Good day, and thank you for standing by. Welcome to the Flowers Foods Q1 2022 Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. 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, Shannon, 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 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 disclosures and reconciliations are provided in the earnings release at the end of the slide presentation on our website. Joining me today are Ryals McMullian, President and CEO, and Steve Kinsey, our CFO. Ryals, I'll turn it over to you. Thanks, J.T. Good morning, everybody. I appreciate you joining our Q1 call. I'm very proud of our team's performance in a tough environment. Their perseverance drove record quarterly results in sales and adjusted EPS. Our leading brands continue to gain share, and we're successfully implementing strategies to further that growth. Inflation and supply chain disruptions are impacting virtually all companies, and we're not immune from that. Our team is working diligently to offset those pressures, and we do call out a $0.05 impact to our 2022 results, but we expect those headwinds to be resolved in the Q3. The fundamentals of the business are strong, and I've never been more optimistic about our prospects. No matter the environment, our team is focused on delivering results in line with or better than our long-term financial targets. With that, Shannon, we're ready to start the Q&A, please. Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Ryan Bell with Consumer Edge Research. Your line is open. Morning. When we're looking at the price mix that you have, would you be able to potentially delineate some of what's coming from pricing, what's coming from mix? Then, you know, as you're thinking about consumer elasticities, they seem to have held up pretty well. The next waves of pricing across the market are hitting a bit more of a pressured consumer. If you'd be able to offer any perspective on that'd be great. Thanks. Yeah, thanks for the question, Ryan. I'll take the elasticities part then turn it over to Steve for price mix. So far this year, we've been really encouraged by what we've seen. Our elasticities have been lower than even we anticipated. I think we called out in the prepared remarks that, you know, most encouraging is the fact that with, you know, a significant amount of price increases in January, we actually grew our units as well with our top brands, Nature's Own, Dave's, and Canyon. So I see that as a really good sign going forward. Now, you know, as we said, we're implementing another price increase in June. You know, there's a bit of a wait and see there to see how the consumer reacts to that second round of pricing. We all know that the consumer, you know, is under quite a bit of pressure, though I will say, you know, a lot of the information out there is somewhat conflicting. You know, you read some things that suggest that perhaps the consumer is starting to bargain hunt a little bit more or making some different decisions. I think, you know, everybody read, you know, a few of the retailers' releases this week and saw a little bit of that, though that seemed to be more limited to general merchandise and not as applicable to food. But nevertheless, we know what the inflationary environment is like. You know, there certainly could be a shift in behavior with this next round of pricing, but we just won't know until we get there. The important thing is that thus far, you know, we've seen a pretty healthy consumer. Steve, you wanna take price mix? Sure. Ryan, we typically, as you know, don't split price mix in our reporting. As we said in our prepared comments, you know, the significant majority or vast majority of that increase on the price mix line actually came from pricing. I think it would be safe to assume that, you know, the vast majority is price. Thanks. In terms of the EPS guidance coming down a little bit, understandably, given all the inflationary pressures, supply chain disruptions, you were talking about the impact falling a little bit more heavily into Q2 versus Q3. I was wondering if you'd be able to provide any color on that. Yeah, sure, Ryan. The price increase that we're implementing won't be effective until June 6th, but we're already experiencing the higher cost, and we have, you know, the packaging disruption that we mentioned. Now, the greater part of the impact is due to the pricing lag, and less due to the packaging effect. You know, come June 6th, for the remainder of the quarter, you know, we'll have the benefit of that additional pricing. It's really due to a combination of price lag and the packaging disruption we mentioned. Thanks. The last one for me. In terms of understanding what kind of incrementality there has been from work from home, is there anything you've done in terms of survey work to understand, you know, how much bigger the breakfast or lunch occasion now is that you can service with respect to your products? Yeah. What we've witnessed, Ryan, is a shift within the category, and I think we've mentioned this on some prior calls to specialty buns and roll-type products to breakfast. You know, a lot of that driven by work from home and also a shift to more premium items away from that traditional sort of 20-ounce loaf segment. You know, though we're still strong there and we're still quite large there, obviously with Nature's Own, you know, we have seen a shift in the category out to those, you know, more premium, more differentiated items. The good news is that has held up at least so far, even in this challenging environment. Great. Thanks a lot. That's it for me. Thanks, Ryan. Our next question comes from Powers with Deutsche Bank. Your line is open. All right. Thanks. Hey, good morning. Ryals, following up on the first question, you know, can you just confirm that the new round of pricing has been accepted, you know, across the board? Just confirm also if your guidance contemplates, you know, a more adverse reaction to that next round of pricing than we may have seen so far. I wanted to ask, you know, kinda loop back on, you know, in the wake of Walmart and Target this week, and as you kind of alluded to, there's been a ton of focus on not only elevated concerns around eroding demand and you know elasticity, but you know kind of embedded my question is, you know, concerns about increasing retailer pushback to further price increases and the prioritization of private label assortment across a number of categories. Against that backdrop, you know, your results, your forward commentary just kind of stand in opposition to those concerns. Can you just, you know, maybe give some perspective on that? Recognizing past trends right up through this Q1, just, you know, what gives you confidence that you can kinda ride and really double down on that premiumization momentum, going forward into what I think, increasingly people feel is a, maybe everyone feels a much more uncertain future. Sure. Steve, thanks for the question. As far as the pricing acceptance goes, we have not had any issues there. Most of our pricing is in and planned, that is, that was planned for June 6th. There's really no issue there from our standpoint. We're confident we can get it all in. That's number one. Number two, as far as private label goes, you know, just going back to some of our prior conversations, as you know, private label's been declining in our category for a long time, and it's still declining. Though I will say, you know, the declines are less severe than we've seen in past quarters, but it still has been down. I recognize that, you know, there's been a little bit of private label growth in broader food, but we're not seeing that in our category right now. I keep coming back to the point of differentiation within our category. Private label are, you know, generally very basic items. You know, we offer a range of items at a range of price points in a range of channels, that are greatly differentiated from private label. I am not in any way suggesting that if we, you know, happen to enter a recession or something like that, there won't be some level of trade down. As you saw from our prepared remarks, as we look back to the last recessionary period, we really didn't see a lot of that in our category. On top of that, our industry is much different than it was back during that, you know, 2008 to 2011 or 2012 period, right? You've got a much more consolidated industry. There's been a lot of innovation in the category. We now have Dave's and Canyon and Nature's Own Perfectly Crafted, et cetera, that we did not have back then. Our market share is much higher than it was back then. You know, even if there is some level of trade down, I feel very confident in our ability to weather, you know, any kind of demand environment. You know, remember we are in a stable and staple category. You know, this is typically a weekly purchase item for many consumers. You add to that the continued work from home trends that we're seeing. I think you know we've got a nice backdrop for continued good performance. As far as retailers prioritizing private label, we have not seen that. I've seen some commentary from retailers that suggest that they're not doing that. Again, we certainly haven't seen it. There seems to still be a focus on branded items in the category, and thankfully, we've got good brands to fill that space. Okay. Very helpful. Can you just maybe confirm just to, or frame for us what kind of, you know, degree of, you know, I guess worsening environment is embedded in your guidance? Then, you know, I guess I was left from your prepared remarks, you were pretty clear around sort of the Q2, Q3 dynamics, rising inflationary headwinds, supply chain disruption, and the pricing that's rolling in leading to that $0.05 impact. I guess I'm not as clear as to where you expect the year to end. I guess I'm really thinking about it from a gross margin perspective. Because while you'll presumably have that full pricing in place by the Q4 and supply chain issues resolved, costs are likely to keep rising. I guess, how should we think about the margin profile of the business exiting 2022? Sure, Steve. This is Steve. You know, I'll talk about it maybe from the cadence of guidance. You know, as we've said early in the year and now it's really embedded in our forecast because our coverage levels have ramped up. Our costs continue to rise and escalate primarily through the Q3, and then they stabilize somewhat, although they'll be at a higher level in Q4. You know, from a comps perspective, it will be an easier comp by the time you get to the back of the year. As the year progresses, you will more than likely see some pressure on margin. As Ryals said, you know, we believe we've priced to offset and mitigate as much of that as possible. You layer on the cost initiatives that we've talked about, you know, for a couple of quarters now. You know, that also allows us to offset some of the inflationary pressure we're seeing. A lot of those initiatives come in the back half, so you will not really begin to see that ramp up until we're out of Q2. Specifically with the Nature's Own around pricing and packaging, as we said, that should abate somewhat from a packaging perspective as we move into Q3. We feel like we have a good plan in place to mitigate that. So far, you know, we're seeing that plan in action and things are beginning to look, you know, somewhat better. We feel like, you know, we've given ourselves, from a guidance perspective, you know, what we need to, you know, to work through that issue. The reality is, you know, this is gonna be a full year challenge, kinda all hands on deck. We do feel like, you know, the way we forecast and the way we plan and the way we've thought about kind of elasticities as prices continue to ramp, you know, we have all that built into our guidance. Okay. Thank you very much. I'll pass it on. Thanks. Thanks, Steve. Our next question comes from Mitchell Pinheiro with Sturdivant & Company. Your line is open. Hey, good morning. Hey, Mitch. Hey. First on the supply chain issues, I realize, you've talked about, you know, plastic bags and things. What other specific issues are you seeing pressure on or disruptions and creating inefficiencies? Mitch, for us, it's primarily been packaging. You know, we've had a few raw material type issues, but nothing that I would call out as being, you know, terribly significant. It's really been on the bags, primarily for obviously for our bread items and then, you know, a couple items in cake. Again, you know, we're working through that. I have complete confidence that we'll be through it, you know, in the Q3. You know, hence again, the reason we call out the nickel impact. You know, and with the bags, I mean, is it a situation where your suppliers, there's obviously problems at your suppliers? I mean, is this how? Why are bags short? Yeah, it was sort of a combination of factors, but suffice it to say, there is plenty of inventory or capacity, I should say, in the system that we've identified and are moving to. We'll actually be spreading our risk around even more than it was before. We'll actually come out of this in a much better situation than we went into it. It was a variety of factors that backed things up. You know, can't point to one single one. Again, you know, with the actions that we're taking, we'll be from a supplier diversification standpoint, we'll be in much better shape than we were prior. You know, as we sort of perhaps see the end of inflation pressure, and you know, you've taken all your pricing, and I know we talked, you know, a lot of the questions here are about elasticity. Do you expect, you know, when we get to the other end of this, you know, this period here that price, you know, your list pricing holds and we go to a little more promotional environment or you know? Would you prefer that because your promotions can drive, you know, accelerated, you know, volume? Or would you rather it be sort of a stable list environment with you know, modest, you know, promotional activity? How? What's best for Flowers? You know, look, for me, that's a great question, Mitch. For me, I would rather the promotional environment remain stable. You know, we've needed to increase our margins in this business for a long time, as you well know. You know, my hope would certainly be that the consumers, you know, are able to accept the price increase, that the price increase holds, and that the promotional environment remains rational. That would be the best for our business. Okay. You know, still impressive to see, you know, your brands gaining share, and I'm curious where that's coming from. Is it coming from store brands? Are there any regional differences that are noteworthy in your share gains? Yeah, there's one that I'll call out. I mean, we continue to perform exceptionally well in the Northeast. I'm really proud of that performance. As you know, you've seen a lot of our commercials. I think you've mentioned before. We put a lot of investment behind that because as you know, our national share is 17.9%-18%, depending on what quarter you look at, whereas you know, in the Northeast, we're about 10.1 or 10.2 now, I think. It was zero not too long ago, and we continue to increase that share, you know, kind of across all of our categories. The investment is paying off. You know, Nature's Own, particularly Perfectly Crafted, Dave's Killer Bread, Canyon, you know, all continue to gain share, and, you know, those, we're talking about premium items here. As I mentioned, it's really encouraging to me to see that unit growth along with the price increase. Okay. Just one more on the food service side. You spoke, I guess, a quarter or two ago about sort of setting new margin thresholds in food service and, you know, holding the line on pricing and not accepting, you know, unfavorable, you know, deals. How's that strategy faring? It's coming along well. Now, I also said, you know, it's a bit of a long-term project because, you know, some of our food service volume is under contract, and so we have to work through those contractual terms to fully get to where we wanna be. But in the areas where we've been able to take action, we have, and it is starting to improve things. Now, the inflation situation does cloud it a little bit because in food service, there's sometimes even more of a pricing lag because, you know, the contracted business, you follow the cadence of the contract, and so you may be experiencing inflation, but your price increase doesn't come until the contract says it comes. There is a little bit of that going on. Where we've been able to take action, where we're not under contract, it's been very beneficial to have those margin thresholds set that you know, the team is fully aligned on working towards. Over time, I expect to see those food service margins start to come up again. Okay. All right. Thank you very much. Okay, Mitchell. Thank you. Our next question is from Ben Bienvenu with Stephens. Your line is open. Hey, thanks. Good morning. Morning. I wanna ask about your portfolio optimization strategy, and you talk about whittling away at your lower margin SKU. As you think about that strategy, are you purely looking at all of your lower margin SKUs and removing those strategically from the portfolio, or are you retaining some of your higher demand low margin SKUs? How do you think about that balance between where the you know the margin versus the demand critical mass resides? Yeah, it's a good question. You know, there are some of our lower margin products that we would describe as more strategic in the sense that, you know, in partnership with some of our retailers, having that store brand business, for example, gives us preferential space for our brands. Where that's not the case, you know, our intent is to get those margins improved, whether that's through a combination of pricing, you know, distribution methods, efficiencies on our end, et cetera. You know, if we're not able to get that up to the correct threshold, then you know, we have the option to thoughtfully exit that business and then convert that capacity, as I've mentioned on previous calls, to our higher margin branded business, which you know, we've been doing for the last several years. It's really been beneficial for us. Got it. Okay. Makes sense. With respect to your CapEx guidance, came down a little bit. You talked about product, raw material shortages production platform. To what extent are you seeing that in your CapEx project pipeline, and how are you navigating that environment? Can you repeat that? The first part of that broke up a little bit. Sure. Just the revision lower of your CapEx guidance, how much of that has to do with production or labor challenges, or material challenges versus, you know, just timing differences? I mean, the reality is the vast majority is probably more timing. When we look at you know, the bakery optimization we've been talking about now for a couple of years, some of those projects as we continue to evaluate, you know, where that needs to happen, you know, we have pushed somewhat on the timing. It will probably take us into out of this year into next year. It's really mostly timing related. I mean, we're pretty much on track when it comes to you know, the largest project going on right now around ERP plus and digital. Those are coming in about where we thought. It's really around some of the optimization, but it really has nothing to do with you know, availability and supply. It's more of just a kind of a push from a timing perspective. Okay. Fair enough. My last question, I know it's early days, but the DKB bars, you talked about promising feedback trends there. Is that mostly a market share gain opportunity, or do you think there's an opportunity for distribution gains in terms of new channels as well, you know, through stores or otherwise? Yeah. We absolutely think there's some distribution opportunities there. You know, look, I was careful to note it's early days, but the results in the test markets were really good. You know, they did exceed our expectations. It's a wonderful position to be in because, you know, it's the rare brand that can move across segments, and Dave's is proving it can do it, right? It moved out of loaf bread into breakfast and then breakfast into buns, and now you know, we're jumping into the healthy snacking category. Our retail partners are really excited about it. Consumers are really excited about it. As I mentioned, we've got a pipeline of things coming behind that. It's early, but, you know, it's incumbent upon us to find new revenue streams for this business. We all know that in sort of the mainline loaf segment, the category dynamics are a little bit tough there. We also know that, you know, as well as DKB and Canyon have performed in their core segments, over time, you know, you gotta expect those growth rates are gonna start to come down a little bit. It's incumbent upon us to identify new revenue streams, and that's what we're doing with these great brands that we have. I'm calling it out specifically because we are so optimistic about it. Yeah. Okay, very good. Great. Thanks. Best of luck. Thank you. Our next question comes from Bill Chappell with Truist Securities. Your line is open. Thanks. Good morning. Hey, Bill. Hey, sorry, I got a little bit late on the call, so some of this might have been asked. In particular, you know, as you're looking across the kinda trade down, if any, would you expect it. I mean, not as it's happening today, but as you kinda look six months, nine months out, would you expect it to go to the opening price point private label, or just be more trade down within your brands. You know, or do you not expect much at all if we go to a greater recession. Yeah. We talked a little bit about this earlier, but I don't mind repeating some of it. You know, if you look back to the last recessionary period, we actually saw, you know, not a whole lot of trade down to private label. We've also mentioned in the past that, you know, we play across a variety of price points, from private label, you know, all the way up to super premium and everything in between, right? You've got private label, you've got Wonder, you've got Nature's Own, you've got Dave's, you've got Canyon. So, you know, there's something for everybody there. But, you know, if history is a guide, you know, I would not expect a tremendous amount of trade down to private label. I also mentioned, Bill, that the industry is quite different now than it was during that last recessionary period. The industry is more consolidated. Our company is stronger. We have a much stronger market share than we did during that last period, and we've got a much stronger portfolio of brands that are significantly differentiated from private label, and consumers continue to show a preference for those products. You know, my outlook would be that while we may see some trade down to private label, that would only be natural, particularly if we, you know, entered a recession, for example. I think that Flowers is well-positioned to hold up very well in that environment. Got it. Again, this might have been asked, but I guess Walmart yesterday kinda highlighted bread, milk, cheese, other things that they really wanted to keep prices low. I think some people took away the thought that they might start pushing back more on incremental price increases from here. I know you're not gonna talk about individual customers, but I mean, do you feel like it's gonna be tougher to pass off incremental prices with retail? Is your business different just because it's such vendor managed inventory and scan-based kind of that it's a little bit different from other packaged food? Any color there would be great. Yeah. I do think that we're a little bit different just given the service levels that we provide as a retailer, obviously being DSD. I also think that it helps. I'll mention it again, the strength of the brands. I mean, I don't think you wanna be in a position where you've got a number four brand right now. Having a portfolio of number one brands, certainly does help. You know, I don't know what the retailers will do in the future. What I can tell you is that for our June 6th price increase, there's been no issue there for us. Okay. That helps. Then last one for me, just as I kinda look out at use of cash, you know, since some of the CapEx has been pushed out, is there anything else you can do in terms of, you know, do you pull forward looking at M&A? Do you pull forward other projects? Or is it just, you know, this is the kind of the way CapEx works, it's, you know, takes a little bit longer, especially on some construction projects at this time. Sure. I mean, you know, the reality is from an overall capital allocation perspective, I'd say really nothing changes in our thought process, you know, with the slight pullback from a capital perspective. Obviously, you know, you've heard Ryals talk about M&A. You know, we continue to have a pretty strong, you know, pipeline from that perspective. It's just a matter of valuation and timing. So that's always a consideration. Then, you know, as we look at other ways to use our cash, whether it's dividends or stock repurchases, I'd say we're pretty, you know, we're sticking pretty true to our philosophical views there, so I don't, you know, anticipate that changing. So really the pullback from a capital perspective is timing. It's not like we've eliminated projects. It's more of a shift maybe between years. I don't think you'll see us do anything dramatically different than what you've seen in the past. Got it. Oh, I'm sorry, one last question. Would you say food service business is kinda back to where it was in 2019 or are we still building back to that? Bill, we're still building back to it. It's improving but still below pre-pandemic for us. Remember also that, you know, some of the disruptions that we had during the quarter would have impacted that volume a little bit too. It's a mix of both. Got it. Thanks so much. Thank you. Thank you. I'm currently showing no further questions at this time. I'd like to turn the call back over to Ryals McMullian for closing remarks. Thank you, Shannon. Thank you very much, everybody, for your interest in our company. We look forward to speaking with you again next quarter and hope everybody has a great weekend. Take care. This concludes today's conference call. Thank you for participating. You may now disconnect.