Good morning, ladies and gentlemen. And welcome to the Flowers Foods Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host J.T. Rieck, Senior Vice President, Finance and Investor Relations.

Thank you and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation that were all posted yesterday evening on our Investor Relations website. After today's Q&A session, we will 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'll also provide non-GAAP financial measures for which disclosure 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; Steve Kinsey, our CFO. Operator, we're ready to start the Q&A, please. Operator, we're ready to start the Q&A.

Thank you. [Operator Instructions] Your first question comes from the line of Bill Chappell with Truist.

Hey, thanks. Good morning.

Good morning, Bill

Guys, quick questions. One, based on your commentary in prepared remarks. One you talked about, you're not really, it's too early to tell what kind of normal looks like in terms of people reverting back to work and to school and stuff like that post Delta variant. But you are pretty well exposed to states like Texas and Florida where they've moved back to normal a little bit faster than the rest of the country. So, maybe tell us what you're seeing there and kind of what that tells you for as we look to '22 in terms of consumption.

Sure. Bill, it's really broad -based across the country. We've been really pleased with how well things have held up, particularly on the branded and retail side. Nothing really in particular call -- to call out by region except to say, overall, the brand investments that we continue to make, the innovation we continue to introduce has really helped us hold on to a lot of these consumers. And similarly, we're also seeing further increases in household penetration, velocities are up, repeat buyers are up. So, all the signs point in a pretty optimistic direction when you think about what return to normal ultimately looks like.

Got it. And then, in terms of costs, the comment that you may look to do additional pricing to cover the costs, and can you remind us, do you -- are you looking to kind of cover margin or cover profit dollars in terms of gross margin looking forward?

Obviously, the ultimate goal would be to protect both. Now, at the end of the day, the consumer is going to drive the ultimate results, right? Yeah, consumers were experiencing very, very broad-based inflation. We've all read the headlines, 30-year highs, fifth straight month, over 5%, that kind of thing. So, everything from gasoline to our products is going up. So, we will have to wait and see how the consumer at the end of the day reacts to that. If we find ourselves in a situation, where there is a trade down the value or units drop-off, you could -- it's certainly reasonable to assume that there could be some margin compression in the short-term. But what I would say overall about the inflationary environment is whether you believe it's transitory or whether you think it lasts a little bit longer than that, ultimately these issues are temporary and not completely within our control. So, we're focused on what we can control. We will continue to make investments in our brands, we will continue to make investments in our digital capabilities, etc. that overtime will lead to expanded margins.

Got it. And then last one for me, you’ve made the comment and the remarks like you're seeing M&A activity kick up. And I guess the question is, why is that the case? I was under the impression that the same kind of key targets you've been talking to for years, if not decades. And so, I didn't know why things would start picking up now or -- and maybe it's more color around that comment.

Sure. I think maybe a little bit earlier in the year, it may have been driven by some tax issues. Now, we'll ultimately see where that bill falls. It looks like some of that's going to knock [indiscernible] the bill. So that could have been driving some of it. And you're right, we still continue to talk to some of the same targets that we have for a number of years, but that activity has really picked up, Bill, more in the adjacent product categories, some more in the snacking space, that kind of thing.

Okay, great, thanks so much for the color.

Sure. Thanks, Bill.

Your next question comes from the line of Ben Bienvenu with Stephens.

Hey, thanks. Good morning, everybody.

Hey, Ben.

So, I want to ask about just this continued strength in branded retail. Really good results still, I'm sure the mix is still supporting gross margins even in an environment where you're seeing some cost increases. I'm curious if you could talk about -- do you think we're at this equilibrium now? Do you think this is an equilibrium that we can grow off of? And to what degree is we continuing to see maybe pricing increases? Does that influence a shift from branded retail -- the store branded retail products?

Yeah Ben. Great question. I think that's a key point. And as I was mentioning in response to Bill a minute ago, I mean, it's all going to be about the consumer. And so far, even with the pricing actions that we took in July, branded retail units have held up very-very well. I mean, we've seen a little to no drop-off at all in branded units now. Going forward and as you look into next year with all the inflation consumers face with the stimulus payments coming off that kind of thing, I think it's yet to be seen just how much the consumer is willing to absorb. And that will be a key topic for next year, right? We've been through situations like this before most recently and kind of 7 or 9 time period, business held up relatively well. Yeah, we do offer products across a variety of price points which certainly helps from the super-premium Dave's Killer Bread all the way down to private labels with some pricing in between two on Nature's Own and Wonder, that kind of thing. So, we feel like we're very, very well-positioned to do well in any environment. Obviously, we would be most pleased if the current trends that we're watching continue, but I think it's really all about the inflationary impact on the consumer and what they'll be able to absorb. But that also makes it more important than ever that we continue to keep up with our -- pressing forward on innovation, that we keep developing our capabilities such that eventually this will subside. It always does; and when it does, we will be positioned even stronger.

Perfect. Understood. On the cost side of the equation, how much visibility do you have into the balance of this year, and into early next year? Any thoughts that you have on what that looks like and where we are in terms of the curve of cost inflation? How close do you think we are to maybe seeing a light at the end of the tunnel from your vantage point?

Sure. We -- obviously, given where we are in the year and the fact we do know forward buy, and hence a lot of our commodity expense, we have full visibility for 2021.

From that perspective, we've been talking about the cadence of inflation for this year. Majority of it is coming in the fourth quarter. We will begin to see some of that ramp up, but all that is priced into the guidance we gave yesterday when we released. Looking forward to 2022, we're not prepared to give guidance today, but obviously you can look out on the forward curve is pretty significant inflation. And if things stay in the market levels we see today, as we said in our prepared remarks, we expect to see pretty meaningful inflation next year. But as Ryals has commented, we're looking at efforts to mitigate that through pricing as well as other cost initiatives. So, we anticipate this to be at least probably another one-year cycle and as Ralph just said, depending on whether it's truly transitory or not, you would make -- it could go slightly beyond a year. But right now, all indications are that the inflation will hold through most of 2022 as well and hit the cost side.

Okay. Sounds good. Thanks so much for the thoughts and best of luck with the rest of the year.

Thank you, Ben

Your next question comes from the line of Steve Powers with Deutsche Bank.

Hey, thanks. Picking up on what we've already been talking about, in your prepared remarks and then some of the conversations this morning just really underscores the uncertainties around the pacing of demand migration back towards pre -pandemic levels potentially and just inflation headwinds and other variables. Plus, we know that you've got ongoing strategic investments around technology and branding otherwise. So, just in that context, I'm hoping you could elaborate on the drivers that, as I read your presentation, at least the presentation slides and the accompanying prepared remarks talk about confidence and expectation to get on to those long-term -- that long-term algorithm in fiscal '22. So maybe, unless that was a misread on my part, just what are the drivers that despite all these uncertainties, you feel like you've got confidence and visibility to lock in those long-term growth targets next year?

Sir, I mean, I think we've already alluded to a few of them, but just to reiterate one, the momentum that we carry into 2022. I mean, we have gained a lot of consumers over the past 2 years, Steve. We've invested a lot behind our brands. We're clearly growing our share nationally, but also in very important markets like the Northeast where we're under penetrated. We have a lot of new innovation items, some of which we're testing right now, some of which will be forthcoming next year that we're quite excited about to continue to drive top-line growth. And you're right, we are making significant investments in our ERP platform and other digital capabilities that over the long haul will enable us to stay on that long-term algorithm. And then of course, Steve, we also have, taking a look at the balance sheet, we're obviously poised for acquisition activity should the right opportunity come along. All those things put together give us confidence that we can stay on our long-term algorithm using 2019 as the base year.

Okay, Great. And I guess maybe this slightly different topic just on your manufacturing footprint. Obviously, a diverse footprint of bakeries and I'm assuming that gives you a pretty good amount of flexibility to help navigate different supply chain challenges. But maybe you can elaborate that on and just kind of talk about that generally, but I'm also hoping just to -- for some visibility into how variable operating conditions are across your bakery footprint. Are things relatively similar across the board are there -- or is there a lot of -- are there other flash points where you're having more challenges. I'm kind of thinking particularly from a labor perspective. But any color you have there would be great thanks.

Sure. Not so much about our region of the country. I mean, the labor challenges are pretty consistent across the Company. And well, we do have a few areas where we've had somewhat less issue than the other areas. But generally speaking, it's pretty consistent across the country now. We have been able to manage through that -- I think pretty well, just given the challenges that we're all facing. But it's still a challenge. And it does impact our efficiency. You've got to -- you're either shorthanded or you have a lot of new people in a bakery, for example, that increases your scrap, lowers your efficiency, that kind of thing. The one call I would make, it has been a bit more intense in the cake bakeries, but those are more labor-intensive operations to begin with. You just -- you have more people, particularly in packaging there. It's still a little bit more acute there, but by the same token, we've been able to manage through it pretty well.

Okay. That's great color. Thank you very much.

Sure. Thank you.

Your next question comes from the line of Mitch Pinheiro with Sturdivant & Company.

Good morning.

Morning, Mitch.

It -- have you defined what your inflation rate has been on cost of goods for 2021?

We have not given that -- not specific measure, because of the way we hedge, they would not launch obviously. You're coming into 2021, is really what you begin to see the inflation ramp. So more back half driven, but we haven't given a specific percentage. Just maybe for competitive reasons.

Okay.

You could do the math with acute input costs, that would be pretty much in line, but beyond that we haven't disclosed that.

Okay. When you -- with brand and growth surging, I'd love to hear more about brand building efforts. In particular, is obviously some of this is driven by the consumer looking for the branded growth looking for premium products, looking for higher-quality and a more diverse set of baked goods. But I was wondering whether you're looking to capitalize and market your way to gross, more so than in the past and I'd love to hear what you're doing and how your spending is allocated. Is it being shifted more to TV like I've seen in the Dave's Killer Bread, or is it a digital eCommerce initiative? I'd love to hear a little more on that.

Sure, Mitch, happy to. You can just take a look at our marketing spend and see over the last several years how much we branded out to support the portfolio strategy, growing our branded business at a faster rate. You touched on a lot of 'em already. I mean, a lot of it is being allocated towards our aggressive growth brands whether that be Canyon, Nature's Own, DKB. It's been more intense in parts of the country where we're underpenetrated like in Northeast that's why you're seeing some of the commercials up your way. And you're also correct on digital. Ecommerce is about 8% of our sales right now, which is roughly in line with the category. We want to continue to grow that. I think ecommerce is going to continue to be a bigger and bigger part of the picture, and we need to have that digital presence. But on the other side, we're also investing in consumer insights. We have to understand our consumers such that we can continue to deliver the innovation that they want in a category. Some of that spend is going into that and continued investments in R&D. And I think you'll start to see some of that as we go forward with some of the newer innovation items that were coming out with that are not in the bread category, put it that way.

And when it comes to Dave's Killer Bread, what's driving the growth there? Obviously, you have new products. I was be curious to hear a little bit more about either any particular channels you'd like to call out, products, their distribution gains happening. I'd love to understand more what's driving DKB rather more than just -- there's just for strong demand for organic product.

Yes. Sure. I think at the end of the day, first of all, it all starts with volatility. There are other organics that are out there. The days has a commanding 70 share for reasons because it's the best taping, the best quality, best consistency. We're continuing to grow in the Northeast [Indiscernible] which is a big part of the puzzle there. Bringing on Lynchburg last year to support that growth has been a huge thing for us in Dave's evolution. We continue to come out with new products with Dave's. We're testing some new products right now with them. There will be more coming next year. So, increasing awareness is a big one. I've talked about this before. When you look at the great success of Dave's that we are all very proud of, of course, but then you compare it to household penetration to that of Nature's Own, it's roughly half that of Nature's Own. Even with the great growth we've experienced, we feel like that brand still has a ton of runway ahead of it, both with in its current categories and in another categories because I think the brand is strong enough now to begin playing across different categories, which we're obviously very excited about.

And then just final question. What any update on your cake business as far as the manufacturing side are we -- is a lot of that solved, or is it still work in progress in 2022?

Yes. Mitch, this is not solved yet, but great progress this year. They're ahead of pace, actually, which we're very pleased about. But as I've said on the past several calls, though we're pleased with the progress, we still have some ways to get them, but the improvement this year has been material.

Okay. [Indiscernible] Thank you very much.

Thank you, Mitch.

I'm showing no further questions at this time. I would now like to turn the conference back to Ryals McMullian.

Thank you very much, everybody. Appreciate your interest in the Company and we'll look forward to speaking with you again next quarter. Everybody takes care.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.