last year or so? Mitch, not really. Overall, the share trends have been good. Obviously a little bit down over the quarter last year, just given the massive gains, but sequentially up from Q4, which is great to see. There's been a lot of talk about geographic shifts and people moving out of the Northeast to Florida or out of California to Texas, whatever it might be. We've looked at that, but there's nothing specific to call out except for one region, which is the Northeast, and that's the one that we've been focused on. We've been talking about that for the last few quarters where we're kind of under-penetrated there and making some nice share gains as we focus on that important market. That's just one that I would call out to you. All right. Well, thank you for your time. Thanks, Mitch. As a reminder, that's star one for questions. Our next question on the conference line, Ryan Bell from Consumer Edge Research in Victor. Morning, everyone. Hi, Ryan. If we're trying to get a benchmark of your non-branded business from what we can see in track channel trends, how should we think about that going forward in general? I know we've been seeing private label across your categories declining. Given your intentional emphasis on your branded products, we've been seeing softer growth from your private label business relative to what we see in track channels. Is that something we should expect to see for the foreseeable future? Well, I think it's yet to be seen, right? Obviously, we're focusing on our brands, and as I said, I think the consumer is driving a lot of this. Again, the shift to brand, the differentiation in brand that you don't find in private label, I think is driving a lot of that. Now, 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. Private label is what it is. We have made some decisions to exit certain pieces of business, but I wouldn't describe that in terms of magnitude as being the primary driver. The primary driver is consumer-driven. Thanks. That's helpful. 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 assets and valuations overall? Absolutely. In short, things are really heating up. Since the first of the year, people sort of took a break largely last year. There's a lot of books flying out around out there right now. I'm sure you guys have read about some of the more public ones. There's quite a bit of opportunity. Ryan, the challenge, as it has been for the past few years, is valuation. We're committed to maintaining our disciplined approach. We certainly have the balance sheet to lean in where we've got high conviction, but we're only going to do so in a reasonable way, and there's only so far we'll go and maintain our disciplined approach. I'm pleased to see the opportunities start to come back. Certainly, we're active, we remain active. I think overall it will be a very active year in the food space. There's a lot of money sloshing around out there trying to find a place to land. Okay. Thank you. I think this is the last one for me. In terms of the organic growth side, you talked about some innovations in rye and flatbread. Could you maybe talk about the opportunity or how fast you'd see some of the expansion? Absolutely. Yeah. We're really pleased with the flatbreads that we introduced in the Northeast. Obviously continuing to innovate with Dave's, the rye's 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. Further out, we're standing up our agile innovation team. It's early days. We're just getting ramped up. The early prototypes they've shown me of some of the things that we're looking at are just outstanding. 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. Thanks, Ryan. Once again, that's star one for questions. I'm not showing any current questions in the queue. Okay. Well, thank you very much, everyone, for your interest in Flowers, and we look forward to speaking to you next quarter. Take care. This concludes today's conference call. Thank you for participating. You may now disconnect.