Good day and thank you for standing by. Welcome to the Flowers Foods Second Quarter 2021 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker today Mr. J.T. Rieck, Senior Vice President of Finance and Investor Relations. Sir, please go ahead.

Thank you, operator and good morning. I hope everyone has the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation. They 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. Operator, we are ready to start the Q&A, please.

[Operator Instructions] We have our first question from the line of Bill Chappell from Truist Securities.

Thanks. Good morning. Hey, just one of the things we've heard from several or multiple food companies over the past month and a half is that there's been a meaningful for whatever reason trade up from private label to branded for this stimulus checks or other issues, though no one can quite figure it out. And clearly that had some impact or continues to have some positive impact on your business. So I guess the question is do you see this as a sustainable shift? Or do you think that people will move back towards private label which could put margin pressure as we move into the better back half of this year to next year?

Yes, it's good question, Bill, in our category with private label being historically so over developed, we were actually seeing these private label declines, even prior to the pandemic. And I think we've mentioned that a couple of prior calls, we've actually done a fair bit of research, consumer insights research into why that trend is continuing and almost accelerating, really. And it really comes down to in our category, there's distinct lack of differentiation in private label. It's basic white and wheat bread and buns, where's in the category. And Flowers has participated in this, obviously, you have a lot of differentiation with the new, perfectly crafted brioche rolls with things like Dave's Killer bread and Canyon. And that's driven a bit of a premiumization process up to branded from private label. As to whether it's sustainable or not, I actually think it is. And that's why we're making all the investments we're making behind our brands, the marketing support, et cetera. If you get into a recessionary situation, you could see some move back to value. But even then in the last recession that we saw, and sort of '08, '09, we didn't see that much of a move back to private label even then.

But I guess did you see a step change in this current quarter? Or is it just more of a continuation of the trend?

It's really more a continuation of the trend. Yes, private label just continues to fall and branded retail continues to hold up very, very well.

Great. And then turning to cost front same thing heard a lot of your peers talk about especially more on freight and incremental costs, you seem to in April to raise EPS guidance for the full year. It seems like it's less of an impact. Is that largely due just to the way your supply chain distribution works? Or is there something else that's helping you offset these costs?

Yes, partially, that's and Steve can jump in here too. But, yes, that's partially - that works a bit more of a closed loop system so we're not as exposed to the long haul freight and then the other thing I would say is with our hedging strategy being four to seven months out sometimes a little bit longer. Yes, that gives us good visibility in advance of what our costs are going to be. And we can be proactive about mitigating those costs. Steve, anything you'd add to that?

No. I mean, I think, as we said earlier, Bill, in the year, we had pretty good visibility into our overall cost structure for this year, obviously, looking at the in place in the back half, a little heavier. But we think we've taken the right steps to mitigate most of that. And as Ryals said, on transportation we're not immune to the increases, but we feel like for 2021, our contracts have protected us the best they can.

Our next question is from the line of Mitchell Pinheiro from Sturdivant.

Hi, good morning. Hey, just following up on those questions. Regarding private label, is the retailers' view of the other private label offerings changing as well, I mean, in terms of shelf space allocation? Are they looking to premiumize private label to a greater extent trying to keep private label? Or is that really not one of their strategies, and they're willing to let the market go where it goes? And reallocate shelf space? Can you give us any color on that?

Yes, I mean, we've had some isolated discussions about that but nothing broadly in the market. We're not hearing much about wanting to premiumize private label or anything like that, to this point, probably the one exception for us, and one area of private label that continues to do well is Canyons private label gluten free, that's probably the one call out in private label that's actually showing some growth in our portfolio.

And, but also, as part of the discussion, are they looking to reduce shelf space to private label, I mean, clearly the dollar value and the gross margin contribution of the brands versus private label would suggest, I would think more allocation to the planet shelf space, but is that happening at all or?

It again, I would say that it has happened to some extent, but we haven't seen any broad sort of market wide moves to take shelf space out, but there have been some, yes, some isolated customers where that's been reduced. And you also have the labor situation that it's kind of happening to everybody that limits somewhat limits the ability to provide all the skews, I mean throughout this pandemic, in this whole liquid situation we've had to in some cases, limit some of our skews. And so that's had some effect on the shelf space allocation. But as far as the overall private label allocation, there's been no meaningful change really.

Is there - are there any pricing changes with private labels? Is it a volume decline? Or is it - is there pricing going up? Or can you talk about that a little bit?

Yes. I mean, we have taken some pricing over the last several years in private label, yes.

In terms of, part of the whole strategy or some of the benefits Flowers gets is from gaining sharing in lower penetrated newer markets, newer for Flowers, that is, and anything you could call out geographically, strengths or weaknesses among your territories.

Yes, I mean, we've been calling out the Northeast for the last several quarters as a focus market for us. We continue to make investments up there. And the good news is we're seeing share gains there. Yes, we had a good quarter in the Northeast, we continue to gain share on the West Coast, another really strong market for us. Obviously, we're super strong in the south. I mean Mitch as you know, the big whole or opportunity for us, is that whole upper Midwest quadrant.

Okay, and then just a couple more in terms of what's happening with that snack cake, and tasty cake in particular, are you making progress on your profitability.

Yes, thanks for asking really good progress at Navy Yard. Again, I'll say we're not - we are still not where we want to be. But the trajectory is really good. The team's done a great job up there, our automation investments are paying off, and scrap rates are coming down. Labor in the cake markets content in the cake plants rather, continues to be a bit of a challenge. It's just the nature of the cake bakeries with more people in there, but overall, we've been able to manage through it really well, we've also done some things on the commercial side, Mitch, from a price promotion standpoint, to make us more competitive there. So all sides pointing in the right direction, in fact relative to our internal goals, we're actually ahead of plan there.

Okay. And then, I guess, final question is when you look longer term, and you look at it your margin profile. I think you mentioned in the - I think either in this quarter while mix is certainly a powerful help for you. You have productivity, and you have your whole network optimization to support further margin improvement, but how it just seems that the branded versus the non branded mix is still going to be the most important part of the change. And I'm curious as to, a, if you agree with that, and b, what you're doing? What specifically you're doing to create the positive mix going forward?

No, absolutely. And I agree with you, I mean, the whole notion of shifting more around mix to branded retail is the most powerful tool we have to improve our overall margin profile. But all the other things you mentioned, whether it's network optimization, whether it's our marketing investments, whether it's our digital transformation are all intended to support that mix shift to branded retail. So you had all rolls up to the same strategy of over time shifting more of our mix to brands, both the brands we have today, and hopefully the brands will have tomorrow with future M&A.

Okay. And just I actually said just one more question speaking of M&A is can you talk, a, that's your pipeline or maybe the environment in M&A right now?

Yes, sure, really no change from last quarter. I mean, it's - deal activity continues to pick up. We're looking at quite a few things right now, which is a welcome change from last year when it really kind of dried up. So we're happy with the pipeline. And Mitch it's nice to be in the position that we're in that we've got the balance sheet to act, when the timing is right.

Our next question is from Ryan Bell with Consumer Edge Research.

Hi, how are you guys? To just touching maybe a little bit more on the inflationary environment and the impacts of the rising costs. Can you talk about maybe your ability to take pricing as we getting to the end of the year in 2022?

Yes, I mean, obviously we're not going to talk about 2022 today. We're not prepared at this point to give guidance. Although it is on our mind, given the inflationary environment we're in, we've seen pretty substantial runs, like most other companies, regardless of which industry or segment you're operating in. We're all experiencing pretty tremendous inflation. What I would say for 2021 and I think we talked about in our prepared comments in the back half we're pretty confident in our overall cost structure. And also confident in the measures we've taken to mitigate inflation the way we have whether that was pricing, I think you'll see promotional efficiency, which we saw in Q2, a lot of our projects are on track with regard to efficiencies and kind of productivity. And we expect really to use kind of the same tools going into 2022. But beyond that, no, I can't really comment about beyond this year.

Hey, Ryan, one thing that I would add to it, and we mentioned this a bit in our prepared remarks is if you think back to the last inflationary period, significant inflationary period that we saw sort of '07, '08 period, we were much different company back then. Our market share was a lot lower. We really only had one sort of quasi national brand in nature Nature's Own, and then you fast forward today and we've got roughly an 18 share. We've got Nature's Own, expanded Natures' Own now with perfectly crafted as well, we've got Dave's, we've got Canyon, we've got Wonder. And so the brand portfolio, if you will, is quite a bit stronger than it was, which also gives us greater confidence that we can pull that lever to the extent necessary to help mitigate any rises in cost.

Okay, thank you. That's helpful. And then could you talk about how you're thinking of the back to school season, in terms of your guidance, what you're assuming about the season and sort of what would change potentially, to your base case, given some of the variability that we see, with the Delta variants, and the back to school and other types of getting back to normal?

Yes, our perspective on that has changed markedly since the first of the year, when we first issued guidance, and then with the vaccine rollout, we were kind of planning for what that was going to look like, and how that was going to affect the market dynamics. And now here we find ourselves right at the beginning of back to school season, we've got this Delta variant, that surging significantly across the country. So our perspective has changed as the dynamics out there have changed. And obviously, it's hard to say. We had originally expected that the back to school season would give us a really good indication of what the new normal might look like in a more steady state going forward. I think the rise of the Delta variant has brought that somewhat into question and it push that timeline out a bit now. And obviously in our results through Q2, and even the beginning of Q3, we're continuing to see very strong branded retail performance in line with what we've been seeing for the first part of the year. So, yes, it's going to be a little bit of a wait and see. I would have thought that back to school would have, and people starting to return to office would have given us a better indication, but I think that's gotten pushed out a little bit now.

Thanks, that's helpful. And would you be able to try maybe a little bit more detail about some of the shifts in your CapEx guidance this year? I know you took it down a little bit. And you said that it was largely due to delays from the pandemic, was the expectation for that just to shift out to next year?

Yes, I mean, the majority of that will just roll into 2022. I mean, the reality is, there's no one, I would say, one specific or large project that was impacted. It's kind of across the whole just some delay in timing and getting equipment in for some of the projects.

Thanks. And then just the last one for me, how would you feel just about the general longer term impacts of incremental add-on demand? I mean, I think that it's pretty evident at this point, that there's going to be incremental work from home relative to 2019. So could you potentially share some of your thoughts about this expense, or the potential for this to impact your business over the next few years?

Yes, I'd be happy to, frankly, Ryan, I'm quite optimistic about it. I mean, I think there have been a fundamental shift in several things some good and some not so good. The good parts are I think that the future of work is going to be a lot different. We here at Flowers are going to be doing it differently, permanently. And many other companies are, as you read, are doing the same thing. And I think that shift, or that change in mindset really only benefits our business with more people eating at home, more sandwiches consumed, or whatever it might be. I think we're very well positioned. Couple with that our commitment to innovation and continuing to bring new and exciting offerings to the consumer, that's going to continue to be really important for us to drive future growth. So I'm frankly, really optimistic. On the negative side, the labor situation continues to be difficult, as we read across every industry, whether service manufacturing or otherwise, it's a difficult situation, it's tough to attract and retain people right now. So far we've done a really good job of managing through it, it has not been easy. But we've been able to continue to serve the market effectively throughout this period. But it is a challenge and we have to re-look at how we view labor in the vagaries we'll probably have to make both some short term and long term changes to how we approach that because I think it's more than just extended unemployment benefits. I think there's been a systemic change of how work is viewed in this country.

Our next question is from the line of Ben Bienvenu with Stephens.

Thanks. Good morning. Ryals, I wanted to follow up on that, on the compensation side of things. You talked about you are reviewing compensation. I'm wondering where you are today in that process? What's considered in your guidance with respect to compensation and benefits for the balance of the year and fiscal '21? And then you talked about a combination of short and long term. Sounds like you're being holistic with how you approach this and more surgical. Can you talk about your mindset and kind of what you're seeing today relative to normal? And how you feel about your ability to kind of ameliorate those dynamics?

Sure, I mean for '21, I wouldn't worry about it too much from a wage standpoint because, for one thing, I think it's more than just wages that are the issue. Now, certainly, we'll look at that we do periodically look at that, anyway, to make sure that in each of our markets that our bakeries are competitive, but again, the whole dynamics change. What you used to look at as your peer set in manufacturing has changed. We used to look at other food companies or warehouses, well, now you're competing against Amazon, you're competing against Tesla. And with all the government payments coming in, you're competing with the government too. So it makes it pretty difficult. So you're right, we're taking a holistic look, because I don't believe it's only about compensation, it could be to some extent, and we want to remain competitive. But I think the quality of life factors are even more important. And what I mean by that is the bakeries can be hot, they can be unpleasant at the summertime, and what can we do to improve the overall working environment inside the bakeries. We're looking at different uniforms; we're looking at different cooling systems, et cetera, and those types of things. But one of the biggest issues for us, I've mentioned this before is scheduling in the bakeries. Working in a bakery is tough job. And we're running the Baker's really hard, particularly right now with the labor shortage. And we've had increases in overtime and things because that our folks are working really hard. And that's not a situation that you want to sustain for too long. So what can we do from a scheduling standpoint to give more consecutive days off, more predictive or predictable rather schedule, so that people can plan their childcare, or doctor visits or whatever it might be in daily life that they need to do? So we're looking at a myriad number of things to help mitigate this, and I'm glad that we are because that I don't think that this is a temporary situation.

Yes, okay, makes sense. And then you know that promotional efficiency contributes to better price mix. Can you talk about what's happening there? Is it that this kind of returns to normal or new, normal dynamic around consumer behavior? Is sustaining volumes that are the new thoughts? Is it initiatives that you have in place, maybe just help us understand what's going on there? And kind of the glide path associated with that, and how repeatable is that dynamic?

Yes, sure. I'll let - I'll start and Steve can chip in if he has something else. But yes, the overall promotional environment has been pretty steady for a while now. And it's really in our category I would call it at least five year lows. And that's been pretty steady. And with the demand for branded retail price, I don't see that changing anytime soon. We also internally do a much better job with our TPM system than we did historically at managing our promotions and only pursuing those that have a high return associated with them. And so both the kind of the macro environment is supporting this, but also our internal efforts of being more efficient with our promotions are helping. Steve, anything you'd add?

No, I mean, I think Ryals' point about systems really can't be emphasized enough. I mean, the last couple of years, we've worked really hard on implementing some new technology and gives us great visibility. And like we talked about in Q1, promotional activity has pulled back quite a bit. So it's really about net getting price. A lot of our inflation comes in the back half. So that's where when more true pricing would show up I would say. So we've been really pleased kind of with the promotional environment and the levels we've seen, and that's been a big part of the margin equation.

Yes, Ben, the only thing I would add to it is we did implement a price increase right at the beginning of Q3. And while it's early days, we've been really pleased with how volume has held up with that price increase. So that's encouraging certainly.

There are no further questions at this time. Mr. Ryals McMullian, please continue.

Okay. Well, thank you very much everybody for your interest in the company. And we'll look forward to speaking with you again next quarter. Take care, everybody.

This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.