Good morning, and thank you for standing by. Welcome to the Flowers Food’s Second Quarter 2024 Results Conference Call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your opening speaker today, J.T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Shannon, and good evening. 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 earlier 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 and 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, Chairman and CEO; and Steve Kinsey, our CFO. Ryals, I'll turn it over to you.

Okay, thanks, J.T.. Good morning, everybody. I'm very pleased with our solid top and bottom line results in the quarter. Our leading brands are outperforming the category, growing volumes, and gaining market share. And our portfolio strategy is enhancing profitability in our private label and away-from-home businesses. At the same time, our savings initiatives have improved our cost structure, significantly boosting our margins, compared to the first quarter, and enabling us to better leverage our top line performance as we go forward. The inflationary environment is encouraging some consumers to seek value, but many are increasingly looking for differentiated products. And that desire is manifesting itself in the strong performance of our leading brands. Consumers are clearly recognizing our brands differentiation resulting in the largest dollar and unit share gain of any company in the category. We're investing to increase that differentiation further aligning our brand portfolio with the consumer. Our quarterly performance bolsters our confidence that we'll deliver results in line with our annual guidance. We're working to drive further improvements, and I look forward to continuing our progress throughout 2024. So with that, Shannon, we're ready to open it up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Robert Dickerson with Jefferies. Your line is now open.

Great. Thanks so much. Happy Friday. Good morning.

Hi, Robert.

Ryals, I guess just a question around the promotional environment. You know, in the prepared remarks you did -- you said you have promoted a little bit more, it doesn't sound like a lot, but a little bit more. And at the same time, clearly it looks like you're taking both unit and dollar share in bread. So I'm just curious, I feel like since the beginning of the year, the guidance has allowed for some promotional risk, right? And maybe some increase in that promotional activity as you get through the back half of the year, you promote a little bit more, you're also taking share. So I'm just curious, like, you know, as we sit here today, you feel like there's maybe a little bit more risk, because usually, you know, if you're taking shares and maybe others notice and they could start to promote more? Thank you.

Yes, sure, Rob. Thanks for the question. Yes, look, I suppose that's possible. And, you know, we indicated, you know, in our prepared remarks and even embedded in the guidance that we are accounting for that risk as we go through the year. We called it out at the beginning of the year, and I think it's still prudent to call it out now. You know, as we noted, consumers are responding a bit more to promotions, whereas not too long ago, they were not. And we all know that the consumer is, you know, alongside of differentiation, the consumer is seeking value. I think we saw that in a large retailer report this week. We're seeing the channel shift. We've been calling that out for several quarters now from grocery to mass club dollar. And that's kind of across income spectrums too. So to sum up, I think it's only prudent that we continue to watch that and be a little bit cautious as it relates to our outlook. Having said all that, you know, while promotions are up, things still remain pretty rational or still well below pre-pandemic. So you'd have a ways to go before you got to kind of 2019 promotional levels.

Okay, fair enough. And then, you know, it sounds like as you got through kind of the end of the quarter, you started to see some improvement in these trends, and you called out an increasing shift maybe back to at-home to seek value?

Yes.

You know, middle of August, I mean, what we've seen in the data, kind of, through July was that was ongoing, actually even improved a little bit. I don't know if there's any way to provide any color kind of as what you've seen, let's say, through kind of the summer months and kind of how you're thinking about that momentum into back to school. Thanks.

Yes, so we have, as you know, we have a large food service business and a significant component of that is quick serve, fast food, food chains. And it's been in the news, folks have seen results that some of these QSR-oriented restaurants be a little bit challenged. And I think a lot of that is inflation obviously, but it also affects our food service volumes since that's a pretty significant part of the portfolio. But on the flip side, that tends to benefit the retail business. And so I do think that, that's somewhat of a tailwind for our branded retail business as we move through the next, at least the next couple of quarters, we'll kind of see how the economy does.

Okay, super. I'll pass it on.

Thanks, Robert.

Thank you. Our next question comes from the line of Bill Chappell with Truist Securities. Your line is now open.

Hey, good morning. This is Davis Holcombe on for Bill Chappell.

Good morning.

Just wondering if you could help us kind of unpack the impact of the business exits on volume. If there's any way that we can kind of get a quantification where volume's kind of flattish up, what does it look like directionally, I guess, from there?

Yes, sure, we don't break that out to that granular of a level. But when you look at volumes in the quarter, they were very positive overall on the branded retail side, and particularly on the branded bread side. Now, that was somewhat weighed down by weakness in the cake business. You've seen that across the sweet baked goods category. And then as for the rest of the business, as we said, food service volumes have been a bit weak, due to that QSR weakness in addition to the strategic exits that we've talked about for several quarters now. However, it's important to remember that those strategic exits roll off in Q4. So they have virtually no impact on us in Q4. We're almost through them, as we mentioned last quarter. And so going forward, you'll see much less impact from that.

Excellent, thanks. And I was just also wondering if you could kind of help us get a feel for how the distribution, I guess, is going for the DKB, like the protein bar rollout and everything like that? Just a little bit more color there?

Yes, sure. Overall, we're really pleased with how well we're doing. Look, as I've said several times before, this is a startup business for us. It's brand new. It's a different form of merchandising. It's not distributed DSD on the bread trucks. It goes to the warehouse, right now we have a limited number of SKUs, so we're working to expand our shelf presence. We've got the three snack bars, we've got the three protein bars that are coming out, so our shelf presence is getting better. At our top accounts, large retailers, where we're doing well, what we're doing well, we’re doing really well. And we've got velocities well within the top 10 in the category. However, there's been a couple of places where we've stubbed our toe from an execution standpoint, and that's part of the learning curve, and we're correcting that. But looking at it overall, we think we've got a great product under a great brand umbrella, and we're very confident about where this is going. Not to mention the additional pipeline of innovation with the snack bites coming later this year and then full distribution next year. So overall, we're pleased.

Awesome. Thanks for the color. We'll go ahead and pass it on.

Yes, thank you.

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

Hey, good morning guys. Thanks for taking our question. Ryals, I wanted to maybe see if we could run through puts and takes on if we look at the exits from the business impacts, mention the pressure on the QSR business, but then if we think about netting those against the strong results at DKB and Canyon plus what seems like a benefit from food at-home shift.

Hey, Jim.

Yes.

Jim, sorry to interrupt you. Can you start your question over because we had some really bad audio at the beginning of your question?

Yes, no problem. Is that better?

Yes, it seems like it is.

Okay, perfect. Yes, I was just asking if we could maybe net the exit from the business impacts with some of the pressure you mentioned in QSR and then thinking about that against the strong results of DKB, Canyon, benefit from a shift in food at-home. If we think about all that together, could we see positive volumes in 3Q and then obviously rolling into 4Q?

Yes, I think definitely for 4Q that's a reasonable assumption, particularly with all the new business, Jim, that we have coming on. We talked about that last quarter. So that'll have more of an impact in Q4. And then with the roll off of the strategic exits, if we can continue to enjoy good momentum from all the brands you mentioned. Then yes, I think that's a distinct possibility. I mean, frankly, we were almost there in Q1. You know, the brand and retail was actually pretty positive in Q1. So yes, I think that's a reasonable possibility.

Okay, great. And then maybe if you could just give us some detail on, you mentioned in your prepared remarks, restructuring the retail team. Could you talk about how that changes some of the capabilities relative to the previous structure, and maybe when/how we might see that show up on shelf?

Yes, I mean I think you got to give us a little bit of time, Meredith just started not just a few weeks ago, but you know we brought Terry on -- Terry Thomas on as the Chief Growth Officer. You know, he had some significant experience and insights from his time at Unilever and other places. And one of the things we lacked here was a channel-specific approach to strategy and execution at the retail level. I think that's one of the areas where it's going to be these restructurings are going to benefit us the most. Whereas before, you know, to shorthand it, you know, it was a little bit of a peanut butter spread approach to all channels. Now you're looking specifically at mass, you're looking specifically at club dollar, whatever it might be. And even as we roll out our snack items, convenience is a tremendous opportunity for us because we're so deeply under penetrated in that channel.

Great. Appreciate the color guys. I'll hop back in the queue.

Thank you, Jim.

Thank you. [Operator Instructions] Our next question comes from the line of Mitchell Pinheiro with Sturdivant & Company. Your line is now open.

Yes. Hey, good morning.

Hi, Mitch.

So curious, you know, you talk about making headway in some of your underpenetrated geographic regions. And I'm curious, like, what's driving that? And is it a sustainable growth that you can see there? Because it's a big part of your growth story is while you have extraordinary strength in the south and southwest, it's -- there's a lot of sort of white space and just curious if it's sustainable.

Well, we certainly think so. As you rightly pointed out, our largest share concentration is in the south. That's a pretty saturated market for us. There's still certain growth pockets and we're seeing that with the Nature's Own Keto low days continues to grow. And then even in the South, if you break up the geographies and look at market share gains, it's been a little bit tougher in the South, frankly, a little bit more promotional activity, basically two primary competitors, our most mature market. But what we've been able to do is find areas within the category to grow. So that's Keto, that's breakfast, that's sandwich buns and rolls even in the south. Now more directly to your question on underpenetrated markets, I absolutely think that's sustainable. When you look at a $17, $18 overall dollar share nationwide and only a $10 in the northeast, we haven't really been there that long. Dave's been there, DKB's been there for even less time. But as you know, a lot of our -- we don't have a national marketing campaign, at least not yet. So that's one of our focus markets for our advertising campaign. We still got room to grow out West at Northwest and probably, most importantly, in the Upper Midwest, which we've already started to enter and we'll continue to roll that out as we go forward. So not only do we have M&A to look to, innovation to look to, but we've also got these underpenetrated regions where we've got a lot of runway to grow to get our fair share of the category. Q - Mitchell Pinheiro Okay, thanks for that. And then, on margins, Steve, in the prepared remarks, you talk about moderating ingredient and packaging costs. Is that something you obviously have a lot of visibility there with the amount with you're pretty much set for the remainder of this year with visibility there? Is that something we're going to see, not just moderating increases, but are we going to see declines?

Yes. I mean, obviously, when you look at kind of the margin performance year-to-date, we've done really well and we're pleased with where we are. Yes, we continue to hedge. I mean, our strategy hasn't changed. We say six to nine months ahead of the market. So, we understand the cost structure. We did see the first-half is actually the largest benefit with regard to the moderating cost. So while we do expect benefit in the half -- in the back half, that benefit will begin to decline somewhat. But overall, we're still forecasting decent margin improvement for the year.

Okay. And then, I guess, just one last question just on M&A. You've been a little quiet. Is that -- is this -- do you anticipate -- I'm curious what the pipeline might look like and whether or not -- are you sort of waiting for a lot of the ERP and California and things like that to sort of get behind you before we see M&A? Or are they too just unrelated and mutually exclusive?

No, we're ready to go. I mean, when the right opportunity comes along, it's time for some M&A for us. I'll reiterate again, we're very proactive in the market. We're out there building relationships. We know what could be coming. We know what we're registered then. In some cases, we've even done some advanced commercial diligence work, so that we're able to execute quickly when the right opportunity comes along. And again, those opportunities can come both in the core and in adjacent categories. I do think -- I mean, there's been some big deals announced over the last week and the last six months or so, but I think there's more ahead. The M&A market seems to be getting healthier, as we noted last quarter. So, we're bullish on that, Mitch.

All right. Thank you. Appreciate the questions.

Okay. Thanks.

Thank you. Our next question comes from the line of Steve Powers with Deutsche bank. Your line is now open.

Hey. Thanks, and good morning, guys.

Good morning, Steve.

So, first question, just a little bit more color on how you're thinking about the price versus -- kind of reported price mix versus the volume outlook across branded retail, as we go through the back half. Obviously, you've kind of cycled year-ago pricing actions. Like most recently in the data that we all kind of track week to week, it looks like pricing in the category, pricing for your own portfolio has dipped negative. So as we go through the back half, as you make those targeted promotional investments and you probably have some channel package mix, that's a negative despite the premiumization trend or is the base case that pricing -- reported pricing runs negative in the back half with volume making up the difference? Or do you think you can hold price mix to kind of neutral as you flow through '24?

Yes. So let's take it -- let's break it up a little bit. I mean, on the branded side, all of our pricing is in. Now, when you -- the data that we look at, Steve, our average price was up $0.07 in the quarter, not down, but that's also driven by mix because as we've talked about, DKB had a great quarter, Canyon had a great quarter, Nature's Own did well given the environment. So that mix is driving that a bit. And if we can continue that trend, and Steve, you should comment on this, too. If we can continue that trend, I would expect mix to be a positive benefit for us as we move through the rest of the year.

Yes, right. I mean, obviously, as Ryals said, all of our branded pricing is in. You've seen the kind of the cost environment as well, and also some slight promotions. So mix is a big part of the back half. And then as Ryals said, if brands continue to perform well and things play out as we think with some of the new business, by the fourth quarter, we might see some positive volume as well.

Okay. Okay, great. And just on ERP as it relates to the bakery rollout, obviously, that's on hold pending the California distribution transition. I guess as we look out through that transition, how quickly -- what's the base case plan for when the bakery rollout resumes? Is that sort of middle of '25 or sooner or later? How do we think about that?

I mean, today, we're obviously trying to work through California, but the plan is to pick back up bakery rollouts late this year or first quarter of next year and then come up with a pretty strong plan to try to stay on our original targets. Obviously, if things shift, we'll let you know. But I think the good thing is right now, from an overall cost perspective, we're not anticipating anything to change. So that's critical from that standpoint as well.

Okay. So the resumption could happen before the distribution, right? Purchases are fully complete. That's what I'm gleaning from what your answer was.

Yes. The goal is to pick back up no later than Q1 of next year.

Okay, perfect. All right. Thank you very much.

Thanks, Steve.

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

Okay. Thanks, Shannon. Thanks, everybody, for taking time today and joining us for questions. We appreciate your interest in our company. And as always, we look forward to speaking with you again next quarter. Take care.

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