Good day and welcome to the Flowers Foods second quarter 2022 results call. At this time, all participants are in a listen- only mode. After the speaker's presentation, there'll be a question- and- answer session. As a reminder, this call may be recorded. I would like to turn the call over to J.T. Rieck, Senior Vice President of Finance and IR. You may begin. Thank you, Michelle, 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 disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are A. Ryals McMullian, President and CEO, and Steve Kinsey, our CFO. A. Ryals, I'll turn it over to you. Okay, thanks, J.T. Good morning, everybody. Thanks for joining the second quarter call. We continue to execute well in the quarter, driving second quarter sales to record levels. Our performance in this challenging consumer environment demonstrates the resiliency of the category and the strength of our leading brands. Due to the outstanding efforts of our team, we successfully mitigated much of the supply chain pressure we discussed last quarter. As a result, we raised the bottom end of our 2022 EPS guidance by $0.05 to $1.25. I'd like to thank our exceptional Flowers team for their hard work and dedication, which has made this strong performance possible. The fundamentals of our 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, Michelle, we're ready to start the Q&A, please. As a reminder, to ask a question, please press star- one- one. Our first question comes from Bill Chappell with Truist. Your line is open. Thanks. Good morning. Good morning. Hey, Ryals, you had mentioned in prepared remarks a little bit about, I guess one competitor being a little bit slower to raise prices, and I don't know if that was just a timing issue. Maybe discuss any changes in terms of competitive landscape of pricing, or is everybody, for the most part, kind of moving up with commodities and input costs and what have you? Your kind of thought as I think you also had thought that inflation would start to peak by October in terms of what you're looking at. Maybe a little more color there would be great. Thanks. Sure. Happy to do that. I'll let Steve handle the inflation question, but, with regard to pricing, it wasn't so much the other competitors were late raising price. It's just that, Bill, we went in a little bit earlier than normal. I would say that, you know, most of the rest of the industry was relatively on time as far as typical, you know, times to raise prices in the industry. We went in June a little bit earlier. You know, what you ended up with were, you know, price gaps that were, you know, a little bit larger than, you know, historical gaps. I think we commented that, you know, that impacted our unit share a little bit in the quarter. Since then, you know, most of the industry has followed and raised prices as we have. Steve, you want to touch on inflation? Sure, yeah, Bill. You know, we have said that Q3 will see our highest overall cost from an inflationary standpoint. It will moderate somewhat in Q4, but again, it still will be elevated in Q4. The peak of that happens in Q3, and then it starts to pull back slightly. Got it. Then separately, you know, just on acquisition/innovation, can you give us a little more color, and I'm sorry the name of the company is escaping me, of the investment you made in the quarter? I guess I would have expected normally you to buy outright those type of businesses, so kind of partnering with a small business and what that brings to the portfolio. Then I'll leave it at that and let others ask questions on other innovation. Sure. Thanks, Bill. Yeah, the name of the company is Base Culture. They're a gluten-free and grain-free baked foods company, so it's all keto and paleo certified, you know, very much on trend. The reason that we took more of a venture approach to this is that Base Culture is much earlier in their growth cycle than even like a Dave's Killer Bread was back in 2015. You know, we've been looking for some time to start doing venture type, minority type investments to bolster our own internal agile innovation efforts. This one just fit very nicely with our portfolio and where we're trying to go as far as, you know, healthier eating, you know, on trend attributes like keto and paleo, which we don't really have much of an offering in right now. We're quite excited about it. Small investment, but a small company, but we're quite excited about the prospects. When should we start to see, I guess, wider distribution of their products? Then is there an option to own the company outright down the road? Yeah, I mean, there is, and you know, we'll be helping them not only with their production, because obviously we have that skill set and they don't. They're a very small organization, but also sales and distribution opportunities. We're already working in that regard. I would see the products in the next couple quarters everywhere? I s that too quick? It'll probably take a little bit longer than that for it to be everywhere. Again, they're really small, but we'll grow them in a way that they can, you know, absorb with their production capacity, which, you know, eventually will need to be expanded. Got it. I'll turn it over. Thanks so much. Thank you, Bill. Our next question comes from Robert Dickerson with Jefferies. Your line is open. Great. Thanks so much. Maybe this is a question for you, Steve, first. I think you just said costs may have peaked in Q2, still high Q3, Q4. Again, the prepared remarks seems like you're essentially almost fully hedged for the year in ingredients, I'm assuming. If we think about kind of that margin cadence, I guess inclusive of mix in the back half, you know, there should be kind of this implied expectation for EBITDA to actually grow, I guess, in the second half, and then maybe just explain it sounds like it's a little bit more Q4 weighted. I have a quick follow-up. Yeah, I mean, just one quick correction there. We said Q3 would be our highest cost quarter. Cost continues to run up, yeah, coming into Q3. It will pull back some in Q4, but for the most part, you know, Q4 will be elevated as well, just not, you know, quite to the level as Q3. You're right. You know, in the back half, we have said a lot of our initiatives come into play. You know, we have the pricing to mitigate a lot of the inflation, but we do have, you know, several cost savings initiatives as well as productivity initiatives that are in flight. You know, from a cadence perspective, we've said those will come in Q3, Q4. That will, you know, be a big driver of EBITDA in the back half. Rob, just to put a number on that, we're still in the range of that $25 million-$35 million, all of which is back half. Okay, great. Yeah, I, you know, I really just asked because I think there's a line in the prepared remarks that said, as you got through the second quarter, you actually started to see EBITDA improve. It sounds like maybe that was also a function of maybe some of the more of the pricing and some of the productivity coming through in the kind of latter part of the quarter. Is that fair? Yeah, remember too, I don't know if this was clear from the prepared remarks, but there's still more pricing that will continue to come in, Steve, roughly through the third quarter. Right, yes. Most of it's in, but there is still more rolling in, primarily in food service. That will also help too, Rob. Okay, super. Then just quickly on DKB, obviously this sounds like, you know, there was a little bit of supply constraint in the quarter. Seems like that's essentially been fixed now. Then you also have the new West Coast facility. Kind of, you know, bigger picture, you know, if we're thinking through kind of back half of this year and then really on the go forward from there, you view, I mean, well, let's say, you're not going to quantify what the opportunity is in the West Coast with DKB, but my assumption is, that would still be kind of an ongoing driver of the business, maybe outside of what you see on the rest of the business. Any incremental color on that would be great. Yeah, no question about it, Rob. I mean, we're still so confident in DKB and its growth prospects. We were hampered a bit by the packaging issues that we had in the second quarter for DKB, but also those capacity constraints, which are now resolved. Those capacity constraints, you know, we don't promote DKB that much, but we were so constrained, we weren't able to do much at all. That hurt the units a bit. Now that we have Henderson up and running, we can, you know, go back to what we have been doing historically, driving the growth of DKB out west. Even still, though, I do want to point out, and I don't know if we mentioned this in the prepared remarks or not, but you know, even though DKB was slightly pressured in the quarter from a unit standpoint, the breakfast segment for DKB was outstanding in the quarter. As you know, that's been a key area of focus for us since we're under-penetrated there. That was one highlight for DKB in the quarter that I wanted to call out. All right. Super. Thanks so much. I'll pass it on. Thank you, Rob. Appreciate it. Our next question comes from Ben Bienvenu with Stephens. Your line is open. Hey, guys. Jim Salera on for Ben. Good morning. Good morning. I wanted to ask, Ryals, in your prepared comments, you had mentioned you were seeing, you know, lower income consumers trade down to less expensive, which is kind of, you know, on par with the expectations. But then for higher income consumers, they had actually been increasing their purchases with the premium products. Can you maybe just drill down on that a little bit and see or talk about what's driving that? Because we would think that, you know, everyone just kind of shifts, parallel shift down. So the fact that they're increasing is, I would say, countercyclical to what you would expect. Yeah. There's a lot to talk about there, really. I know there's going to be a lot of questions about elasticity, so this is as good of time as any to talk about it. There's quite a few sort of competing data points out there that we're looking at. You know, on the one hand, you know, we saw private label gain a little bit of unit share, 10 basis points of unit share. If you look at the overall private label units, they were down almost 8 million units in the quarter. A lot of that private label share growth was being driven in mass. What we've seen in mass is retail prices being held down, which, you know, kind of creates a bit more of a gap than you might have historically seen. If you look at the grocery channel, sort of ex mass, private label lost share again in the quarter. In that channel, the price gaps were much more in line with, you know, historical averages than what we're seeing in mass. You know, turning to DKB specifically, DKB's unit declines were primarily in California and the mass channel, and they were, as you pointed out, concentrated more among lower income households. DKB grew units and share in the Northeast and nationwide among higher income households, yeah, which, you know, you might expect. Product trips also increased nationwide among both middle and higher income households. A caveat to that is we are seeing even those higher income households seek a bit more value from the mass and club channels. You can see there's, you know, a little bit of yin and yang there when we're looking at the data, because I think it's still early days. The takeaway is that, you know, given the environment, and everybody saw the news yesterday, you know, grocery prices up 13.1%, the highest since 1979. Yet, you know, we still performed very well in that environment. Nature's Own units were up, Canyon units were up. Yes, our volumes were down, but quite a bit of that is our own portfolio optimization and SKU rationalization we're doing. Our volume declines were right in line with our expectations. Overall, when you look at the total picture, even though there's some sort of conflicting data points out there, we were very, very pleased with how our brands and the company performed in the quarter. If I can follow up on that, do you think it's because the price point is still so accessible, just in dollar terms, that, you know, if everything's up, you know, the 13% change on a $2 item is obviously a lot lower than a 13% change on a $20 item. Is it just that there's nowhere else for the consumer to go, and so it's easy to make a $3 indulgent purchase than a $30 one? Yeah. Yeah. Certainly, I think it's part of it. You know, we've said many times, I mean, when you think about an inflationary environment, bread is still a very economical choice, just given the number of servings in a loaf, right? Furthermore, you know, even though prices have increased, we play across all the price points, from super premium Dave's Killer Bread and Canyon, you know, all the way down to private label. You know, simply put, there's something for everybody there. There's something for, you know, every household income, every household budget. Okay, great. If you guys could give us, you mentioned real briefly in the prepared remarks, the DKB bars test. If maybe you could just give us a little more commentary on, you know, consumer reception of that, maybe, you know, channels that it worked in better or worse, and just how we're thinking about the rollout of that. Yes. So it's still early days for that. We're still in test market, but we're working towards national distribution on the first three SKUs. As we said in the prepared remarks, we're wildly excited about the results that we've seen so far. It's just further testament to the DKB brand and what it stands for and the quality and the story behind it, et cetera. We're very excited about it. In further news, not in the prepared remarks, we've recently launched three additional SKUs that are high protein, which the original three were not, to add to that that we're also putting in the test markets and quite excited about as well. Not resting on our laurels. You know, we continue to innovate with DKB and one of the reasons we continue to be excited about its growth prospects going forward. Okay, great. When should we expect to see the first handful of SKUs out, you know, kind of in stores across the country? Yeah, early next year. Okay, perfect. Thanks, guys. I'll pass it on. Thank you. Again, to ask a question, please press star- one- one. Our next question comes from Connor Rattigan with Consumer Edge Research. Your line is open. Good morning, guys. Thanks for the question. Good morning. Good morning. Thanks. I guess, just on the mix shift more towards private label in the quarter, I was wondering if you could address the margin implications of that shift. Just, I guess, how much of the 240 basis point decline was attributable to that mix shift? I guess also sort of just following up on Ben's question, would it be a reasonable assumption that maybe in the next few quarters, the portfolio remains slightly more oriented towards private label versus 2021? Private label definitely went up in the quarter, but remember that's virtually all price. You know, I've already mentioned that the units were down in the category 8 million units. That's a good thing. As we've mentioned on prior calls, we've been working diligently to improve the margin profile of our lower margin business, which is, generally speaking, the private label and food service businesses. We've taken significant price to mitigate these inflationary headwinds in both those businesses. Now, certainly, they're still lower margin than branded retail, you know, and the pressures we're feeling on gross margin from you know, ingredients, packaging, freight, eggs, you know, you name it, you know, certainly impacting us on the gross margin line. You know, Steve can comment further. We have done a good job, I think, leveraging SG&A, and that's come down as a percent of sales. Right. I mean, I would say overall, the inflationary pressures, p robably drive more of the margin pressure than the mix shift because it's even though it's happening, you know, we said it's still not meaningful at this point. We continue to monitor that. A lot of the margin pressure really is coming from the inflation on input cost, transportation, labor, more than the mix itself. You know, the one other thing I would add to that, Connor, that's exactly why it's more important than ever for us to maintain our marketing and brand support investments. Because, you know, as we said, we said it last quarter, I mean, in this kind of environment, I mean, you've got to expect some amount of trade down, you know, particularly among lower income households. But lower income households, believe it or not, are 20% of Dave's Killer Bread units. Kind of surprising even to me when I first heard that. But, you know, continuing to support the brands, continuing to be out there from a marketing standpoint, keeping those brands front and center, you know, we will get through this eventually. When we do, you know, we want those consumers obviously to come back to the brands they love. Thanks. That was helpful. I guess just a follow-up to that too, just a question about the Phoenix bakery closure. In the prepared remarks, you guys commented that it's, you know, I guess it's an older, lower margin bakery that services more private label products. I guess just why the decision to close it now? I mean, was this like a long running plan? I mean, just I guess given the increased private label demand you saw in the quarter. Yeah, Phoenix is an older, much less efficient bakery. This is all part of our network optimization plans that we've been talking about for several years now. You know, alongside that, we did exit some lower margin private label and food service business out there, and we have plenty of capacity to take over what remains and ample capacity to fund future growth. We can take care of all of our remaining business. You know, as we execute our portfolio strategy, you know, it can have network optimization implications as well, and that's what you saw with Phoenix. Okay, great. Thank you. I'll pass it on. Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is open. Hey, guys. Good morning. Morning. I want to go back to what you have been seeing in terms of the different tactics in terms of private label pricing mass versus grocery, and how you think that evolves. Do ultimately mass prices move higher because the cost picture demands it? You know, does this risk creating some kind of competitive dynamic where grocery prices you know move lower to compete with mass, and then we have sort of the downward pressure on the category? How are you thinking about that evolution? Well, we certainly haven't seen that yet, and I can't speak to, you know, why certain retailers are doing what they're doing. You know, all we can do is execute on our plans. You know, obviously we hope, you know, that they'll come up and some of those gaps will close a bit, but it's certainly hard for me to predict what they're going to do. Again, as we mentioned so far, we haven't, you know, seen this in grocery and again, you know, private label lost share in grocery. Yeah. It's not, and as you say, you still have some pricing, you know, set to come in. Nothing that you're seeing has really altered your own strategy from a pricing standpoint or your own expectations in terms of price realization? It has not. Okay. Very good. Thank you very much. Thanks, Steve. Our next question comes from Mitchell Pinheiro with Sturdivant & Company. Your line is open. Yeah. Hey, good morning. Morning, Mitch. Hey, I had a question. You talked about price increases and ahead of competition, which seemed to trim a little bit of volume in the quarter. You know, is pricing? I mean, it seems to suggest that it's, you know, that maybe, you know, this is certainly a commodity type product. If, you know, merely, you know, a price increase a couple weeks or a month ahead of the competition is going to affect volume that much, why is it that? Y ou know, was it a very large price increase relative to the competition? Y ou know, why would it be that dramatic? Yeah. It's not in terms of magnitude of our price increases versus, you know, competitors' price increases. It was just that, you know, in this environment, when you start getting gaps, you know, that much larger, that can affect behavior somewhat. That's not the only thing that affected units in the quarter. Again, we talked about, you know, supply chain issues, et cetera. It certainly was a factor. You know, we also got a hurricane, which we haven't mentioned yet, and we typically perform very well. There were other things other than that, but it certainly had, you know, at least some effect in the quarter. That's all much more normalized at this point. Okay. How is food service doing in the quarter? From a top line standpoint, really well. If you look at it from a pre-pandemic standpoint year -to- date, you know, in terms of sales dollars, the food service business has recovered, but the units are still below pre-pandemic. Are units below across the board or in one particular segment like QSR or, you know, fast casual? I'd have to look. I want to say it was a little bit lower in quick serve. Yeah, QSR was more challenged. Yeah. Okay. Is there a reason for that? Is it just traffic in the QSR customers or, you know, is there anything going on underneath that? No, I think it's just Mitch, I think it's just a bit more normalization coming out of the pandemic. Remember, quick serve actually did pretty well during the pandemic just because of, you know, less contact. Now that people are more comfortable going back to restaurants, I think that's why you're seeing that shift. That's also good for us because our margins are higher in those other segments. Right. you know, you've had, you know, I don't know, seems like about six quarters of lower volume growth. When does that stop? When are we going to see SKU rationalization slow down or has an impact on your results? If you could talk about that a little bit, it'd be helpful. Yeah. I think generally speaking, we've done the bulk of what we want to do for now. I mean, obviously, you know, SKU rationalization's a continual process. I think in large measure, you know, we've cleaned out most of the underperforming items that we wanted to simplify operations, simplify our sales execution for that matter, and you know, get to the business of growing volumes. You know, I think innovation remains key for that. Obviously our goal over time is to, you know, not only grow dollars, but continue growing our units and our unit share as well. We're focused on that. If we look at the third quarter, I mean, are we going to still see some year-over-year volume declines in the overall business? Yeah, Mitch, embedded in the EPS guidance is an assumption around mainly elasticities. As I've said, so far year to date, we're running right about where we thought we would be. I think it's reasonable to assume, you know, that trend to continue through the year. Okay. Could you talk about specifically about some of the cost savings programs that you're currently, you know, initiating and how they're going to flow through the second half? Yeah. That's that $25 million-$35 million, and it's a mix of benefits from our digital investments that we've made, which we expect in the back half. We talked a little bit about Bakery of the Future. That's bakery improvement in the digital sense. There are also separate bakery improvement projects initiatives that are underway and also procurement. Those are sort of the three big areas that the savings will come from. As you look next year, does any of that carry through into 2023? Yes, it does. We have not quantified yet, but yes, it does. Okay. I guess finally, just when it comes to regional variations in your business, which were the best performing region and which were the worst performing regions, geographies? The Northeast continues to be a call-out for us. You know, as you know, we've put a lot of focus up there, and it continues to pay dividends for us. You know, we did have a couple of regions that underperformed by our standards, but I would submit to you that was more operational performance driven than it was top line sales performance driven. Okay. That's all I have. Thank you for your time. Great. Thank you, Mitch. There are no further questions. I'd like to turn the call back over to Ryals McMullian for any closing remarks. Hey, Michelle. Thank you very much, everybody, for your interest in Flowers. We look forward to speaking with you again next quarter. Everybody take care. Thank you. This concludes the program. You may now disconnect. Everyone, have a great day.