Good day, and thank you for standing by. Welcome to the Flowers Foods First Quarter 2022 Results Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to your speaker today, J.T. Rieck, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Shannon, 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 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 disclosures and reconciliations are provided in the earnings release at the end of the slide presentation on our website. Joining me today are Ryals McMullian, President and CEO and Steve Kinsey, our CFO. Ryals, I’ll turn it over to you.

Thanks, J.T. Good morning, everybody. I appreciate you joining our first quarter call. I am very proud of our team’s performance in a tough environment. Their perseverance drove record quarterly results in sales and adjusted EPS. Our leading brands continue to gain share and we are successfully implementing strategies to further that growth. Inflation and supply chain disruptions are impacting virtually all companies and we are not immune from that. Our team is working diligently to offset those pressures. And we do callout a $0.05 impact to our ‘22 results, but we expect those headwinds to be resolved in the third quarter. The fundamentals of the business are strong and I have never been more optimistic about our prospects. And no matter the environment, our team is focused on delivering results in line with or better than our long-term financial targets. So with that, Shannon, we are ready to start the Q&A, please.

Thank you. [Operator Instructions] Our first question comes from Ryan Bell with Consumer Edge Research. Your line is open.

Good morning. When we are looking at the price/mix that you have, would you be able to potentially do any some of what’s coming from pricing, what’s coming from mix? And then as you are thinking about consumer elasticities, they seem to have held up pretty well, the next waves of pricing and cost market are hitting a bit more of a pressured consumers. So if you would be able to offer any perspective on that, that would be great? Thanks.

Yes. Thanks for the question, Ryan. I will take the elasticities part and then turn it over to Steve for price/mix. So, so far this year, we have been really encouraged by what we have seen. Our elasticities have been lower than even we anticipated. I think we called out in the prepared remarks that most encouraging is the fact that with significant amount of price increases in January, we actually grew our units as well with our top brands, Nature’s Own, Dave’s and Canyon. So, I see that as a really good sign going forward. Now as we said, we are implementing another price increase in June and so there is a bit of a wait and see there to see how the consumer reacts to that second round of pricing. We all know that the consumer is under quite a bit of pressure, though, I will say a lot of the information out there is somewhat conflicting. You read some things that suggest that perhaps the consumer is starting to bargain, hunt a little bit more or making some different decisions. I think everybody read a few of the retailers’ releases this week and saw a little bit of that though that seemed to be more limited to general merchandise and not as applicable to food. But nevertheless, we know what the inflationary environment is like and there certainly could be a shift in behavior with this next round of pricing, but we just – we won’t know until we get there. The important thing is that thus far, we have seen a pretty healthy consumer. Steve, you want to take price/mix?

Sure. Ryan, we typically, as you know, don’t split price/mix in our reporting. But as we said in our prepared comments, the significant majority or vast majority of that increase on the price/mix line actually came from pricing. So I think it would be safe to assume that the vast majority is price.

Thanks. And then in terms of the EPS guidance coming down a little bit, understandably given all the inflationary pressures, supply chain disruptions. You were talking about the impact falling a little bit more heavily into 2Q versus 3Q. I was wondering if you would be able to provide any color on that?

Yes. Sure, Ryan. The price increase that we are implementing won’t be effective until June 6, but we are already experiencing the higher costs and we have the packaging disruption that we mentioned. Now, the greater part of the impact is due to the pricing lag and less due to the packaging effect. But come June 6, for the remainder of the quarter, we will have the benefit of that additional pricing. So, it’s really due to a combination of price lag and the packaging disruption we mentioned.

Thanks. And the last one for me, in terms of understanding what kind of incrementality there has been from work from home, is there anything you have done in terms of survey work to understand how much bigger the breakfast or lunch occasion now is that you can service with respect to your products?

Yes. So what we have witnessed, Ryan, is a shift within the category. And I think we have mentioned this on some prior calls, to specialty buns enrolled type products to breakfast, a lot of that driven by work from home and also a shift to more premium items away from that traditional sort of 20-ounce loaf segment though we are still strong there and we are still quite large there, obviously, with Nature’s Own. We have seen a shift in the category out to those more premium, more differentiated items. And the good news is, is that has held up at least so far even in this challenging environment.

Great. Thanks a lot. That’s it for me.

Thanks, Ryan.

Our next question comes from Steve Powers with Deutsche Bank. Your line is open.

All right. Thanks. Hey, good morning. So Ryals, just following up on the first question, can you just confirm that the new round of pricing has been accepted across the board, just to confirm also if your guidance contemplates a more adverse reaction to that next round of pricing than we may have seen so far? And then I wanted to ask, kind of loop back on – in the wake of Walmart and Target this week, as you kind of alluded to, there has been a ton of focus on not only elevated concerns around eroding demand and elasticity, but kind of embedded my question is concerns about increasing retailer pushback to further price increases and the prioritization of private label assortment across a number of categories. And against that backdrop your results, your forward commentary just kind of stand in opposition to those concerns? So can you just maybe give some perspective on that and recognizing past trends right up through this first quarter, just what gives you confidence that you can kind of ride and really double down on that premiumization momentum going forward into what I think increasingly people feel as a – maybe everyone feels, a much more uncertain future?

Sure. Steve, thanks for the question. So as far as the pricing acceptance goes, we have not had any issues there. Most of our pricing is in and plan – that was planned for June 6. So there is really no issue there from our standpoint. So we’re confident we can get it all in. So that’s number one. Number two, as far as private label goes, just going back to some of our prior conversations, as you know, private label has been declining in our category for a long time and it’s still declining. Though I will say the declines are less severe than we have seen in past quarters, but it still has been down. I recognize that there has been a little bit of private label growth in broader food, but we are not seeing that in our category right now. I keep coming back to the point of differentiation within our category. Private label are generally very basic items. We offer a range of items at a range of price points in a range of channels that are greatly differentiated from private label. I am not in anyway suggesting that if we happen to enter a recession or something like that, there won’t be some level of trade-down. But as you saw from our prepared remarks, as we look back to the last recessionary period, we really didn’t see a lot of that in our category. And on top of that, our industry is much different than it was back during that 2008 to 2011 or ‘12 period, right? You have got a much more consolidated industry. There has been a lot of innovation in the category. We now have Dave’s and Canyon and Nature’s Own Perfectly Crafted, et cetera, that we did not have back then. Our market share is much higher than it was back then. So, even if there is some level of trade-down, I feel very confident in our ability to weather any kind of demand environment. Remember, we are in a stable and staple category. This is typically a weekly purchase item for many, many consumers. You add to that the continued work from home trends that we are seeing. I think we have got a nice backdrop for continued good performance. As far as retailers prioritizing private label, we have not seen that. I have seen some commentary from retailers that suggest that they are not doing that. And again, we certainly haven’t seen it. There seems to still be a focus on branded items in the category and thankfully, we have got good brands to fill that space.

Okay. Very helpful. Can you just maybe – can you confirm just – or frame for us what kind of degree of, I guess, worsening environment is embedded in your guidance? And then I guess I left from your prepared remarks. You were pretty clear around sort of the 2Q, 3Q dynamics, rising inflationary headwinds, supply chain disruption and the pricing that’s rolling in leading to that $0.05 impact. But I guess I am not as clear as to where you expect the year to end. I guess I am really thinking about it from a gross margin perspective. Because while you presumably have that full pricing in place by the fourth quarter and supply chain issues resolved, costs are likely to keep rising. So I guess how should we think about the margin profile of the business exiting ‘22?

Sure, Steve. This is Steve. When you look kind of – I’ll talk about it maybe from the cadence of guidance. As we have said early in the year and now it’s really embedded in our forecast, because our coverage levels have ramped up, but our costs continue to rise and escalate primarily through the third quarter and then they stabilized somewhat, although they will be at a higher level in Q4. Then from a comps perspective, it will be an easier comp when – by the time you get to the back year – back of the year. So as the year progresses, you will more than likely see some pressure on margin. But as Ryals said, we believe we have priced to offset and mitigate as much of that as possible. And then you layer on the cost initiatives that we have talked about for a couple of quarters now. That also allows us to offset some of the inflationary pressure we are seeing. A lot of those initiatives come in the back half, so you will not really begin to see that ramp up until we are out of Q2. And then specifically, with the nickel around pricing and packaging, as we said, that should abate somewhat from a packaging perspective. As we move into Q3, we feel like we have a good plan in place to mitigate that. And so far, we are seeing that plan in action and things are beginning to look somewhat better, so we still like – we have given ourselves from a guidance perspective, what we need to work through that issue. So, the reality is this is going to be a full year challenge kind of all hands on deck, but we do feel like the way we forecast and the way we planned and the way we have thought about kind of elasticities as prices continue to ramp, we have all that built into our guidance.

Okay. Thank you very much. I will pass it on. Thanks.

Thanks, Steve.

Our next question comes from Mitch Pinheiro with Strudivant & Company. Your line is open.

Hey, good morning.

Hey, Mitch.

Hey. So first on the supply chain issues, I realize you have talked about plastic bags and things. But what are the specific issues are you seeing pressure on or disruptions and creating inefficiencies?

Mitch, for us, it’s primarily been packaging. We have had a few raw material type issues, but nothing that I would callout as being terribly significant. It’s really been on the bags primarily for – obviously for our bread items and then a couple of items in cake. But again, we are working through that. I have complete confidence that we will be through it in the third quarter. But hence, again, the reason we call out the nickel impact.

And with the bag, I mean, is it a situation where your suppliers – there is obviously problems at your suppliers? I mean is this how – why are bags short?

Yes. It was sort of a combination of factors. But suffice it to say, there is plenty of inventory or capacity, I should say, in the system that we have identified and are moving to. So, we will actually be spreading our risk around even more than it was before. So, we will be – we will actually come out of this in a much better situation than we went into it. It was a variety of factors that backed things up. I can’t point to one single one. But again, with the actions that we are taking, we will be – from a supplier diversification standpoint, we will be in a much better shape than we were prior.

Okay. And then as – so as we sort of perhaps see the end of inflation pressure and you have taken all your pricing, and I know we talked – a lot of discussions here about elasticity. But do you expect when we get to the other end of this period here that price – your list pricing holds and we go to a little more promotional environment for – and would you prefer that because you can – your promotions can drive accelerated volume, or would you rather it would be sort of a stable list environment with modest promotional activity, what’s best for Flowers?

Yes. Look, for me – it’s a great question, Mitch. For me, I would rather - the promotional environment remains stable. And we have needed to increase our margins in this business for a long time, as you well know. And so my hope would certainly be that the consumers are able to accept the price increase, that the price increase holds and that the promotional environment remains rational. That would be the best for our business.

Okay. And then still impressive to see your brand is gaining share, and I am curious where that’s coming from. Is it coming from store brands? Is there – are there any regional differences that are noteworthy in your share gains?

Yes. There is one that I will call out. I mean we continue to perform exceptionally well in the Northeast. I am really proud of that performance. As you know, we put – you have seen a lot of our commercials, I think you have mentioned before. And we put a lot of investment behind that because, as you know, it’s – our national share is 17.9%, 18% depending on what quarter you look at, whereas in the Northeast, we are about 10%, 1% or 2% now, I think. But it was zero not too long ago. And we continue to increase that share kind of across all of our categories. So, the investment is paying off. Nature’s Own, particularly Perfectly Crafted, Dave’s Killer Bread, Canyon, they all continue to gain share. And those – we are talking about premium items here. And as I mentioned, it’s really encouraging to me to see that unit growth along with the price increase.

Okay. And then just one more, on the foodservice side, you spoke, I guess a quarter or two quarters ago about sort of setting new margin thresholds in foodservice and holding the line on pricing and not accepting unfavorable deals. And how does that strategy carry?

It’s coming along well. I also said it’s a bit of a long-term project because some of our foodservice volume is under contract. And so we have to work through those contractual terms to fully get to where we want to be. But in the areas where we have been able to take action, we have, and it is starting to improve things. Now, the inflation situation does cloud a little bit because in foodservice, there is sometimes even more of a pricing lag because the contracted business, you follow the cadence of the contract. And so you may be experiencing inflation, but the price increase doesn’t come until the contract says it comes. So, there is a little bit of that going on. But where we have been able to take action where we are not under contract, it’s been very beneficial to have those margin thresholds set that the team is fully aligned on working towards. So, over time, I expect to see those foodservice margins start to come up again.

Great. Alright. Thank you very much.

Okay. Mitch, thank you.

Our next question is from Ben Bienvenu with Stephens. Your line is open.

Hey. Thanks. Good morning.

Good morning.

I want to ask about your portfolio optimization strategy and you talk about whittling away at your lower-margin SKUs. As you think about that strategy, are you purely looking at all of your lower-margin SKUs and removing those strategically from the portfolio, or are you retaining some of your higher demand low-margin SKUs? How do you think about that balance between where the margin versus the demand critical mass?

Yes, good question. So, there are some of our lower-margin products that we would describe as more strategic in the sense that in partnership with some of our retailers having that store brand business, for example, gives us preferential space for our brands, where that’s not the case. Our intent is to get those margins improved, whether that’s through a combination of pricing, distribution methods, efficiencies on our end, etcetera. But if we are not able to get that up to the correct threshold, then we have the option to thoughtfully exit that business and then convert that capacity, as I have mentioned on previous calls, to our higher-margin branded business, which we have been doing for the last several years. It’s really been beneficial for us.

Got it. Okay. Makes sense. And then with respect to your CapEx guidance, came down a little bit. You talked about product raw material to cargo [ph] production platform. To what extent are you seeing that in your CapEx project pipeline? And how are you navigating that environment?

Can you repeat that? The first part of that broke up a little bit?

Sure. Just the revision lower of your CapEx guidance how much of that has to do with production or labor challenges, material challenges versus just timing differences?

I mean the reality is the vast majority is probably more timing. When we look at the bakery optimization that we have been talking about now for a couple of years, some of those projects, as we continue to evaluate where that needs to happen, we have pushed somewhat on the timing. So, it will probably take us into – out of this year into next year. So, it’s really mostly timing-related. I mean we are pretty much on track when it comes to the largest project going on right now around ERP plus the digital. Those are coming in about where we thought. It’s really around some of the optimization. But it really has nothing to do with availability of supply. It’s more of just kind of a push from a timing perspective.

Okay. Fair enough. And then my last question. I know it’s early days, but the DKB Bars, you talked about promising feedback trends there. Is that mostly a market share gain opportunities, or do you think there is an opportunity for distribution gains in the new channels as well stores or otherwise?

Yes. We absolutely think there is some distribution opportunities there. And yes, look, I was careful to note it’s early days, but the results in the test markets were really, really good and they did exceed our expectations. And it’s a wonderful position to be in because it’s the rare brand that can move across segments. And Dave’s has proven that it can do it, right. It moved out of loaf bread into breakfast and then breakfast and the buns, and now we are jumping into the healthy snacking category. And our retail partners are really excited about it. Consumers are really excited about it. As I mentioned, we have got a pipeline of things coming behind that. So, it’s early, but it’s incumbent upon us to find new revenue streams for this business. We all know that in sort of the mainline low segment, the category dynamics are a little bit tough there. We also know that as well as DKB and Canyon have performed in their core segments. Over time, you got to expect those growth rates are going to start to come down a little bit. And so it’s incumbent upon us to identify new revenue streams, and that’s what we are doing with these great brands that we have. So, I called it out specifically because we are so optimistic about it.

Yes. Okay. Very good. Great. Thanks. Best of luck.

Thank you.

Our next question comes from Bill Chappell with Truist Securities. Your line is open.

Thanks. Good morning.

Hey Bill.

Sorry, I got a little bit late on the call, so some of this might have been asked. But in particular, as you are looking across the kind of trade down, if any, so would you expect it – I mean not as it’s having today, but as you kind of look six months, nine months out, would you expect it to go to the opening price point private label or just be more trade down within your brands? And or do you not – do you not expect much at all if we go to a greater recession?

Yes. We talked a little bit about this earlier, but I don’t mind repeating some of it. If you look back to the last recessionary period, we actually saw not a whole lot of trade down to private label. We have also mentioned that in the past that we play across a variety of price points, from private label all the way up to super premium and everything in between, right. You have got private label, you have got Wonder, you have got Nature’s Own, you have got Dave’s, you have got Canyon. So, we are – there is something for everybody there. But if history is a guide, I would not expect a tremendous amount of trade down to private label. I also mentioned, Bill, that the industry is quite different now than it was during that last recessionary period. The industry is more consolidated. Our company is stronger. We have a much stronger market share than we did during that last period, and we have got a much stronger portfolio of brands that are significantly differentiated from private label. And consumers continue to show a preference for those products. So, my outlook would be that while we may see some trade down to private label, that would only be natural particularly if we entered a recession, for example. I think that Flowers is well positioned to hold up very well in that environment.

Got it. And again, this might have been asked. But I guess Walmart yesterday kind of highlighted bread, milk, cheese, other things that they really wanted to keep prices low. I think some people took away the thought that they might start pushing back more on incremental price increases from here. I know you are not going to talk about individual customers. But I mean do you feel like it’s getting – going to be tougher to pass off incremental prices with retail? Is your business different just because it’s such vendor-managed inventory and scan-based kind of price that it’s a little bit different than some other packaged food? Any color there would be great?

Yes. I do think that we are a little bit different just given the service levels that we provide to the retailer, obviously being DSD. I also think that it helps, I will mention it again, the strength of the brands. I mean it’s – I don’t think you want to be in a position where you have got a number four brand right now. And so having a portfolio of number one brands certainly does help. I don’t know what the retailers will do in the future. What I can tell you is that for our June 6, price increase, there has been no issue there for us.

Okay. No, that helps. And then last one for me. Just as I kind of look out at use of cash since some of the CapEx has been pushed out, is there anything else you can do in terms of – do you pull forward looking at M&A? Do you pull forward other projects, or is it just – this is the kind of the way CapEx works. It takes a little bit longer, especially on some construction projects in this time?

Sure. I mean the reality is from an overall capital allocation perspective, I would say really nothing changes in our thought process with the slight pullback from a capital perspective. Obviously, you have heard Ryals talk about M&A. We continue to have a pretty strong pipeline from that perspective. It’s just a matter of valuation and timing. So, that’s always a consideration. And then as we look at other ways to use our cash, whether it’s dividends or stock repurchases, I would say we are pretty – we are sticking pretty true to our philosophical views there. So, I don’t anticipate that changing. So, really the pull back from a capital perspective is timing. So, it’s not like we have eliminated projects. It’s more of a shift maybe between years. So, I don’t think you will see us do anything dramatically different than what you have seen in the past.

Got it. I am sorry, one last question. Would you say foodservice business is kind of back to where it was in 2019, or are we still building back to that?

Bill, we are still building back to it. It’s improving, but still below pre-pandemic for us. But remember also that some of the disruptions that we had during the quarter would have impacted that volume a little bit, too. So, it’s a mix of both.

Got it. Thanks so much.

Thank you.

Thank you. And I am currently showing no further questions at this time. I would like to turn the call back over to Ryals McMullian for closing remarks.

Thank you, Shannon. Thank you very much, everybody, for your interest in our company. We look forward to speaking with you again next quarter, and hope everybody has a great weekend. Take care.

This concludes today’s conference call. Thank you for participating. You may now disconnect.