Q2 2020 Flowers Foods Inc Earnings Call and to Discuss Strategic Priorities and Long-Term Targets

There's from around our company.

To help us build that culture and finally, we have donated $1.5 million this year to three organizations.

That are dedicated to racial equality inclusiveness in education, and we intend to continue that support going forward.

So we're taking this renewed focus on inclusion and diversity very seriously and the steps we are taking today in the steps we will take the Mark tomorrow reflect that decision.

Frankly, I think Theres no doubt it will just make us a stronger company.

So let me begin by touching on our second quarter performance briefly and acknowledging that we're giving this strategic update and a very unique time for our communities our markets and our company.

But simply put the flowers team continues to rise to the occasion and the flexibility of our bakery network has enabled us to continue serving our markets uninterrupted throughout the pandemic.

Our results in the quarter reflect the continued impact of the pandemic with sales rising 5.1%.

The positive mix shift to branded retail drove cost leverage and margin improvement, which led to a 32% increase and adjusted earnings per share over the second quarter of last year.

Steve will give you some more details on the quarter a little bit later this morning, but I mentioned them now because the adult the results do foreshadow, what we what we'll be talking about in greater detail. This morning, particularly around our plans for continuing to evolve our portfolio to a higher branded mix, leading ultimately to margin improvement performance.

Most of the credit of course for these excellent results accrues to the flowers team.

Our folks I can't tell you how hard they work throughout this entire situation really extraordinary they've shown up every day.

Which is a allowed us to be there every day for our customers and our consumer so we owe them a tremendous debt of gratitude.

We also recognize the strong performance by the team has us working from a position of strength.

And we understand that course want once the effects of the pandemic diminish some of the current market dynamics are likely to change again.

But the strategic plans that were going to outline for you today are really focused on positioning flowers to thrive in the future.

To innovate to drive growth to operate more efficiently and ultimately deliver enhanced shareholder value now and in the years to come and under any and by operating environment.

So with that let me highlight for you what we think makes flowers special.

We're a leader in a large and attractive category that offer significant growth potential and stability throughout the economic cycle cycle.

Through a portfolio strategy process, we're shifting our primary focus to value added branded retail products that we expect will drive top line improvement and improve our margins.

We also expect our optimize portfolio to drive share gains by targeting gross segments with innovative new products.

To help offset inflationary pressures.

We're continuing to supply chain optimization program that we started under project Centennial with comprehensive efficiency improvement and cost reduction plans.

And finally, we allocate our consistently strong cash flows using a rigorous process that's focused on maximizing return.

We're very proud of our consistent trap track record of dividends dividend growth and as many of you know M&A has and will continue to play a vital part in our growth story.

And our ample liquidity allows us to flexibility to take advantage of those opportunities as they come our way.

So as we work our way through the presentation. This morning, you'll hear more detail around each of those points.

But before we move on I.

I'd also like to point out our consistent track record of delivering long term shareholder value.

If you go back and look over the last 10 years, we've grown this company from a two and a half billion dollar company to a $4 billion plus company and that's a CAGR of about 5.2% over that period.

Over the same period, we've been able to deliver total annual shareholder returns of about 11.4%.

So overtime, we have demonstrated the ability to deliver excellent returns and by deploying the strategies will talk about this morning, I'm tremendously confident that we'll be able to do so in the future.

So.

Let's now turn our attention to our four strategic priorities because they really serve as the underpinning for everything that we're going to talk about today.

They are developing our team focusing on our brands prioritizing our margins and proactively seeking out smart disciplined acquisitions.

When we announced project Centennial back in 2017, many of you remember we issued an EBITDA margin goal of 13% to 14%.

With the bulk of that margin expansion to come from cost savings.

We have made a lot of progress in removing costs from the organization, but if some of you know we have had difficulty.

Translating those savings to the bottom line, primarily due to inflationary headwinds from things like labor ingredients packaging and transportation.

But having said that centennial has been a tremendous success in many ways and most importantly centennial marked a significant shift in our culture and our mindset.

From a sales and operations focus enterprise to a consumer focused organization.

That is that is focused on delivering innovative items to our consumers.

Were it not for Centennial and all the changes and challenges that it brought we'd be starting many many steps back from where we are today and several initiatives that will talk about this morning, most notably portfolio and supply chain optimization I personally don't think would have been possible at this company, even just three or four years ago.

Today, we've got it organizations dedicated to the consumer we've got one that's hyper focused on growing our brands.

Got one that is committed to driving real innovation to drive growth.

And one with the renewed sense of passion about cost management and.

We believe these four core strategic priorities will drive the new long term growth algorithm that we'll talk about today. We believe these plans are realistic we believe there achievable and they will drive meaningful meaningful shareholder value over time.

So our goal. This morning is to provide you with a clear understanding of those plans and our path to future growth and margin expansion.

Before we get to the new algorithm, let me walk you through each of these strategic priorities because they really set the table and they are the foundation of everything that we're going to do going forward.

Recognizing the importance of our team in meeting our goals, we recently announced an organizational restructuring that's designed to unleash the full potential of our brands and strengthen our prop product innovation efforts.

Some of you may recall that as part of Centennial. We can we converted to a business unit structure, a couple of years ago and.

Yes that structure has served us very well, but we've also learned a ton over the last couple of years.

So after an intense review of would've worked well and what perhaps needed a bit of improvement we decided to make some additional changes.

The most significant structural change is consolidating the two business units in a single function. That's responsible for all the brands and more importantly, we'll leave that unit as the new Chief brand officer are in our intent here really is to bring additional focus to our branded business.

I also think that this new structure will bring greater collaboration and better resource allocation across our entire branded portfolio.

Never Mukherjee, our Chief marketing marketing Officer will guide the development of the new capability dedicated to innovation to bring new and exciting offerings to our consumers that go well beyond just simple line extensions.

Importantly, this new innovation function will also partner more closely with our corporate development group to seek out acquisition and investment opportunities that fit within the overall portfolio strategy.

Innovation is going to be a crucial piece of our growth plans and so devil a little bit later will provide you some more more details about that function and its initial areas of focus.

Appointing David Roche, who is a seasoned operational executive here at flowers with extensive knowledge of our cake business to president of cake operations really underscores the priority that on placing on fixing our cake operations, primarily in our Navy yard bakery and should speed the implementation of efficiencies and improved profitability.

And our foodservice business will now be housed in our sales function, where it will be used tactically to fill unused capacity, where we can do so at an acceptable margin.

Personally I'm, one that believes organization should always be evaluating the effectiveness of their structure to be assured aligns with their strategy and perhaps even more importantly that it puts people and the best possible position to succeed.

I think we've done that and I think these moves will accomplish our objectives and highlight the opportunity, particularly that we see related to our portfolio strategy.

Our second strategic priority is focusing on our brands.

The good news here is they flowers has a very commanding presence in several areas of the market Nature's own. It's the number one brand of soft variety in the United States with 2020 estimated retail sales of about $1.2 billion.

Dk be far and away the number one brand inorganic low with an estimated 2020 retail sales of around 760 million.

And Canyon Bake House has become the number one gluten free brand in the very short two year period that weve owned them, adding another 120 plus million dollars premium brand to our portfolio.

I Wonder strong player in the white low segment, and we've been able to leverage its iconic status.

And it's high awareness to give our to give our company a national presence and White love and it's helped us tremendously in the sandwich Bun and roll segment as well.

So with leading brands in several major categories were working from a position of strength in our our goal is to build on these leading positions by placing even more focus on branded growth through targeted strategies and better resource allocation all of which are encompassed in our portfolio strategy work.

We've also added new capabilities to better understand the consumer and how we can leverage those insights to build our brands through innovation and marketing investments.

Prioritizing margins as our third strategic priority and as you'll see rather than a distinct separate initiative. It really goes hand in hand with the brand building work.

Our portfolio strategy is designed to shift our sales mix to a greater percentage of branded retail.

Which in turn will drive stronger margin performance.

And as you will hear we expect to drive branded growth through a combination of share gains and underdeveloped geographies, but also.

In underdeveloped segments, we're going to make marketing investments, bringing on more truly incremental innovation and of course selective M&A that aligns with the portfolio strategy.

Now our recent results. This year have given you at least a sense of the dramatic impact. This mix shift can have on our margins, albeit an extreme example, but it does it does back it up the recent organizational changes combined with a strategy of re purposing capacity.

To support our branded retail products and then selective exits of low to no margin business over time should further our progress.

Cost management and efficiency gains will also play an important role in our margin improvement trajectory.

The highlight of our first quarter call that through our portfolio and supply chain work.

Which we started last November we expected to drive about $10 million to $20 million and cost reduction around the areas that you see here on the slide.

Frankly, I think we'll end up this year exceeding the top end of that range.

Also expect that will enjoy some further benefits from this work into 2021 as well.

So all of this is designed to reduce fixed cost, allowing us to better leverage our cost base and improve margins as we grow the business.

I've said many times it it's crucial than our cost structure be in line with the company. We are today, but it's also got to remain flexible enough to support the company that will become tomorrow.

We also have several important initiatives underway to improve operations at certain underperforming bakeries.

Those initiatives will further reduce costs going forward as we put new efficiency programs in place invested automation and return those bakeries to operational excellence, which is what we have underway currently at Navy yard in a few other bakeries.

Finally, our network optimization strategies or is this are designed to ensure that we have the right assets in the right location supporting the right products, which will bring additional efficiencies.

Now.

Having said all that.

While cost containment and cost management are certainly very important the most critical factor for our future success and ultimately margin improvement is growth.

But the right kind of growth.

That's why we're so focused on further shifting our mix overtime to branded retail and making investments to drive growth in share while selectively pulling back on underperforming business and then optimizing that capacity.

That shift can be enhanced by innovation and continuing to smartly add to the portfolio through disciplined M&A.

So speaking of M&A.

I expect it will continue to play a vital role in our growth story, except saw since we went public back in 1968. Some 50 years ago, we've completed more than 100 acquisitions, which created a tremendous amount of value for our company as we grew from a small regional operation to one with a national presence.

And the good news here is the opportunities are still aplenty.

There's still room for us to grow in our core segments through M&A, perhaps a little fewer than in the past, but there is still there, but there's also many many more opportunities to grow and under the underdeveloped segments and adjacent categories.

We've enjoyed tremendous success with Dave's killer bread and Canyon and we intend to continue building upon that track record of success going forward.

With our organizational realignment as I mentioned earlier, we've implemented an exciting new partnership.

Between the corporate development group and the new innovation function, that's designed to identify innovative opportunities beyond the core business that can enhance our growth and margin profile.

In short, we intend to be proactive and we'll see we'll be seeking to become a more innovative company, both organically and by leveraging the power of entrepreneurship that smaller companies bring.

I am excited have mark garish, our new VP of corporate development.

To outline these plans for you a little bit later this morning.

So everything that I've talked about has has already been underway for sometime now and we're very encouraged by the early returns and even more so by the promise for this work that this work holds for the future.

You'll hear more details will move through the morning, but I want to emphasize the enthusiasm and optimism with which we're approaching all of this.

So that brings us to the new long term algorithm, which you can see here on the slide So our plan is to grow organic sales by 1% to 2%.

EBITDA by 4% to 6% and earnings per share by 7% to 9% over the long term and overtime. We expect this plan to deliver meaningful total shareholder returns through a combination of topline growth and bottom line margin expansion.

Important to note again, the topline and EBITDA target just reflect the organic business growth, but the EPS target does include the effects of potential future M&A.

And or opportunistic share repurchases.

We expect sales growth to come from a combination of branded retail, but partially offset by revenue declines as we anticipate exiting certain under underperforming pieces of business overtime.

Similarly, the EBITDA and EPS growth model also assumes the margin enhancing benefits of a higher or branded retail mix and better cost management, but we're expecting that to be partially offset by the contribution losses associated with the exit of that lower margin business overtime.

So now let's tie those long term goals back to the strategic priorities focusing on the right kind of growth will drive the topline.

And that means focusing on our branded business. If we can continue to shift our mix more heavily to our most profitable products that in turn will drive significant margin improvement.

We can do this by growing our share and underdeveloped markets, where we can increase the presence of our leading brands.

And we'll be looking to further grow and underdeveloped segments, where those leading brands have a REIT play.

We'll invest in innovation and finally overtime will manage down certain areas of the business that are unable to deliver acceptable margin.

We will prioritize margin by continuing to focus on cost management efficiencies at the bakeries and execute on us on our supply chain optimization program.

We'll work to ensure that our capacity is put to its highest and best use which can have a profound effect on margins.

And to the extent, we have excess capacity in certain segments of the business. It will be important to manage that down overtime as well. If we can do these things and I certainly believe we can and this new algorithm provides a much clear path to our margin goals.

I want to emphasize again to that.

M&A would be incremental to this model on the sales and EBITDA line and so as we continue to seek out new attractive businesses, there's upside to the to the model and we've got a really good track record of M&A as we've talked about this morning.

So as I've said, our primary goal today its demonstrate how we'll achieve these targets because I want you to leave the session with a really good understanding of our strategies and how they'll propel the future success of flowers.

The the present environment.

Has proved that with the right product portfolio the right cost structure. The right people. The right focus the targets are realistic they are achievable and were intent on optimizing all aspects of our business as we move forward.

So with that I'd like to turn it over to Brian Alexander Our Chief operating officer, and he's going to talk to you about our growth imperatives, and our supply chain optimization work Brad.

Thanks trials and good morning.

Today I'm going to discuss three key priorities first the margin benefit potential offer by work and optimizing the portfolio and our supply chain.

Next our focus on building our brands and third how our portfolio strategy informs our supply chain optimization work to reduce fixed costs and drive operating leverage.

Rouse mentioned, our initiatives related to the portfolio strategy, which focuses on value added branded retail products that we expect to drive topline and improve our margins.

Those initiatives are in the early stages, but the current environment offers a glimpse into the effect our initiatives has on our long term results.

In the second quarter, we saw greater demand for our brands as increased at home eating and a consumer shift to trusted brands drove a favorable mix shift for us.

As a result margins increased significantly despite a decline in volume as our more profitable branded retail products grew to a larger percentage of our sales.

Combining the REIT portfolio mix with an optimal bakery network can drive meaningful and margin improvement.

These results have strengthened our teams resolve to accelerate work in this area and position ourselves to deliver improved margin performance overtime.

Two of our key operational priorities are focusing on brands and improving our margins.

Many of our brands have strong and growing market shares and we're focused on continuing that share growth by remaining irrelevant with the changing consumer.

An important part of proving relevance is innovation that creates products that are meaningful to our consumers and marketing those products to the appropriate segments.

In a few minutes debow is going to address some of our efforts in that regard.

After endeavor.

Mark will discuss brand presence and our efforts to make our brands available to the right markets in segments and the huge opportunity we have in this area.

As you will hear we expect our portfolio strategy to help drive margin improvement via a mix shift.

But first I'd like to deal with details some of the work we're doing around supply chain optimization.

Supply chain optimization is about more than just cutting costs. It is linked to our portfolio strategy as we shift our sales to a more profitable mix of products. We must also adjust our asset base to produce the new mix in the most efficient way.

Our network is flexible and our goal is to utilize each part of it to its highest and best use.

Most of the bakeries, we produce most of our bakeries produce a variety of items, including bread buns and rolls that versatility allows us to alter our mix to meet changing consumer demands, including changes due to a hurricane or the current pandemic.

The rest of our supply chain is equally flexible as our depots and ended the independent distributor partners can distribute a variety of products sufficiently to the marketplace.

It is important to highlight that while the products. We produced can very many of our costs whether production or distribution are largely fixed.

Given that network flexibility and the fixed asset base, our portfolio strategy informs the brands and segments that we target.

By pivoting capacity to our most powerful brands, we maximize our revenues and margin expansion potential.

A good example of this is what we're dealing with our network optimization work and Lynchburg, Virginia.

Historically Lynchburg was producing a fairly standard portfolio products, however, with the substantial growth the Dave's killer bread and the area, we needed additional capacity, especially in the mid Atlantic and northeast.

Rather than build an entirely new bakery, we're in the process of converting Lynchburg, two inorganic facility that will meet the demand, but also reduced transportation costs.

That flexibility of our bakery network allows us to shift production of the items formally baked lynchburg to nearby sister bakeries, thereby improving their capacity utilization.

Another part of our optimization process as network consolidation and example of the consolidation work we've been doing is reducing the number of depots.

The graphic details our production and distribution process as goods are produced at our bakeries transported to our depots and then move our independent distributor partners to retailers and other customers.

One example of how we are working to remove excess capacity in this network is by consolidating depots, which often comes with the added benefit of reduced transportation Myles.

Our portfolio optimization work will enhance this process as we know our product focus and potentially free up additional network capacity.

One particular benefit of our portfolio and supply chain work is an improvement in sales.

Through a process, which includes better ordering and SKU rationalization, we have lowered costs and increased realized capacity.

By reducing the amount of production that turns into sales, we have freed up enough capacity that amounts to adding one new bakery.

Each of our bakeries has a certain product mix of branded retail store brands and foodservice production.

As we increase the production of branded retail products baked in our facilities.

As we did and our lunch break example, we can be more selective about the type and quality of other business we accept.

Not only are we reduced in the percentage of store brand in foodservice products that we make but that process allows us to negotiate better pricing in terms on the business we decide to keep.

The end result is a higher mix of branded retail products on a more profitable mix, a store brand and foodservice business, which we expect to help us meet our updated sales and EBITDA growth targets with that I'll turn it back over to route.

Thank you Brad So building on brass discussion, we're going to turn it over to debit Merck Mukherjee now who is going to give you some more detail on our marketing and innovation efforts Devin.

Good morning, everyone Riles. Thank you so much.

As Brad mentioned, we look at our growth underpinnings and to clear buckets, one is brand relevance and the other one being brand presence I'll focus on brand relevance and my partner more Courtney will take you through the brand presence component.

So what are we talking about when we talk about brand relevance it starts with having a category thats vibrant and I'll take it to some dynamics there within that vibrant category, we need to make sure that our brands relate to our consumers and that they are relevant in their promise as well as in their vision I'll take you through how we develop that and normally how we do we develop that we've dealt with a fact.

We centered on consumer insights and our core principle here being honoring the consumer and all their facets. Their stated on say it needs in terms of July being not only our brand promise, but also our innovation as Elias mentioned a bit earlier.

And last but not least we need to take continue to look at consumers evolving behaviors and habits and buckanavage related ecommerce Digitization has certainly spondon new activity set for us as well so while we get started.

Research and just take a look at the bread category, Brett the print categories want the most vibrant categories in the entire grocery store certainly among the largest so with a $24 billion and continuing to grow now what you may or may not realize that 90% of households American households, that's roughly 120 million to 130 million households purchase.

Spread and what's interesting about that is that they buy Brad every 12 days, so you're talking about a very large category very dynamic reaches a lot of households, and pantries and as purchase with a great frequency now astoundingly. Among that we also realized this category is deeply brand centric in the sense that the share of brands relative to private.

Label continues to grow.

So consumers are demonstrating a propensity to to choose brands with a differentiated proposition.

Alongside with that we also see the pricing power that's resident within this category, meaning that as folks are paying more or low for a for choosing a brand with a differentiated product benefit allows each quantifies to create a profitable growth environment. So that gives you the underpinnings for why the bread category, so relevant to us so important to us and and.

And having that reach and frequency is powerful now why should that matter.

It matters when we make our brands are relevant in that context.

So when we go to the next slide.

And talk about creating brand relevance.

When we think of off a funnel and at the top end of the funnel being the 120 million households that I referred to are roughly 90% of the U.S. households are 90% of I use households, it is to them that we want to make our brands very relevant we want to make sure our brand promise as well as our positioning.

Matters to them in a manner in a manner that they find acceptable in a manner in which the except that messaging and brand promise and therefore use a towards make their decisions. So.

Referring to the widest part of the funnel on 28 million households, as I mentioned, we didn't want to generate awareness you awareness creation is perhaps the biggest unlock towards the value creation and within awareness that two elements that I would point your attention to one is aided meaning they are prompted have you ever heard of nature's own.

One more powerfully if the unaided that we really want to seize on so this is a consumer having the top of mind awareness for nature's own or Dave's killer bread or wonder when they're approaching the bread shop, when they're getting ready to make that shopping occasion. So that is what we really want to seize and that should unlock from there. If we have promised our brand and.

Position did well the consumer maybe prompted to try us and that starts the second part of that leg, which is the penetration component. The first purchase and again, if the brand promise holds up as well as the product delivery from a texture quality taste and all of these other attributes that ideally we've created a brand loyalists, who will come back and repay.

Right and that's that's a promised land if you would from the open ended up Bonnells down so most narrow end.

And this is how we're looking to create brand relevance, but how do we understand what is is that the consumers looking for so let's go to the next slide.

We start with understanding what consumers are facing on an everyday basis their stated needs their gaps the opportunities, but we also seek to understand the emotional benefits and the gaps there off what are you looking to convey what remains unmet what says what remains on said, we accumulate all that information today.

And develop our brand architecture and the Mark brand architecture, effectively means to who does a brand new watt and why.

And within that we construct how will the brand b spoken about what is its promise what at this tonality has agreed to be a friend.

From there, we ladder, our brand strategies waters products going to be.

Where are we going to advertise how are we going to raise awareness with consumers all those aspects and that further ladders to the ultimate Gestalt, which is consumer messaging as you see here in the middle.

We know that moms C to make everyone in their homes happy with with her offerings and our foods.

We also know that she's got a keen eye towards health. So for those volumes I want to balance both happy and healthy, we're bringing nature's own and that's our our tagline there you've noticed that has not only our functional attributes, but also very emotional promise of happiness. Similarly, with wonder we don't talk about white bread necessarily in the payoff for the bright.

And promise, we talk about his moms wanting to inspire.

Imagination in their children, so inspiring childlike wonder thus being the Tyler.

So now we have this information about how do we get to it so let's go to the next slide.

We looked at our consumers I know as most brands do we look at it from a segmentation up Geo Geo debt demographics socioeconomics, well, we went a step further we released took to understand our lifestyles, how does the behave what propels them and then we look to understand the emotional motivations as well. So this particular exam.

Sample in the in the matrix on the right hand side.

We identified people, who that I think we can all relate to a person who is a busy budget or she's got an active lifestyle. She has to want runner household on a particular budget, but within that intersection. We also realized that she has a craving or a desire to convey love comfort or even bonding to her family and how does she expressed that.

We all realize that we have loved for fresh products and freshness and cooking something fresher offering something fresh to our families is a way of conveying our love and caring to them and a mom is no different than this particularly intersection when we discovered this particular insight. We then translated that to our unique selling proposition for nature's own.

Which is from scratch to shelf and 48 hours.

And therefore, nature's own gets well positioned in conveying that comfort and loved that a mom wishes to express all the while also how did the rational attributes of being healthy and no of having no preservatives colors or flavors in addressing that consumer states now as was mentioned earlier.

We're also doing a great deal of innovation work and our innovation work is consumer centric.

If you look at the other intersection points within this chart and there are others like it.

We seek to find not all the areas, where our brands can grow into to address certain needs or in some cases, there virgin white spaces that deserve to be exploited a bit further through some upfront. Some additional analyses. So this becomes the basic fabric a week if you would.

Identifying growth opportunities that lie within this core bread category and one that we find so powerful.

So let's go to the next slide.

As I said earlier the unlock.

The greatest unlock and for our growth upside is driving awareness and wild prompted awareness has certainly helped helpful which has aided.

The more powerful statistic here on the one that I'd love for you to keep going on is the on aided.

So unaided awareness for core nature's own is only 15%.

However, aided awareness is over 70% a week to interpret that then is that 15% of the households, good good rattle off nature's own without even big prompted right.

So all of the 128 million people. It stands to reason that if I can raise my unaided awareness it will convert to greater degree of sales.

That is my first step of unlock if you recall back to the funnel analogy that I mentioned earlier this is where the first on lock starts.

Now how do we kept convey our messaging to our consumers well, we're very dynamic and how we deliver that messaging to our consumers who is using a myriad of mediums and you see that a bit to a right and that's largely to demonstrate to you that we're staying nimble as and when the consumers are modus changes how they have received the information changes we are.

Flexible and reaching out to them and creating meaningful points of impressions during that time period.

So with that let's go to the next slide.

The second piece of that on Loxo.

Traveling thousands upon all again is that once we've identified with the awareness as and hopefully gotten to that point than their three particular levers that we really wanted to focus on.

One is household penetration so household penetration if you recall is the component of alpha households, buying the local Brad once and then ideally going to repeat so household penetration.

Household consumption in terms of how quickly they are consuming.

And a third as I mentioned, the lowest part of the funnel loyalty. So let's speak to that we know that American household 90% of them have Brett so they purchase Brett and yet when you look at nature's own.

Only about 30% of those households by Nature's own stands to reason that if I increase the number of households, buying nature's own it would be incremental to our business.

Now if you look on the right hand side the top right.

You'll notice the brightest purchase every 12 days, but nature's own is only purchased about every 30 days I have an opportunity therefore to help drive incremental consumption of off nature's own wants that then the pantry by offering perhaps more usage ideas addressing different dayparts and that also helps use help spawn.

Innovation ideas as well from how to tackle the nature's own franchise would that consumer base last but not least it's a loyalty holding onto that valuable consumer wants if converted them once they've tried the product.

And to it the desired behavior, obviously is to make sure that the consumer doesn't get swayed by their competitive offers or pricing or other other endeavors. When the approach the shelf. The next time, so holding onto them and retention is powerful to shed light in terms of how this could work for US I point, you to the southern region up all of the United States, where nature's own has been.

A question while on a national basis, we have about 33% household penetration in the south where we've been established we have over 52% household penetration right. There you see almost 26 20 percentage points of upside that exists and if we can translate that on on the national basis I Hope. It gives you a sense for our growth underpinnings.

With that let's go back side.

We realize that with covidien consumers behaviors have changed rather substantially what was otherwise lacking in terms of an uptake for animals in terms of coke consumers buying edibles on E. Commerce that has dramatically switched today. He calls about 13% of Brad is purchased B E Commerce now what does.

To take to win in E Commerce.

Very simply it's two aspects, it's awareness and optimization of the search she noticed how key the word awareness as again and if we continue to drive our focus and making sure that we're targeting the consumer in a manner. They wished we spoken to awareness continues to be a key unlocked whats value creation or growth.

So with that let's go over the next side.

What I should touched on from the prior slide is that under Wilders leadership, we are now setting up a digitization competency within our organization.

And while disparate pieces of work are being put together towards it we feel very confident about being able to bring that to life very shortly.

So I've talked to you about the the funnel analogy if you would from the upper end down going out to the bottom the key through all of this is not already said acting right consumer, but also retaining that consumer so what I'd love for who play our clip for you here is a video thats taken off our 32nd add four nature's own but Scott.

To towards a six second.

Demonstration that we use in social rather forms of digital media, so with that let's roll rolled over clip. Please.

Nature.

Congrats to shop, and about 48 hours so everything.

[music].

No I noticed the tagline beds as goodness in our nature and look at the articulation of some of those messages over on the right hand side.

We told you about the scratches shelf and about 48 hours and how powerful that is with the consumer.

We also.

Spoke to the fact that goodness is in our nature is as part of our product benefits.

All of that latter so the high order messaging in terms of how nature's own can be relevant to our consumers.

So with that let me turn it back to rivals.

Thanks, a lot of exciting efforts underway in both marketing and innovation and hopefully that hopefully that read through with demos presentation. So now we're going to move to Mark coordinate our chief brand officer, and he's going to talk to you about our portfolio and growth strategy smart.

Thank you rivals and good morning.

Today, I'll highlight our portfolio strategy.

And how we will use it to profitably grow our business by expanding our brand presence.

In underdeveloped markets.

Underdeveloped segments.

And by staying closely aligned with our retail partners.

The fresh packaged bread category has certainly seen a sales lifts since a pandemic began.

This channel shifting from foodservice to retail has been significant.

Fueling category growth of 14%.

I'm pleased to say that we have outpaced category growth by 420 basis points.

And introduced our brands two three and a half million additional households in just this last quarter.

Our challenge now is to drive engagement with these consumers by increasing our brand presence wherever and however, they shop.

To that end, we have clarified the roles for each of our brands and businesses.

We can now leverage to drive branded growth and meaningful margin expansion.

Our portfolio includes some of the strongest brands in the category. They collectively appeal to a very broad percentage of the population.

It includes strong regional brands.

That allow us to win locally.

And our National brand portfolio is comprised of the who's who of mainstream bread brands.

Starting with wonder.

Which gives consumers an opportunity to trade up from store brand and into the most iconic bread brand.

And nature's own the number one low red and United States, which offers premium products at mainstream prices.

And our superpremium entries.

Dave's killer bread.

Has been driving category growth for the last five years, where the best bread in the universe.

And our newest injury Canyon Bakeoffs has quickly become the number one gluten free bread.

About giving consumers a reason to love Red again.

We've developed growth maps for our brand portfolio to drive optimal revenue.

In margin growth and serve as a guide for resource investments and prioritization.

We've aligned our growth maps and brand strategies.

With our network optimization plans to ensure that we have the right capacity.

For the right products in the right markets and with minimal capital investment.

We've also sunsetted two brands this year and streamlined our assortment deleting some 20% of our products.

We will continue to leverage the portfolio to delight, our consumers of every demographic, while driving sales and margin expansion for our retail partners are independent.

Distributors and our shareholders.

One of our teeth growth opportunities is clearly to drive growth in underdeveloped markets.

Keep in mind that we have a 17 and a half share nationally.

But when you look at this map you can see that our growth opportunities very widely by market.

You can see where our strengths are and how much headroom we have for growth.

And while we have a 30 share in the ROI of South market, we've only begun to scratch the surface in high population markets like the northeast in the Midwest.

And we're just beginning to hit our stride in on the West Coast.

We're taking a focused approach to targeting markets at all for the greatest opportunity for profitable growth.

And investing appropriately to drive brand presence with customers and consumers in high potential markets.

We have a great opportunity to grow our business in close in adjacent segments in the markets, we serve with a clear leader in low red.

With over 30 share.

As you can see low fares the biggest segment in the category almost an 8 billion dollar segment.

And low pass two primary use occasions lunch and breakfast core sandwiches for lunch.

Where our brands over index.

And also as toast for breakfast, where we are fairly indexed.

We believe we have significant headroom to build our business in non low segments by introducing products for the breakfast and dinner meal occasions that uniquely deliver on our brands promises.

Let me give you an example getting back to breakfast.

Our Dave's killer bread consumers, we call them bread heads.

Our quite vocal they love our bread.

They love our second chance this program and they have encouraged us to offer them killer nutrition, and killer taste and texture and other types of bread, so we listen to them.

And it just three years, we've built our Dave's killer bread bagels, and English muffins to over 100 million dollar business and seen our share increased 420 basis points.

Just this year, we made a strong push in the dinner meal occasion, specifically with sandwich months.

Now, it's true that we sell buttons for many years.

But our growth has been limited by two factors.

First much of our bank capacity has been dedicated to Nonbranded bonds.

And secondly, our branded bunch strategy has been fragmented with most of our sales efforts behind our regional brands.

Our portfolio strategy addresses both of these issues as we have defined and communicated that our first priority.

For line capacity is branded retail.

And our main shrink buying priority is wonder.

We are leveraging the power of the wonder bran.

And have rallied our team's efforts behind this iconic brand.

We've also launched innovation in our premium and Super premium brands.

Nature's own perfectly crafted brioche.

Bonds were introduced this year Dave's killer bonds have been introduced and for the gluten free consumer consumer we have launched Canyon bake House Burger bonds.

I'm pleased to say that early results for the entire been segment in our in our branded business is up 29%.

And our shares improved 80 basis points in the second quarter in this three and a half billion dollar segment.

Finally, I want to speak to the marketplace and our retail partners.

Our retailers are doing a great job of serving the most rapidly changing environment most of us have ever seen.

They're dealing with consumer behavioral changes that are happening at blinding speed just as the accelerated adoption of the ecommerce platform home delivery and in many cases, they've transform their business into a hybrid retail store.

And our fulfillment center.

There are also dealing with workforce related issues from the pandemic.

As well as an uncertain economy and an uncertain future.

I'm pleased to say, though we're far from perfect.

Our team is generally recognized as a leader in serving the market in times of crisis.

Our retailers know they can depend on us not only to serve them well and help them stay in stock for their customers.

But because we have a portfolio of brands that their customers demand.

Our brands are important to consumers as you can see from this chart.

Nature's own Dave's killer bread and Canyon bake house have the highest loyalty the highest share of wallet in our category.

And because our brands are important to consumers. They are important to retailers our brands command, a premium price driving higher category sales and profits for our retailers.

We will continue to work strategically with our retail partners as they continue to evolve and serve the changing consumer.

In this important category, thank you and back to you Rouse.

Thanks, Mark I Hope you can see our our marketing efforts our innovation efforts in our portfolio strategies going forward are really the backbone of everything that we're going to be doing going forward and hopefully it read through and you can see why we're we're so excited about it M&A turning our attention to M&A I'd like to introduce Mart Garish Mark is the new Vice President corporate.

Element.

And runs all of our M&A now taking over my model job and Trust me. It's it's an upgrade so mark once you take us through alright. Thank you Ryan good morning, everyone I'm excited to be here on the next to spend the next few minutes talking about our corporate development program earlier double discussed how we use consumer insights the leverage opportunity.

These for our core business.

Equally important the future flowers is taken that same information and using it for M&A, we have growth ambitions through M&A. We're positioned for this growth we will take a structured approach partnering with our newly formed limited information team to identify opportunities both in our core and within grain based adjacent space.

As Rob discussed earlier M&A is one of our four strategic priorities that will enable long term growth.

With a strong balance sheet.

Free cash flows we are poised to invest for this growth, but we're not just standing here, telling you that we have cash and capacity. We have the experience we have the capabilities and we have the commitment coupled with a long history of delivering on M&A as you can see by the chart on the screen. Our two recent deals Dave's killer bread and Canyon Bake House.

Have produced incredible profitable growth.

And even more importantly in that that slide doesn't show is these brands have a long runway and we expect many years of continued growth from these brands.

A structured M&A approach is critical to ensuring flowers long term success again, we have the track record for M&A and we will continue that success by developing a clearly defined repeatable process with a clear set of acquisition criteria.

We view here flowers, we view M&A as a capability. This is not a one off project focus on its secrete target, we're developing a capability to provide a steady stream of potential growth drivers demonstrated on that commitment I was hired in September 2019, as a dedicated resource I sit within.

In our corporate strategy department to ensure a tight link between strategy strategic intent and M&A.

Enabled by a defined strategic M&A criteria, we will look to identify assess prioritize and maybe most importantly look to cultivate rated relationships with potential partners.

Our structured approach extends beyond the screening and acquisition phase to cover integration.

As we know integration is a key component of acquisitions that we've not overlook that we're developing dedicated resource by aligning internal functions I areas throughout our company.

Right I spoke earlier about our commitment and what we called Smart M&A.

Smart M&A to me to us means falling as disciplined process in foreign buyers strategic goals and innovation platform goals, we will seek to develop new brands and products both in house and through investments.

We're looking at opportunities not only solidify our core but also look into adjacent sees.

Within the core we're identifying areas for infrastructure and distribution growth in underdeveloped locations basically we're looking to expand in areas, where we know our brands have a right to win with not only the retailer, but with the consumer.

Within adjacent sees we're looking and gain exposure to growing underdeveloped segments with innovate and brands and our capabilities.

Hi partnership with our corporate strategy team our brand team our newly formed innovation team and R&D team will inform these target areas.

From an operating perspective.

Our operating model for adjacent these will vary by deal, but similar to Dave's killer bread, we expect to leave a significant portion of the acquired company in place well driving significant growth.

For example, after your card Dave's killer bread manufacturing marketing sales stayed in place, we really like the heart of the company in place and we drove growth.

Not only through or industry expertise, but also through innovation as we've talked about earlier, adding bonds and breakfast items to fuel growth.

In the same way that we are flexible with the types of targets are exploring we're also considering various transaction structures will remain open to alternative deal structures, such as joint ventures minority investments strategic partnerships.

We know that this dedicated disciplined yet flexible approach will enable long term success, we will deliver on our core strategy priority of smart M&A.

Thank you for your time I look forward to sharing our progress in results.

With that I'll turn it back over to Rob's.

Great. Thank you Mark as we've said many times on on this call and and prior calls M&A is always played a vital part of our growth story is going to continue to do so in the future might look a little bit different you heard from that that we're we're really trying to open the aperture not only just [noise].

The types of companies that were interested in but with regard to the types of deal structures that we're we're interested in going forward.

You are willing to make smaller minority investments to help fuel innovation from an outside perspective. So we talked a lot about supply chain optimization, we talked about our portfolio strategy, we've talked about our marketing and innovation efforts and now I'd like to call on our Chief Financial Officer, Steve Kinsey, who is going to tie it all together for us and talk about our our financial progress and the long term out.

Steve.

Thank you Raul and good morning, everyone.

Well I need to admit while I'm very excited about the fact, we have the technology that we can all be together today virtually I'm definitely looking forward to today that we have the ability to meet again in person. So hopefully that day come soon.

Today I plan to cover several key topics first our business is performing well.

Based on our first half performance and our back half outlook, we have a positive view on 2020.

Second the business continues to generate strong free cash flow and our capital allocation policies are aligned with supporting the priorities you've heard about today.

And finally I will provide you some color to our updated long term targets in a roadmap to reaching them.

Turning to the second quarter results.

As Ralph stated, we released earnings late yesterday and filed our 10-Q with the FCC as well.

You can see from that release, we had another strong quarter with great performance.

From both the sales and margin perspective.

Results were driven overall by solid brand performance.

We continue to experience elevated in home eating which bodes well for our brands.

The topline grew 5.1% with adjusted EBITDA growth of 21.4%.

Adjusted EBITDA large has expanded 170 basis points to 12.5% of sales.

Adjusted earnings per share grew 32% to 33 cents per sphere.

A record second quarter.

Adjusted EPS.

I'd like to also highlight briefly a few items excluded from the adjusted results that were driven primarily.

Our continued focus on brands and overall optimization work.

First we did have two significant impairment charges, a $4.6 million charge related to surplus property and equipment. We're in the process of selling.

And a 4.6 million charge due to the discontinuance of Alpine Valley brand. This brand as you know has been somewhat challenged by the overall performance of Dave's killer bread. So we shifted our priorities are resources for our strongest organic bread Teekay D.

This allows us.

To use both our salesforce inorganic production capabilities to drop drop continued growth in this important segment of the category.

Second as Ralph mentioned in July we announced an organizational restructuring.

Yes, good with this we recognize the charge of 1.5 million related to employee termination benefits and we also anticipate into third quarter, recognizing an additional 7 million.

Charge related to employee termination benefits as well.

Now turning to guidance.

Based on the strong business performance year to date, we've increased our full year guidance. We now expect sales to increase 4% to 5% in adjusted EPS to be in the range of $1.15 to $1.25.

This range is water than we typically provide at this time of the year.

That's because there are several key considerations that could influence our results in the back half.

Overall food at home consumption continues to remain elevated to the prior year.

However, given that consumers are starting to cope and move about we're closely monitoring the impact on our mix.

While there are some indication consumers are comfortable with carry out or even on side dining in home consumption is still elevated.

As you are aware Corona virus infections are on the rise again.

So we will continue to watch the impact this type of consumer behavior as well.

If trends reverse and we begin to see a sustained decrease in overall cases, we anticipate that consumers resume something close to the normal lives.

We would then expect the percentage of our non branded business to increase impacting mix somewhat.

The uncertainty around the pace of this reversion is the main reason for the water got it right guidance range at this point.

Back to school and returned to work timelines are key to from minutes when our sales mix begins to shift.

But their trajectory is very unclear at this point.

While there are a range of scenarios, we remain confident our business will continue to perform well over the balance of the year.

We continue to see strong consistent cash generation from the business.

In fact year to date operating cash flow was up approximately 32%.

The cash flow has not only supported a growing dividend, but also.

Generate a discretionary free cash flow that we've invested strategically to expand the new markets and growing product segments like organic and gluten free breads.

With the stream of cash flow, we've been consistent with our capital allocation decisions, which are guided by a set of balance principles that have served us well.

First will direct capital expenditures to support our core business growth for example.

Investments, we made to produce dk be in the northeast.

For 2020, we are targeting capital expenditures in the range of 85 to 95 million.

Second.

We'll manage our debt levels that we can maintain our investment grade credit rating and conservative financial position.

Third we reviewed we view the dividend as a key component of total shareholder returns, we're committed to maintaining a strong dividend.

As you heard from Mark we aim to proactively identify acquisitions.

And the grain based foods space to add faster growing brands to our portfolio.

And then finally, we'll consider making our throughput opportunistic share repurchases with excess cash.

[noise], our ample free cash flow has allowed us to maintain a strong balance sheet. We're very committed as I said to our investment grade credit rating and we have a track record of quickly de levering in the years following each of our recent acquisitions.

Over the past decade, and as Ralph stated earlier, we've demonstrated the ability to grow flowers business through both organic growth and acquisitions delivering solid mid single digit topline growth over the long term.

We're also pleased that we translated the growth of our business and to enhance shareholder value achieving low digit low double digit total shareholder return over the past 10 years.

Today, you heard Ralph and team members detailed our strategic priorities and we hope you have a better understanding of the steps, we're taking to deliver on our targets.

Start by focusing on our leading brands and shifting our mix to more profitable products.

We aim to deliver sales growth of 1% to 2%.

This level of topline growth.

Primarily driven by growth of our higher margin render products is expected to deliver a adjusted EBITDA growth of 4% to 6%.

He did this will be our supply chain optimization work and as noted by Brad is an important component of our overall strategy.

And finally, our 7% to 9% adjusted EBITDA.

Growth goal recognizes that additions EBITDA growth of dropping the bottom line there are significant opportunities within the grain based foods arena, where we can add value and improve the growth potential of our portfolio.

No. It's important support I'll point out that we do not view, our long term targets as annual guidance.

But as God posts to better understand what we consider normalized annual results over a multi year timeframe.

Obviously, we're in a unique environment right now that is providing strong performance in the current year well above our long term targets.

On average over time, we think our business can generate those results, but results at any one year may differ.

Looking ahead, we thought it would be useful to provide a little more color around how we see execution against our targets over the next few years.

Clearly, our 2020 guidance implies growth in excess of our long term targets.

Not only are we benefiting from greater than normal demand, but we also have a 50 threerd week, which is expected to bolster sales by approximately 1% to 2%.

Adjusted EPS by one to two cents per share.

Keep in mind fiscal 2021 does not thus have one last week and potentially some demand reversion as the pandemic effect receipts.

Which will be a headwind will need to overcome in order to achieve the growth algorithm in fiscal 2021.

We do expect the environment to somewhat normalized about 20 to 22 and to deliver on a long term targets.

And as I hope you've heard today, we're executing against instead of clear strategic priorities in the team is very committed to achieving our goals.

Now I'll turn it back to Ralph Thank you.

Great. Thank you Steve before we wrap up I I want to highlight the strength and longevity of flowers is a company we've been in business for.

Over 100 years now and in fact, the original Thomasville bakery that sits just write down the street from where we are now is still in operations and it's really a great illustration of why we think flowers is such a good long term investment.

Over the years, if we've done anything we've certainly cultivated a tremendously important asset and that's a passionate team that's committed to delivering shareholder value.

[music].

Another key attribute it's the it's the emotional connection of our core products. It's it's fresh bread. It's a nutritious staple it's a foundation as many many everyday meals and frankly very economical and them on a personalized basis. It's unique among staple foods consumers have their individual preferences across a wide variety of taste and texture.

And we play across a wide variety those same taste and texture. This provides an umbrella innovative brands like the ones that we have.

The opportunity to connect powerfully with consumers as you heard from data. This morning, it's that consumer loyalty in the end that builds valuable brands over time.

Third as evidenced by the Thomas will bakery, there are significant competitive advantages to leading operators like flowers. The combination of really strong brands and the logistical scale that we have.

Provided by our network of many bakeries across the country out supports the consistent cash flows that Steve spoke Steve spoke to and also.

Offers very attractive returns on capital.

Finally, we have an opportunity to grow through a product adjacent sees innovation and with smart acquisitions as you heard from Mark and Mark and demo and with our new organizational structure and flight in place. Our vision has never been clear I'm really excited about the opportunity a truly unleash the power of our our brands and bring our CFO.

Customers and consumers more new and exciting products for years to come.

So in summary, I certainly believe is what we're doing and hopefully today's presentation has made you a believer as well. So thank you for joining and I think now we'll open it up for questions.

Very good let's begin the today's session as a reminder.

To submit a question use the Q a function on the zoom App. Our first question is from a bill Chappell with Truest Securities, though are you on the line.

Yeah can you hear me yes.

Fantastic.

Good morning, a few quick questions I guess, we'll not quick but.

First Rialto just.

Help us understand on on the long term growth of kind of 1% to 2% what are you expecting.

Out of the category and when I say that we can you do that what are you expecting beyond Dave's killer bread and canyon and kind of especially side for the core business to grow in beauty pricing to do this or is this all really volume driven.

Yeah. It's a great question Bill as you know I mean, the category overall, let's take cobot out for a minute you know the category overall spin and pretty flat over the last few years, but we have been able to achieve you know above category growth both with our obviously the acquisitions of help but you also with some of our core products and that's why that's why I'm so focused on innovation.

Because that's really going to be key to bring those new and differentiated items to the consumer on to help continue to drive that above category growth.

Farce pricing, what we've assumed as we built our models and release the released the guidance is that we will take pricing when we can to to offset inflationary headwinds and then you also heard about the ability to grow image in the additional geographies as well we still have you are pretty low market share and some ins.

Some very important areas of the country like the northeast we talked about our 30 share in the south which is great I'm little about little tougher to grow that outside of innovation right, but if you think about the northeast where we only have an eight share and we're really just getting started up there you can see you can see the the potential future opportunity.

And I guess you follow on to that I mean, what are you expecting for from your competitor largest competitor because I mean part of the issue as we look to like try to continue Olin.

And the benefits never really fell to the bottom line was because your competitor remained and or the competitive environment remained fairly aggressive on promotions in pricing and stuff like that until it was we were unable to see that kinda does benefit. So are you expecting from here forward a more rational environment.

I think it's I think it's hard to semi we all know the promotional environments. You know bin bin way down for a lot of food companies. During the situation is due to the due to the high demand.

Yes, I would I would expect us things normalize that maybe that comes back some but bill I can't control what competitors do I can control, what we do and how we were acts and how we run our business and we're confident overtime that pulling all the levers that we've discussed today that we can grow the topline at that rate understanding that you know embedded underneath that top.

Flying growth rate.

As some anticipated pull back on lower margin business.

Got it and just just two more for me.

Since you were part of.

The you I think you spearheaded the projects continue.

Move why why a lot of changes happening today why weren't a part of tried to continual are done four or five years ago.

Yeah, I think I've talked about the sports. It's another good question first of all the supply chain piece was always plan. When we started centennial really started executing against it back in 2017, Yeah. We were more focused on the S. DNA line their understanding we would get to the supply chain piece over time, one of the looking back one of that one of the false with Centennial overall.

All it's honestly, which we probably try to do too much at once.

So you you lost focus in a couple other areas where is now coming back around making some of the organizational tweaks. After we after we sat with that and learn from it some and hopefully it came across they being much more focused around our portfolio strategy supply chain optimization strategies marketing investments and innovate.

Jason.

Hopefully that read through today. So it's yeah, we're trying to be targeted.

In the areas that we think we'll have the most impact on the business.

Got it and last one just any more color in what you mean by Green based acquisitions I mean in terms of your willingness to look at <unk>.

It seems like a broader scope is that include snacks does that include cookies and crackers does that include pasta I can go up with other green based type products like you have thought my head now what is what does that mean.

Well largely what we said it you know it's a large when you when you look at it when you when you open up the lens so to speak and you and you look at the industry from a wider perspective than just.

Fresh sliced bread, you, obviously have a much larger sample set of opportunities.

If it it's it's honestly built a little bit of a tough question to answer just because I don't want to give away too much but suffice it to say that we're looking beyond fresh bread.

Great. Thanks, so much sure. Thanks Bill.

Very good our second question is from Ryan with consumer edge.

Right there.

Hi.

Hi, Good morning, Ryan.

Morning.

As you have increased frequency in household penetration.

Over recent periods due to coded could you dial in a bit on your efforts Streeteasy increased households, and you also speak a bit more about the specific niches within bread and baked goods.

That you want to target for innovations the future M&A.

Yeah, and I'll, probably have demo come up and and weigh in on this as well, but yeah. We have we have reached a lot more households, and of course that you know the key.

The key to that opportunity is retain those households going forward. So let me, let debow give you some details on some of the specific things that we're doing going forward. Even as this thing you know begins to die down to retain those new consumers.

Hey, Ryan Good morning, Great question Unipart, the consumers habits are certainly changing and their situational.

The objective that we have as of before those habits became become behaviors, we need to understand what the consumer practices are going to be what they're turning to play there sources of information and make sure that where relevant and present in those environments. So we're studying the consumers' behavior pretty hard and looking at their odd the impressions that they're creating and well what wed.

I'd say, we're going to for example, where they turning to for some of their recipe idea of usage ideas and were seizing on those as part of our media mix of we're staying very nimble in that regard I hope that answers your question.

Yes, those pretty helpful. And then would be niches within Brad baked goods in general that you actually want to target for innovations and future M&A, we could build to provide any more details on that.

Yeah, I mean look Weve I think we've already demonstrated some of the things that we've done, particularly in a in the gluten free category I mean, it's it look it's a it's a much smaller category, but despite calls for its demise for the last 10 years. It just continues to grow whether for dietary reasons or out of absolute necessity.

And so we've been able to build on that we've we've introduced the breakfast items as you heard mark According to talk about a little bit earlier under Dave's killer bread, which I mean, we've tried.

Countless things and the breakfast segment over the years with a variety of brands, but the days breakfast items have really taken off for us.

We're still small relative to some of the competition, but the trajectory is certainly a really good and.

Look theres may it was sort of similar to the question Bill ask as we've we've talked about innovation, both organically inside of flowers and outsourcing some of that innovation and we'll be looking at some of these these smaller players now you're right now and the situation that ran now we've all been reading about how big brands are winning again as and is that is that here to stay.

I am and probably to some extend it is I hope it is because we have some we have some big brands, but also think that you know that overtime when things settle down I think people will continue to look for for smaller brands for truly innovative differentiated items and we need to be a part of that.

Okay. Thanks, that's helpful and with your efforts improved on the profitability of the portfolio.

What should we expect regarding SKU rationalization, maybe describe the general got SKU rationalization potential.

And how much low hanging fruit there might be there in terms of unit. This makes it profitability between your most profitable skews in your lease profitable skews.

Yeah, and I'll, probably asked ask Brad the way in a little bit on this too I mean weve.

SKU rationalization is really a continual effort I mean, you heard Mark Cordoning earlier talk about the ski right. We did the some 20% of products that would that we deleted I'm. So overtime you take pieces of the portfolio that are that aren't doing as well are creating too much complexity in the network.

And you take them out and honestly, that's that's one of the challenges with innovation really is yet to be careful as you don't end up just putting out a bunch of skews, but the ones that don't do well you end up not taking them. All so it's a bit more of a continual process in my view, but the idea the central thesis behind all.

This is to shift our mix I mean, we've seen it we've seen it in the current results. We've seen what it's done from a margin improvement standpoint, which is only served the steel are resolved because we're already working on this pretty cobot, but this situation, albeit a extreme example has really proved out the thesis branded business is way up and yet.

We still have.

Pretty significant declines in foodservice and private label and yet you know the margins margins are up significantly. So you can you can really start to see what the potential is there on when I talk about.

Potential low no margin exits overtime that will be methodical that will be structure, that's not going to happen at wants because pretty much everything contribute something and so you know as we grow the branded business over time, if we can't get.

The lower margin business to an acceptable margin threshold I'd, rather do that but if we cat then we will pull back on that and rationalize that capacity Brad anything you want to add just I would say the biggest change probably for us as we've got a more structure approach to SK rationalization now and what we realized and we knew.

But weve accelerate it is the amount of reducing the complexity in the bakeries, reducing changeovers has really Matt I'm a lot of free production time for our plant. So we are doing SK rationalization, we're looking at everything about twice a year now so I'm more will calm, but we've done a lot already and it's it's proving benefit for us.

Well.

Great. Thanks. Thanks, that's it for me Thank you Rob.

Our next question will come from Brian Holland.

And Brian hauling from D.A. Davidson.

Well Im Brian.

Hey, Good morning can you hear me, yes, loud and clear okay. Great. Thank you so much of it maybe if we start just kind of on the second quarter results just kind of curious given the backdrop with cobot 19, how grilling season sort of played out obviously, we see out the results were quite strong overall, but just curious how grilling season evolved.

Versus your expectation I think kind of applying any of those learnings how should we think about playing out over the rest of the summer both with respect to consumer behavior and your promotional stance.

We honestly, we had a we had a great grilling season, despite everything going on I mean going into it we were all little unsure.

About how it would go with people having to social distance, but by the same talking I guess there were stuck at home. So I went the home depot not too long and heavy girls left so out of currently people are still still doing that but but we had it we had a great season, Mark Gordon talked a little bit about this we had great success with thought with wonder.

Over the holidays and as you all know the saying what's been enroll segment is very important and yet it's one that we we underperformed in for a few years now so it was great to see that that trajectory for the summer right you know going forward.

I wish our smarter than everybody else, but I'm not I really don't know [noise].

You know my my Best Prognostication is that we'll continue to see some at some level of elevated in home eating even as we move into the school cycle and the fall because I just don't I don't know, how I'm anxious deeper again to be.

In mass to go back into restaurants, I think the I think the food service side of things is a pretty pretty long.

Road to recovery.

It it some of the drive through you know QSR stuff may do a little bit better actually don't forget when but.

Because of that I think there will continue to be a bit more elevated and how many how long that last is anybody's guess I think.

It's largely dependent on when schools go back do they stay in.

What happens in late fall and flu season Calstock around how long does this last before you know a vaccine as available so a bit of uncertainty. There you can see a little bit of that uncertainty as Steve talked about reflected in the guidance I know, it's kind of a wide range for halfway through the year, but.

That's the reason for it but so far so good I mean, you know even you know just a few a few weeks we're into the third quarter I'm certainly off the peak, but we're still seeing you know good retail good retail sales.

I appreciate the color and certainly agree with your view Ari at home consumption, if we could see switch back to the long term now.

I think you you spend a bit of time talking about some of these components and bill you addressed with those question.

Some of the things that maybe you can come along as as you expected originally with Centennial and maybe what some of these targets. Therefore pushed faxes. So won't you all too much on that but just kind of curious you spend a lot of I was talking about the branded ports and I think thats something you've talked about for the last few years.

If we think about this category historically.

The largest branded players have also been very relevant as you know with respect to producing private label products.

Which has been important retailers and I think intuitively, but thought was.

Private private label production is kind of you know the at the point of entry into maybe preferred shelf space et cetera.

Clearly branded share is growing in package spread over the past several years I made continues to do so but it still seems like private label should be important. So I guess, what I'm curious is how do you balance.

These two components going forward is private label less important to the retailers in this category than maybe it was five years ago, and then also with respect to price points et cetera, keeping keeping private label at price points that retailers want but you have more premium ice products to the price gaps are wider.

Which in theory, Craig finish all of the data would suggest that hasn't gotten in the way so I apologize, but that's it that's it.

That's question with a lot of parts, but really just want to get into the importance of private label. How you manage that too as you continue to increase your focus on branded products, absolutely and I'll, let Brad comment as well he's he's so close to it but yeah look private label is always been an important part of the business I mean for its if still important.

The retailers to answer that that question and frankly, it's important to us too because when you have.

You have some excess capacity it helps us because we're able to.

We are able to cover some overhead by by making it for our retailers.

And I consider our retailers strategic partners and and yes, we will continue to be important message, having said that we do have some elements of our portfolio that just don't carry.

Enough enough margin.

For whatever reason because of them the method of distribution, that's required or pricing or whatever and a and Brian at the end of the day.

We're not in business to generate a sales dollar were in business to make money for our shareholders and so we're approaching it as much more of a strategic partnership for our retailers, but also think.

The retail for are responding to the consumer.

You know certainly there is a place for private label, we play across as we've talked about today a lot of different price points, you know from from private label to wonder to regional brands to Nature's own today's in Canyon, so kind of kind of all across the spectrum and their consumers that that want items in each of those areas. So.

No we've got to be there for the consumers just like the retailers have to be there for consumers spread any additional color you want to have the only thing I would add is I think the branded companies have done a good job of differentiating their brands, becoming a new innovation and that's that's I think got a big interest in the consumer so and it varies.

Like while said customer by customer on what their strategy is with private label and we have to be in sync with what they want and decide if we want to play with them or not in private label. So.

Hey, good well, let's move to our next question from Matt Fishbein with Jefferies. Matt are you on the line.

Matt I might add on mute.

Oh, sorry about that did not have to click there morning, It's Matt on for Rob Dickerson. Thank you just one question for me.

First of all great presentation definitely to best Webinars set up I think we've probably ever seen so thank you for that well.

I wanted to follow up on want to Bill's questions regarding project Centennial and supply chain optimization plan.

I totally appreciate the topline growth is clearly a big driver sounds like the biggest driver a fixed cost leverage.

Increased and then it could go forward margin expansion potentially business.

But in addition to the increase focus.

You have now what are the key differences between the list.

List of levers call it identified to drive supply chain optimization over the last few years in the Centennial plan versus the levers in the current plan today and it may be as a follow up to that what is the magnitude of the supply chain optimization.

Improvement to margins relative to that topline growth that you need a and has that changed versus Centennial plan. Thank you yeah sure a great great question, Matt. Thanks first of all as I mentioned it earlier you know the first phase of Centennial. If you will was focused much more on the SC and.

In line.

And.

We made a lot of progress there on we always knew that we would move to phase two which focus is much more on supply chain now having said that in some way shape or form we've always done. Thus you know the company is always move capacity to wear to where the people are where it can be that most profitable to to optimize our transportation miles that.

I think what I would say is.

All the all of the supply chain optimization efforts now are being done under the Halo of the portfolio strategy. The portfolio strategy really drives everything underneath that right. So you heard me say, we want to make sure that we've got the right plan assets and the right location supporting the right products. So that means as we shift our.

Mix to branded retail that we can either re purpose capacity Brad talked about the Lynchburg bakery that'll come online in the fall producing dk B I mean, essentially that was a sort of the main line you know white bread bakery before and now it's moving up to Dave's killer bread and.

In the premium segment, we have done the same thing with the Tuscaloosa, Alabama bakery, we'll continue to do things like that as we need capacity and and great brands like days up keep growing.

So it's important to note that it's it's really part of the overall portfolio strategy comes right underneath it as far as magnitude goes without being too specific they're both critical right I mean, you've got it you've got to have the right brand strategy to drive growth, but you better have the right cost base to and you better have the right network to some.

For that growth not too big not too small just just right, but flexible enough to move up as you grow hopefully hopefully that helps a little bit.

Certainly guys. Thank you very much thanks, Matt well go to our next question with Pfizer always with Deutsche Bank.

Pfizer you there.

Yes can you hear me, yes, okay great.

No I wanted to talk a little bit more about the expansion market and the focus there I know you've talked about that historically.

It seems like there's more focus now than before and I was wondering if if you're doing something different.

Good morning, maybe more investments to those markets and.

But what that entails.

Yes, yes, and yes, but I'll turn that to Brad and let him give you more color.

Thanks, Charles [laughter].

We are the nice thing is we're starting to gain some traction.

No we've only been in New York about five or six years, and we started with a zero and we now have a benign share. So once you get some momentum going it is easier to grow in those areas, but we are excited we are putting additional efforts in those markets, we're putting additional marketing.

Prowess in that market, we are focused on it we've got good targets. The nice thing is we've had strong single and low double digit growth in those newer markets and we want to continue that and push that along even more.

Okay, great. Thank you so much. Thank you very good and we now have we will now go to Mitch Pinheiro with start event Mitch are you there.

You might be on you know I got you yet you there.

Yes, good morning, Mitch Hey, good morning, so.

So first question this is on snack cake.

Why you know obviously, it's a priority here to get it back.

Two.

More optimal level, but I don't understand it's just.

Second always seems to be.

In issue and not long before you the tasty cake.

Tasty cakes in issue a host this has been an issue it's.

Finally create category or at least it doesnt seem to be.

Why not just the best it.

Ah why why struggle through trying to make tasty cake and Miss the specialties and everything else work.

Mitch you know I've said I've said many times, yes first of all cakes been a part of our company for a very very long time in one form or another but it has been tough I mean, you're right I mean and for US you know.

We've got a brand that.

Not one of the top ones outside of the core Philly market.

But we do have some really great products some great quality products, that's why keep saying that the first three priorities for our cake business is operational improvement operational improvement and operational improvements. We've got to we've got a tremendous opportunity. If we can get the navy yard bakery back to where it needs to be back to operational excellence.

The incremental profit opportunity is quite large it's also great support for our for our routes.

The independent distributors like having a take on their trucks and frankly tasty case, a big brand we've got to fix operational pieces first but we think that takes he's got good potential down the road to I don't really mean to deemphasize. It's just really first things first and I might ask if a if mark Courtenay, maybe wants to talk a little bit more about tasty cake as well.

Yeah, Rouse and good morning, Mitch the only other thing that I would add is as you will know tasty cake is extremely strong in the mid Atlantic area, where our shares or you know high Thirtys 40.

So in our portfolio strategy. It falls under the strong regional brands for that reason, we do sell it nationally but in contrast to the mid Atlantic region, where we have dedicated cake routes that are really focused on selling cake everyday the balance of our cake in the rest of the country is sold or a combination route.

What's in it does provide incremental sales opportunities profit opportunities for our distributors and serve very tactical Roe from that which back.

Thank you.

And just look and actually have also in the second quarter I mean, how good I know you don't break it out by brand but.

How was the snack cake business in the quarter.

Taking had a good they had a good quarter.

They did very well okay.

When you look beyond I think at some point.

Hopefully some point, we get beyond this co bid.

Issue and you know things get back to normal maybe it's in five years, but if.

When you go five years from now are we still get would be in the same spot in terms of they'll be more foodservice sales, which is lower margin I'm not sure about private label that night stay where it is but are we going to start to see what we had a little bit of a negative mix as coated.

Disappears.

Or or.

We think about that.

No, it's I get what you're saying niche.

In a way, yes, because you know if you if you think if we're if we're unable to grow branded retail and foodservice and private label comes back up obviously, you have that shift there, but if we can keep growing our branded retail business at a faster rate than than the food service and private label business grows and of course, there's two ways to do that.

You can you cannot not take business or you can take business down in those less attractive areas.

And we should still continue to see the positive mix that we're looking for we I need it was I mean.

We like the foodservice business frankly, we don't like all of it but we like a lot of it we have some really good foodservice business that we would like stay in the idea here, though is again just like the question related to private label, we want to be in strategic partnerships with our customers and you know where as I said before we're in business.

To make money and so we need of a framework with which to do so if we can work with.

A particular customer that may be underperforming on pricing or method of distribution, then I'll have to be price it might be method of distribution for example.

Or formulation or things like that where we can you improve our cost structure to acceptable margin I don't mind, keeping some foodservice business on because it does it does provide us a lot of overhead coverage as we continue to grow the branded side of business.

Okay. Thank you and then last just so you talked about M&A deal structure.

[laughter].

What would it take what why would you.

Had a and unusual or modified deal structure in an acquisition I mean, what are we talking about of large acquisition that would require that are we just talking just trying to get an enduring a very small company and willing to take a minority you know some sort of minority stake.

Mike can you talk about that a little bit yeah, yeah sure. It's a great question I'd say, mostly mostly on the smaller end of things right.

Almost from the almost from a venture capital type standpoint, not really formally that but that's the general idea probably less so on the large acquisition side, although Mitch you remember as well as anybody you know the keyboard transaction that we did back in the late Ninetys, which started off as a minority investment so certainly not ruling that out but most likely on.

The smaller into things.

Okay.

Thank you very much like you match very good that concludes our Q and I session and aren't investor update. Thank you for your interest in our company and we look forward to sharing our third quarter results in November.

Alan Goodbye.

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