Good day and thank you for standing by, and welcome to the Flowers Foods First Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [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, operator and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation. These were 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. Victor, we're ready to start the Q&A, please.

[Operator Instructions]. Our first question comes from the line of Rob Dickerson from -- sorry, Rob Dickerson. You may begin.

Great, thank you, from Jefferies. Good morning everyone.

Good morning Rob.

So, Q1 was a good quarter, it sounds like you have decent conviction in the revenue guidance plus it sounds like or seems like those consumers that have been consuming at home continue to consume at home with retail brands still elevated, which is great. I would just ask because I think this is kind of the main question for a lot of investors right now. There's a line in the prepared remarks that says, it seems as if maybe commodity inflation is somewhat manageable for this year, but for next year if prices kind of remain where they are, there could be a bit more pressure. So, I would just appreciate any more color on that color potentially around some of those offsets including pricing potential in the back half of this year? And then obviously leave it at that. Thanks a lot.

Sure Rob. Hey, this is Steve. Obviously, there's a lot of volatility in the commodity markets. Our guidance takes into consideration what we believe will play out for 2021. And as you know, we do hedge and we take coverage usually on the seven to nine months-time horizon and typically stay on the long end of that. So, we do believe we have good visibility for the rest of 2021. There are a few things that we can't cover, a little more near-term from some of the packaging area. And you are seeing a lot of volatility and inflation in packaging, particularly around the corrugated area and arena. But like I say, we do feel like we have decent visibility. Ralph said in his comments, there are several levers we can pull, I think being one of those that we are looking at, efficiencies across our bakeries as well as other cost initiatives. So, I do feel pretty good about the guidance range we have out there. And, obviously due to the volatility and the way things moved so quickly, as the year progresses, we'll be able to exchange the guidance if necessary, but I think given the point we're at, we feel pretty comfortable with that. Looking into 2022, obviously, we're not prepared to give guidance for 2022, but the reality is when you look at what's driving kind of the commodity inflation, a lot of that is not necessarily wheat. I mean, the wheat crop is in pretty decent shape, but it's other grains like corn and beans, and it's more of a global market. We are seeing, China back into that market in a big way. And just -- and as grains turn to feed grains, and there is tightness on availability of the supply, then that starts to impact things like wheat and other grain crops. So, the reality is that today's prices, if we had to go out and cover, it would be significant commodity inflation, but we still have a lot of runway with regard to the corn crop, the bean crop. We'll cycle a wheat crop, but we just thought it was important to get that out there from a transparency perspective.

Rob, just to add a couple of points to that, Steve is spot on across the board, but we've -- as you know we've been through periods like this many times in the past and we've been able to adequately cover most of the inflation that we've experienced over the years. I would say that I think we're better positioned today, perhaps, than we've ever been. Just with the -- if you think about the strength of our branded portfolio now and the focus on it, consumers obvious desire for branded products with a point of difference. I think that positions us even better as you think about some of the levers we can pull from an inflationary environment standpoint.

Okay, that makes sense. And just a quick follow-up. Like you said, consumers continue to focus on brands, your branded business is doing very well. You called out in the prepared remarks just the growth overall with BKP and Canyon [ph], which is doing phenomenal. And, even relative to 2019, revenues still remain elevated. So, I just think the larger question then is as consumers, they start to revert back, as you say kind of one of the three things you're keeping your eye on, right is reverse, basically channel reversion. Is there anything that you would say now relative to 12 to 18 months ago that has changed your way of thinking of maybe how to service some of the channels, like are there benefits to maybe not reverting as much, but just say, okay, we're going to leverage some excess capacity over here, a little bit private label, a little bit in food service, what we've learned through the pandemic, yes or [ph] no, is it just kind of get back to business as usual and that's all this time? Thank you.

Yeah, thanks Rob. No, I don't think it goes back necessarily business as usual. As we've said before, I do think there are -- some of these patterns are probably permanent, but we've also consistently said we do expect to see some movement back to pre-pandemic levels. So, I don't think it'll go all the way back. I do think that when school starts in August, that should give us a better and a long-term indication of where these trends are ultimately going to land. Having said all that, no matter what that environment looks like, we believe that we're very well-positioned with our branded portfolio, as I mentioned. But also as you think about food service coming back, which it already did somewhat in the quarter, we started to see some moves up in food service. And the good story there is, via our customer strategy work, it is coming back at better margins. So, as that mix reverses and food service starts to come back, it won't have as significant of an impact as it would have prior to the execution of that strategic work.

Okay, interesting. I'll follow-up on that. Thank you very much.

Thanks, Rob.

Thank you. Our next question comes from the line of Bill Chappell from Truist. You may begin.

Thanks. Good morning.

Good morning, Bill.

First follow-up on pricing, have you seen any pricing from -- on the competitive landscape, I think we heard the other day that little [indiscernible] pricing. I imagine not all of your competitors are kind of headed the same way you are. So, they may be feeling the pinch sooner than later. So, didn't know if you've seen anything there or looked to follow it up from that standpoint?

Yeah, nothing really significant, Bill. The one comment I'd make relative to pricing just in the competitive environment is the promotional cadence and still consistent with past quarters we haven't seen really any move relative to promotions. Still remain [indiscernible] day sales really driving everything, though, obviously down year-over-year just given the pantry loading months. But nothing significant. I mean, we know that some of the regional players perhaps don't hedge like we do or at least not as far out. So, they're a little bit more exposed to the spot market and that kind of thing. But, thus far nothing, nothing notable at this point.

Got it.

Bill, also it will be more of us, just like for us it could be more of a back half dynamic that of course have [indiscernible].

Yeah, sure. And then on private label, I mean, it's pretty astounding that it's gone from 26% of the category down to 20%, which is going to be one of the lowest in years. And I think I've asked this question before, but since you supply so much of the private label, I mean at what point can you go in and push more of your branded products on the shelf and show that, hey, this is not really a great use of the space. I mean, since you do service it with DSB [ph], I would think that that's something that's pretty apparent to the retailers as well as the industry?

Yeah, In deed it is, you're right. We've talked about this a little bit on prior calls. But I mean, I think the retailers are seeing the benefit in our category and others, frankly, of consumers preference for brands. So, we have been able to expand our shelf space, but particularly with Dave's and perfectly crafted and Canyon some of those leaning items that we have, we again just kind of highlighted the importance of the portfolio strategy overall. But I agree with you, it is pretty amazing to see how -- see how far balanced it is, but I think that's a reflection of consumer behavior more than anything else, and I'm certain that the retailers are pretty in tune with that.

Sure, and then last one for me, just going back a year ago, you had your 40ish bakeries being able to in a short period of time hit a massive surge in sales. And now that we've come or we're coming back down or normalizing, I mean do you look back and say, boy, the supply chain, the number of facilities we have could be streamlined even further, if we were really much more efficient than we could or more efficient and could be even more efficient by cutting out a few plants here or there, or is that not the case, is it, hey, let’s just continue to operate and grow with it?

To the contrary, look I mean, network optimization has been one of our key areas of focus as you know. We did convert that [indiscernible] bakery, we have some other projects going on this year and are you seeing with the elevated CAPEX numbers this year. So, still very much a focus point for us. As we often say, there a lot of levers you can pull in an inflationary environment, but it's always incumbent upon us to make sure we're being as efficient as possible. So, we're constantly evaluating our network from that standpoint.

Got it, but more just the normal process, I mean, would you I guess -- would you expect CAPEX to be elevated going into 2022 or is this really the big year of change?

Well Bill, this year the focus is on kind of the digital initiatives. We have said the digital isn't a two to three year initiative. So while we're not prepared to give guidance on 2022, I would expect you could see some elevated CAPEX for the next two to three years, whether it's digital or whether it's working on our portfolio and optimization on some of those projects.

Got it, great. Thanks so much.

Thank you, Bill.

Our next question will come from the line of Faiza Alwy from Deutsche Bank. You may begin.

Yes. Hi, good morning. So I just wanted to follow-up on the inflation point and I don't know if you're willing to say anything on this, but I'm curious are you still hedging out into 2022 because it sounds like are you expecting sort of these prices on wheat etcetera to come down into 2022 so you rather have open positions or are you sort of continuing your programmatic hedging program at these current prices?

Yeah, I mean, we wouldn't comment specifically on 2022 at this point, but we tend to stick pretty true to our overall hedge strategy which is the seven to nine months. So, we do have some visibility into the first quarter of 2022 but, the reality is it's still pretty volatile. And, beyond that, I'll probably wouldn't comment much on our particular coverage with regard to the long end of our coverage range. But, we do -- we are beginning to think about what we do for 2022.

Okay, that's helpful. Thank you. And then just secondly, you talked about improving the profitability of the non-retail segment and I know you've talked about this previously, but I wonder if there's more color, are there numbers that you can put around that, just more details around how much of an impact this could have going forward or has had so far?

Yeah, well Faiza, I mean, obviously, food service on a relative basis remains pretty depressed if you particularly if you compare it back to 2019. So, it's just starting to recover. The quick serve business has been the fastest to recover. I think that's actually up a bit over 2019, with the balance of the food service business still being a little bit off. We haven't quantified it before, but it's something that we measure internally. We have set new margin thresholds for our food service business and the way we're approaching it is, if we cannot get a piece of food service business to that acceptable margin threshold via price or our own efficiencies or whatever levers maybe out there for us to pull, then we have a decision to make about whether or not that's some business that we want to continue. And so far, we've been pretty successful in getting a nice piece of that business up to those margin thresholds. Having said that we're not done yet. I mean, we've still got a long way to go. We've only been executing on this for nine months or so. But early returns have been really good. And as I said, as that business has come back, it has come back at an overall higher margin level. So as we go forward, yeah, I expect it to be a meaningful contributor to the overall. We've said in the past that food service is never going to be at the margin level of branded retail, but there's certainly a lot of room for improvement. And I think, in years past our food service team and we have, I believe the best one in the industry. There was a bit of a different strategic vision for food service that was based more on volume and sales gains than margin. But that team has now been given permission if you will to go get that margin even if it means walking away from some business from time to time. Not all of it's going to fit, but there is a lot of opportunity out there in food service that we think can be nicely additive to the overall. Hopefully that helps give you a little bit more color.

Yes, definitely. Thank you. And then just last one from me just on the digital initiatives. Have you made any of these investments so far to adjust my reading of your comments was that you're sort of, you're not there yet, but you're still committed to the $0.05 of funding that you talked about. Are those more -- should we expect those to come through more in the back half or have you already sort of started making these investments?

Yeah, no, we have already started. I mean, a lot of it is on the front end working with our outside partners in the -- for the planning and design phases. But the nickel is still good for the year, that'll be a little more heavily weighted in the back half as we start executing on the plan. At which time also later this year, we will be giving you guys some more detail on where we're headed from a digital strategy standpoint.

Perfect. Thank you very much.

Thank you.

Our next question will come from the line of Mitch Pinheiro from Sturdivant. You may begin.

Good morning. So, couple of questions here. First, back to private label for a second, is it is a remarkable drop when you look at the trend from just several years ago, and you talked about it being sort of consumer behavior led. Is any of this retailer led?

I don't think so. I think it is consumer led. If you think about the category overall Mitch and just back up, let's just call it five years ago just to use a round number. Yeah, there wasn't nearly as much innovation, if you will, in our category. You didn't have DKB nationwide, certainly that was basically a West Coast phenomenon until we bought it. Had the same thing with Canyon, that was all in Costco or in the freezer case, etcetera. And since then, I mean, we'll even talk about our competitors. I mean, certainly coming out with [indiscernible], us coming out with Perfectly Crafted and then obviously later on DKB and canyon. I think a lot of the innovation on the Bread Wall is driving this too. And as you know, in our category there's not much differentiation among private label items in our category. It's basically white and wheat bread. Similarly, within the category, we've seen a shift from kind of your traditional lows, still a lot sold, but your hopes at whole wheats or honey wheat to these specialty items, buns, breakfast in particular there's kind of been a mix shift in the category that we've been watching for some time. And obviously with our new items in both of those sub segments we've benefited. I think that's the primary driver Mitch.

Okay. Okay, thank you. And then looking at your, back to your stack, growth you did 3% in this quarter versus 2019 first quarter. That's looking at that over two years, obviously it's a little above your long-term growth rate. Is that -- and looking at your sort of revenue guidance for the remainder of the year, it looks like you expect to see this type of staff growth for the remainder of the year, is that accurate?

Yeah, we actually feel pretty good about that, Mitch. I mean, our branded retail business is actually up 13.7%. I believe it was JT over 19. So we're really pleased with the overall trajectory. Frankly, to me it's even more acceptable considering the fact that private labels off as much as it is, plus we've done quite a bit of skew right over that period of time, too. So you've taken all that complexity out of the portfolio, really focusing on the winners. I think, we're showing that that's paying some nice dividends and we see that through the rest of the year. We're quite optimistic there.

Have you ever defined your skew rationalization drag?

I'm sorry, can you say that one more time.

Have you guys every declined or given any color on what the skew rationalization drag was in percentage terms on your growth rate?

No, I don't think so.

Okay. I mean, how meaningful is it? Is it in the low single digits or is it less than 1%, I mean, how meaningful is skew at to these numbers?

Yeah, well let’s go back and look at that Mitch. I don't have that in front of me.

Okay. And then as it relates on the same thing on, looking at your growth in adjusted EBITDA, from 19th quarter to this current quarter, how -- is it all mixed or is there anything else in there, any cost of goods savings in there, anything else in it besides just a positive mix shift?

Yeah, no, there absolutely is. We had our $10 million to $20 million in portfolio optimization savings last year. We actually beat the top end of that. So you've got that piece of it and that's a mix of procurement savings, overhead savings, SG&A savings. So it's kind of a broad cost basket. We have a target of 30 million to 40 million out there for this year, in many of those same categories. And we're on track to deliver on that as well. And then Mitch, if you think about the bakery efficiencies and some of the underperforming bakeries, making some really nice progress at Navy yard, which I know you'll be happy to hear things like that. Our efficiency was up in the first quarter of those. Those add meaningfully to the bottom line as well.

Okay, terrific. And then, last question, so your market share has been creeping up in bread, over the last year or two. And is there -- have you seen anything to call out among regional differences there, I mean, are you, I don't see the regional scanner data, but is that -- any noteworthy changes in any regional market share gains or losses over the last year or so?

Mitch, not really. I mean, it's -- overall the share trends have been good, obviously a little bit down over the quarter last year, just given the massive gains. But sequentially up from Q4, which is great to see. There's just been a lot of talk about geographic shifts and people moving out of the Northeast to Florida or out of California to Texas, wherever it might be. We've looked at that, but there's nothing specific to call out except for one region, which is the Northeast. And that's the one that we've been focused on. We've been talking about that for the last few quarters, where we're kind of under-penetrated there and making some nice share gains as we focus on that important market. So that's just one that I would call out to you.

Well, thank you for your time.

Thanks Mitch.

[Operator Instructions]. Our next question comes from the line of Ryan Bell from Consumer Edge Research. You may begin.

Good morning everyone. Can I get a benchmark of your non branded business from what we can team track channel trends and how should we think about that going forward, in general, I mean, we've been seeing private label across your categories declining. Given your intentional emphasis on your branded products, we have been seeing software growth from your private label business relative to what we've seen track channels. Is that something that we should expect to see for the foreseeable future.

Well I mean, I think it's yet to be seen, right. I mean, obviously we're focusing on our brands and as I've said, I think the consumer is driving a lot of this. So there's again the shift to brand, the differentiation in brand that you don't find in private label. I think it is driving a lot of that. We are making some decisions about select pieces of our private label business, kind of the same way that we're looking at food service to the extent it's underperforming or under-delivering relative to what it should. I mean, private label is what it is. We have made some decisions to exit certain pieces of business, but yeah, I wouldn't describe that in terms of magnitude as being the primary driver. The primary driver is consumer driven.

Thanks. That's helpful. And then you talked about M&A being your fourth strategic priority. Would you build to provide any updated thoughts about the current M&A landscape just in terms of availability of the assets and valuations overall?

Absolutely. Yeah, things are -- in short things are really heating up. I mean since the first of the year you have people sort of took a break largely last year. And it's -- there's a lot of books lying around out there right now. I'm sure you guys have read about some of the more public ones. But there's quite a bit opportunity. Ryan, the challenge as it has been for the past few years is valuation. We're committed to maintaining our disciplined approach. We certainly have the balance sheet to lean in where we've got high conviction, but we're only going to do so in a reasonable way, and there's only so far we'll go and maintain our disciplined approach. So, I'm pleased to see the opportunities start to come back. Certainly we're active, we remain active. And I think it'll be -- I think overall it will be a very active year in the food space. There's just a lot of money sloshing around out there trying to find a place to land.

Okay. Thank you. And, uh, I think this is the last one for me, in terms of the organic growth side, you talked about some innovations in flatbread. Could you maybe talk about the opportunity or how fast you'd see some of that expansion?

Absolutely. Yeah, we're really pleased with the flatbreads that we introduced in the Northeast, obviously continuing to innovate with Dave's, the rise out there it's doing great, right on target. Great reception from consumers. If you haven't tried it, I suggest you do. It's a great loaf of rye bread. And then further out, I mean, we're standing up our agile innovation team. It's early days, we're just getting wrapped up. But the early prototypes they've shown me if some of the things that we're looking at are just outstanding. So there's a lot of great things to come, and we all know how important -- we all know how important innovation is going to be for us to continue to grow our top line in line with the long-term targets.

Great. Thank you for.

Thanks Ryan.

[Operator Instructions]. And I am not showing any current questions in the queue.

Okay. Well, thank you very much everyone for your interest in Flowers’ and we look forward to speaking to you next quarter. Take care.

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