Welcome to the Flowers Foods Third Quarter 2016 Earnings Conference Call and Webcast. My name is Ellen and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to J.T. Rieck, Vice President, Investor Relations. Mr. Rieck, you may begin.

Thank you, Ellen, and good morning, everyone. Our third quarter results were released yesterday evening and we filed our 10-Q then as well. You'll find the earnings release on the Flowers Foods website, you can find the slide presentation that supports our discussion for today posted on the conference call page in the Investor Center at flowersfoods.com. Before we begin, please be aware that our presentation today may include forward-looking statements about our company's performance. Although we believe those statements to be reasonable, they are subject to risks and uncertainties that can cause actual results to differ materially. In addition to matters we'll discuss during the call, important factors related to Flowers Foods business are fully detailed in our SEC filings. Now let's get started. Participating on our call today we have: Allen Shiver, Flowers Foods President and Chief Executive Officer; and Steve Kinsey, our Executive Vice President and Chief Financial Officer. We'll open the call to your questions following our prepared remarks. Now, Allen, I'll turn the call over to you.

Thank you, J.T., and good morning, everyone. During our call today, I'll comment on the factors driving our sales and earnings, I'll report on category trends and provide an update on Project Centennial. Then I'll turn the call over to Steve Kinsey, our CFO who will review our financial performance and discuss our outlook for the remainder of the year. After our prepared remarks, we'll take your questions. Turning to the summary results on slide 3, on the top line, we grew sales by 3.8%. This increase was driven by Dave's Killer Bread as we continued to gain share in the organic bread segment, offsetting the continued softness in the total category. Overall, the competitive environment varies market by market and during the quarter, we increased promotional activity to better align with the marketplace. On a comparable basis, EBITDA and EPS were down year over year due to disappointing sales in our core markets as well as higher marketing and legal costs. The higher marketing costs are primarily to support the roll out of Dave's Killer Bread across the DSD network that began in the second quarter. I want to be clear. Our results do not reflect the underlying strength of Flowers Foods and our team is committed to delivering better results. We have already begun to reinforce the mindset of ownership and accountability to the team. Over the longer-term, we expect to realize substantial benefits as we implement Project Centennial. Now more than ever, our entire Flowers team is driven to resume our long track record of steady growth and value creation. Let's turn now to the category trends on slide 4. The overall fresh packaged breads market declined 0.5% in dollars with pricing and mix shifts offsetting unit declines of 1.2%. Continuing recent trends, category unit volumes have…

Thank you, Allen, and good morning, everyone. Our third quarter sales of $918.8 million increased 3.8% versus last year, driven by acquisitions until cycled (9:35) that increased sales by 4.4%. As a reminder, we did cycle the DKB acquisition during the third quarter on September 12. Excluding acquisitions, volume declines offset sales growth by 0.9%, as declines in the branded category were not fully offset by increases in the non-retail and store branded categories. On a consolidated basis, and excluding acquisitions, price/mix increased by 0.3% due to a positive price/mix in branded retail that more than offset declining price/mix in the non-retail channel. EPS for the quarter was $0.19, down $0.02 from the year-ago quarter. Adjusted for the settlement cost associated with our pension de-risking strategy, the write-off of the loss on the extinguishment of debt, the legal settlement charge recorded in the current quarter, and the facility closure and acquisition-related costs last year, EPS decreased 8.7%, or $0.02 per share, to $0.21. Net income for the quarter decreased 8.2% to $40.2 million, while adjusted net income decreased 10%. Consolidated adjusted EBITDA for the quarter decreased 3% to $101.7 million. The adjusted EBITDA margin was 11.1% of sales, a decrease of 70 basis points when compared to the third quarter a year ago. As a percentage of sales, overall gross margin increased 50 basis points to 48.1%. Lower input cost, notably the cost of ingredients, packaging and utilities, benefited margin by approximately 90 basis points, an increase that was partially offset by higher workforce cost. As a percent of revenue, SD&A costs were up 80 basis points to 37.2% of sales, as higher workforce-related marketing and legal costs were more than offset lower distributor distribution fees as a percent of revenue. Included in SD&A expenses for the third quarter is…

Thank you, Steve. Before we go to Q&A, I'd like to leave you with three key takeaways for the quarter. First, we are not satisfied with our results but we are confident that we're taking the right steps to build on our strong foundation and deliver shareholder value over the long-term. In the near-term, we are continuing to manage through the challenging, competitive environment. We've taken action to protect our market share by bringing promotional activity more in line with the marketplace. Second, we are continuing to generate growth from the rollout of Dave's Killer Bread across our DSD network. Organic breads are driving growth for the entire category and DKB is driving the growth of organic breads. Finally, I want to recognize our entire team that works tirelessly to drive our success. Thank you for all you do every day. As we continue with Project Centennial, I'm reminded of the spirit and determination that is THE FLOWERS WAY. And at the end of the day, it is our team that gives me confidence in our success. Thank you, and now we'll turn the call over to Ellen for Q&A.

Thank you. Our first question is from Farha Aslam with Stephens. Please go ahead.

Hi. Good morning.

Good morning, Farha.

Allen, could you share with us kind of the current retail dynamics in the bread category. Are you seeing here in the fourth quarter as we go into the holidays, increased promotional efforts, the response to your new increased promotions on your key brands? Could you give us sort of on-the-ground-level information?

Yeah. Well, really the promotional activity in the bakery category really has not changed significantly. If you'll recall last year, we announced going into – I guess, into the summer that we were adjusting our pricing to be more competitive, and it takes some time to get price changes into the marketplace. And now that we've done that, we are competitive with the conditions in different markets. Once again, each market, each geography is different, but what we've done is made sure that from a promotional standpoint we are competitive with the market leaders in each one.

And so if you could share with us what that does to pricing expectations and volume expectations for your key brands? Perhaps you could share with us Nature's Own and Wonder, DKB, how should we think about growth in those brands?

Farha, really at the end of the day the consumer sets the price, and we are very encouraged about the growth of especially the organic categories and Cobblestone Bread Company is doing really well. We're also enjoying growth in underdeveloped markets. We've mentioned markets; New York, Connecticut, on and on, but as far as pricing, those conditions are really pretty stable with the story that we've given you in prior quarters. I think the emphasis now is that we have made adjustments, and those adjustments have found their way into the marketplace pretty much system-wide. But I do not anticipate any further deterioration of pricing in this category. In fact, we're optimistic that with time, pricing will improve. And if you look at our history, we've always been the price leader, especially in those markets where our brands are strongest.

That's helpful. And then, Steve, perhaps a question on commodities. Could you share with us forward positions and some early look into next year on how much commodity inflation we could anticipate? And so far this year, commodities have been offsetting that higher workforce expense. As we think about next year, generally, could you give us some color on how much workforce inflation we should see, and how much commodity slate (22:08) we should expect?

Sure. Obviously, we haven't given guidance for 2017, but as you look at our overall results (22:18) on the commodity and input cost basket, obviously 2016, there was a nice tailwind. Commodities and all input costs have seemed to stabilize somewhat now as we progress through the year. So as we move into 2017, while we're expecting some minimal benefit, we're not expecting tremendous cost tailwinds like we saw in 2016. With respect to workforce, I think you could anticipate to see the traditional low-single digit increase in overall workforce cost for 2017.

Okay, great. Thank you so much.

Thank you, Farha.

The next question is from Akshay Jagdale with Jefferies.

Hi. Good morning.

Good morning, Akshay.

Couple of questions. First, just related to the legal costs, do you consider those as – I mean, the level at which you're experiencing legal cost right now, do you consider that level to be unusually high?

If you look at legal costs year over year, Akshay, obviously they're up fairly significantly. It's hard to project how they turn out as we continue with the litigation that's before us. So to sit here today and try to say, if they're more elevated than they will be in the future or – I mean, that's hard to predict. All I can say is, they are elevated compared to the prior year.

Right. I mean, there's significant – in my estimates, they're a double-digit drag on your EPS growth. So it's a significant number. I know you mentioned the settlement in Connecticut, and you gave us the number on the settlement. Are there any balance sheet implications? I wasn't able to access the actual settlement on the website (24:30). But can you talk – was there any balance sheet implications? You mentioned there was some changes made to the structure, in addition to the settlement. Can you provide any color on that?

Yeah, when you look at the Connecticut case, the settlement was for $1.25 million. It's still subject to court approval, so we did record a reserve for that amount. When you look at the litigation in general, if you're asking that question, from that perspective, each case continues to have its own fact pattern by being filed in different states, so the laws do vary there. We continue to monitor each case, and at this point, we're not taking any more reserves than what we've recorded for the Connecticut case. But we do continue to monitor each situation, and we'll act accordingly when we think it's necessary.

Okay. And just two more. So one on the guidance. So you're saying you're trending towards the low end. Does that basically mean we should consider the low end as sort of your expectations, both on sales and EPS?

When you look at where we ended up the quarter and year-to-date, and see how – we're several weeks into the fourth quarter now. We feel like we want to be cautious. So it appears that we're towards the lower end. I'm not willing to say we're at the lower end, but we're trending towards that direction.

Okay. And then just on Project Centennial, I mean we appreciate the color on where you are in the process, but I know you're not willing or ready to quantify any of that yet, but at least can you give us generally the buckets or the areas of focus or what's changed? I mean where I'm coming from, Flowers has always been considered one of the better operators within the bread industry. You've operated like a local type of model, right, where your plants were producing maybe on a size basis a little bit smaller than some of your competitors. But can you just give us a sense as to what is the big takeaways that are going to come out of this? I mean are there going to be some pretty significant changes in your COGS? Are there going to be significant changes in SG&A? Or just some color on what the buckets are, some sort of magnitude and the process.

When you look at where we're focused coming out of the diagnostics phase, there's going to be a big focus on leveraging our shared service concept. Currently, we're looking at benefits we think in the purchased goods and services area of the company. We've done a good job from a shared service perspective on direct costs, so we're going to look at the buckets of indirect costs. So I think you can expect to see some savings potential there in the future. Another big area of focus coming out of the diagnostics is network optimization. I mean it's obvious from a production standpoint we need to make sure we have the right production in the right marketplace and from an SKU perspective we want to make sure we have the SKUs that are moving, which also will lead again to our focus on stale (28:23) improvement. So I would say the key focus right now in the diagnostics phase will be leveraging more the shared service concept and taking that into other areas of the organization where we've not done that in the past. And there's going to be some focus on strategic growth as we look at opportunities to grow the top line over the next 18 to 24 months as well. As far as quantifying and giving it a dollar amount today, we're really being cautious not to get the cart ahead of the horse here. We don't want to promise something we don't think we can deliver, but we are still very excited about the project. I don't want you to go away today thinking because we're not quantifying amounts today, we're not excited. But I do think when we talk about it again in January, there will be some meaningful savings there.

But...

And Akshay, just to add to that, the team is really engaged and excited about the opportunities. I mentioned last quarter that our company has grown significantly in the past five to six years, and with that growth, we know that we've got some excessive cost from an overall standpoint. So there really are two buckets: one is focused on cost reduction; and as Steve mentioned, the other is what are the opportunities to grow sales in our existing categories as well as adjacent categories. So a lot of work underway and the team is very engaged. And we'll be looking forward to giving you more specifics on the fourth quarter call.

Okay, great. I'll pass it on.

The next question is from Amit Sharma with BMO Capital Markets.

Hi. Good morning, everyone.

Hello, Amit.

Allen, just wanted to go back to your comments about the category and the promotional activity. I mean, why do we think promotional environment will not get worse? I mean, we have seen that historically you are the price leader, but in the last 12 to 18 months, we've seen the competition probably stray a little bit ahead of you. So now as you ramp up your promotions, why shouldn't we expect a similar response from your main competition?

Amit, again, I don't want to speculate looking forward, but if you look at what has taken place, we basically have adjusted pricing to be competitive with pricing that was already in the individual markets. So in most of the markets where we compete, our pricing is still above the marketplace. So really don't have any reason to believe that pricing should deteriorate further than this, but again, I don't want to speculate. The growth story is very different from one segment of the category to the other. I mentioned that we're encouraged with the growth in the white bread segment. We've talked a lot about organics today. Sandwich buns and rolls are showing growth. Our real focus is on our Nature's Own brand in the soft variety category to make sure that we maintain a growth structure there. But if you look at the trend on pricing going back the last two to three years, it has really been very consistent. And I think the only news today is that the pricing that we mentioned last quarter, most of that is now in the marketplace and we're competitive with the competitors.

And then on the similar topic on Project Centennial, granted you're not giving details and we can certainly wait until the next quarter. But as we think about the contribution from that and its impact on your margin structure, isn't there a real risk that whatever savings that do come out of that will probably have to be reinvested into the business to regain competition or maybe even regain market share?

Yeah, Amit, when you look at the project, obviously we will want to be able to take some of the savings and reinvest back into the business, but we're also very mindful of driving margin improvement. So what we're seeing today gives us I think some confidence we'll be able to do both. But there will be some need to invest back into the business based on the changes that will come out of Project Centennial as well.

All right. And then just two more for me. One on the legal issue, legal settlement, actually. Granted you can't say much about it and all cases are different, but could you talk about like what non-economic changes that you are proposing as part of this settlement? And how does that impact your cost of operation going forward?

Yeah, I mean, we're not going to get into the specifics today on the non-economic because it still requires court approval, but generally the non-economic changes will not impact the overall financial structure and there will be no significant financial cost with implementing those. They're primarily structured around the program itself and the contract.

Hello?

Yeah.

That was it, okay.

That was it.

Yeah, I thought you were stopping midsentence. Sorry about that. And then just on that, and this settlement only applies to 49 different routes. It doesn't extend to other routes in that market, right?

Yeah, the settlement only applies to the 49 territories that are part of this lawsuit. It doesn't extend to any other territories.

Got it. Thank you very much.

Okay. Thank you.

The next question is from Tim Ramey with Pivotal Research Group.

Thanks so much. Just sort of was interested in the price/mix calculation. I'm sure that DKB had a positive impact on mix. Can you say more about just price in isolation from mix? And what your expectations are say for the next couple of quarters if possible?

Yeah. When you look at the price mix, Tim, on a consolidated basis, I think we're up basically 30 basis points. It's driven primarily by price. DKB, as we said, we cycled that about midway in the third quarter, so there was some contribution from DKB from that perspective. But looking ahead, I don't want to speculate because we have seen the marketplace be competitive, so we're not giving any guidance for the quarter or next year yet as far as price mix or the sales growth. Thank you, Tim.

The next question is from Brett Andress with KeyBanc Capital.

Hey. Good morning.

Good morning.

So in the past you guys have given us the price gaps of you versus the other brands in that traditional loaf category. So I guess could you give us those numbers for this quarter and then maybe more broadly, have you seen any changes in the pricing environment right now in the category, versus 90 days ago?

Brett, we'll be happy to provide that information offline, we'll follow up after the call. Again, pricing in the marketplace that we've seen this past quarter is consistent with what we've seen from prior quarters, so it has not deteriorated, it has not improved, it's basically a continuation of what we've seen in past quarters. And we can get you the specifics as far as the price gap. We'll do that taking it offline after this.

And then I guess, when you say non-economic cost in the settlement, it seems to be positive from your point of view, because you said it enhances the independent contractor model. But I guess, are these new changes? Because I know you guys have kind of redone the agreements in the past, or are these just kind of implementing some of those same old agreements?

Brett (7:06), I can appreciate the need to want to know more at this point, but until the court approves it, we feel like we need to be – we're not prepared to discuss it until the court approves the final changes.

Okay. Fair enough. And then, I just wanted your thoughts on Hurricane Matthew. I think that was the first major storm in the last few years, and it fell really right at the start of the fourth quarter. So did you guys see any disruption? Or was it more of a benefit to your volumes?

Our team did a wonderful job taking care of the marketplace during the hurricane. But if you look year-over-year, there were hurricanes in prior years as well, but really my hat's off to the entire team and our distributor partners for taking care of the marketplace. And we received a lot of thank-yous from our trade customers after the storm. And as far as any significant damage, we were able to keep most of our plants online, and no real damage associated with the storm.

Thank you.

Yeah, thank you.

The next question is from Bill Chappell with SunTrust.

Hi. Good morning. This is actually Stephanie on for Bill. Could you just provide us an update on the Alpine business and kind of the expansion for that brand, and has there been any improvement from some of those issues that creeped up in the second quarter? Thanks.

Stephanie, we're still very bullish about the growth of Alpine Valley. I mentioned the activities in the organic channel. Alpine is primarily sold but refrigerated and frozen. So it's a little bit of a new distribution channel for our team, but even though we kind of came out of the blocks a little slower than expected, we're starting to see momentum build with Alpine Valley. Also very happy with the progress in our manufacturing plants, where we're producing both Alpine and Dave's. Great quality, and very much getting our cost structure in line for that type of product. So we're confident that Alpine will continue to grow. The delay is more a function of just timing and really getting in place with some new channels from a distribution standpoint, being frozen and refrigerated. But Alpine will be just fine.

Got it. Thanks so much.

Yeah, thank you.

The next question is from Mario Contreras with Deutsche Bank.

Hi. Good morning.

Good morning.

So with respect to margins, focusing in on the SG&A, is there any way to rank or quantify some of the factors that led to the year-over-year increase in costs and subsequent decrease in margins? You mentioned higher legal costs, higher marketing. So, is there any additional detail you can provide there? And then looking forward the next couple of quarters, should we see any change in those amounts? Thanks.

I mean, look (40:21) there was three buckets, there was elevated workforce costs, you had the marketing, and the legal. We didn't quantify specifically by bucket, but generally speaking, the legal and marketing were the primary drivers of the increase year-over-year.

Should we expect to see elevated marketing costs for the next couple of quarters, as DKB continues to build momentum?

I think you can expect to see us, as we try to continue to integrate DKB, Alpine, as well as continue to focus on our core brands and getting those back on track. You should expect to see continued marketing spend there.

Okay. And then just one additional one from me. Staying on the topic of margins, are you seeing any negative margin mix impact to the extent that you're losing share in some of your core markets, but perhaps gaining share in some of these expansion markets that may or may not require additional investment?

When you look at kind of sequentially at the quarters, price mix has been flat to slightly up with some negative mix shift. We did see some mix improvement in the third quarter even though it was still slightly negative. Part of that mix improvement was driven by the organic business, and I think you're right in your assessment, kind of the downward volume on our core business is causing some negative mix when you look at the overall price mix number.

And with respect to margins, I guess that would also hold true as well?

Yes. I mean, with the core business being down and the Nature's Own volume being down that is impacting overall margin as well.

Okay. Thank you very much.

Thank you.

And our final question comes from Eric Gottlieb with D.A. Davidson. Eric Gottlieb - D.A. Davidson & Co.: Yes. Good morning.

Good morning, Eric. Eric Gottlieb - D.A. Davidson & Co.: Good morning. I know details on Project Centennial are kind of limited at this point, but you did say that costs were included in guidance. Could we find out how much costs were included in guidance and have those changed at all from previous guidance levels?

You're talking about the cost of the consulting project? Eric Gottlieb - D.A. Davidson & Co.: You tell me. You just said it was included.

Yeah, we do have the costs associated with Accenture in the third quarter and fourth quarter in our guidance, but we have not quantified that. I mean, I'd say it's not that significant but there is cost associated with it. Eric Gottlieb - D.A. Davidson & Co.: Okay. So that's not moving guidance down at any point. In snack, a competitor we all know is not really back in the market, but recently became public and kind of announced strategies to better their business. I'm wondering if you have any plans in place to change your strategy to counter those or go defend your own market position?

We feel very confident in our current structure with our Tastykake brand being distributed, DSD and our Mrs. Freshley's brand going through Warehouse delivery. Snack cakes are all about product quality and unique items and good packaging and seasonal flavors, and we have a lot of marketing activity geared around our cake business to get us back on the right track there. We have had a competitor kind of reintroduced to the marketplace, but again, that's not new, and we'll continue to grow our cake business. Eric Gottlieb - D.A. Davidson & Co.: Okay. Great. And then in the beginning of the call you said results were disappointing. However, guidance wasn't really changed and pretty much in line with what everyone else was thinking. I'm wondering, can we highlight, forget what was strong and what was weak, but what was underperforming and outperforming your own internal estimates?

I mean generally, when you look at kind of our internal expectations, I'd say we continue to see downward pressure on our core business and that's the primary driver of where we want to perform better, and we think we should be performing better, we just continue to see overall pressure on our core brands. We're very pleased with our non-retail segment, we're very pleased with Warehouse and what we're seeing there, and cake has been slightly down on the branded side as well, so it's really a focus on our core brands at retail. Eric Gottlieb - D.A. Davidson & Co.: Okay.

We've always set our internal goals aggressive and that's the nature of our leadership team, and the purpose of the comment is to let you know that that leadership team has not changed. We continue to set the high internal goals for ourselves, and we're not satisfied until we reach those goals. Eric Gottlieb - D.A. Davidson & Co.: Okay. Thank you. And then the last question, is there any whitespace that the company plans on entering in the near-term?

Nothing to report at this time. We did mention as part of Project Centennial we'll look at adjacent product categories for opportunities for growth, but again, it would be premature to mention anything at this time. Eric Gottlieb - D.A. Davidson & Co.: Okay. Great. Thank you.

Very good.

I would now like to turn the call back over to Allen Shiver for closing remarks.

Thank you so much for your time and your interest in our company. We look forward to visiting again as we close out the year and talk in February. Thank you very much.