Good day, and thank you for standing by, and welcome to the Flowers Foods Second Quarter 2023 Results Conference Call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your speaker today, J.T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Norma, and good morning, everyone. I hope you all have 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 will also provide non-GAAP financial measures for which disclosures 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, Chairman, CEO and President; and Steve Kinsey, our CFO. Ryals, I'll turn it over to you.

Great. Thanks, J.T. Good morning, everybody. Thanks for joining the call today. I'm very pleased with the strong quarterly results. Our performance recovered after a slow start to the year, helped by the competitive strength of our leading brands, despite strategic pricing initiatives designed to mitigate inflationary pressures. Volume trends in our branded retail business did improve, and that may be an early indication that consumer demand is migrating back to pre-inflationary levels. That top-line strength translated into improved margins and earnings, which is reflected in our updated 2023 guidance. Private label products gained share, but that growth appears to be moderating. So, we remain confident that the trend towards premiumization, driven by our investments in innovation and marketing, will win out over the longer term. I'm excited about our prospects, and I've really never been more confident in our ability to grow shareholder value over time. So, Norma, with that, we are ready to open up for questions.

Thank you. [Operator Instructions] And our first question will come from the line of Bill Chappell with Truist Securities. Your line is now open.

Thanks. Good morning.

Hi, Bill.

I guess, can we start a little bit more commentary on Canyon? I didn't fully understand kind of what happened to have the deterioration of, I guess, market share and margins over the past few months. I'm just trying to understand how that improves going forward. It seemed like Canyon had a pretty strong trajectory for the past few years. And I just didn't know if that's more of a sign of we're hitting a plateau or if there's something else that I don't fully understand.

Yes, sure. I'd be happy to. I would describe it as temporary, Bill. I mean, a lot of it has to do with capacity. It's, in some ways, a good problem to have, because as you know, Canyon has been on a really nice trajectory, but we got a little bit tight. We've had to do some things to restructure Canyon's portfolio, and made some more investments at the Canyon Bakery to help free up additional capacity. So, we've got that solved. That's coming online in the second half, and we've got plans to reinvigorate the growth. There is a little bit of channel shift as well that's happening that's not picked up by the syndicated data. So, what you're seeing is a little different than reality. But again, I put that in the temporary category. We'll get that back on track. Canyon has got a -- still got a great future ahead of it.

Got it. Thank you. And then this is the second or third time you put in your commentary kind of a thought of moving into tangential categories through M&A. And at the same point, I think you've talked about rolling out Dave's Killer Bread bars sometime in '24. I didn't know if those kind of coupled if you'd like to have greater expertise in the snack bar or tangential category before expanding that kind of nationwide, or any kind of update on how that's going would be great. Thanks.

The rollout is going really well. So, those initial three SKUs of bars build are in the middle of a nationwide rollout right now. So, I think we noted in the pre-recorded commentary that we're in about 12,000 stores. We'll be in more than 13,000 by year-end, and we'll actually slightly be slightly ahead of our own expectations for that rollout. For 2024, there are three new SKUs of bars coming out that are higher protein based. They're the amped-up protein bars. Really great product. They've been in test market for a while. They've done extremely well in test market. And I think most promising is they're proving to be incremental to the original free SKUs. So, I think we're touching a different consumer segment with that higher protein offering. And then of course, behind that, we've got the snack bites, those are still in tests. Those will be coming a little bit later. And then a whole pipeline of innovation even behind that. So, we're really excited about what we're building from an innovation standpoint with Dave's.

And I guess from an M&A standpoint, does that make the bars category more attractive from a non -- getting out of just straight bread, as you're building expertise and building kind of a national following up behind a brand?

Yes, it could. I mean, it would definitely depend on the brand and what that brand brings to the consumer. I mean, it is a crowded category. So, we want to be careful that we're investing in the right segments of that category. But, yeah, there are definitely opportunities out there we'd be interested in.

Great. Thanks so much.

Thanks, Bill.

Thank you. One moment for our next question, please. Our next question comes from the line of Mitchell Pinheiro with Sturtevant & Company. Your line is now open.

Hi. Good morning.

Hey, Mitch.

Hey. I guess, a couple of questions here. First, you spoke a lot. You spent time in the -- in your script about private label and you're seeing sort of improved trends, but you still have -- you still wary on -- you're just not sure where it's going. And I'm curious are you seeing the positive or a trend back to brands even into here in August? And what you might be looking for as signs of either of movement in either direction?

Yes, sure. Great question. So, a couple of things there. Private label still gained share in the quarter. But I think it's important to note that, that growth is slowing. And this was -- towards the end of the quarter was the lowest that we've seen in terms of gains for private label this year. So that's definitely on a good trend. The other thing to remember, and we've talked about this all year, this is -- the private label phenomenon is playing out more in mass than it is in grocery. It actually lost share in grocery. Continues to gain in mass. We've talked about there's been a little bit of channel shift, as consumers seek bargains in mass, club, dollar, that sort of thing. I do think also that it's important to note that the private label share gains are generally confined to that loaf category, the traditional products. In other words, those with the lease differentiation. Private label lost share in virtually every other category where you tend to see more differentiation, so especially breakfast, sandwich, buns and rolls, that sort of thing. So, the trend towards premiumization is definitely still there. Clearly, consumers are still looking for bargains, but that trend is headed in the right direction from our standpoint as we look to build our branded business. Mitch, I'd also point to, and we did mention this in the pre-recorded commentary, Dave's had a great quarter, up 7% in units in the syndicated data. That's a really, really good sign, particularly given its premium positioning. If you recall, about 20% of Dave's Killer Bread shoppers are low-income households. It was a surprising number to me when I first found out, but that's where we were really starting to lose a lot of the unit volume. And in fact, earlier in the year, Dave's units had turned negative. Well, now those low-income shoppers are coming back to the brand and helping us achieve that nice unit growth in the second quarter and were positive for the year. We did also gain some penetration in higher-income households to help. So, just all of those factors put together give us some confidence that consumer health is improving. Now we did caution everyone that we're not ready to call the play yet. We'd like to see that trend continue well into the third quarter before we conclude that it's here to stay, but definitely some really nice early signs.

Thank you. And then, looking at your foodservice in the other category, I mean, how much pricing -- is there still pricing to go there? Number one. Number two, are you seeing any pushback on pricing so far? And as these volumes come down, how does that have an impact on your gross margins?

Sure. So, as far as pricing goes, we got in the pricing that we needed for the year. Now there is some of it on the contractual business that will continue to trickle in, but I think it's fair to say most of it is done. As far as resistance goes, broadly speaking, everybody understands the inflationary environment. So, we -- again, we were able to get through all the pricing that we wanted. In terms of volume, remember, a lot of the volume declines -- first of all, overall, the volume declines are largely made up of foodservice and cake volume declines. And then most of that is intentional. So, as we rationalize some of that lower margin business that we've been talking, that certainly plays into it. Same thing on the cake side, just getting out of some of the cheaper business, focusing more on the branded business. Obviously that's having an effect on volumes. I think sequentially, for cake, you should see that improve. It did improve this quarter quite markedly, because we're really starting to lap some of the heavy SKU ramp that we did last year. And then finally in terms of foodservice, we did have some disruptions in the quarter from one of our cold storage suppliers that definitely impacted volume performance in the quarter.

Okay. And then just last question. So, when it comes to -- you talked about -- I was interested in the -- you've moved some of your sales -- your, I guess, the bakery function away from the sales leadership and more to the supply chain leadership and you're seeing positive benefits on both ends, better efficiency in the bakery and also, you pointed out how you're pleased with how the sales sort of have improved. And I'm just curious, how that -- you have a lot of national customers. How much influence the local sales leadership has at each bakery? And whether -- is there also a reduction in force at all as it relates to the sales, just having more sales out there -- more salespeople out there?

Well, I'll answer your last question first. No, not from a material standpoint. Obviously, there's always a little bit of attrition in turnover. But I think the more important pieces of your questions are, yeah, it does have an effect at local level, yes. A lot of national accounts now. Grocers have consolidated. We all know that. But the area sales director can have a major impact at the local store level, helping to sell in that additional display, for example. Those types of executional elements are critical. And I would point to that reorganization as one of the reasons we've performed so well in the quarter. As you know, this is the big summer buns season. We had our best buns season ever. We achieved our highest buns share in the quarter. I think those are all proof points that the organizational restructure is working. Mitch, it's really a matter of focus, having our sales folks be able to focus only on sales, what they do best, and then similarly on the supply chain side, having that expertise solely focus on running those bakeries as efficiently as possible. And to your point, we've seen improvements on both fronts.

Okay. All right. Thank you very much for the questions.

Thanks, Mitch.

Thank you. One moment for our next question, please. Our next question comes from the line of Connor Rattigan with Consumer Edge. Your line is now open.

Hey, guys. Good morning. Congrats on the great quarter.

Thank you, Connor. Appreciate it.

Yes. So, just kind of wanted to follow-up on some of Mitch's questions there. So, you noted private label share gains somewhat moderating in the quarter and sort of confined to more, I guess, traditional loaf segment and sort of with those share -- and I guess just trying to get a fact -- just trying to get a sense, just how much of a factor is maybe mix shift shifting maybe -- more towards the buns segment or I guess is more differentiated segments in the summer months? And I guess maybe is there any concern that consumers are maybe just temporarily moving to different segments of the category where private label is under shared?

Actually, we've been seeing that trend for some time. If you go back quite a few quarters, I think we talked about that pretty heavily that even within the category, we were seeing shifts more towards specialty premium, more towards breads, buns and rolls, more towards breakfast items, all of which tend to have a higher level of differentiation, and are certainly more premium products as well. So, for example, our Nature's Own Perfectly Crafted Brioche buns have done extremely well. That's a differentiated item from just a standard white bun. The Dave's Killer Bread, bagels, English muffins, et cetera, even the buns with Dave's have done really well, as well as that broader specialty premium category. So I think it's a trend we've been seeing for a while, somewhat disrupted by the inflationary environment because obviously we've talked a lot about trade down and households economizing. But I think over the longer pull, I think that trend remains in place. One of the things that we're focused on here is how can we bring more differentiation to that traditional loaf category? It is still our largest segment. So, it's very important from performance, from a cash flow standpoint, all of it. So, what can we do to further differentiate those mainline Nature's Own items? Is it from a quality standpoint, a packaging standpoint, different flavors, et cetera? So that's something that we're focused on here.

Perfect. And then just back to SKU rationalizations a little bit as well. So that was the volume headwind again in the quarter, obviously. And I guess, I was just wondering, was a headwind driven mostly by compares from prior rationalizations or were there more SKUs actually eliminated during the quarter? And mean, I know you mentioned the impact is expected to lessen the second half, but I guess just trying to get a sense for if there are a lot more SKUs potentially on the chopping block or if you're pretty much all finished?

I'm going to break that into two pieces, because on the cake side, we're largely done. And I think we said at the beginning of the year, you'll see those volume declines start to moderate as we move to the back half of the year. And you -- we saw that even in the second quarter. So that's on the cake side. I mean, obviously, there's always continued SKU rationalization, but the bulk of it that we've been doing over the last couple of years, we're sort of through that. On the foodservice side, it's a little bit different, because we still have some of that lower-margin business that we'll be rationalizing over time. And it's not all going to come at once. Some of it is under contract and that affects the timing. We did exit some more late in the quarter. I wouldn't say that's heavily responsible for the volume decline in the second quarter. That's more the previous rationalization we did, the disruption with the cold storage operator, et cetera, was more responsible for that. So on the foodservice side, to sum up, I would say, we're not done yet. But it's not like it's going to come all at once, it will be spread out over a number of years. And it's really about -- we intend to stay in foodservice. We like the foodservice business. It's really about exiting that lower-margin business, margining up in foodservice and, even more importantly, shifting that capacity and production to branded retail.

All right. Great. Thanks for the color as always.

Okay. Thank you, Connor.

Thank you. One moment for our next question. Our question comes from the line of Jim Salera with Stephens. Your line is now open.

Hi, guys. Thanks for taking our question.

Good morning.

You talked in the prepared remarks about the stabilization on the branded side. Do you feel like there's anything you can do in the near term to maybe juice that a little bit, whether it's from an advertising standpoint or a promotional standpoint? Do you feel that there's a way you kind of help it along to get it going -- the brand is going back in the right direction and gaining share?

Yes, good question. I'm glad somebody asked about promotions. I was hoping we get that. Yes. So to answer your question, yes, we are doing things to juice it, to use your words. So, if you look at SG&A, marketing was up in the quarter. I think that's something you can continue to expect to see from us. We're very committed to our marketing efforts to support these brands. I think that's always important. From a promotional standpoint, we did promote a little bit more in the quarter. I wouldn't call it out as anything terribly significant. I think overall, in the category, promotions were up a little bit, but still well below historic or even pre-pandemic levels. So, no significant movements there. The interesting bit that we're seeing is that even when we do promote, the incremental units aren't terribly attractive. So, we have to be very selective about when we do promotions to ensure we're getting a good return on those promotions. And there are some good ones out there to be had to be sure. But I think what that tells you is a little something else about the consumer, right? If you're putting an item on promotion and you're really not getting that lift that you normally see, what it tells me is the shopper is still not -- they're only buying what they need. So, it's another indication that consumers are still trying to economize in the household. So, we'll see how those trends continue. But I think the takeaway is the category has not gotten terribly promotional, at least not yet. And to the extent that there are promotions, we're really not seeing that incremental lift that you might have seen in the past.

Great. That's helpful. And then maybe to drill down on kind of the balance between promotions versus marketing, because you mentioned step-up on the marketing side. Could you give a sense for which one of those drives consumer engagement, especially with the less differentiated branded products? Is it better to have a low priced [indiscernible] $0.05 less, or is it better to have 5% more airtime or visibility, so it has the brand top of mind for consumer?

Yes. I think they're both important. They may serve slightly different purposes. I mean promotions can be very effective in driving trial, for example. So, if you think about our bar launch, obviously, we're doing ads and promotions for the bars because we're trying to bring new consumers to that. Certainly, marketing can do that for you as well. But almost look at marketing as much about retention as it is acquisition. And so, it's really -- the combination of the two are really important depending on what you're trying to drive. In a more commoditized category, yes, promotions are probably, at least historically, a little bit more effective despite what I just got finished talking about. But I think the most important thing that we can do within our portfolio of brands is continue to drive differentiation and then drive consumers to that with a combination of promotions and marketing.

Great. That's very helpful. I'll pass it along.

Thanks, Jim.

Thank you. I am currently showing no further questions at this time. I would now like to turn the conference back to Ryals McMullian, Chairman, Chief Executive Officer and President, for closing remarks.

Great. Thank you, Norma. I just want to thank everybody for taking time today and joining us for questions. We really appreciate your interest in our company. And as always, we look forward to speaking with you next quarter. Everybody, take care.

Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.