Q2 2019 Earnings Call

August 8, 2019

Paulette: Welcome to the Flowers Foods Q2 2019 Earnings Conference Call and Webcast. My name is Paulette. I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to J.T. Rieck, Treasurer and Vice President of Investor Relations. You may begin.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.

During the question answer session. If you have a question. Please press Star then one on your Touchtone phone. Please note that this conference is being recorded.

I will now turn the call over to J.T., Rex Treasurer, and Vice President of Investor Relations you may begin.

Thank you and good morning, everyone. Our second quarter results were released yesterday evening the earnings release and updated presentation is posted in the investors section of the flowers Foods website. Our 10-Q was filed with the FCC yesterday evening as well.

J.T. Rieck: Thank you. Good morning, everyone. Our Q2 results were released yesterday evening. The earnings release and updated presentation is posted in the investor section of the Flowers Foods website. Our 10-Q was filed with the SEC yesterday evening as well. Before we begin, please be aware that our presentation today may include forward-looking statements about our company's performance. Although we believe those statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters we'll discuss during the call, important factors relating to Flowers Foods business are fully detailed in our SEC filings. Participating on the call today, we have Ryals McMullian, Flowers Foods President and Chief Executive Officer, and Steve Kinsey, our Executive Vice President and Chief Financial Officer. Ryals, I'll turn the call over to you.

Before we begin please be aware that our presentation. Today may include forward looking statements about our company's performance. Although we believe those statements to be reasonable they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters, we'll discuss during the call important factors relating to flowers foods business are fully detailed in our SEC filings.

Participating on the call today, we have rousing Bowen flowers, foods', President and Chief Executive Officer, and Steve Kinsey, Our executive Vice President and Chief Financial Officer, Ralph I will turn the call over to you.

Thanks, Dave.

Ryals McMullian: Thanks, J.T. Good morning, everybody, and thanks for joining our Q2 call. As we approach the 90-day mark since I took over as CEO, I have been spending a great deal of time visiting with and listening to our team and our customers. Now more than ever, building good relationships with our customers is critical. It's really important to me that I fully understand where our customers intend to take their business, and that Flowers stands ready to support their strategic ambitions with our outstanding brands, our quality, and our service. I think it's equally important for them to hear about where we're headed so that we can work better together towards mutually beneficial outcomes.

Good morning, everybody and thanks for joining our second quarter call.

So as we as we approach the 90 day Mark since I took over as CEO .

I have been spending a great deal of time.

Visiting with and listening to our team and our customers.

Now more than ever building good relationships with our customers is critical.

It's really important to me that I fully understand where our customers intend to take their business.

And the flower stands ready to support their strategic ambitions with our outstanding brands, our quality and our service.

But I think it's equally important for them to hear about where we're headed so that we can work better together towards mutually beneficial outcomes.

Visiting with our team members.

Ryals McMullian: Visiting with our team members has given me the opportunity to hear about what's most important to them, where they think our challenges and opportunities lie, and how they'd like to see the company develop going forward. It's also given me the chance to reinforce our strategic priorities with them and help to ensure that we're all moving together in the same direction. I've visited several plants and markets. I've conducted a couple of town hall meetings so far, with more to come in the next few months. I'm very pleased to say that our team is energized, and they're eager for what the future holds. They believe in our strategic direction, and they're anxious to contribute their part towards that mission. In short, this intentional and heightened level of engagement with our team has been very positively received.

He has given me the opportunity here about what's most important to them.

Where they think our challenges and opportunities lie and how they'd like to see the company develop going forward.

It's also given me the chance to reinforce our strategic priorities with them.

And helped ensure that we're all moving together in the same direction.

So I've visited several plants in markets conducted a couple of town Hall meeting so far with more to come in the next few months and I'm very pleased to say that our team is energized and they're eager for what the future holds.

They believe in our strategic direction and they're anxious to contribute their part towards that mission.

So in short this intentional and heightened level of engagement with our team has been very positively received.

One of the one of the key messages I tried to consistently communicate is that it's crucial for all of us to constantly seek out opportunities to improve our business.

Ryals McMullian: One of the, one of the key messages I've tried to consistently communicate is that it's crucial for all of us to constantly seek out opportunities to improve our business and to execute daily on our strategic priorities. That means not only relying upon our team's years of experience, but also asking different questions in the search for creative new answers. It also means that although we're focused on the long-term earnings power of the company, we must always keep our current results front and center, so we have a clear understanding of progress toward our goals. In the, in the spirit of that message, we're gonna shake things up a little bit this morning and start by having our CFO Steve Kinsey review this quarter's results and share our outlook for the balance of the year.

And to execute daily on our strategic priorities.

That means not only relying upon our teams years' experience, but also also asking different questions in the search for creative new answers.

It also means that although we are focused on the long term earnings power of the company.

We must always keep our current results front and center. So we have a clear understanding of progress toward our goals.

So in the in the spirit of that message going to shake things up a little bit this morning.

And start by having our CFO , Steve Kinsey review this quarters results and share our outlook for the balance of the year.

Hopefully that will help to better set the context for my commentary about our operations and strategic priorities.

Ryals McMullian: Hopefully, that'll help to better set the context for my commentary about our operations and strategic priorities. Of course, after our remarks, we'll look forward to answering your questions. Steve?

And of course after our remarks, we'll look forward to answering your questions Steve.

Thank you, Rob and good morning, everyone.

Steve Kinsey: Thank you, Ryals, good morning, everyone. During Q2, we continued to experience solid performance on the top line, driven primarily by sales in the retail channel. In Q2, consolidated sales increased $34.5 million or 3.7% year-over-year. Canyon Bakehouse, our recent acquisition, contributed 1.9%. In the base business, improved price mix drove 1.9% of the sales increase, while slightly lower volumes impacted the top line by 10 basis points. Price realizations improved across most of our channels and product classes, which has helped us to partially offset the commodity, labor, and transportation cost increases we've highlighted in recent quarters. Volumes were primarily impacted in our food service and cake businesses. Looking at sales by channel, branded retail sales increased $25.8 million or 4.6%.

During Q2, we continued to experience solid performance on the top line driven primarily by sales in the retail channel.

In the second quarter consolidated.

Sales increased $34.5 million or 3.7% year over year.

Okay, and Bakeoff or recent acquisitions contributed 1.9%.

The base business improved price mix drove 1.9% of the sales increase.

While slightly lower volumes impacted the topline by 10 basis points.

Price realizations improved across most of our channels and product classes.

Which has helped us to partially offset the commodity labor and transportation cost increases we've highlighted in recent quarters.

Volumes were primarily impacted in our foodservice and cake businesses.

Looking at sales by channel resident refill retail sales increased $25.8 million or 4.6%.

The contribution of Canyon, Banco branded products accounted for approximately half of these incremental sales dollars.

Steve Kinsey: The contribution of Canyon Bakehouse branded products accounted for approximately half of these incremental sales dollars. The balance was largely driven by continued growth from Dave's Killer Bread, Nature's Own, and Wonder products, and the introduction of Sun-Maid Breakfast Bread in Q3 last year. This growth was partially offset by softer volumes in our branded cake items. Store branded retail sales increased $15.4 million or 10.5%. Store branded items produced by Canyon accounted for about a third of this increase. The balance of the growth was split between improved pricing and volume growth due to increased distribution. Store brand as a category continues to post volume declines. Food service and other non-retail sales decreased by $6.8 million or 2.9%.

The balance was largely driven by continued growth from Dave's killer bread nature's own wonder products and the introduction of Sun made breakfast.

In the third quarter last year.

This growth was partially offset by softer volumes at our branded cake items.

Store branded retail sales increased 15.4 million our 10.5%.

Store branded items produced by Canyon accounted for about a third of this increase.

The balance of the growth was split between improved pricing and volume growth due to increased distribution.

Store brand of the category continues to post volume declines.

Foodservice and other non retail sales decreased by $6.8 million or 2.9%.

Lower volumes drove most of the decline.

Steve Kinsey: Lower volumes drove most of the decline, due in part to lost business from the inferior yeast disruption we experienced last year, and volume losses in the vending channel of our non-retail cake business. In the quarter, gross margin decreased 20 basis points to 47.9%. Improved price realizations did address input cost inflation to some extent, but pricing actions were offset by higher workforce costs and lower manufacturing efficiencies. Excluding the items affecting comparability, detailed in the press release, adjusted SD&A expenses decreased 20 basis points as a percentage of sales, primarily due to lower distribution fees and legal fees as a percent of sales, offset by higher workforce costs in our shipping department and bad debt expense. GAAP diluted EPS for the quarter was $0.25 per share.

Due in part to lost business from inferior these disruption, we experienced last year and volume losses in the bidding channel of our non retail cake business.

In the quarter gross margin decreased 40 basis points to 47.9%.

Improved price realizations did address input cost inflation to some extent.

But pricing actions were offset by higher workforce costs and lower manufacturing efficiencies.

Excluding the out of the fed and comparability detailed in the press release adjusted EPS DNA expenses decreased 20 basis points as a percentage of sales primarily due to lower distribution.

Fees and legal fees as a percent of sales.

Offset by higher workforce costs that are shipping department and bad debt expense.

GAAP diluted EPS for the quarter was 25 cents per share.

Excluding the out of the effecting comparability to detailed in the release.

Steve Kinsey: Excluding the items affecting comparability detailed in the release, adjusted EPS in the quarter was flat compared to the prior year. Higher sales were largely offset by elevated labor costs and reduced manufacturing efficiencies. Canyon Bakehouse was accretive to EBITDA and neutral to EPS in the quarter. A few comments on leverage and cash flow. Year to date, we've generated operating cash flows of $208.1 million, and made capital expenditures of $47.4 million. Accordingly, free cash flows were solid, and we paid $79.6 million in dividends to shareholders and reduced our total indebtedness by $86.8 million. At quarter end, our net debt and trailing 12-month adjusted EBITDA stood at approximately 2.1x. Now turning to guidance. For 2019, we continue to target sales growth in the range of 2% to 4%.

Release, adjusted detailed bps in the quarter was flat compared to the prior year.

Our sales were largely offset by elevated labor costs and reduced manufacturing efficiencies.

Can you bake health was accretive to EBITDA and neutral to EPS in the quarter.

A few comments on leverage and cash flow.

Year to date, we have generated operating cash flows of $208.1 million and made capital expenditures of 47.4 million.

Accordingly free cash flows were solid and we paid 79.6 million in dividends to shareholders and reduced our total indebtedness by $86.8 million.

At quarter end, our net debt to trailing 12 month adjusted EBITDA stood at approximately 2.1 times.

Now turning to guidance.

For 2019, we continue to target sales growth in the range of 2% to 4%.

This includes canyon bake health sales, which are anticipated to be in the range of 70 to 80 million accounting for approximately 1.8% to 2% of the total sales growth.

Steve Kinsey: This includes Canyon Bakehouse sales, which are anticipated to be in the range of $70 to 80 million, accounting for approximately 1.8% to 2% of the total sales growth. We expect base business growth to be driven by improvements in price mix, partially offset by a conservative view on volumes due to broader category softness. We now expect adjusted EPS in the range of $0.94 to $0.99 per share. Inflationary pressures from commodities, labor, and transportation are expected to be approximately 150 basis points as a percent of sales. To mitigate these costs, we are working on a broad set of cost savings and productivity initiatives, as well as continuing to evaluate pricing and promotional strategies, market by market. We expect Canyon Bakehouse to be accretive to EBITDA and neutral to slightly dilutive to full year EPS.

We expect base business growth to be driven by improvements in product mix, partially offset by a conservative view of volumes due to broader category softness.

We now expect adjusted EPS in the range of 94 cents to 99 cents per share.

Inflationary pressure from commodities labor and transportation are expected to be approximately 150 basis points as a percent of sales.

To mitigate these costs, we are working on a broad set of cost savings and productivity initiatives as well as continuing to elevate evaluate pricing and promotional strategies market by market.

We expect Canyon bake house to be accretive to EBITDA and neutral to slightly dilutive to full year EPS.

Now I will turn the call back to Ross.

Steve Kinsey: Now I'll turn the call back to Ryals.

Thank you see.

Ryals McMullian: Thank you, Steve. I want to put my comments this morning on the quarter into the context of our 4 strategic priorities to create shareholder value. As a reminder, they are very simply focusing on our brands, managing our costs, making smart, disciplined acquisitions, and developing the capabilities of our team. I believe our results this quarter demonstrate that the focus we're putting on our brands is working. Our dollar share of the fresh packaged bread category increased by nearly a full share point, driven by our key national brands, new product introductions, and incremental share from Canyon. Our unit share also increased as well by 50 basis points, and in fact, we gained dollar share in every segment except bread and rolls, which, as many of you know, is a small part of our total business.

So I want to put my comments this morning on the quarter into the context of our four strategic priorities to create shareholder value.

So as a reminder, they are very simply focusing on our brands.

Managing our costs.

Making smart disciplined acquisitions and developing the capabilities of our team.

I believe our results this quarter demonstrate that the focus we're putting on our brands is working.

Our dollar share of the fresh packaged breads category increased by nearly a full share point.

Driven by our key national brands, new product introductions and incremental share from Kenya.

Our unit share also increased as well by 50 basis points and in fact.

We gained dollar share in every segment, except that our resin rolls, which as many of you know is a small part of our total business.

And importantly, we were able to to achieve these results despite higher prices and less promotional activity.

Ryals McMullian: Importantly, we were able to achieve these results despite higher prices and less promotional activity. I believe that these results are a great testament to our new strategies, our capabilities, our brands, and of course, our team. We're hyper-focused on taking what's already a strong brand portfolio and making it even more powerful. Our new org structure has been a key enabler in this regard, and our marketing, consumer insights, and brand teams are working with our new ad agency to connect more meaningfully with consumers. We're also gaining greater insight into how our consumers perceive our brands and how to keep them relevant, not only today, but going forward in the future. As a result, we're thrilled with our marketing and innovation pipeline, and we believe we're taking the right steps to build strong national brands.

So I believe that these results are a great Testament to our new strategies, our capabilities, our brands and of course our team.

We're hyper focused on taking what's already a strong brand portfolio and making it even more powerful.

Our new ORCC structure has been a key enabler in this regard.

And our marketing consumer insights and brand teams are working with our new AD agency to connect more meaningfully with consumers.

We're also great gaining greater insight into how our consumers perceive our brands and how to keep them relevant not only today, but going forward in the future.

So as a result, we're thrilled with our marketing and innovation pipeline and we believe we're taking the right steps to build strong national brands.

In other parts of the portfolio the refocus on profitability is well underway.

Ryals McMullian: In other parts of the portfolio, the refocus on profitability is well underway. In our cake business, lower sales are the result of a very competitive landscape, but also from planned portfolio optimization. The good news here is that we're beginning to see some margin improvement in parts of the cake business. While we certainly have more to do to improve profitability, we are encouraged by the progress we've made, and we're optimistic about the new product introductions that we have slated for the back half of 2019 and beyond to reignite the top line. Our food service business is being pressured by both difficult year-over-year comparisons as certain food service customers discontinue limited time product offerings, and of course, the business loss to last year's yeast issues.

In our cake business lower sales was the result of a very competitive landscape, but also from planned portfolio optimization.

And the good news here is that we're beginning to see some some margin improvement in parts of the cake business and while we certainly have more and more to do to improve profitability.

We are encouraged by the progress we made and we're optimistic about the new product introductions that we have slated for the back half of the 19 and beyond to reignite the topline.

Our foodservice business.

He is being pressured by both difficult year over year comparisons as certain food service customers discontinue limited time product offerings and of course, the business loss to last years east issues.

But foodservice remains a vitally important part of our business. Despite the focus on brands.

Ryals McMullian: Food service remains a vitally important part of our business, despite the focus on brands, so we're taking this opportunity to prioritize those customers and product lines that value our high product quality, our broad scale, and our unique distribution capabilities. Despite the good top-line performance, the inflationary pressures we continue to experience do underlie the need for us to aggressively manage costs. That's why it's one of our four strategic pillars. I don't view managing costs as a tactical exercise designed to manage quarterly results. Rather, I believe it should be embedded into our strategic framework to ensure that we're correctly positioned to achieve our goals and free up resources for growth.

So we're taking this opportunity to prioritize those customers and product lines that value our high product quality, our broad scale and our unique distribution capabilities.

Now despite the good topline performance the information inflationary pressures, we continue and continue to experience.

Do underlined the need for us to aggressively manage costs.

And Thats why its one of our four strategic pillars.

Idle idle view managing costs as a tactical exercise.

Designed to manage quarterly results, rather I believe it should be embedded into our strategic framework to ensure that were correctly positioned to achieve our goals and free up resources for growth.

The pricing and promotional actions we've taken so far this year have helped to address a portion of these inflationary headwinds.

Ryals McMullian: The pricing and promotional actions we've taken so far this year have helped to address a portion of these inflationary headwinds without checking the good momentum we're seeing on the top line. Since the start of Project Centennial, we've had our entire operation under the microscope, looking for ways to remove complexity and generate cost savings. Enhanced analytical capabilities have given us greater transparency into our business and are informing better strategic decision-making. We've had good success with this effort, and we've reduced costs in many areas of our operations, and we've been able to reinvest some of those savings into building the new capabilities I mentioned earlier, which are essential for enhancing our growth profile. Make no mistake, we have invested in the business, and this does come with a near-term cost.

Without checking the good momentum were seeing on the topline.

Since the start of project Centennial, we've had our entire operation under the microscope looking for ways to remove complexity and generate cost savings.

Furthermore, enhanced analytical capabilities have given us greater transparency into our business and our informing better strategic decision making.

So we've had good success with this effort we've reduced costs in many areas of our operations and we've been able to reinvest some of those savings into building the new capabilities I mentioned earlier.

Which are essential for enhancing our growth profile.

But make no mistake, we have invested in the business and this does come with a near term cost.

Many of you will remember originally the plan was to reinvest a portion of our centennial savings back into the business.

Ryals McMullian: Many of you will remember, originally, the plan was to reinvest a portion of our Centennial savings back into the business and then let the remainder fall to the bottom line. However, greater than anticipated cost increases have offset some of those remaining savings, and we've not yet been able to fully realize our earnings potential. In short, one could argue that we're a little heavy on cost due to those investments. Now, the easy course of action would be to cut costs in those areas, but that would amount to cutting capabilities, which in turn would come at the expense of future growth. We believe firmly this is a temporary imbalance, and that it will right itself over time as we grow our top-performing brands and achieve greater efficiency.

And then let the remainder fall to the bottom line.

However, greater than anticipated cost increases have offset some of those remaining savings and so we have not we have not yet been able to fully realize our earnings potential.

So in short one could argue that were a little heavy on costs due to those investments.

Now the ease of course of action will be to cut costs in those areas.

But that would amount to cutting capabilities, which in turn would come at the expense of future growth.

We believe firmly this is a temporary imbalance.

And then it will right itself over time, as we grow our top performing grand brands and achieve greater efficiency.

But in the meantime, we are working the current opportunities we've we've identified to drive down costs in other areas.

Ryals McMullian: In the meantime, we are working the current opportunities we've identified to drive down costs in other areas. Specifically, we're focused on improving workforce productivity and manufacturing efficiencies, which has been impacted by a tight labor market and increased turnover. For this sort of situation, there's no quick fix, but we know the steps that need to be taken to address the root causes and enable our team to reach their full potential. In addition, our team is intensely focused on removing complexities from our supply chain by optimizing the portfolio, shifting production missions, and rationalizing capacity. A recent example of this is the conversion of a conventional bread line in the Northeast to produce Dave's Killer Bread products.

Specifically.

We're focused on improving workforce productivity and manufacturing efficiencies, which has been impacted by tight labor market and increased turnover now for this sort of situation. There is no quick fix.

But we know the steps that need to be taken to address the root causes and enable our team to reach their full potential.

In addition, our team is intensely focused on removing complexities from our supply chain by optimizing the portfolio shifting production production missions and rationalizing capacity.

A recent example of this is the conversion of a conventional bread line in the northeast to produce Dave's killer bread products.

This not only improve service and availability to the northeast market.

Ryals McMullian: This not only improves service and availability to the Northeast market, but also significantly reduces transportation costs and complexity, and we intend to take similar network optimizing actions as we go forward. Now, given the relatively high fixed cost nature of our supply chain and the innate complexity that comes along with the perishability of our DSD products, we are taking a prudent, data-driven approach to these initiatives. We believe the impact of this work can be significant, but because we're taking a cautious approach, it will take some time to see the effect of these efforts in our financial results. Acquisitions. Acquisitions have always played a large role in our growth story, and the same will be true going forward.

But also significantly reduces transportation cost and complexity.

And we intend to take similar network optimizing actions as we go forward.

Now given the relatively high fixed cost nature of our supply chain and DNA complexity that comes along with the Perishability of our DSD products. We are taking a prudent data driven approach to these initiatives.

We believe the impact of this work can be significant.

But because we are taking a cautious approach it will take some time to see effect of these efforts in our financial results.

Acquisitions.

Acquisitions have always played a large role in our growth story in the same will be true going forward.

As we said for a while now were looking into areas of the store outside the traditional bread aisle as well as different product segments, where we believe we have the right to win.

Ryals McMullian: As we said for a while now, we're looking into areas of the store outside the traditional bread aisle, as well as different product segments where we believe we have the right to win. You've seen us do that recently with the acquisition of Dave's and Canyon Bakehouse. We've got an attractive pipeline of potential opportunities. We are being proactive in the M&A market. Importantly, I am pleased to announce that we've recently hired a new VP of Corporate Development, who will be taking over from me and continuing to drive our M&A efforts. This gentleman brings more than 18 years of experience in M&A, 13 of which were spent with another large CPG food company. He's set to start in September. I'm really looking forward to the value he can bring to Flowers.

And you've seen us do that recently with the acquisition of Dave's and Canyon Bake House, we've got an attractive pipeline of potential opportunities and we are being proactive in the M&A market.

Importantly, I'm pleased to announce that we recently hired a new VP of corporate development, who will be taking over from me and continuing to drive our M&A efforts. This gentleman brings more than 18 years of experience M&A.

13 of which were sent with another large CPG food company.

He he set to start in September and I'm really looking forward to the value we can bring the flowers.

Finally, and I think most importantly, it's imperative that we continue to develop the capabilities of our team to bring forth that heightened level of engagement and greater achievement.

Ryals McMullian: Finally, and I think most importantly, it's imperative that we continue to develop the capabilities of our team to bring forth that heightened level of engagement and greater achievement. Our goal is to build a team that can bring a fresh perspective to our business challenges and pursue creative solutions. We'll do this by investing in the tools and information they need to do their job better, whether that's faster, more efficient, or a deeper insight. We're also working to modernize our benefits packages to be more competitive. If you think about it, not only has the business landscape radically changed, but so has the workforce, both in composition and what they seek in their careers. Today, it's not just the paycheck they receive that's important, but also the quality of life that comes with it.

Our goal is to build a team that can bring a fresh perspective to our business challenges and pursue creative solutions.

So we'll do this by investing in the tools and information they need to do their job better whether thats faster more efficient or deeper insight.

We're also working to modernize our benefits packages to be more competitive.

If you think about it not only has the business landscape radical change, but so has the workforce spoken composition and what they seek in their careers.

Today, it's not just the paycheck they receive its important.

But also the quality of life that comes with it.

So in short we are moving ourselves closer to the desires and needs of today's workforce to make flowers and even better place to build a career.

Ryals McMullian: In short, we're moving ourselves closer to the desires and needs of today's workforce to make Flowers an even better place to build a career. With that, we will turn it over to your questions.

And so with that we will turn it over to your questions.

Thank you.

Paulette: Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touch tone phone. Our first question comes from Amit Sharma from BMO Capital Markets. Please go ahead.

Operator: Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touch tone phone. Our first question comes from Amit Sharma from BMO Capital Markets. Please go ahead.

We will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.

If you wish to be removed from the queue. Please press upon final to hash key.

If you are using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone.

And our first question comes from Amit Sharma from BMO capital markets. Please go ahead.

Hi, good morning, everyone.

Amit Sharma: Hi, good morning, everyone.

Good morning.

Ryals McMullian: Morning. Good morning.

Ralph These are these are very interesting changes that you that you outlined.

Amit Sharma: Ralph, these are very interesting changes that you outlined. Can you dig into that a little bit? Like, what prompted, I don't want to call this a rethink, but what prompted this deeper dive into it? How quickly you think it can lead to a, maybe, at least a restatement of how you think about the growth outlook on a longer term?

Can you dig into that a little bit.

Like what prompted.

I don't want to call is there anything but what prompted this deeper dive into it and how quickly you obtain it can lead to a maybe.

At least the restatement of how you think about the growth outlook on a longer term.

Are you speaking specifically about supply chain or.

Ryals McMullian: Amit, are you speaking specifically about supply chain or?

What about you and the way you think about how flowers is positioned.

Amit Sharma: You know, supply chain and the way you think about how Flowers is positioned, as you think about your cost structure or investment, beyond key brands.

As you think about your cost structure or investment banking brands.

Yes, no absolutely I appreciate the question well look I mean, obviously, focusing our brands is a key priority we have some of the top performing brands in the country and the more thats, where the margin of the business comes from the more resources and talent, we can put behind those brands, whether it's through our new Bu structure in our brand teams that are intensely focused on those brands.

Ryals McMullian: Yeah. No, absolutely. I appreciate the question. Well, look, I mean, obviously focusing on our brands is a key priority. We have some of the top performing brands in the country. That's where the margin of the business comes from, the more resources and talent we can put behind those brands, whether it's through our new BU structure and our brand teams that are intensely focused on those brands, that's what gives us good confidence in our growth. Supplementing that with smart M&A, if you think about the additions of Dave's Killer Bread and Canyon, really being able to enhance our growth profile, also gives us confidence. On the cost side of the equation, you know, it really comes down to a couple of things. It comes down to labor.

That's what gives us good confidence in our growth and then supplementing that with smart M&A. If you think about the additions of Dave's killer bread and canyon really being able to enhance our growth profile.

Also gives us confidence on on the cost side of the equation.

It it really comes down to a couple of things.

It comes down to labor certainly there is some transportation costs in there too, but lets primarily talk about labor here not only is the is the cost of labor up.

Ryals McMullian: Certainly, there's some transportation costs in there, too, but let's primarily talk about labor here. You know, not only is the cost of labor up, but with the tight labor market that, frankly, everyone's experiencing, that manifests itself into higher turnover, which in turn manifests itself into lower efficiencies. You're constantly turning over people at the bakeries. You tend to have, you know, higher scrap costs, that kind of thing. Getting control of that and doing it both from a quantitative standpoint, but also from a qualitative standpoint. That's why I talked a lot about the workforce and how can we improve scheduling and working conditions. It's not just all about pay, it's benefit packages and quality of life.

But with the tight labor market frankly, everyone is experiencing.

That manifests itself into the higher turnover, which in turn manifest itself into into lower efficiencies you're constantly turnover people the bakeries.

You tend to have.

Higher scrap costs that kind of a so get getting control of that.

And doing it both.

From a quantitative standpoint, but also from a qualitative standpoint, that's why I talked a lot about.

The workforce and how can we improve scheduling and working conditions and it's not just all about pay its benefit packages and quality of life. Those are the types of things that this this if this tight labor market is going to continue.

Ryals McMullian: Those are the types of things that if this, if this tight labor market is going to continue, we're going to have to do to make our operations more efficient.

We're going to have to do to make our operations more efficient.

Got it and then.

Amit Sharma: Got it. A little bit technical. You know, one of your largest competitors did talk about, you know, being maybe a little bit more focused on pricing to stem the volume losses or share losses. Can you talk about that a little bit in terms of how or what are you expecting in the marketplace, and how are you positioned if you do see pricing environment get a little bit more promotional?

No the technical.

One of your largest competitor.

Did talk about.

Being maybe a little bit more.

Focus on pricing and to stem the volume losses associated share losses.

Can you talk about that a little bit in terms of how or what are you expecting in the marketplace and how are your position.

If you do see pricing environment get a little bit more promotional.

Yes, well first of all I think thats, where some of our new analytical capabilities really come into play because were in a position now where we can analyze and analyze where we are from a pricing standpoint market by market.

Ryals McMullian: Yeah. Well, first of all, I think that's where some of our new analytical capabilities really come into play, because we're in a position now where we can, you know, analyze where we are from a pricing standpoint, market by market. Nothing's really changed there in the sense that this still tends to be a bit of a market-by-market business, but I think we're better positioned now to make the correct decisions as we go forward. As far as Flowers specifically goes, we've been very pleased. You know, we took some pricing actions last year. We've been very pleased with how our volumes have held up. We did a little less promotion on branded buns during the holidays, and again, we're very pleased with how our volumes held up.

Nothing's really changed there in the sense that the still still tends to be a bit of a market by market business, but I think we're better positioned now to make the to make the correct decisions as we go forward.

As far as as far as flowers, specifically goes.

We've been we've been very pleased.

We took some pricing actions last year, we've been very pleased with how our volumes have held up.

We did a little less promotion.

On on branded bonds during the holidays and again, we're very pleased with how our volumes held up so.

Ryals McMullian: So far, things have gone pretty well in that regard.

So far.

Ryals McMullian: So far, things have gone pretty well in that regard.

Things have gone pretty well in that regard.

Got it and just one very quick follow up Steve can you remind us of your hedging positions on the cost and then recently there is some chatter that.

Amit Sharma: Got it. Just one very quick for Steve. Steve, can you remind us of your hedging positions on the wheat cost? Recently, there's some chatter that the protein quality of the red winter may not be quite as good. Can you just talk about how it impacts your cost going forward?

The protein quantity of that I'd been term may not be quite as good.

Can you think about it can you just talk about how it impacts your costs going forward.

Yes, sure. If you if you recall, we basically use the hedging strategy to mitigate.

Steve Kinsey: Yeah, sure. If you, if you recall, we basically use a hedging strategy to mitigate, you know, wheat and flour costs. We are well within our strategy.

We well recall, so we are well within our strategy of.

Hedging four to seven months than we typically are on the long end of that.

Ryals McMullian: ... hedging 4 to 7 months. We typically are on the long end of that. For 2018, we pretty much have our cost structure in place, so we feel pretty confident about, you know, knowing our costs for 2019. You are right there, you know, the new crop is coming in. There is some protein concerns. Just like last year, you had a lower protein quality crop, which means eventually you will have to blend that with higher spring wheat, which typically runs a little higher. That'll be a, you know, we'll begin to talk about 2020 guidance later in the year, but for 2019, we feel pretty good about where we are from a cost perspective.

So for 2018.

We pretty much of our cost structure in place. So we feel pretty confident about the order call for 2000, I'm sorry 2019.

Youre right there.

The new crop is coming in there is some protein concerns just late last year, you had a lower approaching quality crop, which means eventually you will have to blend that with higher springleaf, which typically runs a little higher but that will be up.

Well, we're going to talk about 22, when he got a flavor of the year, but for 2019, we feel pretty good about where we are from a cost perspective.

Got it thank you so much like it.

Tim Ramey: Got it. Thank you so much.

Ryals McMullian: Thank you.

Our next question comes from Bill Chapelle from Suntrust. Please go ahead.

Operator: Our next question comes from Bill Chappell from SunTrust. Please go ahead.

Thanks, Good morning.

Bill Chappell: Thanks. Good morning.

Hey, just kind of following up on it so.

Ryals McMullian: Morning.

Bill Chappell: Kind of following up on Amit's questions. You know, Ryals, are you pleased with kind of where the cost structure is at this point, with where Project Centennial is at this point, and kind of what it's doing to quarterly numbers? Just I say that of, you know, I, I think some of us, as we've now, what, 3, 4 years into the program, would have expected a little more upside, both to the quarter into the year on the cost structure. I know that's been kind of a key thing you've been working on prior to taking over the CEO role. So maybe kind of help us understand, do you feel like you're going fast enough? Do you feel like things need to accelerate, or are you just, you know, is this kind of where you expected to be?

Question.

You know Ralph.

Are you pleased with kind of where the cost structure is at this point where products continual is at this point and kind of what it's doing to quarterly numbers, just let's say that have.

I think some of US as we've now what three four years into the program would have expected a little more upside both to the quarter into the year on the cost structure and I know that's been kind of a key thing you've been working on prior to taking over the CEO role. So maybe can you help us understand do you feel like Youre going fast enough do you feel like things need to accelerate or or are you just.

This kind of where you expected to be.

Well.

Ryals McMullian: Well, I mean, it's kind of a tricky question to answer in the sense that as far as Centennial goes, yes, I am pleased. I think we've made tremendous progress with Centennial. What I'm not pleased about is the fact that we haven't been able to drop as much as we originally anticipated to the bottom line. I mean, Centennial fundamentally changed how we operate the company, how we look at the business, and I think those things put us in good stead for the longer term. The frustrating piece is some of this cost inflation that we're having to deal with now that kind of offset, if you will, some of the savings that we were able to generate.

I mean, it's kind of a tricky question to answer in the sense that.

As far as Centennial goes yes, I am pleased I think we've made tremendous product progress with centennial what I'm not pleased about is.

The fact that we haven't been able to drop as much as we originally anticipated to the bottom line I mean centennial fundamentally changed.

How we operate the company how we look at the business and I think those things put us in good stead for the for the longer term, but the frustrating pieces is some of this cost inflation.

That we're having to deal with now that that.

That kind of offset if you will some of the savings that we that we were able to generate.

Ryals McMullian: As to whether things are going fast enough, things never go as fast as you want them to. You know, you always wish that you could do things quicker. Yeah, I said earlier that, you know, with regard to the supply chain optimization piece, in particular, we are being intentionally cautious there. You know, we have a high fixed cost network. We've got to be very careful about how we make choices around our network and, you know, what types of business we want to be in, what types we don't want to be in. Overall, you know, Centennial itself, yes, I am pleased. Again, the frustrating part is the lack of read through to the bottom line that we're trying to address now.

As to whether things are going fast enough that things never go fast as fast as you want them to.

You always you always wish that you can do things quicker.

Yes, I said earlier that with regard to the supply chain optimization piece.

In particular, we are being intentionally cautious there.

We have a we have a high fixed cost network, we've got to be very careful about how we how we make choices around our network and and.

And what types of business, we want to be and what types, we don't want to be but Tom but overall centennial itself, yes, I am pleased.

But again the frustrating part is the is the lack of read through to the bottom line that we're trying to address now.

Does there need to be another centennial plus just because I guess this is now the the second year, where costs have more than mass the centennial benefits.

Bill Chappell: Does there need to be another Centennial plus? Just because I guess this is now the second year where costs have more than masked the Centennial benefits.

Yes, we have we have a very structured formal initiatives around.

Ryals McMullian: Yeah. We have very structured, formal initiatives around our labor costs, around supply chain optimization. Now, we're not laden with consultants like we were when we were undergoing Centennial, but, you know, we learned a lot from going through that process as to how to, you know, structure disciplined initiatives around discrete topics. That's how we're handling those pieces going forward.

Our labor cost around supply chain optimization now we're not we're not laden with consultants like we were when we were undergoing centennial, but we learned a lot from going through that process as to how to.

Structured disciplined initiatives around discrete topics. So thats, how we are handling those pieces going forward.

Got it and last one for me just on Canyon any kind of update on on where you are on the the.

Bill Chappell: Got it. The last one for me, just on Canyon. Any kind of update on where you are on the fresh or, I mean, the flaked out version of the product, you know, kind of ACV there?

Fresh ore of it.

Blacked out version of the product kind of HCV there, yes, the state fresh yes.

Ryals McMullian: Yeah, the Stay Fresh! Yeah. Canyon overall is doing great. I mean, they've got a fantastic team out there, totally engaged. They're excited. The business is performing extremely well. The frozen side of the business is actually exceeding our expectations. The Stay Fresh! piece is slightly behind our expectations. Bill, most of that has to do with consumer awareness. You know, a lot of gluten-free shoppers aren't necessarily accustomed to shopping gluten-free breads in the bread aisle. It's taking us a little bit longer than we expected to draw them in, right? Having said that, we are growing the Stay Fresh! business, and not only is our ACV growing, but so are our turns in the store.

Okay Canyon overall is doing great I mean, they got a fantastic team out there.

Totally engaged they're excited.

The the business is performing extremely well for the frozen side of the business is actually exceeding our expectations.

The stay fresh piece is slightly behind our expectations and bill most of that has to do with.

Consumer awareness a lot of gluten free shoppers are necessarily a custom to shopping gluten free breads in the bread aisle and so it's taking us a little bit longer than we expected to draw that down right, but having said that we are growing the stay fresh business and not only is our HCV growing but so are our turns in the store.

Great. Thank you.

Bill Chappell: Great. Thank you.

Our next question comes from Tim Ramey from.

Ryals McMullian: Sure.

Operator: Our next question comes from Tim Ramey, from Pivotal Research Group. Please go ahead.

Search group. Please go ahead.

Thanks, so much.

Tim Ramey: Thanks so much. First is sort of more a comment than a question, because I know you can't answer it. Your payout ratio is, you know, 78%, 79% right now, which, you know, I hear what you're saying about wanting to refocus the company on growth, but that's a super high payout ratio for a company that would like to grow and do acquisitions, as you mentioned. Just a comment that, you know, seems like, you know, that's something that ought to be addressed by the board. Where do you want to be? Do you want to, you know, do you want to be a yield stock, or do you want to be a growth stock?

First this is sort of more comment than a question because I know you can't answer it but.

Your payout ratio is.

70, 879% right now, which.

I hear what you're saying about wanting to refocus the company on growth, but that's a super high payout ratio for.

Company that that would like to grow.

And do acquisitions as you as you mentioned so just to comment it seems like.

That's something that ought to be addressed by the board, where do you want to be on them.

Do you want to be a yield stock or do you want to be.

A growth stock.

And then to throw a question on that since I know you can't comment the.

Tim Ramey: To throw a question on that, since I know you can't comment, the, you know, the cost issues that you're discussing are not that unusual, I don't think. We've seen this pattern, you know, several years in a row, where you'll raise prices early in the year and then not get the volume and, you know, become sort of a negative spiral in the second half of the year. How is this different from what we've seen in the last two or three years?

The the cost issues that you're discussing are not that.

The usual I don't think.

And we've seen this pattern.

Several years in a row, where.

You will raise prices early in the in the year and then not get the volume and.

You become sort of a negative spiral in the second half of the year.

How is this different from what we've seen in the last two or three years.

Thank you.

Ryals McMullian: Thank you, Tim. Well, first of all, as I, as I said earlier, maybe one of the things that makes it different is, as I said, we did take some pricing action in the back half of last year, and we've been very pleased with how our volumes have held up. Our brands are continuing to perform well. Dave's, Canyon, Nature's Own, Wonder, they're all performing very nicely. I think that differentiates it perhaps from years past.

Well first of all as I said earlier, maybe one of the things that makes it different is I said, we did take some pricing action in the back half of last year and we've been very pleased with how our volumes have held up.

Our brands of our continued to perform well Dave's Canyon nature's own wonder, they're all performing very nicely.

And so I think that differentiates it perhaps from from years past.

Okay.

Tim Ramey: Okay. Does that mean you feel okay about taking further pricing in the second half? I thought I sensed some hesitancy on that.

Does that mean, you feel okay about taking further pricing in the second half because I I I thought I sense, some hesitancy on that.

I'm not going to comment on on future pricing.

Ryals McMullian: I'm not going to comment on future pricing.

Yes, Okay, hey, thanks for your help.

Tim Ramey: Yeah. Okay. Hey, thanks for your help.

Ryals McMullian: Thank you.

Our next question comes from Mitch Pinheiro with Sterne <unk> Company. Please go ahead.

Paulette: Our next question comes from Mitch Pinheiro with Sturdivant & Company. Please go ahead.

Operator: Our next question comes from Mitch Pinheiro with Sturdivant & Company. Please go ahead.

Hey, good morning.

Mitch Pinheiro: Hey, good morning.

Hi, Mitch.

Ryals McMullian: Morning, Mitch.

So rather than just curious so you talked about.

Mitch Pinheiro: Hey, Ross, I was just curious, so you talked about visiting customers and you know, your own employees, but what are your customers saying about the category and Flowers? Anything you can share with us?

Visiting customers.

Your own employees, but what are your customers, saying about the category and flowers.

I can share with us.

Yes, I can add several good visits with some with some key retail partners I think the one constant among them.

Ryals McMullian: Yes, I can. Had several good visits with some key retail partners. I think the one constant among them is they're really looking for innovation in the fresh bread aisle. I mean, you see the same category trends that we do, the sort of the softness in that traditional soft variety category. I think their hunger is really around new innovations, and we've certainly given them some of that between Day's, Canyon, and Perfectly Crafted, but I think they'd like to see more of that. You know, there's quite a few consumers that have turned to the perimeter of the store. They're seeking pitas, naans, and sort of non-traditional type flatbreads, that sort of thing.

As they are really looking for innovation in the in the fresh bread aisle and you see the cat at the same category trends that we do the sort of the softness in that traditional saw Friday category I think their hunger is really around.

New innovations and we certainly given them some of that between days and canyon and perfectly crafted, but I think they'd like to see more of that.

There's a there's quite a few consumers that is as.

Have turned to the perimeter of the store they are seeking peters and nods and sort of non traditional type flatbreads that sort of thing I think they'd like to see like to see flower to bring more of that their way.

Ryals McMullian: I think they'd like to see Flowers bring more of that their way.

And so.

Mitch Pinheiro: Hearing, you know, you've mentioned, you know, the cost inflation, you know, throughout the call, you know, it's pretty evident. I mean, your margins, you know, are nice, but, you know, there's certainly room for improvement here. With all your competitors facing the same exact challenges, you know, here's a chance for the supermarket, you know, the grocery industry, to raise the value of the category, I don't see what the pressure is on pricing. I mean, you know, it just seems to me, with a consumer that is seemingly in okay shape, from what we hear, I just don't understand why pricing isn't a little more robust across the entire category. Can you talk about that?

I am hearing you know you've mentioned the cost inflation.

Throughout the call and.

It's pretty evident I mean your margins.

Our nice, but there's certainly room for improvement here with all your competitors facing the same exact challenges.

And.

Here's a chance for the supermarket the grocery industry to raise the value of the category I don't see.

I don't see what the pressure is on on on pricing.

I mean.

It just seems to me with a consumer that is seemingly in okay shape from what we hear.

I, just don't understand why pricing isn't a little more robust across the entire category can you talk about that.

Yes.

Ryals McMullian: Well, I mean, again, I'm not going to, I'm not going to comment on future pricing, but I think, you know, for us, you know, ensuring that we are bringing consumers good value, good brands, good quality, and the retailers good service is primarily our focus. We'll worry about the rest as it comes along. That's really our focus, Mitch. We believe we've got the best quality, we think we have the best brands, and we think we have the best service. We've got to continue to be that way to protect our brand, the brand equity that we have.

Again, I'm not going to I'm, not going to comment on future pricing, but I think for us.

Ensuring that we are bringing consumers good value good brands, good quality and the retailers. Good service is primarily our focus will worry about the rest as it comes along that's that's really our focus match.

We believe we've got the best quality, we think we have the best brands and we think we have the best service.

And.

And we've got a we've got to continue to be that way.

To protect our brand the brand equity that we have.

Okay.

Mitch Pinheiro: Okay. And then a couple, just a couple others. Regarding your store-branded sales, they were up in the quarter. I was surprised that there's gluten-free store brand items. Usually, you know, the innovation is left to the brands, and, you know, private label store brands pick up the more commodity piece of the category. Is there a change here?

And then a couple of couple others.

Regarding your store branded sales they were up in the quarter.

I was surprised.

That.

Theres gluten free store brand items usually.

Vacation is left to the brands and private label store brand pick up the the more commodity piece of the of the category.

Is there a change here.

No no not at all as a matter of fact, Thats with one particular retailer for Canyon and it it came with the acquisition. So Steve They had they had had that business for quite a long time, it's primarily just one retailer.

Ryals McMullian: No, no, not at all. As a matter of fact, that's with one particular retailer for Canyon, and it came with the acquisition, so to speak. They had had that business for quite a long time. It's primarily just one retailer.

Mitch Pinheiro: Okay, got it. When it comes to private label, any change in pricing on the private label side?

Okay got it and then.

And then when it comes to private label any.

Any any.

Any change in pricing.

On the private label side.

We took some pricing last year, Mitch so yes.

Ryals McMullian: We took some pricing last year, Mitch. Yes.

Okay, and then last question on Tasty cake haven't you don't really breakout brands and in that area. How they are doing but I, obviously am I.

Mitch Pinheiro: Okay. Last question, on Tastykake. You don't really break out, you know, brands in that area and how they're doing. I, obviously, see that cake sales have been pressured. Is it in the Mrs. Freshley's side? Is it Tastykake? Is it both? What's, you know, but when do we start seeing? I know it seems like things were getting better in this quarter. When should we start anticipating some upside there?

See the cake sales have been pressured is is it.

Is it in the Miss is freshly side is it tasty cake is it both.

And.

What's that.

When do we start seeing I know it seems like things are getting better in this quarter, but when do you start when should we start anticipating.

Some upside there.

It's it's really it's really and it's really in both.

Ryals McMullian: It's really in both. Again, you know, some of that is, you know, due to the competitive nature of that category and our, frankly, our relative brand positioning there, but some of it's also intentional. You know, we've gotten rid of some really low-margin business to turn our attention back to where we can make better margin. As I said up front, we've started to see some progress on the margin side of the equation. Over the top of that, you know, we have some innovation and new product offerings slated for the back half and then forward, that we think will help reignite that top line.

And again some of that some of that is due to the competitive nature of that of that category and our frankly, our relative brand positioning there, but some of it's also intentional.

We were we've gotten rid of some really low margin business to turn our attention back to where we can make make better margin.

And as I said upfront, we've we've started to see some progress on the margin side of the equation and then over the top of that we have some innovation and new product offerings slated for the back half and then for that we think will help reignite that topline.

Okay.

Mitch Pinheiro: Okay. You know, I just... One more, just follow up to Tim's question about about the dividend versus growth. When I calculate your free cash flow, it's fairly robust, even that's after dividends. I'm not sure why investors would think that Flowers couldn't be a growth company while paying a dividend. Can you speak to that?

Thats one moment this follow up to Tim's question about.

About the dividend versus growth.

When I when I calculate your free cash flow its fairly robust Stephen that's after dividends I'm not sure why.

Investors would think that that flowers couldn't be a growth company while paying.

Paying a dividend.

Can you can you speak to that.

Yes. This is Steve I mean I wouldn't.

Ryals McMullian: Yeah, this is Steve, Mitch. I mean, I would, you know, I would agree with your assessment. When you look at our overall capital allocation and you look at, you know, free cash flow, it continues to be a business that just drives, you know, very strong free cash flow. We believe with the right balance, you know, that we can continue to, you know, pay a nice dividend as well as fund future growth within the company.

I would agree with your assessment when you look at our overall capital allocation and you look at free cash flow.

It continues to be a business to just drive.

Very strong free cash flow. So we believe with the with the right balance.

That we can continue to.

Pay a nice dividend as well as fund future growth within the company.

Okay. Thanks for your time.

Mitch Pinheiro: Okay. Thanks for your time.

Thank you.

Our next question comes from Brian Hollenden from D.A. Davidson. Please go ahead.

Operator: Our next question comes from Brian Holland, from D.A. Davidson. Please go ahead.

Yeah. Thanks, good morning, gentlemen.

Brian Holland: Yeah, thanks. Good morning, gentlemen. First question, forgive me, I hopped on a little bit late, so apologies if you addressed this at all. Just curious, buns and rolls selling season around the Fourth of July, weather, seemed a little bit not in your favor. Just curious if there's any callouts there, and if there was any, you know, in consideration of where you came in on revenue, was there a little upside left on the table if indeed weather was a callout at all?

First question forgive me.

I hopped on a little bit late so apologies if you addressed this at all but.

Just curious buns and rolls selling season around the fourth of July weather.

So you've been a little bit.

Not in your favor.

But but just curious if there is any call outs there if there was any.

You know.

In consideration of where you came in on revenue was there a little upside left on the table is a deep weather was was.

Call other at all.

Yes, Brian its route.

Ryals McMullian: Brian, it's Riles. Both of the holidays I would describe as good, but not great. Some of that was certainly due to the weather. The good part about it is our sales execution this year was outstanding, particularly compared to last year. I mean, the sales team did a great job. Our sales were way down, so that sales performance was way up. Our partnership with the USO on the Wonder Bun promotion was fantastic. Overall, it was a success.

Both of the holidays I would describe as good but not great. Some of that will certainly due to the weather.

But the good part about it is our our sales execution. This year was outstanding, particularly compared to last year I mean, the sales team did a great job our sales were way down so thats sales performance was way up.

Our partnership with US So we'll move on to Wonder Budd promotion was was fantastic and so overall as it was it was a success.

Okay. That's helpful. Thank you and then on.

Brian Holland: Okay. That's helpful. Thank you. Then on the margin side, you know, it's been my experience that with your business, it's fairly easy, all things being equal, for pricing to flow right through the model. Clearly, that didn't happen this time around. I understand about the brand investment, but I feel like that was part of the... That was in the plan. If I've got this right, I'm thinking that higher labor, particularly, was the incremental. So I guess what I'm asking is, did labor get sequentially worse, and was that the primary callout for why the pricing didn't flow through? Is there another piece of this equation that I'm leaving out here?

On the margin side.

Yeah, it's been my experience that.

With your business, it's fairly easy all things being equal for pricing to flow right through the model clearly that didnt happen this time around.

And I understand about the brand investment, but I feel like that was part of that was in the plan. So if I. If I got this right I'm thinking that higher labor, particularly was the incremental is that so I guess, what I'm asking is did labour get sequentially worse and was that the primary call outs for why the why the pricing didnt flow through or is there. Another piece of this equation that that that I'm.

Leaving out here.

Hello.

Ryals McMullian: No, no, I think that's the primary issue. Again, it's labor, it's the pure labor cost, but then it's also the high turnover, and that tends to come out in manufacturing efficiencies, which were lower for the quarter, and that has an impact as well.

I think Thats I think thats the primary issue and again, it's it's labor. It's the it's the pure labor costs, but then it's also the high turnover and that that tends to come out in manufacturing efficiencies, which were lower for the quarter and that has an impact as well.

Okay right. So understood and then so then.

Brian Holland: Okay, right. Understood. Then, do I have that right then, that that is, that has gotten sequentially worse, like Q1 to Q2?

Do I have that right than that that is that that has gotten sequentially worse, but Q1 to Q2.

Yes, I mean Q2 was was slightly down compared to Q1.

Steve Kinsey: Yeah. I mean, Q2 was slightly down compared to Q1. Typically...

Okay got it typically you'll see pretty strong efficiency performance in Q1, but it did fall off more than usual in Q2 this year.

Brian Holland: Okay, got it.

Steve Kinsey: Typically, you'll see pretty strong efficiency performance in Q1, but it did fall off more than usual in Q2 this year.

Understood and so then if we play this board.

Brian Holland: Understood. If we play this forward, you know, obviously, gross savings through 2018 had come in ahead of plan. You know, you couldn't have calculated the magnitude of labor impact. Obviously, freight was another issue since you instituted Centennial. I'm just curious, is there an... I mean, the next part that's out there, it seems to be around supply chain optimization. I understand that you can't quantify this, but do you have something still left in the bag that you feel like is a significant sort of catalyst for the trajectory of what we're seeing on margins in excess of what you've already gotten thus far?

You know obviously gross savings through 2018 had come in ahead of plan.

You couldn't have calculated the magnitude of labor impact obviously freight.

Was another was another issue since you instituted centennial Im just curious is there any.

I mean, the next part that's out there and it seems to be around supply chain optimization.

I understand that you can't quantify this but do you have something do you have something still less than the back what you feel like is a significant.

Sort of catalyst for the trajectory of what we're seeing on margins in excess of what you've already gotten thus far.

I do and I think it think about it kind of in three buckets, one obviously, maintaining the topline is paramount right.

Ryals McMullian: I do. Think about it kind of in three buckets. One, obviously, maintaining the top line is paramount, right? That means, you know, making sure that we're supporting our brands properly, we keep that good branded growth, that we're focusing on the right kind of sales, which means the higher margin type products. That brings in number two, portfolio optimization, right? Making sure that our mix is correct. Three, maximizing that plant level efficiency, and that's primarily the labor issue. Extending that a little bit into, you know, broader supply chain optimization, that's a little bit longer term. As I said, that'll take us a little while to do. We've got to be very careful there.

That made that means.

Making sure we're supporting our brands properly we keep that good branded growth that we're focusing on the right kind of sales, which means the higher margin type products and then that then brings a number to portfolio optimization right, making sure that our that our mix is correct and then three.

Maximizing that plant.

Plant level efficiency and Thats, primarily the labor labor issue.

And then extending that a little bit into broader supply chain optimization, that's a little bit longer term as I said that will take us a little while to do we've got to be very careful there, but those those are the things that give me confidence that we can reach our long term margin targets.

Ryals McMullian: Those are the things that give me confidence that we can reach our long-term margin targets.

Okay and then last question for me just kind of on the M&A front.

Brian Holland: Okay. Last question from me, just kind of on the M&A front. You know, you've done a really good job with Dave's Killer Bread. Obviously, Canyon seems like another great opportunity, maybe it's potentially smaller in magnitude, but still, you know, same really exciting opportunity, share growth, et cetera. And you're doing a great job of identifying these niches. Can we, I guess two questions. One, when you start thinking about particular niches, is there one that stands out as attractive to you, that's a hole in your portfolio, not speaking to any specific asset that may or may not be available?

You've done a really good job with these killer bread.

Obviously canyon seems like.

Another great opportunity, maybe potentially smaller magnitude, but still.

It's a really exciting opportunity share growth et cetera.

And you're doing a great job of identifying these niches.

Kevin I guess two questions. One when you start thinking about particular niches is there one that stands out as attractive to you. That's a hole in your portfolio not speaking to any specific asset that may or may not be available and then second kind of the quality of assets high level that are within the parameters of what you'd be looking.

Brian Holland: Second, kind of the quality of assets, high level, that are within the parameters of where you'd be looking, valuation, availability, attractiveness, just general thoughts on what that pipeline looks like today, and maybe your readiness. Maybe put another way, I mean, obviously, you've made the Canyon Bakehouse acquisition late last year. What is the appetite, and what is your ability to digest something else in the near term while you integrate Canyon, get it on DSD, and also think about, you know, continuing to attack the supply chain pressures?

Valuation.

Availability attractiveness, just general thoughts on what that pipeline looks like today and maybe your readiness and maybe put another way I mean, obviously you've made the Kenyan bake House acquisition late last year, what is the appetite and what is your ability to digest something else in the near term. While you integrate can you get it on DSD and also think about.

Continuing to to attack.

The supply chain.

Pressures.

Okay. So I don't really want to comment on specific pieces are categories that were looking at just because I really don't want to tip my hand, there, but suffice it to say that we have a we have a really good pipeline.

Ryals McMullian: Okay. I don't really want to comment on specific niches or categories that we're looking at, just because I really don't want to tip my hand there. Suffice it to say that we have a really good pipeline. As I said, in the opener, we are continuing to be really proactive in the M&A market. What I mean by that is, we're reaching out instead of just relying on inbounds as we used to be able to do, you know, when we were just looking inside the core business. I'm really happy with our pipeline. And I don't, Brian, I said, I think you said you joined Light Outlet.

As I said in the opener, we are continuing to be really proactive in the M&A market. So what I mean by that is we're reaching out instead of just relying on imbalances, we used to be able to do what we were just looking inside the core business. So.

I'm really happy with where the with our with our pipeline.

And I don't that Brian I think you said you join light outlet. If you heard me say that we've we've hired a new VP of corporate development, who is going to continue to drive. This some really really happy about that as well as far as our ability to digest I mean, I don't want to.

Ryals McMullian: If you heard me say that we've hired a new VP of corporate development, who's gonna continue to drive this, so I'm really happy about that as well. As far as our ability to digest, I mean, I don't wanna intimate that any integration is easy, but you know, Canyon is it's one plant, it's in Colorado. We've basically integrated that already. You know, our sales team knows how to roll out items, excuse me, DSD. I mean, we are positioned when the right opportunity comes along.

I don't want to intimate that any integration is easy, but the canyon is it's one plan its in Colorado, we basically integrated that already.

Sales team knows how to roll out items DS excuse me.

DSD.

So I mean, we are we are positioned when the right opportunity comes along.

Thanks, gentlemen, best of luck you okay.

David Brown: Thanks, gentlemen. Best of luck.

Brian Holland: Thanks, gentlemen. Best of luck.

Ryals McMullian: Thank you. Okay.

That concludes the Q and a session I will now turn the call over to Ross Macmillan for closing comments.

Paulette: That concludes the Q&A session. I will now turn the call over to Ryals McMullian for closing comments.

Operator: That concludes the Q&A session. I will now turn the call over to Ryals McMullian for closing comments.

Thank you. So in summary from this morning, while we definitely have some opportunity in front of US overall I'm pleased with the actions we've taken so far to improve our performance with a focus on brands, we're working to maintain our solid topline momentum and then coupled with that were zeroed in on a few specific areas of cost containment, where if we can execute well should put us on a solid path to continued bottom line improvement and enhance shareholder value. So thank you for joining us. This morning, and thank you for your interest in flowers foods.

Ryals McMullian: Thank you. In summary from this morning, while we definitely have some opportunity in front of us, overall, I'm pleased with the actions we've taken so far to improve our performance. With a focus on brands, we're working to maintain our solid top-line momentum, coupled with that, we're zeroed in on a few specific areas of cost containment, where if we can execute well, should put us on a solid path to continued bottom line improvement and enhanced shareholder value. Thank you for joining us this morning, and thank you for your interest in Flowers Foods.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.

Paulette: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Ryals McMullian: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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