Welcome to the Flowers Foods First Quarter 2017 Earnings 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. [Operator Instructions] 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 first quarter results were released yesterday evening, and 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. Our 10-Q was filed with the SEC yesterday evening as. 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 could cause the actual results to differ materially. In addition to matters we'll discuss during the call, important factors relating to Flowers Foods business are fully detailed in our SEC filings. Now, let's get started. Participating on the call today, we have Allen Shiver, Flowers Foods' President and Chief Executive Officer, and Steve Kinsey, our Executive Vice President and Chief Financial Officer. Now Allen, I'll turn the call over to you.

Thank you, J.T., and thank you to joining our call today. I’ll begin the call with the category overview and then we’ll discuss our key initiatives. Our CFO, Steve Kinsey, will follow with greater detail on the first quarter results as well as provide our current outlook for fiscal 2017. Then we’ll open up the call to your questions. When we consider the broader trends in the packaged foods we are seeing multiple factors applied. They reflect changing consumer taste and preference. In short, brands that deliver innovation and unique products were the point of difference of growing sales. In the bakery category the marketplace remains highly competitive as retailers and bakers finds a balance between improving margins and building market share. We believe Flowers is well positioned to navigate in this challenging environment. We know where to focus our attention in order to drive sustainable profitable earnings growth and create value for our shareholders. For example, we see opportunities to improve our return on trade investment and so we are in the process of rationalizing our product assortment and investing in tools to better manage our promotional spend. The following shelf resets [ph] will reflect elements of our streamline assortment and we expect our improved promotional management tools to be online in early 2018. Also our priority, is to better align our Nature’s Own brand, which is a number one brand in the bread category with the growing number of Millennial families. Through research and integration we are working to enhance the brand’s consumer appeal. Already underway, our efforts to improve the efficiency of our bakeries. We are scrutinizing cost and enhancing processes in order to improve productivity and product quality. Importantly and as we will discuss in more detail, we are also building capabilities to drive innovation and…

Thank you, Allen and good morning, everyone. Since the detailed financials for the quarter are available in the release and the 10-Q was filed last night, I'll focus my comments today on the key variances, cash flows and our outlook for the remainder of fiscal 2017. As Allen mentioned, category trends in the first quarter were softer than expected. On the top-line the primary factors impacting sales were lower volumes of branded snack cakes, lower volume and negative price mix of conventional branded breads and the divestiture of the mix business. These declines were partially offset by growth in organic breads. Production cost as a percentage of sales declined 40 basis points resulting in higher gross margins. We did lap roughly $2 million of cost associated with the Tuscaloosa plant conversion a year ago, but we're considering that throughput volumes were less than expected due to lower sales. We are pleased with how production cost were managed in the quarter. Relative to the prior quarter, we produced the vast majority of our organic items in-house, which reduced outside purchases significantly. Improved manufacturing efficiencies also contributed to the reduction in production cost as a percentage of sales. Adjusted for items affecting comparability selling, distribution and administrative expenses as a percent of sales increased 70 basis points, the main driver being higher distributor distribution fees. This was anticipated due to more sales going to the DSD system as a result of the rollout of DKV, which began in the second quarter of fiscal 2016. Reflecting the net of higher gross margin and SD&A as a percentage of sales, adjusted EBITDA decreased 30 basis points to 11.2% of sales. I'll quickly comment on the few items affecting comparability during the quarter. As we've previously communicated we sold our mix business, which resulted in…

Thank you, Steve. Before we take questions I want to stress my confidence in the Flowers team and our ability to achieve our long-term potential and create value for our shareholders. With underdeveloped categories and new markets, we have plenty of opportunity to grow in our core business and in adjacent categories. Even though we’re only a few months into the implementation phase of Project Centennial, I see evidence of us becoming a more effective and efficient company able to meet the needs of the evolving consumer and deliver enhanced profitability to the bottom-line. Thank you for your attention, and now let’s begin the Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Farha Aslam with Stephens.

Hi, good morning.

Good morning, Farha.

Just a quick clarification on your comments about the category, you highlighted that you now expect the category to decline about 1%. Could you -- is that by volume and is that just in bread or does that include the whole entire sweet baked goods category?

Farha, we’re looking at the entire fresh packaged bread category to decline 1.1% and again this trend is very consistent with what we’ve seen in the past few years. But we’re not predicting any significant change in category trend.

And that's by volume, not price or mix?

Mostly volume.

Okay. And then just as a follow-up, could you share with us as you go through Project Centennial that you were rethinking your brands, and how in particular you're thinking about DKB versus Alpine and kind of the branded portfolio going forward in bread?

Farha, I think one of the exciting changes with Project Centennial is really focusing on becoming a national branded company as oppose to the regional company that we've been. So naturally to do that, certain brands are going to take priorities. And the great news is that we have a wonderful assortment of strong brands that can build that need. The Dave’s Killer Bread certainly is very exciting in terms of the -- not only as a reception the trade has given us, but also the reception that we're seeing from consumers. Dave’s Killer Bread is very much on target with the organic trends that we're seeing in the food business in general. So overall, we will be focusing more on becoming a national branded company. We will have certain brands that will be priority that will be national brands, but at the same time in certain markets, regional brands are still strong. So we'll be very careful to make sure that our branding plans going forward are such that we grow the overall sales. But we are focused on becoming a national branded company.

Okay. And perhaps, my final question is on the DSD segment versus the warehouse segment. The warehouse sales just came in far below our expectations in consensus, but in the press release you did highlight that some of the sales of product baked in warehouse is captured in DSD. How should we understand that trend?

We're still very committed to our DSD model. Again the success of Dave’s Killer Bread as we've rolled it out on DSD really shows us the strength of DSD and what we can do with a brand like Dave’s. At the same time, we continue to grow in our warehouse model. We're looking at other portions of the supermarket, the parameter of the store, the bakery deli that really lends itself to a different form of distribution. So we do have some significant test markets underway there. Steve, anything you want to add?

Yes, I mean when you look at the inter-company sales, our Mesa [ph] facility produces quite a bit of the Dave’s Killer Bread products. So a lot of those sales are captured in DSD. I mean, the vast majority of the pressure in warehouse at obviously is the loss of the mix business and we also continue to see some pressure in the cake business whether it's branded cake or store brand cake.

Okay, thank you very much.

Thank you, Farha.

The next question is from Akshay Jagdale with Jefferies.

Hey, good morning. This is actually Lubi on for Askhay. Just wanted to ask firstly on Project Centennial, can you comment a little bit on when you expect to begin to see sort of a meaningful impact on the P&L related to Project Centennial? And then, also related to that, as you’ve begun to implement the program, have you identified any incremental areas of savings that maybe you didn't see before?

Lubi we have -- we feel very confident about the $45 million of run rate cost reductions that would be achieved by 2018. Again, on the longer term, we're still focused on the 250 basis points of improved margin over the three to five year period. Steve, anything.

Yes, I mean, Lubi in the quarter we did see savings of roughly $4 million on the continuing the initiatives we have begun in the fourth quarter. Those were around primarily travel, entertainment and in certain corporate type events where we've eliminated any unnecessary travel or unnecessary events or unnecessary things like subscriptions. And so it's amazing as you add all that up across the company how the total, but with regard to kind of the run rate as Allen said, we’re still looking at the purchase goods and services $45 million savings by 2018. We are in the middle now across several work streams, the RFP process so we have to have that completed by mid to late summer. And then we should begin to see some of those savings roll-in during the fourth quarter and really start picking up in 2018, but a lot of that rolls into purchase goods and services. We have announced some structural changes for the organization, so we will continue to work on that. And I think when you look at the project roadmap that’s in the deck, you can see 2017-18 we are still very focused on capturing our savings initiatives. So we can begin to really invest in growth initiatives in ‘19. That’s obviously that we’re not working on growth initiatives currently, but ‘19 is when we expect to see the meaningful bump within the project.

Got it, thanks, that’s very helpful. And then if I could ask a question just in terms of your guidance, it does seem like you have tempered your guidance somewhat, but on our math your outlook still in place a decent acceleration in sales and EBIT growth relative to what we saw in the first quarter. Now I know that the top -- for the top-line the comps do get a little bit easier in the balance of the year and then you know in terms of EBIT probably see some more savings related to Project Centennial come through. But can you just talk a little bit about what gives you confidence that the guidance that you have laid out there is achievable? Thank you.

Sure, I mean, when you look at the remaining three quarters, we have seen some improvement in trends coming into the second quarter, Q2 and Q3 are typically stronger because of some bun seasonality for the summer month. So we feel like we are positioned really well this year for the bun season, we have had some wins across the company as far as shelf space from a bun position that was not there last year. So we feel like that, it gives us some confidence when we look at our outlook for the rest of the year. And then we’re starting to see -- we have some business wins on additional business and we also -- we did have pretty heavy promotional activity in the first quarter. So as Allen said, we are focused on being more targeted with our overall promotions for the rest of the year. We won’t be eliminating them because the category operates with certain level of promotional activity remain competitive. And then from a calls perspective we have been pretty conservative from including any savings from the project, from the back half, I do think the initiatives that we have implemented in Q4 ‘16, we will continue to see those benefits. And then as we complete the RFP process, we should begin to see some of the benefits of the other work streams from the project. We look at production cost, we are very focused on product efficiencies, we have begun some pilot work at a couple of plants around continuous improvement. We believe that’s going to give us some savings from production perspective. And then from a cost perspective we are pretty much covered on our input cost for the rest of the year. So we feel like we have good visibility there. So I think that’s where we from a confidence perspective in the range and where we have got it to today, we feel like things are achievable.

Steve I’d just add that as we look at new markets where our share is lower than our core markets is exciting to see the support that we’re getting with the introduction of Dave’s Killer Bread, along with Dave’s comes our full product line, as we are expanding our space and improving our position especially in new markets. So I think that will also be a factor as we look at the rest of this year.

Thank you, I’ll pass it on.

Thank you.

The next question is from Brett Hundley with The Vertical Group.

Hello, Brett.

Brett, go ahead, your line is open.

Hi, good morning. Can you guys hear me okay.

Yes, we can.

Alright, I am sorry; I am in a bad spot here, so I am going to ask my questions real quick together. Did you guys give a mix impact to margins in DFD from greater private label sales relative to branded? And then secondly, with 2017 really being a year of transition, significant amount of change going on, obviously a lot of this is happening against a really tough backdrop that is having an effect on all U.S. food companies. With your balance sheet where it is and your valuation where it is relative to peers, would there be more of an appetite and a year like this to elevate share repurchase. Just given that a lot of forward earnings improvement can come from internal improvement and not necessarily [indiscernible]. Thank you.

Yes, I mean, if you look at the mix, we do not give a mix breakout on the increase in private label versus the impact of the branded product. DSD was slightly up, but we do not -- but private label typically carries a lower margin and it covers a lot of everyday from a production standpoint, but we do not breakout the mix impact there. When you look at the relative valuation again from a capital allocation standpoint, again there is -- we remain prudent, I don't think you'll see step outside of balance of anything from a normal historical perspective. When you look at now there are a lot of opportunities coming out of the project, so from a capital perspective, we'll be focused on Project Centennial and the value it drives longer term. We did from a share repurchase perspective you'll continue to see us behave opportunistically. And if the cash flow warrants we’ll be in the market.

Thank you.

Thank you Brett.

Our next question comes from Brett Andress with KeyBanc Capital.

Hey, good morning.

Good morning.

I had a question on your far reset comments. I'm assuming that that’s factored into your updated guidance, but I mean should we expect more sales pressure now in the back half because of that, and some of the rationalization? And do these resets apply to both your DSD and your warehouse segments?

Primarily the resets apply to our DSD business and we're looking for the resets to be positive in terms of overall growth. Many of the retailers only reset their bakery departments once or twice per year. And with the opportunity in the sales that have been generated by the Dave’s Killer Bread and turns that is generating on the retail side, we expect the resets to be very favorable in terms of our overall product line.

Brett when you look at the guidance however we have factored in down about 50 basis points. You should begin to see that in the fourth quarter and potentially you'll see some of that in Q1 of 2018 as well.

Got it, thank you. And I had a question on the performance management changes that I think you guys have been making. Can you comment on maybe how you're adjusting to hold the team accountable for Project Centennial and maybe what metrics you guys are using to measure performance across the enterprise?

Brett, overall I mentioned earlier the strength of our Flowers' team and I think that's really where you start. If you look at the confidence that our team has in each other that is even though that structures are being adjusted and changed. Now there is still a tremendous confidence in our leadership team at all levels. We are focusing on developing much deeper levels of accountability so that we can measure performance down to the lowest level. And it's not that we have not measured performance in the past, but we've never taken it down to the levels that we're looking at. And performance will be rewarded and lack of performance will be addressed. And it's exciting to think about what can be accomplished with everyone focused on the same goals going forward.

Brett, I mean, specifically to that, we just announced the change in the old structure. So we're still in the middle of developing the overall performance metrics, but historically the company has been on one goal of EBITDA, but now as we move into a more brand focused company, we'll begin to set specific targets based on functionality. So if you're in sales, you'll have some component of the sales target. Manufacturing will have some component of manufacturing KPIs, plus probably an overall company goal, but we're not ready to announce or discuss those today.

Got it. And then I just had one last one, can you give some more detail on the lease termination cost during the quarter, I guess what were those related to, was it a certain facility? Did you renegotiate new lease terms? Just some -- anymore color you can provide there.

The primary savings there was if you recall when we made the acquisition of Tasty Baking back in 2011, they had -- there were publically traded company so they had a corporate headquarters facility as well. So, we’ve been able to exit that -- we were able to exit that lease this year. So, that primary -- that's the vast majority of all the savings.

Thank you.

Thank you.

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

Thanks, good morning.

Good morning, Tim.

It sounds like your payments or your costs relative to Project Centennial are pretty heavily weighted to the first quarter if we’re at $25 million to $30 million for the full year. Should we expect the costs relative to Project Centennial to be mainly a 2017 item or will some flow into ‘18 as well?

Yes, the vast majority of the cost for the project will be in ‘17 and 2017 the first half. You will those start temper into back half. There could be some in 2018, but we are not anticipating anything of the magnitude we’re seeing this year.

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

Hi, good morning everyone.

Good morning, Amit.

Allen just wanted to go into your category growth outlook right. So you went back to maybe negative one, and that’s more consistent with how it’s been over the last few years. Just wanted to know so why did we start with a higher expectation when you gave guidance earlier? And has happened in the last three months that compose you to go back to where the historical performance of the category has been?

Amit, this year if you look at the total categories, actually if you look at total food business, the food business and the bakery category has really started up slow. We are encourage looking at sales the last several weeks that we’re seeing that hopefully the sales trend is changing and we’re optimistic as Steve mentioned earlier looking into back half of the year. But there are some things that are taking place, I think with today’s consumer that are influencing the overall category and we’re addressing those especially with brands like Dave's Killer Bread as well as looking at different opportunities in the parameter of the store the bakery deli elsewhere. So, it is very much with changing category and a changing market place, but we feel like we are in very good position to take advantage of it. Still if you look at the overall fresh bakery categories still a $31 billion category, which is the number three category in the entire supermarket. So, even though the category is relatively soft, it’s still extremely large and there is a lot of opportunity for us to grow this business as we look forward.

And that's really helpful. And I think that's well understood, just I was trying to get like between guidance given earlier to where we are some of these are fairly longer term place, right. But what has happened in the last three months or last four months where is it, the competitive environment, is it you’re seeing a little bit more promotion or you’re seeing more softness in the takeaways. What has happened for your outlook for the category to be little bit more negative now?

Again, the category trends are pretty consistent with what we’ve seen in past years. It did start up slow and sluggish. In terms of category promotional activity or any major changes I mean there is nothing you can put your finger on in the last two to three months. It’s simply been a slow start to the year and hopefully looking at the last few weeks, hopefully we’re seeing that turn to a more positive trend. But it did require us to basically where we are at this point required to us adjust our guidance to the low-end of the range.

Got it, that's helpful. And then just two more from me, in this revised guidance for sales any sense for how much is coming from DKB versus the rest of the core fresh bread category or portfolio for you guys?

When you look at the performance of organics together, I’d say we are still trending with what we were seeing when we made the acquisition. So you are seeing the organic -- and I’d say our brands are trending in line with the category as far as growth, of course Dave’s is driving the vast majority of that. We didn’t -- we haven’t given that specifically, but when you look how our overall organics are performing and we look into the full year performance, right now we are trending in total ahead of our plan.

Got it. And then last one from Allen, a little bit longer term, so you are outlining pretty large changes throughout the organization and it looks like the end of that will be much a replace from a company margin perspective. But is there any risk or how are you mitigating that risk that between now and let’s say end of 2018, early 2019. The company is focused on Project Centennial that this is still a tough category to operate on day-to-day basis. How do you ensure that should operating focus remains on that and not get distracted by all these changes that you’re putting in place?

Yes, I mentioned earlier, what give us me confidence is the strength of our team. I have said it many times, we have the best team in the food industry. Our team understands the category continues to evolve and our company must evolve and change with the category. So very confident that all of the adjustments that we’ve laid out so far are going to be implemented properly. And as we look at the next two to three years, that implementation has always been our strength. And I feel like that we have done a very good job of laying out a multiyear improvement to our overall organization, we had our entire team together, leader -- the senior leadership team just a few week ago. And I have never seen so much support from all levels of the organization against Project Centennial. So we are focused on building this company for the long-term and we have got the team in place to do it. So again, I am very confident, but it is very critical that we do a great job implement Project Centennial, but at the same time we have got to stay on top of today’s business today. And we are also focused on doing exactly that. But it really all comes back to the strength of our team.

Got it, thank you so much.

Thank you.

The next question is from Bill Chappell with SunTrust.

Thanks, good morning.

Good morning, Bill.

Hey, just trying to understand the comments on the category. If we go back from what we’ve heard from most food companies it what was that if consumer takeaway in general in January and February was pretty weak, you got a little better in March and it’s gotten better in April. But you gave kind of guidance, I think, updated guidance in mid-February and now we’re kind of talking about it being even worse. So is that the way to look at it that things were holding up okay for at least the bread category for the first two months and have gotten worse since then or is there something I am missing?

I think, when you look generally coming up and February when we gave guidance, we were seeing kind of a sluggish start, but that’s typically February has been a slow month in our industry. So we are beginning to see some trends pickup, because of the where the quarter came in what you had to make up to get back into the upper end of your range would be pretty significant for the rest of the year. So, don’t see the category -- from a category perspective there would be no way to make up the loss that you had in the first quarter from a top-line perspective.

So trends as we look into March and April a little bit better it’s just you can’t makeup kind of the quarter in general?

Yes, March was better we’re actually seeing better trends in April and May. But I don’t see -- we don’t see that there is the opportunity to make up the loss from the first quarter.

Okay. And then just making sure I understood, if you’re expecting the category to be down 1% and you to be even though at the low end of 0% to 2%. What is that implying in terms of market share gains for this year?

From a share perspective, we did see growth in the first quarter from a share perspective. The big driver of our confidence has to do with the organic category and the performance we are seeing there. I don’t have a specific shared number with me, but we are anticipating share growth just like we saw in the first quarter.

Okay. And then last question and sorry if I just a little confused. But sounds like in last year you didn’t -- there were some consulting charges throughout the year for a Project Centennial that were not excluded and this year we’re kind of excluding everything. So how should I look that on a year-over-year basis?, I mean is there any Project Centennial that is not excluded this year or last year? Sorry for the confusing question.

Yes, I mean, so far we did not have any cost in the first quarter, so as the year progresses we had roughly a little over $6 million last year. I think it was it was roughly a million or so Q2 $1.4 million Q3 and about $3.7 million Q4. So we will call those out as we -- as the year progresses. So it was about $0.02 last year.

Okay. And that wasn’t excluded last year?

No, because of the magnitude but now that we’re well into the project. If you recall in December we actually finished up our diligence space and we made the decision to move forward. So once we made that decision to move forward with all -- with the project. That’s when the cost really ramped up.

Got it. Okay, thanks so much.

Thank you.

That concludes our question-and-answer session. I'd like to turn the call back to Allen Shiver for closing remarks.

Thank you for your attention today. We're excited about Project Centennial and we are very excited about the plans we have laid for the not only the rest of this year, but looking forward into next two to three years. Our leadership team is 100% behind the initiative and we look forward -- plans we will continue to keep you apprised, in terms of plans and potential benefits. Thank you for your attention today, this will conclude our call.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.