Good day, and thank you for standing by. Welcome to the Flowers Foods Third Quarter 2022 Results Conference Call. 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 one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, J.T. Rieck, SVP of Finance and Investor Relations. Please go ahead. Thank you, Gigi, and good morning, everyone. I hope you all 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 Ryals McMullian, President and CEO, and Steve Kinsey, our CFO. Ryals, I'll turn it over to you. Thanks, J.T., and good morning, everybody. Appreciate you joining our third quarter call. Before we get started on this Veterans Day, we'd like to recognize the contributions of our servicemen and women, both past and present. We thank you for your service to our country and the sacrifices you've made for our freedom. Moving on to our results, we executed well in the quarter, driving third quarter sales to record levels. Our performance in this challenging consumer environment demonstrates the resiliency of our business and the ongoing effectiveness of our strategy. Consumers continue to express a preference for the differentiated attributes of our leading brands, and we are focused on maintaining our momentum with investments in innovation and marketing, including our new agile innovation capability. I've never been more optimistic about our prospects, and I am excited about the initiatives we have in place to drive future growth. As always, our team is committed to delivering results in line with or better than our long-term financial targets. With that, Gigi, we can open it up for questions, please. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bill Chappell from Truist Securities. Thanks. Good morning. Morning, Bill. Hey, just wanted to talk a little bit more about store branded and your prepared remarks and just the growth in the quarter. I guess, one, maybe help us understand how that's continued to trend as we moved into October and November, if you're continuing to see an acceleration of store branded versus brand or trade down in general. Then, two, I think you had mentioned that it was really at one retailer that was not allowing you to or not allowing pricing to come up, and I'm trying to understand why that's the case, in part because I think you manufacture some of the store branding for that retailer, and so I'm just trying to understand the pricing dynamic. Thanks. Sure, Bill. Well, just generally to start off, as we've been saying all year, in a challenging economic environment like this, you would expect to see some trade down to private label. L ooking across the market, that has held true. Private label gained 100 basis points of unit share in the quarter. Digging down a little deeper into that, what you see, as we mentioned last quarter, is that this is very concentrated in the mass channel. In the mass channel, some of the retail prices on private label have been held down a little bit lower. If you flip and look at grocery, the story looks quite a bit different. In fact, we gained 10 basis points of share in grocery in Q3, and then later in the quarter, that actually accelerated, and we gained 60 basis points a unit share in grocery. Also, as we got towards the end of the quarter, and to answer your trend question, we actually saw that rate of growth in private label slow a bit. Now too early to call that a trend, but we did see it slow down some. As far as our own results go you did see a large increase in private label sales. Remember, we also took significant price increases in private label, which frankly, we needed anyway, harking back to our portfolio strategy where not only are we trying to shift our mix to more branded retail, but in other parts of the business that are lower margin, we've been working furiously to improve the margin of those lower margin items. Between SKU rationalization, price increases, strategic business exits, et cetera, that's all part of our strategy. Overall, market-wise, yes, private label has shown a little bit of strength. Certainly showed dollar strength Flowers, but the unit story is a bit more nuanced. Hope that's helpful. Steve, maybe a little bit on as I look out on gross margin I know you're not giving guidance at this point for 2023, but how are you thinking about it? I imagine with your hedging program, some of the higher or the lower cost hedges will be rolling off and and you cover some of that with pricing. You also have the cost savings program, which certainly helps. You have maybe private label which you do make, which is lower margin, which is growing faster right now. Is there still a strong opportunity for gross margin expansion next year, or is it gonna be more challenging? I mean as you said we're not prepared to give guidance for next year, but we're seeing the same things you're hearing from other companies. We continue to expect inflation to be strong. We look particularly at some of our input costs. Still a lot of volatility in wheat, although we're remaining pretty true to our hedge strategies. Labor, transportation, all of those continue to show significant inflation and really no signs of any of that reverting at this point. Without getting into specifics, Jeff, for 2023, I would say you could continue to expect some of the same pressures you're seeing this year with regard to gross margin. Okay. I'll turn it over. Thanks so much. Thank you, Bill. Thank you. One moment for our next question. Our next question comes from the line of Connor Rattigan from Consumer Edge. Good morning, guys. Thanks for the question. Hey, Connor. As we start to lap inflation and pricing is largely catching up, can you share your thoughts on sort of the balancing act of recovering gross margin while protecting market share? I guess if share trends maybe start to slow while certain retailers are unwilling to pass on pricing, are you open to introducing more promotions, even if it means maybe a longer time horizon to recapture that lost margin over 2022? Yeah, look, I mean, obviously there's always a tricky balance, as you say, between covering these inflationary costs and holding your market share. I think so far we've done a pretty good job. I mean, our shares remain pretty steady and even in the midst of this environment. So far, the competitive environment has remained pretty rational. W e are doing some promotions, as you might expect DKB being a super premium item we've had a little bit of unit share, little bit of unit share loss in DKB. We've done some targeted promotions, right, to hold onto those consumers. F or some folks, obviously that's gonna be out of reach in the short term. That's why it's also important that we keep up our media and advertising, digital, social campaigns to make sure we keep these brands front and center in front of those consumers so that when when relief does come, and thankfully at least we got a better inflation report yesterday, hopefully that trend continues. If that relief does come, they come back to the brand. W e're very attuned to the number of households that we've gained since 2019. We certainly want to hold on to those households, but as you say, there is a balance that we we deal with daily. Great. That was helpful. I wanted to ask about maybe any impact from Hurricane Ian in the quarter. I think you have a few bakeries located in Florida. D id you guys maybe see any out of stocks or empty shelves for a while with those bakeries shut down for a period of time? Maybe was there a bit of pantry loading before the storm? Yeah. Typically, we tend to perform really well during hurricanes. Frankly, I'm glad you brought it up because as you look at our share performance in the quarter, remember that last year in the third quarter, there were four named storms and we typically outperform the competition in these storms. This year we only had one. It does have some effect. I don't wanna overemphasize it too much, but it does have an effect on our share. Thankfully, we didn't have any bakery shutdowns. All of our people were safe. As usual, the team did an outstanding job keeping the market served. All right, great. Thanks guys. Okay. Thank you. Thank you. One moment for our next question. Our next question comes from the line of Mitchell Pinheiro from Stifel, Nicolaus & Company. Hey, good morning. Hi, Mitch. I'm curious, in terms of geography, were there any areas that were surprisingly strong or below expectations in the quarter? No, I'd say overall, Mitch, pretty even. A couple of highlights I would give you is the Northeast continues to perform really well for us. T hat's a growth area for us. So we, from a share standpoint, really performed nicely again this quarter in the Northeast. Mitch, it's been a little tougher out west, particularly California. W e've done kind of some background research to figure out exactly what's going on out there. Really, you've got a state that already has very high costs. F uel has been a better story for most of the country lately, but is still very high in California. Rent escalations, everything else. I think the consumer in California is just a bit more pressured perhaps than what we see in other parts of the country. As we're looking at our share, we see a little bit more weakness out there on the West Coast right now. Okay. Thank you. When as you're looking at your bakery capacity and maybe future needs, I mean, do you have ample capacity within your current system or are we gonna need to spend some money on some new bakery capacity in 2023 or start to think about it then? Yeah, good question, Mitch. Overall, we're comfortable with where we are. There are pockets of need that I would call out to you. One, that we already solved for with the new organic line in Henderson. That takes care of base as we were really tight out there for a while. We're in good shape there. The other one I would call out to you is Canyon. It's a good news story. Demand for Canyon is still very, very high. Very pleased with how that business is progressing, but we're super tight on capacity at Canyon. We're actively looking to solve that with a short-term solution and a long-term solution. Will your CapEx spending, I know we're not talking 2023 yet, but is anything unusual for 2023 in terms of capital spend? No. I mean, we're not gonna comment on it at this time, but the short answer is no, pretty typical. Okay. Mitch, you have to factor in ERP. Just like this year, it'll probably be a little bit higher than normal, but a lot of that's the ERP implementation. Okay. Just the last question is that, in terms of your cake, and food service, volumes were down, I think 5%. Yeah. I saw in cake, I guess units were down 12% in the measured and tracked channels. I'm curious so what the outlook here for the fourth quarter, maybe into the early part of 2023, what cake is gonna look like have margins begun to improve? Sales trends, what's the strategy there in cake? Sure. Remember with cake now that overall volume decline of 5%, let's start there, most of that is cake and food service. Okay. The lion's share of it is. For the rest of the business, elasticities are well within the normal range that we were expecting for the year, and frankly, below historical levels. Specifically for cake and food service, a lot of that volume decline, the lion's share of it has been SKU rationalization and strategic business exits. On purpose kind of stuff, reducing complexity, getting out of the lowest margin business, all part of that portfolio strategy that we keep talking about. As far as tracked channels go, the tracked channels pick up all of our cake business. Internally, sales were up substantially. To answer your question, profitability is also up as well. We are starting to see that margin improvement, Mitch, that we've been working on for several years. Because of that, and because of the stabilization that we've achieved at Navy Yard in particular, we'll start turning our attention back to actual growth. A lot of that growth in sales obviously has been pricing so far. We need to start innovating, get some new products out there, reintroducing the seasonal items, the things that you used to see up your way. Okay. Thank you very much for the questions. Okay. Thanks, Mitch. Thank you. One moment for our next question. Our next question comes from the line of Steve Powers from Deutsche Bank. Hey, good morning, everybody. One of two questions for me, actually. The first one is on your innovation agenda. I guess I'm just curious, as you size up the consumer amidst inflation and some of the other pressures you've talked about, does that impact your points of emphasis in terms of new product rollout as you think about the year ahead? I'm just curious if your plans have changed at all over the past few months as you size up the consumer again into the year ahead. Yeah, a little bit. I mean, obviously we're focused on snacking, so we've got the DKB bars that are being launched nationally in January 2023. Very excited about that. Yeah, but also to your point, we are looking at some things from a price-pack architecture standpoint that can help in a recessionary environment should that come to pass. But overall, I wouldn't say that it's changed our innovation pipeline meaningfully, particularly when we talk about the agile innovation side of things, the actual new products outside of core categories. I wouldn't say it's affected that at all. Maybe it's affected a little bit more in some of the renovation type items that we're doing within the core business. Okay. Thank you for that. My second question is as you look at the Biden administration's proposed rule changes under the Fair Labor Standards Act, I guess, are there any implications at all on your business in terms of definition of employee workers versus independent contractors just as it relates to your distribution? Yeah. We're obviously monitoring that. It's in the comment period right now, which I think runs out sometime in December. Remember too that what this is doing is just going back to the rule that was in effect under the Obama administration. Remember, Trump changed the rule. This is basically reversing that, going back to the Obama rule. O bviously we were able to operate fine in that environment as well. Yeah. Okay. Thanks for that. Appreciate it. Okay. Thanks, Steve. Thank you. One moment for our next question. Our next question comes from the line of Jim Salera from Stephens. Hey, guys. Good morning. Morning, Jim. I wanted to ask, you've talked in the past about private label kind of playing this catch up game on pricing and that that's driving some of the dollar sales strength versus branded. Can you maybe give us an update on kind of where the pricing gap stands now compared with before we had this bout of inflation? Should we expect private label still has kind of a little bit more price to take before they normalize that gap to what it was pre-inflation? I'd have to look at it specifically. I don't have it in front of me, but I would say that the gaps are probably. Remember, we've taken branded pricing, too. They may have narrowed a bit, but it's also gonna depend on what channel you look at. From a retail standpoint, 'cause obviously it depends on what the retailer actually does. Okay, do you think that as the private label price—I know we're talking about low dollar entry price points, but do you think that as the private label price comes up, it makes that trade down less attractive and you could actually get maybe some people to stay in the branded category just because the the trade down to $3 is much less attractive than to $1.79? Yeah. I mean, you would think that would be the case. I'll want to wait and see if that actually happens. You would certainly expect that to be the case. Again the gaps are gonna be a lot higher right now in mass. W hat you're seeing in grocery, and maybe this is a proof point relative to your question, what you're seeing in grocery are tighter gaps there, and the performance for brand and grocery has been much better. Okay, great. In the script, you guys talked about expanding beyond the core business. Do you think that the brands that you have kind of in the portfolio right now, specifically DKB and Canyon, do you think that you can use those brands to jump into new categories, or do you need to add something to the portfolio that maybe kind of has an existing reputation in another category? The direct answer to your question is absolutely yes. I mean, like I said, we're introducing the DKB bars in January nationally. The results that we've had in test markets have been remarkable. The loyalty, the interest in that brand, DKB, is astounding to me. We'll continue to push that brand further out, particularly in the snacking arena. We have a whole pipeline of products coming behind the DKB bars. We're testing high protein bars right now in a couple of select test markets. I think the same is true for Canyon. It's just a smaller market with Canyon, right? It's not as big of a business as Dave's. I mean, Dave's should reach around $1 billion in retail sales this year. We're to a point as far as scale goes right now, where we think we have the right to play in other categories. The second part of your question, though, is we will absolutely continue to look for M&A opportunities where we can add brands to our portfolio that will likely play outside of our core business that can further strengthen that branded portfolio. It'll be a combination of innovation and. Yeah. I know you guys mentioned that you had an acquisition fall through, and you don't have to get into too much detail on that one specifically, but maybe just more broader details about some of the challenges that you face in just getting a deal done kind of in the current environment. Yeah. T hat one was an outlier, so it's not really all that relevant to the conversation actually. Yeah, I mean I would say that the pipeline has slowed a bit, honestly, just given the economic environment, interest rates spiking the way they have. I think things have slowed down a bit. We still have plenty in our pipeline, but the overall flow of deal activity has slowed. Now prior to this, it's the normal struggles with any deal, right? I mean, you've gotta make sure that your financial, operational, and commercial conviction is there. You've gotta make sure that the price is right and responsible. And also have a seller that's willing. Seller expectations up until now have remained pretty robust. T hat may moderate. We'll have to see. W e intend to continue being proactive in the space. It's always been an important part of our growth story and I believe that will continue. Perfect. Thanks, guys. I'll pass it on. Thank you. Thank you. I would now like to turn the conference back to Ryals McMullian, President and CEO, for closing remarks. Thank you, Judy, very much, and thank you everybody for your interest in Flowers. We certainly look forward to speaking with you again next quarter and, we hope everybody has a wonderful and safe holiday season. Take care. This concludes today's conference call. Thank you for participating. You may now disconnect.