Flowers Foods, Inc. (FLO) Earnings Call Transcript & Summary

Good morning to all of you, and welcome. We appreciate you being here for our investor update. Our CEO, Ryals McMullian, along with other leaders on our team, will talk today about how we performed in the second quarter of 2020, walk you through what our strategic priorities are, and lay out the growth targets we're aiming for over the long term. Using the Q&A function within the Zoom platform, you're welcome to send in questions at any point. Once the prepared remarks are finished, we'll move into the Q&A portion; this webcast is being recorded, and it will be made available in the investor relations section of flowersfoods.com; the slides will be posted as well. Last, please be aware that during this presentation, we will make some forward-looking statements regarding our future performance. Although we consider these statements reasonable, actual results could differ materially because of risk and uncertainties. These and other important factors relating to our business are fully detailed in our SEC filings. We thank you for listening. At this point, I'll hand things over to Ryals.

Hello, everyone, and thanks for joining our inaugural virtual investor day. I trust all of you are faring well. What a remarkable year it has been. While driving up from Florida earlier today, I found myself reflecting that it feels like only a handful of days ago when we began monitoring the earliest reports emerging from China, and afterward tracked how the virus moved from Washington State and California to every corner of the nation. These have been truly difficult times, and my sincere hope is that each of you and your loved ones are staying safe through all of this. Yesterday evening, we published our earnings release for the second quarter, and earlier today we put out a release detailing our strategic priorities along with refreshed long-term objectives. Our plan had been to host an investor day in July in New York, though clearly COVID got in the way and turned that into something quite hard to pull off. I've now served as CEO for slightly more than a year, and although an in-person gathering wasn't possible, we still believed it mattered for all of you to have an opportunity to become more familiar with me, and with several members of the management team too. I'm delighted you could be with us today. Today, we're glad to take any questions regarding the quarter or the year, of course, but what we mainly want to accomplish is to lay out for you the road ahead. Our intention is to give you a crystal-clear picture of our identity as a company, the culture we've built, and the initiatives already in motion for what comes next. As a quick overview of what we'll cover, we'll explain why Flowers represents an appealing investment prospect. We'll bring you up to speed on our long-term targets, and above all, we'll walk you through precisely how we plan to get there. I'll kick things off, but you'll also be hearing from Brad Alexander, our Chief Operating Officer, Debo Mukherjee, our Chief Marketing Officer, Mark Courtney, our new Chief Brand Officer, Mark Gerrish, our Vice President of Corporate Development, and naturally, Steve Kinsey, our Chief Financial Officer. In my view, this management team is the finest in the business, so I'm extremely thankful for this chance for you to hear from a number of them this morning. Before diving into the strategic priorities, I want to acknowledge our gifted and committed team, since they are truly the ones who make hitting all these objectives achievable. The pandemic has undeniably introduced fresh obstacles for us, just as it has for countless other businesses, and our thoughts and prayers go out to everyone touched by this illness, among them people on our own Flowers team. COVID has had a certain impact on how we operate. A few of you might have noticed that we needed to shut down a couple of bakeries briefly. Because of the adaptability of our bakery network, and above all, the commitment of our people, we've managed to keep serving our markets without interruption throughout this crisis. Naturally, the well-being and protection of the people on our teams stays our number one concern, since it is their commitment and the personal sacrifices they make to keep things running that have truly been extraordinary, honestly. On that note, I want to show all of you a brief video showcasing how the Flowers team has come together with loyalty, commitment, and enthusiasm. Let's watch.

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I want to take a moment to talk about the heartbreaking incidents that lately have sparked demonstrations and conversations—not just here at home, but honestly, across the world—regarding racial injustice and discrimination. Those incidents have led me personally, along with our leadership group and plenty of others here at Flowers, to genuinely examine ourselves and think hard about the preconceptions and mindsets we hold when it comes to race. We recognize that as individuals and as an organization, there is more we must do so that we represent more faithfully the communities and the shoppers we serve. And here at Flowers, respecting each individual and showing one another kindness has always stood among our fundamental values. If improvement is possible, we ought to pursue it. Flowers is dedicated to carrying forward values it has held for a long time and to playing a role in the remedy. We are putting in place a specific initiative that involves working alongside an external advisory group to strengthen our capacity to foster a genuinely varied workforce; beyond that, we are forming a committee made up of varied leaders drawn from throughout the business to assist us in cultivating that culture. Last, we have given $1.5 million during this year to three organizations focused on racial equality, inclusiveness, and education, and we plan to keep up that backing moving forward. This sharpened emphasis on inclusion and diversity is something we treat with real seriousness, and both the actions being taken now and those we will take later demonstrate that commitment. Honestly, I believe it will undoubtedly result in a stronger enterprise for us. Allow me to start with a brief word on how we performed in the second quarter, while recognizing that we are delivering this strategic update during a highly unusual moment for our communities, our markets, and our business. To put it plainly, the Flowers team keeps meeting the challenge, and the adaptability of our bakery network has let us keep supplying our markets without interruption all through the pandemic. Our quarterly results show the ongoing effect of the pandemic, as sales climbed 5.1%. The favorable mix shift toward branded retail generated cost leverage and better margins, which produced a 32% rise in adjusted earnings per share versus the second quarter a year ago. Steve will provide additional detail about the quarter a bit further into this morning, and I bring it up now since these results do hint at what we will cover more thoroughly today, especially regarding our intentions to keep shifting our portfolio toward a greater branded mix, ultimately delivering improved margin performance. The bulk of the credit, naturally, for these outstanding results belongs to the Flowers team. Our people—I cannot express how tirelessly they have labored through this whole ordeal; truly remarkable. They have come in every single day, which has let us be available every single day for our customers and our consumers, so our gratitude to them is enormous. We likewise acknowledge that the team's robust performance means we are operating from a position of strength. Naturally, as the pandemic's impact fades, certain market conditions we see today will probably shift once more. The strategic plans we'll lay out for you now are aimed squarely at putting Flowers in a position to prosper going forward — to bring new ideas to market, to fuel expansion, to run leaner, and in the end to produce greater shareholder value both currently and in future years, regardless of what the operating climate looks like. Having said that, allow me to walk you through what we believe sets Flowers apart. Within a big, appealing category, we hold a leading position, and that category provides meaningful room to grow along with steadiness across the economic cycle. By way of a portfolio strategy process, our main emphasis is moving toward value-added branded retail products, which we anticipate will lift top-line results and boost our margins. We further anticipate that our optimized portfolio will generate share gains, since we're going after growth segments with inventive new offerings. To help counter inflationary pressures, we're carrying forward the supply chain optimization program launched under Project Centennial, backed by thorough plans for efficiency gains and cost cuts. Last, we put our reliably strong cash flows to work through a disciplined process centered on getting the greatest return. Our steady record on dividends and dividend growth is something we take real pride in. As a lot of you are aware, M&A has played, and will keep playing, an essential role in how we grow. Having plenty of liquidity gives us the flexibility to seize those opportunities whenever they arise. As we proceed through this morning's presentation, you'll get more specifics on each of those items. Before moving ahead, I want to note as well our dependable history of generating long-term shareholder value. Look back across the past 10 years, and you'll see we've expanded this business from one worth $2.5 billion into one worth more than $4 billion. That works out to a CAGR of roughly 5.2% across that stretch. During those same years, we managed to produce total annual shareholder returns of approximately 11.4%. Over time, we've shown we can generate outstanding returns. By putting into action the strategies we'll discuss this morning, I have enormous confidence that we can keep doing exactly that going forward. Let's shift our focus now to our four strategic priorities, since they truly form the foundation for all we'll cover today. Those priorities are developing our team, focusing on our brands, prioritizing our margins, and proactively pursuing smart, disciplined acquisitions. When Project Centennial was announced back in 2017, lots of you recall, we set an EBITDA margin target of 13%-14%, with most of that margin expansion expected to come from cost savings. We've made considerable headway in taking costs out of the organization, and as some of you are aware, turning those savings into bottom-line results has been a challenge, largely because of inflationary headwinds tied to areas such as labor, ingredients, packaging, and transportation. That said, Centennial has succeeded tremendously on numerous fronts, and above all, it represented a major cultural and mental shift for us — moving away from being a company centered on sales and operations toward one centered on consumers, devoted to bringing them new and innovative products. Without Centennial, along with every transformation and difficulty it introduced, we would be beginning from a far earlier point than where we stand now. A number of the efforts we will discuss this morning — particularly portfolio and supply chain optimization — in my own view could not have happened here even merely 3 or 4 years back. At present, we have a company devoted to the consumer; we have one intensely focused on expanding our brands. We have one dedicated to generating genuine innovation that fuels growth, and one that has rediscovered its enthusiasm for managing costs. These 4 central strategic priorities, we believe, will power the fresh long-term growth algorithm we will cover today; we believe such plans are realistic, we believe they can be achieved, and that over time they will generate substantial shareholder value. What we aim to do this morning is give you a lucid picture of those plans along with our route toward growth and margin expansion going forward.

Okay, before we dive into the new algorithm, I want to take you through each of these strategic priorities, since they truly set the stage and form the basis for everything we'll be doing moving forward. Given how important our team is to hitting our targets, we recently shared news of a reorganization meant to unlock the complete potential of our brands and bolster our product innovation work. Some of you might remember that during Centennial, we moved to a business unit structure a couple of years back, and while that setup has treated us quite well, we've also picked up a great deal of learning over the past couple of years. Following a thorough look at what had succeeded and what maybe could use some refinement, we chose to implement some further adjustments. The biggest structural shift involves combining the two business units into one function that oversees all of the brands. Mark Courtney will head that unit as the new Chief Brand Officer. What we're really aiming for here is to add more focus to our branded business. I also believe this new structure will drive stronger collaboration and improved resource allocation throughout our whole branded portfolio. Debo Mukherjee, our Chief Marketing Officer, will oversee building a new innovation-focused capability to deliver fresh and exciting products to our consumers that extend well past mere line extensions. Just as importantly, this new innovation function will work more closely with our corporate development team to hunt for acquisition and investment opportunities that align with the overall portfolio strategy. Innovation will be an essential component of our growth plans. A bit later, Debo will give you further specifics on that function and its first areas of focus. Bringing in David Roach, a veteran operational executive at Flowers with deep expertise in our cake business, as President of Cake Operations, truly highlights how much priority I'm giving to repairing our cake operations, mainly at our Navy Yard bakery, and ought to accelerate the rollout of efficiencies and better profitability. Our food service business will now sit within our sales function, where it will be deployed tactically to fill unused capacity whenever we can do so at an acceptable margin. Personally, I hold the view that organizations ought to constantly assess how effective their structure is to make sure it matches their strategy, and maybe even more crucially, that it positions people to succeed as well as possible. I believe we've achieved that, and I believe these moves will meet our objectives and bring to light the opportunity, especially the one we see tied to our portfolio strategy. Our second strategic priority is a focus on our brands. The good news on this front is that today Flowers holds a very commanding presence across several areas of the market. Nature's Own is the number one brand of soft variety in the U.S., with 2020 estimated retail sales of about $1.2 billion. DKB is by a wide margin the top brand in organic loaf, and we estimate its 2020 retail sales came to roughly $760 million. Within the very brief two-year stretch since we acquired them, Canyon Bakehouse has grown into the leading gluten-free brand, bringing one more premium brand worth $120-plus million into our portfolio. Wonder is a powerful participant in the white loaf segment, and we have managed to capitalize on its iconic standing along with its strong recognition to establish a national footprint for our company in white loaf, and that has aided us enormously in the sandwich bun and roll category too. Since we hold leading brands across a number of major categories, we operate from a position of strength, and we aim to extend those leading positions by directing still greater attention toward branded growth via focused strategies and improved resource allocation, and all of that sits within our portfolio strategy work. We have additionally brought on new capabilities so we can better grasp the consumer and figure out how to use those insights to grow our brands via innovation and marketing investments. Making margins a priority is our third strategic priority, and as you will observe, it is not a distinct, standalone initiative but instead operates hand in hand with the brand-building effort. Our portfolio strategy is built to move our sales mix toward a larger share of branded retail, which will in turn generate stronger margin performance. As you will hear, we anticipate generating branded growth through a blend of share gains in underdeveloped geographies as well as in underdeveloped segments. We will invest in marketing, introduce more genuinely incremental innovation, and naturally pursue selective M&A that fits the portfolio strategy. Our results so far this year have offered at least a glimpse of the dramatic effect this mix shift can produce on our margins, even if it is an extreme example, yet it does confirm the point. The recent organizational changes, paired with a strategy of repurposing capacity to back our branded retail products, followed by selective exits from low to no margin business over time, ought to advance our progress further. Cost management and efficiency gains will likewise be significant in our margin improvement trajectory; we pointed out on our 1st quarter call that via our portfolio and supply chain work, which began last November, we anticipated generating about $10 million-$20 million in cost reduction across the areas shown here on the slide. Honestly, I believe we will finish this year above the top end of that range. I also anticipate that we will reap some additional benefits from this work into 2021 too. All of this is intended to lower fixed costs, letting us better leverage our cost base and enhance margins as the business grows. I have stated repeatedly that our cost structure must align with the company we are today, yet it also has to stay flexible enough to sustain the company we will become tomorrow. There are also a number of key efforts we've got going right now aimed at making operations better at a few bakeries that aren't performing up to par. As we bring new efficiency programs online, put money into automation, and get those bakeries back to running at a high level — which is exactly what's happening today at Navy Yard along with a handful of other bakeries — those efforts are going to drive costs down even more as time goes on. And then there's our network optimization approach, which is built to make sure the proper assets sit in the proper places and back the proper products, and that's going to deliver still more efficiencies. So, with all of that said. Cost containment and managing costs are definitely quite important, no question, yet growth — the correct sort of growth — is the single most important thing when it comes to our success down the road and, in the end, to improving margins. That's the reason we remain so committed to continuing to shift our mix toward branded retail as time passes, and to putting money behind growth and share while deliberately scaling back on business that isn't performing and then getting that capacity optimized. Innovation can amplify that shift, as can continuing to add to the portfolio wisely by way of disciplined M&A. And on the subject of M&A, my expectation is that it will keep playing an essential part in the story of our growth.

When we first listed on the public markets in 1968 — that's roughly 50 years ago now — we had closed over 100 deals, and those deals generated an enormous amount of value for the company, taking us from a modest player in one region to a business with reach across the country. The encouraging part is that plenty of opportunities remain. Within our core segments, there is still space to expand via M&A — maybe somewhat fewer than before, but they haven't disappeared. On top of that, there are far, far more chances to grow in segments that are underdeveloped and in categories that sit adjacent to ours. Dave's Killer Bread and Canyon have delivered outstanding results for us, and our plan is to keep extending that record of achievement as we move forward. Through the organizational realignment I described a moment ago, we've set up an exciting new partnership linking the corporate development group with the newly created innovation function, and its purpose is to spot innovative opportunities outside the core business that can lift our growth and improve our margin profile. To put it simply, we plan to take a proactive stance, and we'll be working to become a company that innovates more, whether through organic efforts or by harnessing the entrepreneurial strength that smaller businesses offer. I'm delighted that Mark Gerrish, who has just become our VP of Corporate Development, will lay out these plans for you a bit later this morning. All of the things I've just described have actually been in motion for quite a while, and the early returns have us very encouraged — and the potential this work offers for what lies ahead encourages us even more. You'll get further specifics as the morning unfolds, but I want to stress the enthusiasm and the optimism we bring to all of this; that leads me to the new long-term algorithm, which appears here on the slide. Our objective is to expand organic sales by 1%-2%, EBITDA by 4%-6%, and earnings per share by 7%-9% across the long term. As time goes on, we expect this plan to produce substantial total shareholder returns via a blend of top-line growth and bottom-line margin expansion. One thing worth noting again: the top line and EBITDA targets capture only organic business growth, whereas the EPS target does factor in the impact of possible future M&A, and/or opportunistic share repurchases; we expect sales growth to arrive through a mix of branded retail, though partly offset by revenue declines, since we anticipate leaving certain underperforming pieces of business behind over time. The EBITDA and EPS growth model likewise presumes the margin-enhancing advantages of a richer branded retail mix and improved cost management, yet we expect that to be partly offset by the contribution losses tied to exiting that lower margin business over time. So now, let's connect those long-term goals back to the strategic priorities. Concentrating on the right kind of growth will fuel the top line, and that means concentrating on our branded business. If we keep shifting our mix more heavily toward our most profitable products, that will in turn produce significant margin improvement. This can be accomplished through expanding our position in developing regions, where we have room to boost the footprint of our top-selling brands, and we'll aim to build further in underpenetrated categories where those leading brands have a legitimate opportunity; innovation will receive investment from us. Then, gradually, we'll scale back some parts of the company that can't produce a margin we consider acceptable. Margin will be our priority as we keep concentrating on controlling costs, driving efficiencies across the bakeries, and delivering on Project Centennial. We'll strive to make sure our capacity is used in the most productive and valuable way possible, which can dramatically impact margins. Where we have spare capacity in particular parts of the business, reducing that over time will also matter. Should we accomplish these objectives, and I firmly believe we will, this new algorithm then offers a substantially more transparent route toward our margin objectives. I also want to stress once more that M&A would add on top of this model at both the sales and EBITDA lines. As we keep hunting for new appealing businesses, there's additional potential in the model, and our M&A record is genuinely strong, as we discussed earlier today. Like I've mentioned, showing how we'll hit these targets is our main aim for today, since I want you to walk away from this session understanding our strategies really well and how they'll drive Flowers' future success. The current climate has shown that when you have the right product portfolio, the right cost structure, the right people, and the right focus, these targets are realistic, they're achievable, and we're determined to optimize every part of our business going forward. Having said that, I'd like to hand things over to Brad Alexander, our Chief Operating Officer, who will speak with you about our growth imperatives and our supply chain optimization efforts. Brad?

Thank you, Ryals, and good morning to everyone. Three main priorities are what I want to cover today. The first is the potential margin gain that comes from the work we're doing to optimize both the portfolio and the supply chain. The second is the emphasis we're placing on brand building. The third is the way our portfolio strategy shapes the supply chain optimization effort, allowing us to lower fixed costs and generate operating leverage. Ryals already touched on the initiatives tied to the portfolio strategy, which centers on value-added branded retail products that we anticipate will lift the top line and boost our margins. Those efforts remain at an early point, yet the present climate gives us a window into how our initiatives affect results over the long term. During the second quarter, demand for our brands rose, since more at-home eating along with a consumer move toward trusted brands produced a favorable mix shift for us. Consequently, margins climbed considerably even though volume fell, because our branded retail products, which are more profitable, accounted for a bigger percent of our sales. Pairing the right portfolio mix with an optimal bakery network can generate substantial margin improvement. These outcomes have bolstered our team's determination to speed up work in this area and to put ourselves in position to deliver better margin performance as time goes on. Two of our main operational priorities are a focus on brands and bettering our margins. A great many of our brands hold strong and growing market shares. We aim to keep that share growth going by staying relevant as the consumer changes. Innovation that produces items our consumers find meaningful, plus marketing those items to the right segments, is a crucial piece of staying relevant. In a few minutes, Debo will speak to some of our efforts on that front. Following Debo, Mark will cover brand presence and what we're doing to get our brands into the right markets and segments, along with the enormous opportunity that exists there. As you'll hear, we expect our portfolio strategy to assist in driving margin improvement through mix shift. First, let me lay out some of the work underway regarding supply chain optimization. Supply chain optimization means more than simply reducing costs. It ties directly to our portfolio strategy. As we move our sales toward a more profitable mix of products, we likewise need to reshape our asset base so the new mix is produced in the most efficient manner. Our network is flexible, and we aim to use every part of it for its highest and best purpose. A variety of items, among them bread, buns, and rolls, come out of most of our bakeries. That flexibility lets us change our mix to satisfy shifting consumer demands, among them changes brought about by a hurricane or by the present pandemic. The remainder of our supply chain is just as flexible, since our depots and independent distributor partners are able to distribute an array of products to the marketplace efficiently. It's worth emphasizing that although the products we make can change, a large share of our costs, whether for production or for distribution, are mostly fixed. Because of the way our network can flex and the assets we already have in place, the brands and segments we go after are shaped by our portfolio strategy. When we move capacity toward the brands with the most strength, we drive revenue higher and open up more room for margin improvement. What we're doing with network optimization in Lynchburg, Virginia, illustrates this well. In the past, Lynchburg turned out a pretty typical mix of products. But Dave's Killer Bread has grown so much in that region that we required more capacity, particularly across the Mid-Atlantic and Northeast. Instead of constructing a brand-new bakery from scratch, we're currently transforming Lynchburg into an organic facility, which will satisfy that demand while also cutting transportation expenses; because our bakery network is flexible, we can move production of the items that used to be made in Lynchburg to sister bakeries close by, which lifts their capacity utilization. Network consolidation forms another piece of our optimization efforts. Cutting down on the number of depots is one illustration of the consolidation work underway. Our production and distribution process — goods made at our bakeries, shipped to our depots, then delivered by independent distributor partners to retailers and other customers — is laid out in the graphic. Consolidating depots, which frequently brings the bonus of fewer transportation miles, is one instance of how we're trying to eliminate excess capacity in this network. As we sharpen our product focus and possibly unlock extra network capacity, our portfolio optimization work will strengthen this process. Improved sales represent one specific gain from our portfolio and supply chain efforts. Thanks to a process that involves better ordering and SKU rationalization, our costs have come down and our realized capacity has gone up. By cutting how much production becomes stales, we've released sufficient capacity to equal the addition of one new bakery. Every one of our bakeries carries a particular blend of branded retail, store brands, and food service production. When we raise the output of branded retail products baked in our facilities, as happened in the Lynchburg case, we gain the ability to be choosier regarding the type and quality of other business we take on. We're not only lowering the share of store brand and food service products we produce — that process also lets us bargain for better pricing and terms on whatever business we choose to retain. The outcome is a greater proportion of branded retail products and a more profitable combination of store brand and food service business, which we anticipate will assist us in hitting our updated sales and EBITDA growth targets; with that, I'll hand things back to Ryals.

Thanks, Brad. To add to what Brad just covered, we're now handing things over to Debo Mukherjee, who will walk you through additional specifics regarding what we're doing in marketing and innovation. Debo?

Hello, everybody. Ryals, I really appreciate it. Like Brad said, we examine the foundations of our growth through two distinct buckets. The first is brand relevance, while the second is brand presence. I'm going to concentrate on brand relevance, and my colleague, Mark Courtney, will walk you through the brand presence piece. What do we mean when we discuss brand relevance? It begins with having a category that is vibrant, and I will guide you through some of the dynamics involved. Inside that vibrant category, we must ensure our brands connect with our consumers. And that they are relevant both in their promise and in their vision. I'll walk you through how we build that. It's not only about our approach to making it, but also about the way we anchor everything in what we learn from consumers. Our guiding belief is that we must respect the consumer in every dimension—both the needs they express and those they don't—when it comes to shaping our brand promise and our innovation, which Ryals mentioned briefly before. And lastly, we have to look at how consumers' behaviors and habits are shifting. The digitization of e-commerce tied to COVID has clearly given us a fresh set of activities as well. So, shall we get started? Let's take a look at the bread category. Within the whole grocery store, bread is one of the most dynamic categories, and certainly one of the biggest. It stands at $24 billion and continues to expand. Here's something you may not be aware of: bread gets purchased by 98% of American households—about 128 million to 130 million of them. An intriguing detail here is that these households restock on bread roughly once every 12 days. So we're discussing a massive category, one that's highly dynamic, that finds its way into a huge number of homes and kitchen pantries, and that gets bought extremely often. What's also surprising is that, inside this category, we've noticed it has a strongly brand-driven character—meaning branded products' share versus store brands continues to climb. Shoppers are demonstrating a willingness to pick brands that offer a distinctive proposition. Beyond that, there's clear pricing strength in this segment. When shoppers spend more on a loaf because they're picking a brand that delivers a distinct product advantage, everybody involved gets to build an environment of profitable growth. That's the foundation explaining why bread matters so much to us, why it's such a key category, and why having that kind of reach and frequency carries real power. So why does this deserve attention? It deserves attention when we keep our brands relevant in that setting. Let's move to the following slide and discuss how we build brand relevance. If you picture a funnel, the widest part at the top is those 128 million households I brought up earlier—about 98% of all homes in the U.S. Those are the people we're trying to connect with so our brands feel truly relevant to them. What we're after is making sure that what our brand represents, and the way it's positioned, really lands with them—in a manner they're at ease with, one where they take in that message and promise, and afterward lean on it when making a choice. Taking that biggest slice of the funnel, 128 million households, as I said, the thing we're working toward next is creating awareness. Building that recognition could be the most important factor in driving value. On the subject of recognition, there are two elements you should concentrate on. The first one is aided, meaning a prompt is given to them. Has the name Nature's Own ever reached your ears? But the unaided portion is much more powerful, and that's the thing we're really trying to secure. Picture a buyer with Nature's Own, Dave's Killer Bread, or Wonder at the front of their mind as they walk toward the bread aisle, getting ready for that trip to the store. That is precisely what we hope to achieve, and it's the crucial part. Once that's in place, assuming our brand has been promised and positioned well, the buyer could be inspired to give us a shot. That kicks off the second portion of that leg—the penetration element, the initial purchase. Once more, should the brand promise hold true along with how the product performs in texture, quality, taste, and all those other attributes, then ideally we've built a brand loyalist who returns and buys again. That's the promised land, so to speak, traveling from the wide opening of the funnel all the way to its tightest point. This is our approach to building brand relevance. How do we grasp what the shopper is actually seeking? Let's move to the next slide. We begin by understanding what shoppers encounter daily—their expressed needs, their gaps, their opportunities. We're also trying to understand the emotional payoff, and the places where it doesn't deliver. What are they attempting to say? What remains unfulfilled? What hasn't been voiced yet? We collect all of it, and from there we construct our brand architecture. At its core, brand architecture responds to: which audience does a brand signify what to, and for what reason? Within that framework, we determine how the brand gets talked about. What does it stand for? What's its vibe? Is it going to act like a buddy? From that point, we build upward into our brand strategies. What are the products going to be? Where do we put our advertising? How do we drive awareness among shoppers? Every one of those pieces. That then rises to the final overarching picture—consumer messaging. So what you're seeing in the center of this slide reflects something we understand about moms: when she's choosing what to offer and what to put on the table, her goal is to make everybody at home happy. At the same time, we recognize that she pays very close attention to wellness. So for the mom who's trying to strike a balance between joy and good health, we offer Nature's Own — and you can see that tagline of ours right there. What you'll see is that it speaks to what the product does functionally, while also carrying the emotional pledge of happiness. In much the same way, with Wonder, the benefit or the brand promise we choose to highlight isn't white bread. What we put front and center instead is the mom who wants to ignite her children's imagination. That's what led to the tagline about awakening a sense of childlike wonder. So we now possess this insight, but what was the path that brought us there? Please move on to the following slide. We examined our shoppers, and like the majority of brands, we approach this through dividing them by demographic and socioeconomic factors, yet we took things further. We genuinely made an effort to grasp how they live. What are their behaviors? What drives them? After that, we also sought to grasp what motivates them emotionally. In this specific case, shown in the matrix located on the right side, we pinpoint individuals whom I believe all of us can identify with — someone who is a busy budgeter. Her lifestyle is active. She must manage her household within a specific budget. At that overlap, we additionally recognize that she feels a longing or wish to communicate affection, coziness, or perhaps closeness to her family. In what way does she show it? All of us recognize that we appreciate fresh items, and that freshness — preparing something fresh or giving something fresh to our families — serves as a means of expressing our affection and care toward them, and a mother is exactly the same at this particular overlap.

Once we hit upon that specific insight, we took it and turned it into what makes Nature's Own stand apart: going from scratch to shelf in 48 hours. That lets Nature's Own be positioned strongly to deliver the comfort and love a mom wants to show, while at the same time offering the rational benefits of being healthy and containing no preservatives, colors, or flavors, which speaks to what that consumer needs. Like Ryals said before, we're also doing a lot of innovation work, and that innovation work puts the consumer at the center. If you look at the other places where things intersect on this chart, and there are more charts like it, we try to find not just areas our brands can expand into to meet certain needs. Sometimes there are untouched white spaces that ought to be mined a bit more through further analysis. This turns into the fundamental fabric, a weave, so to speak, for spotting growth opportunities sitting inside this core bread category, and one we see as so powerful. Let's move to the next slide. Like I said before, the unlock, the biggest unlock for our growth upside, is driving awareness. Prompted awareness has definitely been helpful, since it's aided, but the statistic that carries more weight here, and the one I'd really like you to focus on, is the unaided figure. Unaided awareness for Nature's Own comes in at just 15%. Aided awareness, though, is above 70%. One way to read that is that 15% of households could name Nature's Own on their own without any prompting, correct? Out of the 128 million people, it makes sense that if I could lift my unaided awareness, it would translate into a higher level of sales. That's my first unlock step. If you remember the funnel comparison I brought up earlier, this is where that first unlock begins. How do we get our messaging across to our consumers? Well, we're highly dynamic in the way we deliver that messaging to our consumers, using a wide range of mediums. You can see some of that toward the right, and it's mostly there to show you that we remain nimble whenever the consumer's habits shift, whenever the way they take in information shifts. We stay flexible in reaching them and in building meaningful impression points during that window. With that, let's move to the next slide. The second part of that unlock, going through the funnel once more, is that after we've figured out what awareness looks like and hopefully reached that stage, there are three specific levers we truly want to concentrate on. The first is household penetration. Household penetration, if you remember, is the piece where a household buys the loaf of bread one time, and then ideally comes back to buy again. Household penetration, household consumption in terms of how fast they go through it, and then the third, as I noted, the bottom portion of the funnel, loyalty. Let's talk about that. We're aware that 98% of American households have bread, so they're buying bread. But if you look at Nature's Own, only roughly 30% of those households are purchasing Nature's Own. It makes sense that growing the count of households who buy Nature's Own would add incrementally to our business. On the right-hand side, at the top right, you'll see that bread gets bought every 12 days. Nature's Own is bought only around every 30 days. So there's a chance for me to help generate incremental consumption of Nature's Own once it sits in the pantry — maybe by providing more usage ideas, speaking to different day parts — and that also helps create innovation ideas for how to go after the Nature's Own franchise with that consumer base. Finally, there's loyalty. Keeping that valuable consumer once you've converted them, once they've sampled your product. The behavior you want, clearly, is making sure that consumer isn't pulled away by rival offers or pricing or other efforts when they come to the shelf again. Retention, holding onto them, is powerful. To illustrate how this might work for us, look at the southern region of the United States, where Nature's Own is especially well-established. Nationally, we have about 33% household penetration; in the South, where we're established, household penetration is over 52%. Right there, you can see nearly 20 percentage points of upside available. If we could replicate that nationally, I hope it gives you a feel for our growth underpinnings. With that, let's move to the next slide. We recognize that with COVID, consumer behaviors have shifted quite substantially. What had otherwise been missing in terms of uptake for edibles, in terms of consumers purchasing edibles on e-commerce, has flipped dramatically. Today, roughly 13% of bread is bought via e-commerce. So what does it take to win in e-commerce? Quite simply, two aspects: awareness and optimization of the search. You notice again how crucial the word awareness is. If we keep driving our focus and make sure we're targeting the consumer in a manner they wish to be spoken to, awareness remains the key unlock toward value creation or growth. With that, let's move to the next slide. What I should mention from the prior slide is that under Ryals's leadership, we are now establishing a digitization competency within our organization. While disparate pieces of work are being brought together toward it, we feel very confident about bringing that to life very shortly. I've spoken to you about the funnel analogy, if you will, from the upper end down to the bottom. The key through all of this is not only choosing the right consumer but also retaining that consumer. Here's something I'd really like to do — play a clip for all of you. It's a video pulled from the 30-second spot we made for Nature's Own, though it's been reworked into a six-second version that we run on social and in other digital channels. So with that, please roll the clip.

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Take a look at that tagline on the screen — "Goodness in our nature" — and then check out how some of those messages are laid out on the right side. We mentioned the scratch to shelf taking roughly 48 hours and just how much impact that has with the consumer; we also brought up the point that goodness being in our nature ties into our product benefits. Everything there builds up toward that higher order messaging regarding the way Nature's Own can connect with our consumers. So with that, I'll hand things back over to Ryals.

Thanks, Debo. There’s a lot of exciting work happening across both marketing and innovation, and hopefully that came through in Debo’s presentation. Now we’re going to turn to Mark Courtney, our Chief Brand Officer, and he’s going to speak with you about our portfolio and growth strategies. Mark?

Thanks, Ryals, and good morning to everyone. What I want to do today is walk you through our portfolio strategy and explain how we'll use it to grow the business profitably — by extending our brands into underdeveloped markets and underdeveloped segments, and by remaining tightly connected with our retail partners. Since the pandemic started, the fresh packaged bread category has clearly gotten a sales boost. There's been a major shift in channels, away from food service and toward retail, and that has powered category growth of 14%. I'm happy to report that we've grown faster than the category by 420 basis points, and in just this last quarter we brought our brands to 3.5 million additional households. What we need to do now is drive engagement with those consumers by building our brand presence wherever and however they shop. With that in mind, we've made clear what role each of our brands and businesses plays, and we can now use that to fuel branded growth and meaningful margin expansion. Within our portfolio are some of the category's strongest brands, and together they appeal to a very broad percentage of the population. It also includes strong regional brands, which let us win locally. When it comes to our national brand portfolio, it's a who's who of mainstream bread brands, beginning with Wonder, which gives consumers a chance to trade up from store brand into the most iconic bread brand. Then there's Nature's Own, the number one loaf bread in the U.S., offering premium products at mainstream prices. On the super premium side, Dave's Killer Bread has been driving category growth for the last five years with the best bread in the universe. And our newest entry, Canyon Bakehouse, has quickly become the number one gluten-free bread by giving consumers a reason to love bread again. For our brand portfolio, we've developed growth maps to drive optimal revenue and margin growth, and to serve as a guide for where we invest resources and what we prioritize. Our growth maps and brand strategies have been aligned with our network optimization plans, so we're sure to have the right capacity for the right products in the right markets, with minimal capital investment. We've also sunsetted two brands this year and streamlined our assortment, deleting some 20% of our products. We'll keep leveraging the portfolio to delight consumers of every demographic while driving sales and margin expansion for our retail partners, our independent distributors and our shareholders. Clearly, one of our key growth opportunities is driving growth in underdeveloped markets. Remember that nationally we hold a 17.5% share, but when you look at this map, it's clear our growth opportunities differ widely from market to market. You can see where we're strong and how much headroom we have for growth. We have a 30% share in the IRI South market, yet in high population markets such as the Northeast and the Midwest we've only begun to scratch the surface, and on the West Coast we're just beginning to hit our stride. Our strategy is tightly focused: we aim at markets where profitable growth is most achievable, and we put money behind building brand awareness among shoppers and consumers in those high-potential areas; there's a substantial chance for us to expand in both close and adjacent segments. Within the markets where we compete, we hold a decisive number-one position in loaf bread, with a share above 30%. As the data shows, loaf represents the category's largest segment, worth nearly $8 billion. There are two main occasions when people eat loaf: the midday meal and the morning meal. Naturally, that means sandwiches at lunch, an occasion where our brands over-index, plus toast in the morning, where our indexing is about average. We see considerable room to grow in non-loaf segments by bringing out products tailored to breakfast and dinner that deliver our brands' promises in a distinctive way. Take breakfast as an illustration. The people who buy our Dave's Killer Bread, whom we refer to as Breadheads, speak up loudly. They're devoted to our bread and to our Second Chances program, and they urged us to bring killer nutrition along with killer taste and texture to additional bread varieties; we paid attention, and within only 3 years, our Dave's Killer Bread bagels and English muffins have grown into a business worth more than $100 million, while our share climbed 420 basis points. This year alone, we made a major effort around the dinner occasion, particularly sandwich buns; yes, we've been selling buns for many years, yet two things have held our growth back. First, a large portion of our bun capacity went to non-branded buns. Second, our approach to branded buns lacked cohesion, with the bulk of selling effort placed behind our regional brands. Both problems are resolved by our portfolio strategy, since we've set out and made clear that branded retail comes first when allocating line capacity, and Wonder is our mainstream bun priority. We're drawing on the strength of the Wonder brand and have united our team behind this iconic name. Beyond that, we've rolled out innovation under our premium and super premium brands. Nature's Own Perfectly Crafted Brioche buns arrived this year. Dave's Killer Buns have also launched. And for shoppers avoiding gluten, we introduced Canyon Bakehouse Burger Buns. I'm happy to report that initial results across our branded bun business show a 29% gain, with our share up 80 basis points during the second quarter in this segment worth $3.5 billion. Last, let me address the marketplace and our retail partners. Retailers are performing admirably in the most swiftly shifting environment nearly all of us have witnessed; they're coping with changes in consumer behavior that arrive at incredible speed, including the faster embrace of the e-commerce platform and home delivery, and in numerous instances, they've remade their operations into a combination retail store and fulfillment center. On top of that, they're grappling with pandemic-driven labor challenges, plus an economy that's unpredictable and a future that's just as unclear. I'm happy to report that while we certainly aren't flawless, people in the industry generally view our team as a standout when it comes to supplying the market during crises. Retailers understand they can count on us both to meet their needs and to keep them in stock for their shoppers, and also because the brands we carry are ones their shoppers ask for. As this chart makes clear, consumers care about our brands. In our category, Nature's Own, Dave's Killer Bread, and Canyon Bakehouse hold the top loyalty and the top share of wallet. Since consumers care about our brands, retailers care about them too. Our brands bring in a premium price, which lifts category sales and profits for our retail partners; we'll keep working strategically alongside them as they evolve and serve the shifting consumer in this key category. Thanks, and I'll hand it back to you, Ryals.

Appreciate that, Mark. I trust it's clear that what we're doing on the marketing side, with innovation, and through our portfolio strategies moving ahead truly forms the foundation for all our future activity. With any luck, that came across, and you can understand why this has us so energized. On the topic of M&A — shifting our focus there — let me bring in Mark Gerrish. Mark has stepped into the role of vice president of corporate development, and he now oversees all of our M&A, having taken over the position I previously held, and believe me, that's a step up. Mark, how about walking us through it?

Okay, thanks Ryals. Morning, everybody. It's great to be here. Over the next several minutes, I'll walk through our corporate development program. Debo spoke earlier about how consumer insights help us capture opportunities in our core business. Just as vital to Flowers' future is applying that same knowledge to M&A; we hold growth ambitions through M&A. We're set up for that growth; we'll follow a structured approach, working alongside our newly formed innovation team to spot opportunities in our core as well as within grain-based adjacencies. As Ryals mentioned before, M&A stands as one of four strategic priorities that will drive long-term growth. Thanks to a strong balance sheet and free cash flows, we're ready to invest in that growth; we're not simply up here claiming we hold cash and capacity. We bring experience, capabilities, and commitment, along with a lengthy history of delivering on M&A. As the chart on the screen shows, our two recent deals, Dave's Killer Bread and Canyon Bakehouse, have generated tremendous, profitable growth. Even more significant, what that slide doesn't show is that these brands have a long runway, and we anticipate many years of continued growth from them. A structured M&A approach matters greatly to securing Flowers' long-term success. Once again, we hold that track record in M&A, and we'll keep that success going by building a clearly defined, repeatable process with a clear set of acquisition criteria. Here at Flowers, we treat M&A as a capability. It isn't a one-off project aimed at a discrete target. We're building a capability to deliver a steady stream of potential growth drivers. As evidence of that commitment, I was hired in September 2019 as a dedicated resource. I sit within our corporate strategy department to ensure a tight link between strategy and strategic intent and M&A. Enabled by our defined strategic M&A criteria, we'll aim to identify, assess, prioritize, and maybe most importantly, seek to cultivate relationships with potential partners. Our structured approach reaches past the screening and acquisition phase to cover integration. As we know, integration is a key component of acquisitions, and we haven't overlooked that. We're developing dedicated resource by aligning internal functions areas throughout our company. Ryals spoke earlier about our commitment and what we call smart M&A. Smart M&A, to us, means following a disciplined process informed by our strategic goals and innovation platform goals. We'll seek to develop new brands and products, both in-house and through investments. We're examining opportunities to not only solidify our core, but also look in new adjacencies. Within the core, we're identifying areas for infrastructure and distribution growth in underdeveloped locations. Essentially, 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. When it comes to adjacencies, our aim is to reach growing, underdeveloped categories that have innovative brands and/or capabilities. Working together with our corporate strategy group, our brand group, the innovation group we've just formed, and our R&D group will shape where we focus. On the operational side, how we run an adjacency will depend on the deal, but as with Dave's Killer Bread, we anticipate keeping a substantial share of the business we buy intact while generating substantial growth. Take Dave's Killer Bread, for instance: once the acquisition closed, manufacturing, marketing, and sales remained as they were; we truly kept the core of that company intact, and we generated growth not just via our industry expertise but also via innovation, as discussed earlier, by introducing buns and breakfast items to drive growth. Just as we stay flexible about which kinds of targets we pursue, we're likewise weighing different transaction structures. We'll keep considering alternative structures for deals, including joint ventures, minority investments, and strategic partnerships. We're confident that this dedicated, disciplined, yet flexible approach will make long-term success possible; we will fulfill our core strategy priority of smart M&A. Thank you for your time. I'm eager to share our progress and results. With that, I'll hand it back to Ryals.

Alright, thanks, Mark. Like we've mentioned repeatedly during this call and on earlier ones, acquisitions and mergers have consistently been an essential element of how we grow, and that will remain true going forward. The approach may shift somewhat. You've heard that we're actively working to widen our scope — not just regarding which kinds of businesses interest us, but also concerning the sorts of deal structures we'd consider moving ahead. We're open to making smaller minority investments as a way to drive innovation from an external viewpoint; we've discussed supply chain optimization at length. We've discussed our portfolio strategy. We've discussed our marketing and innovation efforts, and at this point I'd like to bring in our Chief Financial Officer, Steve Kinsey, who will connect all of this for us and discuss our financial progress along with the long-term algorithm. Steve?

Thank you, Ryals, and good morning to all of you. I have to say, though I'm thrilled that we have the technology allowing all of us to gather virtually today, I certainly can't wait for the moment when we're able to get together face to face once more. Let's hope that moment arrives before long. During today's remarks, I intend to address a handful of important subjects. To start, things are going nicely for our business. Given how we performed in the first half along with what we expect for the back half, our outlook on 2020 is a favorable one. Next, we keep producing robust free cash flow, and the way we allocate capital lines up with backing the priorities that have been described to you today. Last, I'll give you some detail regarding our revised long-term targets and the path we'll take to hit them. Moving on to the second quarter's results. As Ryals said, we put out earnings late yesterday and also submitted our 10-Q to the SEC. As that release shows, we enjoyed yet another solid quarter, with excellent results on both the sales side and the margin side. Solid brand performance broadly speaking powered these results. We're still seeing heightened levels of in-home eating, which is a good sign for our brands. The top line rose 5.1%, while adjusted EBITDA climbed 21.4%. Adjusted EBITDA margins widened 170 basis points, reaching 12.5% of sales. Adjusted earnings per share rose 32%, hitting $0.33 per share — a record second quarter for adjusted EPS. I'd also like to briefly call out a few items that were left out of the adjusted results, which came about mainly because of our ongoing emphasis on brands and our overall optimization efforts. First, we recorded two sizable impairment charges: a $4.6 million charge tied to surplus property and equipment that we're in the midst of selling, plus a $4.6 million charge stemming from discontinuing the Alpine Valley brand. As you're aware, this brand has struggled somewhat because of how Dave's Killer Bread has performed overall, so we redirected our priorities and resources toward our strongest organic bread, DKB. That lets us leverage both our sales force and our organic production capabilities to fuel further growth in this key part of the category. Second, as Ryals noted, we announced an organizational restructuring in July. In connection with that, we recorded a charge of $1.5 million for employee termination benefits. We also expect to recognize an extra $7 million charge in the third quarter for employee termination benefits too. Now let's discuss guidance. Thanks to how strongly the business has performed so far this year, we've raised our full-year guidance. We now anticipate sales growth of 4%-5% and adjusted EPS landing between $1.15-$1.25. This range is broader than what we normally give at this point in the year. The reason is that a number of key considerations could affect how we finish the back half. Broadly speaking, food at home consumption is still elevated compared with the prior year; even so, since consumers are beginning to cope and get out and about, we're watching closely for how this affects our mix. Although we see certain signs that people feel at ease grabbing food to go or even sitting down at a restaurant, eating at home remains at higher levels than usual. As everyone knows, cases of the coronavirus are climbing once more, and we'll keep monitoring how that shapes what shoppers do. Should the pattern flip and a lasting drop in total infections appear, our expectation is that buyers go back to roughly their ordinary routines. We'd anticipate a portion of the business we run without brands rising, which would move mix to some degree. How quickly such a return unfolds is the primary factor behind the broader range we're giving right now. Schedules for going back to school and heading back to the office largely decide when the makeup of what we sell starts to change, yet where those stand today is quite murky. Even though many possible paths exist, our confidence stays firm that the company keeps delivering solid results through the rest of the year. We keep witnessing robust, steady cash being produced by the operation. So far this year, cash from operations has climbed by roughly 32%. That cash has funded a dividend that keeps getting bigger and has also left us with free cash we chose to put to work deliberately, reaching additional markets and expanding categories such as organic and gluten-free breads. Thanks to this flow of cash, our choices about where to deploy capital have stayed steady, shaped by balanced set of rules that have worked in our favor. To start, money for capital projects goes toward fueling growth in our main business. Take, for instance, what we spent so DKB could be made in the Northeast. During 2020, our capital expenditure goal sits between $85 million and $95 million. Next, we keep our borrowing in check so our investment-grade credit rating and careful financial standing stay intact. Third, we regard the dividend as central to the total return shareholders receive. Keeping that dividend robust is something we're dedicated to. Mark mentioned it, and we too want to seek out acquisitions in grain-based foods on our own initiative, bringing quicker-expanding brands into what we own. Last, when extra cash exists, we may look at buying back shares when the moment seems right. Having plenty of free cash flow has let us keep our balance sheet solid. As I noted, our investment-grade credit rating matters deeply to us, and after every recent deal we've closed, we've shown we can cut leverage fast in the years that follow. Across the last 10 years, just as Ryals said before, we've proven we can expand the Flowers business via both organic gains and purchases, posting dependable mid-single-digit revenue growth across the long run. It also makes us glad that we turned that business growth into greater shareholder value, reaching low double-digit total shareholder return across the prior 10 years. Ryals and other team members walked you through our strategic priorities today, and we trust you now grasp more clearly the actions we're taking so our targets get met. To begin with, we're concentrating on our top brands and moving our mix toward products that bring in more profit, and through that we're looking to achieve sales growth between 1% and 2%. That kind of top-line growth, mostly coming from expansion of our branded items with higher margins, should produce adjusted EBITDA growth of 4% to 6%. Our supply chain optimization efforts are essential here, and as Brad mentioned, that work is a major piece of the strategy we've laid out overall. Then there's our goal of 7% to 9% adjusted EBITDA growth, which acknowledges that beyond EBITDA growth feeding the bottom line, we have substantial opportunities in the grain-based foods space to create value and boost our portfolio's growth potential. I want to emphasize that we don't treat our long-term targets as annual guidance — instead, they're guideposts for grasping what we consider normalized yearly results across a multi-year period. At the moment we're in a distinctive situation that's delivering robust performance this year, far above those long-term targets. Over time, on average, we believe the business can produce those results, though any single year's outcome might vary. As we look forward, we felt it would help to offer a bit more detail on how we expect to execute against our targets in the coming years. Our 2020 guidance suggests growth that exceeds our long-term targets. We're not just seeing demand above the usual level — we also get a 53rd week, which should lift sales by roughly 1% to 2% and adjusted EPS by $0.01 to $0.02 per share. Bear in mind that fiscal 2021 has one fewer week, plus possible demand reversion as the pandemic's impact fades. That will create a headwind we'll have to get past if we want to hit the growth algorithm in fiscal 2021. We do anticipate the environment will more or less normalize by 2022, and that we'll deliver on our long-term targets. As I hope you've picked up today, we're carrying out a set of clear strategic priorities, and the team is strongly dedicated to reaching our goals. Now I'll hand things back to Ryals. Thank you.

Thank you, Steve. Before we finish, I'd like to emphasize how strong and enduring Flowers is. Our company has now operated for more than 100 years, and the very first Thomasville bakery — located only a short distance from this room — continues to run today, which perfectly demonstrates why we view Flowers as an excellent long-term investment. Throughout all these years, one thing we've accomplished is developing an incredibly valuable asset: a dedicated workforce devoted to creating shareholder value. A second essential quality is the emotional bond consumers feel with our main products. This is fresh bread. It's a wholesome staple. It serves as the basis for countless daily meals and, honestly, is extremely affordable slice by slice. Among staple foods, it stands apart. People hold their own distinct likes and dislikes spanning many flavors and textures, and we offer products spanning many of those very same flavors and textures. That gives creative brands, such as ours, a chance to form deep connections with shoppers, as Debo explained earlier today. Ultimately, it's that shopper devotion which creates valuable brands over the years. Third, as the Thomasville bakery demonstrates, leading players such as Flowers enjoy meaningful competitive benefits. Pairing truly powerful brands with the distribution scale our nationwide system of numerous bakeries delivers sustains the steady cash flows Steve mentioned, and it likewise generates highly appealing returns on capital. Last, we can expand via adjacent product categories, new ideas, and well-chosen acquisitions, as Mark, Mark, and Debo described; now that our fresh organizational structure is set, our direction has never been sharper. I'm genuinely thrilled by the chance to fully unlock the strength of our brands and deliver more novel and thrilling items to our customers and shoppers in the years ahead. To conclude, I firmly believe in what we're doing, and I hope today's presentation has convinced you too. Thanks for attending, and now I believe we'll take questions.

All right, that's great. We're going to move into the question-and-answer portion now. Just a quick note — if you'd like to ask something, please use the Q&A feature within the Zoom application. Up first, we have Bill Chappell from Truist Securities. Bill, can you hear us?

Yeah, can you hear me?

Yes.

Great. Morning, everyone. I suppose I have a handful of brief questions. Actually, not so brief. To start, Ryals, could you walk us through your expectations for the category when it comes to that 1%-2% longer-term growth? When I ask that, are you able to do so? Outside of Dave's Killer Bread and Canyon and the specialty portion, what do you anticipate from the core business in terms of expansion? Is pricing required for that, or does it all come down to volume?

Yes, that's an excellent question. Bill, as you're aware, the category as a whole — let's set COVID aside for a moment — has been essentially flat across the past several years. We've managed to deliver growth above the category, both because the acquisitions clearly contributed, and because of a number of our core products. That's exactly why my attention is so fixed on innovation, since bringing new and differentiated items to the consumer is truly what will be essential to keep driving that above-category growth. Regarding pricing, what we've built into our models and our released guidance is an assumption that we'll take pricing whenever possible to counteract inflationary headwinds; you've also heard about our capacity to expand into additional geographies. In certain very important parts of the country, such as the Northeast, our market share remains fairly low. We discussed our 30 share down in the South, which is excellent. Growing that outside of innovation is a bit harder, correct? Consider the Northeast, where we hold only an eight share and are truly just getting started, and you can see the potential opportunity ahead.

So, continuing from that point, what do you anticipate from your biggest rival? Since when we examined Project Centennial, the gains never actually made it down to the bottom line, largely because your competitor stayed — or rather, the competitive landscape stayed pretty aggressive when it came to promotions, pricing, and that sort of thing. We couldn't see those gains materialize. Going forward, do you foresee a more rational landscape?

That's tough to answer. Everyone knows that for many food companies, the promotional climate has dropped considerably amid this situation, simply because demand has been so high. My expectation is that as things return to normal, perhaps some of that comes back. Bill, what rivals choose to do isn't something I can dictate. What I can dictate is our own actions, our responses, and the way we operate. Over time, we're confident that by pulling every lever we've talked about today, we can achieve that rate of top line growth, recognizing that beneath that top line growth rate there's an expected pullback in lower margin business.

Understood. I have only a couple additional questions. You were involved in — in fact, I believe you led — the Project Centennial initiative. So why is so much of this being rolled out now? What kept these items out of Project Centennial, or from being addressed 4 or 5 years back?

Yes, this subject has come up with me previously. That's another solid question. To begin with, the supply chain component was always in the plan. Once Centennial got underway — and we truly began carrying it out in 2017 — our attention centered more on the SD&A line, with the understanding that we'd reach the supply chain portion eventually. In hindsight, one flaw of Centennial as a whole is that, frankly, we likely attempted too many things simultaneously. Attention drifted in a few places, but now, circling back and making certain organizational adjustments after reflecting on that and taking some lessons from it — I hope what came through today felt far more centered on our portfolio strategy, supply chain optimization strategies, marketing investments and innovation. I hope that was the takeaway today. Our aim is to concentrate on those areas we believe will deliver the greatest effect on the business.

Understood. For the final question, could you give us a bit more detail about what you're referring to with grain-based acquisitions? When it comes to your openness to consider them, the scope appears to be wider. Would snacks be part of that? Are cookies and crackers included? What about pasta? I could keep naming other products made from grain that come to mind right away. What exactly does that mean?

Well, it's mostly what we already told you. Once you widen the lens, if you will, and you examine the sector from a broader angle rather than only fresh sliced bread, clearly the pool of possible opportunities becomes far bigger. To be honest, Bill, that's somewhat difficult to respond to, simply because I don't wish to reveal too much. It's enough to say that our focus extends past fresh bread.

Great. Thanks so much.

Sure. Thanks, Bill.

All right, then. Moving on to our next question, which comes from Ryan over at Consumer Edge. Ryan, can you hear us?

Hi.

Hey, good morning, Ryan.

Good morning. Since you've been showing up in more homes lately because of COVID, might you elaborate a little on what you're doing to keep those added households? And could you also share more about which particular segments in bread and baked goods you'd like to pursue for new products and upcoming M&A?

Debo will likely step in and add his perspective here too; a far greater number of households have come our way. Naturally, holding onto those households down the road is what makes this chance so valuable. I'll turn it over to Debo for specifics on certain actions we're taking moving forward, even as the situation starts to fade, so that these new consumers stick with us.

Hi Ryan, good morning to you. That's an excellent thing to bring up. Without a doubt, what consumers do is shifting, and it depends on the situation. What we're aiming for is this: ahead of those habits hardening into behaviors, we have to grasp what shoppers will actually do, where they'll go to get their information, and then ensure we show up and matter in those spaces. We're digging deeply into how consumers act and examining the impressions they generate and which sites they visit — for instance, where do they look when seeking recipe or usage inspiration? We're grabbing onto those opportunities within our media mix, and we remain extremely flexible about it. I trust that addresses what you were asking.

Yeah, that's quite useful. When it comes to the subsegments inside bread and baked products overall that you might aim at for new products and upcoming acquisitions, could you share any additional information about that?

Yeah. Listen, I believe we've already shown a few of the moves we've made, especially in the gluten-free space. Listen, that's a significantly smaller space, yet in spite of predictions of its downfall over the past 10 years, it keeps expanding, whether for diet-related reasons or sheer need; we've managed to grow within it; we launched the breakfast offerings, as you heard Mark Courtney mention a bit before, beneath Dave's Killer Bread, and we've attempted numerous things in the breakfast area throughout the years with many different brands, yet the Dave's breakfast offerings have truly taken off for us. We remain small compared to certain competitors, but the momentum is definitely quite strong. Listen, this was somewhat like the question Bill posed, since we've discussed innovation both internally at Flowers and by bringing in outside help for some of it, and we'll be examining some of those smaller companies. At present, given where we are right now, all of us have been seeing how large brands are succeeding once more, and will that last? Likely to some degree it will. I'm hopeful it does, since we possess some large brands. I also believe that eventually, once things calm down, I think consumers will keep seeking out smaller brands, for genuinely novel and distinct products, and we must play a role in that.

Thanks, that's useful. As you work on making the portfolio more profitable, what should we anticipate when it comes to SKU rationalization? Perhaps you could outline how much room there generally is for SKU rationalization and how much easy opportunity exists there, looking at how profitability is distributed between your best-performing SKUs and your worst-performing ones.

Yeah, I might ask Brad to add a few thoughts on this as well. SKU rationalization is truly something we do on an ongoing basis. You heard Mark Courtney mention earlier the SKU rat we carried out, those roughly 20% of products we eliminated. As time goes on, you remove parts of the portfolio that aren't performing well or that are adding too much complexity to the network. Honestly, that's among the difficulties with innovation — you have to be careful not to simply roll out a bunch of SKUs, but then fail to remove the ones that don't perform well. In my view, it's more of a continuous process. The core idea, the central thesis behind all of this, is to change our mix. We've observed it in the present results; we've seen what it has accomplished from a margin improvement perspective, which has only strengthened our determination, because we were already working on this before COVID, and this situation, even though it's an extreme example, has really validated the thesis. Branded business is up considerably, yet we still have fairly substantial declines in food service and private label, and yet margins have risen significantly. You can really begin to see the potential that exists there. When I speak about potential low, no margin exits over time, that will be methodical; that will be structured. It won't all occur at once because nearly everything contributes something. As we expand the branded business over time, if we can't bring the lower margin business to an acceptable margin threshold, I'd prefer to do that, but if we can't, then we'll reduce that and rationalize that capacity. Brad, anything you want to add?

Sure, I'd probably say the most significant shift for us is that our method for SKU rationalization has become more organized. Something we came to understand — and we already had some awareness of it, though we've sped things up — is that cutting down on complexity within the bakeries and lowering the number of changeovers has genuinely given our plant a substantial amount of extra production time; we're engaged in SKU rationalization; roughly every 6 months we now review everything. There's more to do, but quite a bit is already finished, and it's delivering value for us.