Flowers Foods, Inc.

Good day, and thank you for standing by. Welcome to the Flowers Foods second quarter 2023 results conference call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your speaker today, J.T. Rick, Executive Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Norma, and good morning, everyone. I hope you all had the opportunity to review our earnings release. listen to our prepared remarks, and view the slide presentation that were all posted yesterday evening on our investor relations website. After today's Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session, we may make forward-looking statements about the company's performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our SEC filings. We will also provide non-GAAP financial measures for which disclosures and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are Riles McMullen, Chairman, CEO, and President, and Steve Kinsey, our CFO. Riles, I'll turn it over to you.

Great. Thanks, JT. Good morning, everybody. Thanks for joining the call today. I'm very pleased with the strong quarterly results. Our performance recovered after a slow start to the year, helped by the competitive strength of our leading brands, despite strategic pricing initiatives designed to mitigate inflationary pressures. Volume trends in our branded retail business did improve, and that may be an early indication that consumer demand is migrating back to pre-inflationary levels. That top-line strength translated into improved margins and earnings, which is reflected in our updated 2023 guidance. Private label products gain share, but that growth appears to be moderating. So we remain confident that the trend towards premiumization, driven by our investments in innovation and marketing, will win out over the longer term. I'm excited about our prospects, and I've really never been more confident in our ability to grow shareholder value over time. So normal with that, we are ready to open up for questions.

Thank you. To ask your question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question, please. And our first question will come from the line of Bill Chappell with True Securities. Your line is now open.

Thanks. Good morning.

Hey, Bill.

I guess, can we start a little bit more commentary on Canyon? I didn't fully understand kind of what happened to have the deterioration of, I guess, market share and margins over the past few months, and just trying to understand how that improves going forward. It seemed like Canyon's had a pretty strong trajectory for the past few years, and I just didn't know if that's more of a sign of we're hitting a plateau or if there's something else that I don't fully understand.

Yeah, sure. I'd be happy to. I would describe this temporary bill. I mean, a lot of it has to do with capacity. It's, you know, in some ways a good problem to have because, as you know, Canyon has been on a really nice trajectory, but we got a little bit tight. We've had to do some things to restructure Canyon's portfolio and made some more investments at the Canyon Bakery to help free up additional capacity. So we've got that solved. That's coming online in the second half, and we've got plans to reinvigorate the growth. There is a little bit of channel shift as well that's happening that's not picked up by the syndicated data. So what you're seeing is a little different than reality. But again, I put that in the temporary category. We'll get that back on track. Canyon's still got a great future ahead of it.

Got it. Thank you. And then this is the second or third time you've put in your commentary kind of a thought of moving into tangential categories through M&A. And at the same point, I think you talked about rolling out Dave's Killer Bread bars sometime in 24. And didn't know if those kind of coupled if you'd like to have greater expertise in the snack bar or tangential category before expanding that kind of nationwide or any kind of update on how that's going would be great. Thanks.

The rollout's going really well. So those initial three SKUs of bars, Bill, are in the middle of a nationwide rollout right now. So I think we noted in the prerecorded commentary that we're in about 12,000 stores. We'll be in more than 13,000 by year end, and we'll actually be slightly ahead of our own expectations for that rollout. For 2024, there are three new SKUs of bars coming out that are higher protein based. They're the amped up protein bars. Really great product. They've been in test market for a while. They've done extremely well in test market. And I think most promising is they're proving to be incremental to the original three SKUs. I think we're touching a different consumer segment with that higher protein offering. And then, of course, behind that, we've got the snack bites. Those are still in test. Those will be coming a little bit later. And then a whole pipeline of innovation even behind that. So we're really excited about what we're building from an innovation standpoint with Dave's.

And I guess with, from an NA standpoint, does that make the, the bars category more attractive from a non-tan getting out of, out of just straight bread, uh, as you're building expertise and building kind of a national following up behind a brand?

Yes, it could. I mean, it would, it would definitely depend on, on the brand and, and you know, what that brand brings to the consumer. I mean, you know, it is a crowded category. So we want to be careful that we're investing in the right segments of that category. But yeah, there are definitely opportunities out there we'd be interested in.

Great. Thanks so much.

Thank you, Bill.

Thank you. One moment for our next question, please. Our next question comes from the line of Mitchell Pinheiro with Sturdivant and Company. Your line is now open.

Hi. Good morning. I guess a couple questions here. First, you know, you spoke a lot. You spent time in your script about, you know, private label, and you're seeing sort of, you know, improved trends, but you still, you know, have – you know, you're still wary on – you're just not sure where it's going. And I'm curious – You know, are you seeing, you know, the positive or a trend back to brands even into, you know, here in August? And, you know, what you might be looking for as signs of either, you know, of movement in either direction?

Yeah, sure. Great question. So a couple things there. Private label still gained share in the quarter. But I think it's important to note that that growth is slowing. And this was, towards the end of the quarter, was the lowest that we've seen in terms of gains for private label this year. So that's definitely on a good trend. The other thing to remember, and we've talked about this all year, this is the private label phenomenon is playing out more in mass than it is in grocery. It actually lost share in grocery. Continues to gain in mass. We've talked about there's been a little bit of channel shift. as consumers seek bargains in mass, club, dollar, that sort of thing. I do think also that it's important to note that the private label share gains are generally confined to that loaf category, the traditional products. In other words, those with the least differentiation. Private label loss share in virtually every other category where you tend to see more differentiation, so especially breakfast. sandwich buns and rolls, that sort of thing. So the trend towards premiumization is definitely still there. Clearly, consumers are still looking for bargains, but that trend is headed in the right direction from our standpoint as we look to build our branded business. Mitch, I'd also point to, and we did mention this in the pre-recorded commentary, Dave's had a great quarter, up 7% in units in the syndicated data. That's a really, really good sign Um, particularly given, you know, it's, it's premium positioning. If you recall, um, about 20% of Dave's killer bread shoppers are low income households. Um, it was a surprising number to me when I first found out, but that's where we were really starting to lose a lot of the unit volume. And in fact, you know, earlier, earlier in the year, Dave's units had turned negative. Well, now those low income shoppers are coming back to the brand. and helping us achieve that nice unit growth in the second quarter and were positive for the year. We did also gain some penetration in higher income households that helped. So just all of those factors put together give us some confidence that consumer health is improving. Now we did caution everyone that we're not ready to call the play yet, we'd like to see that trend you know, continue well into the third quarter before we, you know, conclude that it's here to stay, but definitely some, some really nice early signs.

Thank you. And then, um, looking at, you know, your food service, um, you know, in the other category, um, how, I mean, how much pricing is there still pricing to go there? Um, number one, number two, uh, Are you seeing any pushback on pricing so far? And as these volumes come down, how does that have an impact on your gross margins?

Sure. So as far as pricing goes, we got in the pricing that we needed for the year. Now, there is some of it on the contractual business that will continue to trickle in, but I think it's fair to say most of it's out. As far as resistance goes, broadly speaking, everybody understands the inflationary environment. So again, we were able to get through all the pricing that we wanted. In terms of volume, remember a lot of the volume declines. First of all, overall, the volume declines are largely made up of food service and cake volume declines. And then most of that is intentional. So as we rationalize some of that lower margin business that we've been talking about, that certainly plays into it. You know, same thing on the CAKE side, just getting out of some of the cheaper business, focusing more on the branded business. You know, obviously that's having an effect on volumes. I think, you know, sequentially for CAKE, you should see that improve. It did improve this quarter quite markedly because we're really starting to lapse some of the heavy ski rat that we did last year. And then finally, in terms of food service, you know, we did have, you know, some disruptions in the quarter. from one of our cold storage suppliers that definitely impacted volume performance in the quarter.

And then just last question. So when it comes to, you know, you talked about, I was interested in the, you've moved some of your sales, I guess the bakery function away from the sales leadership and more to the supply chain leadership and you're seeing positive benefits on both ends. Better efficiency in the bakery and also you pointed out how you're pleased with how the sales have improved. I'm just curious how that you have a lot of national customers, how much influence the local sales leadership has at each bakery and whether Is there also a reduction in force at all as it relates to the sales, just having more salespeople out there?

Well, I'll answer your last question first. No, not from a material standpoint. Obviously, there's always a little bit of attrition and turnover, but I think the more important pieces of your questions are, yeah, it does have an effect at the local level, yes, A lot of national accounts now, you know, grocers have consolidated. We all know that. But, you know, the area sales director can have a major impact at the local store level, helping to sell in that additional display, for example. Those types of executional elements are critical. And I would point to that reorganization as one of the reasons we perform so well in the quarter. As you know, this is the big summer bun season. We had our best bun season ever. We achieved our highest bun share in the quarter. I think those are all proof points that the organizational restructure is working. Mitch, it's really a matter of focus, having our sales folks be able to focus only on sales, what they do best, and then similarly on the supply chain side, having that expertise solely focus on running those bakeries as efficiently as possible. And to your point, we've seen improvements on both fronts.

Okay. All right. Thank you very much for the questions.

Thanks, Mitch.

Thank you. One moment for our next question, please. Our next question comes from the line of Connor Radigan with Consumer Edge. Your line is now open.

Hey, guys. Good morning. Congratulations on the great quarter.

Thank you, Connor. Appreciate it.

Yeah. So, just kind of wanted to follow up on some of Mitch's questions there. So... So you notice private label share gains somewhat moderating in the quarter and sort of confined to the more, I guess, traditional low segment. And sort of with those share law and, you know, I guess just trying to get a sense just how much of a factor is maybe makeshift, you know, shifting maybe more towards the bond segment or I guess these more differentiated segments, you know, in the summer months. And I guess maybe is there any concern that consumers are maybe just temporarily moving to different segments of the category where private label is undershared?

Yeah, well, you know, actually, you know, we've been seeing that trend for some time. If you go back, you know, quite a few quarters, I think we talked about that pretty heavily that, you know, even within the category, you know, we were seeing shifts more towards specialty premium, more towards breads, buns, and rolls, more towards breakfast items, all of which, you know, tend to have a higher level of differentiation. and are certainly more premium products as well. So for example, our Nature's Own perfectly crafted brioche buns have done extremely well. That's a differentiated item from just a standard white bun. The Dave's Killer Bread bagels, English muffins, et cetera, even the buns with Dave's have done really well as well as that broader specialty premium category. So You know, I think it's a trend we've been seeing for a while, you know, somewhat disrupted by the inflationary environment because, you know, obviously we've talked a lot about, you know, trade down and households economizing. But I think over the longer pull, I think that trend remains in place. You know, one of the things that we're focused on here is how can we bring more differentiation to that traditional loaf category? It is still our largest segment, so it's very important. from performance, from a cash flow standpoint, you know, all of it. So what can we do to further differentiate those mainline nature zone items? Is it from a quality standpoint, a packaging standpoint, you know, different flavors, et cetera? So, you know, that's something that we're focused on here.

Perfect. And then just back to skew rationalizations a little bit as well. So that was the volume headwind again in the quarter, obviously. And I guess I was just wondering – Was the headwind driven mostly by compares from prior rationalizations or were there more skews actually eliminated during the quarter? And I mean, I know you mentioned the impact is expected to lessen in the second half, but I guess just trying to get a sense for if there are a lot more skews potentially on the chopping block or if you're pretty much all finished.

I'm going to break that into two pieces because on the cake side, we're largely done. And I think, you know, we said at the beginning of the year, you'll see those volume declines start to moderate as we move to the back half of the year. And, you know, we saw that even in the second quarter. So that's on the cake side. I mean, you know, obviously there's always continued skew rationalization, but the bulk of it that we've been doing over the last couple of years, we're sort of through that. On the food service side, it's a little bit different because we still have some of that – that lower margin business that we'll be rationalizing over time. It's not all going to come at once. Some of it's under contract, and so that affects the timing. We did exit some more late in the quarter. I wouldn't say that that's heavily responsible for the volume decline in the second quarter. That's more the previous rationalizations we did, the disruption with the coal storage operator, et cetera, was more responsible for that. Um, on the food service side, to sum up, I would say we're not done yet. Um, but it's, you know, it's not like it's going to come all at once. It'll be spread out over a number of years. And it's really, it's really about, um, you know, we intend to stay in food service. We like the food service business. It's really about, you know, exiting that lower margin business, margining up in food service, and even more importantly, shifting that capacity and production to branded retail.

All right, great. Thanks for the call, as always.

Okay, thank you, Connor.

Thank you. One moment for our next question. Our next question comes from the line of Jim Solera with Stevens. Your line is now open.

Hi, guys. Thanks for taking our question. You talked in the prepared remarks about the stabilization on the branded side. Do you feel like there's anything you can do in the near term to maybe juice that a little bit, whether it's from an advertising standpoint or a promotional standpoint? Do you feel that there's a way you can kind of help it along to get it going, the brand is going back in the right direction and gaining share?

Yeah, good question. I'm glad somebody asked about promotions. I was hoping we'd get that. Yeah, so to answer your question, we are doing things to juice it, to use your word. So, you know, if you look at SD&A marketing, you know, was up in the quarter, I think that's something you can continue to expect to see from us. We're very committed to our marketing efforts to support these brands. I think that's always important. From a promotional standpoint, we did promote a little bit more in the quarter. I wouldn't call it out as anything terribly significant. I think overall in the category, promotions were up a little bit, but still well below historic or even pre-pandemic levels. So no significant movements there. The interesting bit that we're seeing is that even when we do promote, the incremental units aren't terribly attractive. So we have to be very selective about when we do promotions to ensure we're getting a good return on those promotions. And there are some good ones out there to be had, to be sure. But I think what that tells you is a little something else about the consumer. If you're putting an item on promotion and you're really not getting that lift that you normally see, what it tells me is the shopper is still not – they're only buying what they need. So it's another indication that consumers are still trying to economize in the household. So we'll see how those trends continue, but I think the takeaway is the category has not gotten terribly promotional, at least not yet. And to the extent that there are promotions, we're really not seeing that incremental lift that you might have seen in the past.

Great. That's helpful. And then maybe to drill down on kind of the balance between promotions versus marketing, because you mentioned step up on the marketing side. Do you have a sense for which one of those drives consumer engagement, especially with the less differentiated branded products? Is it better to have a low-priced

making the number of five cents less or is it better to have five percent more air time or visibility so it has the brand top of mind for consumer yeah i i think they're both important um they may serve slightly different purposes i mean promotions can be very effective in driving trial for example so you know if you think about our our bar launch you know obviously we're you know we're doing um you know ads and promotions for the bars because we're trying to bring new consumers to that certainly marketing can do that for you as well but you almost look at marketing is as as much about retention as it is acquisition and so it's really the combination of the two are really important depending on what you're trying to drive you know in a more commoditized category yes promotions are probably at least historically a little bit more effective despite what I just got finished talking about but you know I think the most important thing that we can do within our portfolio of brands is continue to drive differentiation and then drive consumers to that with a combination of promotions and marketing.

Great. That's very helpful. I'll pass it on. Thanks, Jim.

Thank you. I am currently showing no further questions at this time. I would now like to turn the conference back to Riles McMullen, Chairman, Chief Executive Officer, and President for closing remarks.

Great. Thank you, Norma. I just want to thank everybody for taking time today and joining us for questions. We really appreciate your interest in our company, and as always, we'll look forward to speaking with you next quarter. Everybody take care.

Thank you for your participation. You may now disconnect. Everyone have a wonderful day. you Thank you. Thank you. Thank you. Good day, and thank you for standing by, and welcome to the Flowers Foods second quarter 2023 results conference call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your speaker today, J.T. Rick, Executive Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, Norma, and good morning, everyone. I hope you all had the opportunity to review our earnings release. listen to our prepared remarks, and view the slide presentation that were all posted yesterday evening on our investor relations website. After today's Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session, we may make forward-looking statements about the company's performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our SEC filings. We will also provide non-GAAP financial measures for which disclosures and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are Riles McMullen, Chairman, CEO, and President, and Steve Kinsey, our CFO. Riles, I'll turn it over to you.

Great. Thanks, JT. Good morning, everybody. Thanks for joining the call today. I am very pleased with the strong quarterly results. Our performance recovered after a slow start to the year, helped by the competitive strength of our leading brands, despite strategic pricing initiatives designed to mitigate inflationary pressures. Volume trends in our branded retail business did improve, and that may be an early indication that consumer demand is migrating back to pre-inflationary levels. That top-line strength translated into improved margins and earnings, which is reflected in our updated 2023 guidance. Private label products gain share, but that growth appears to be moderating. So we remain confident that the trend towards premiumization, driven by our investments in innovation and marketing, will win out over the longer term. I'm excited about our prospects, and I've really never been more confident in our ability to grow shareholder value over time. So normal with that, we are ready to open up for questions.

Thank you. To ask your question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question, please. And our first question will come from the line of Bill Chappell with True Securities. Your line is now open.

Thanks. Good morning.

Hey, Bill.

I guess, can we start a little bit more commentary on Canyon? I didn't fully understand kind of what happened to have the deterioration of, I guess, market share and margins over the past few months, and just trying to understand how that improves going forward. It seemed like Canyon's had a pretty strong trajectory for the past few years, and I just didn't know if that's more of a sign of we're hitting a plateau or if there's something else that I don't fully understand.

Yeah, sure. I'd be happy to. I would describe this temporary bill. I mean, a lot of it has to do with capacity. It's, you know, in some ways a good problem to have because, as you know, Canyon has been on a really nice trajectory, but we got a little bit tight. We've had to do some things to restructure Canyon's portfolio and made some more investments at the Canyon Bakery to help free up additional capacity. So we've got that solved. That's coming online in the second half, and we've got plans to reinvigorate the growth. There is a little bit of channel shift as well that's happening that's not picked up by the syndicated data. So what you're seeing is a little different than reality. But again, I put that in the temporary category. We'll get that back on track. Canyon's still got a great future ahead of it.

Got it. Thank you. And then this is the second or third time you've put in your commentary kind of a thought of moving into tangential categories through M&A. And at the same point, I think you talked about rolling out Dave's Killer Bread bars sometime in 24. And didn't know if those kind of coupled if you'd like to have greater expertise in the snack bar or tangential category before expanding that kind of nationwide or any kind of update on how that's going would be great. Thanks.

The rollout's going really well. So those initial three SKUs of bars, Bill, are in the middle of a nationwide rollout right now. So I think we noted in the prerecorded commentary that we're in about 12,000 stores. We'll be in more than 13,000 by year end, and we'll actually be slightly ahead of our own expectations for that rollout. For 2024, there are three new SKUs of bars coming out that are higher protein-based. They're the amped-up protein bars. Really great product. They've been in test market for a while. They've done extremely well in test market. And I think most promising is they're proving to be incremental to the original three SKUs. I think we're touching a different consumer segment with that higher protein offering. And then, of course, behind that, we've got the snack bites. Those are still in test. Those will be coming a little bit later. And then a whole pipeline of innovation even behind that. So we're really excited about what we're building from an innovation standpoint with Dave's.

And I guess with, from an NA standpoint, does that make the, the bars category more attractive from a non tent getting out of, out of just straight bread, uh, as you're building expertise and building kind of a nation national following up behind a brand?

Yes, it could. I mean, it would, it would definitely depend on the, on the brand and, and you know, what that brand brings to the consumer. I mean, you know, it is a crowded category. So we want to be careful that we're, you know, that we're investing in the right segments of that category. But, yeah, there are definitely opportunities out there we'd be interested in.

Great. Thanks so much.

Thanks, Bill.

Thank you. One moment for our next question, please. Our next question comes from the line of Mitchell Pinheiro with Sturdivant and Company. Your line is now open.

Hi, good morning. I guess a couple questions here. First, you know, you spoke a lot, you spent time in your script about, you know, private label and you're seeing sort of, you know, improved trends, but you still, you know, have, you know, you're still wary on, you're just not sure where it's going. And I'm curious about, You know, are you seeing, you know, the positive or a trend back to brands even into, you know, here in August? And, you know, what you might be looking for as signs of either, you know, of movement in either direction?

Yeah, sure. Great question. So a couple things there. Private label still gained share in the quarter. But I think it's important to note that that growth is slowing. And this was, you know, towards the end of the quarter was the lowest that we've seen in terms of gains for private label this year. So that's definitely on a good trend. The other thing to remember, and we've talked about this all year, this is the private label phenomenon is playing out more in mass than it is in grocery. It actually lost share in grocery. Continues to gain in mass. You know, we've talked about there's been a little bit of channel shift. as consumers seek bargains in mass, club, dollar, that sort of thing. I do think also that it's important to note that the private label share gains are generally confined to that loaf category, the traditional products. In other words, those with the least differentiation. Private label loss share in virtually every other category where you tend to see more differentiation, so especially breakfast. sandwich buns and rolls, that sort of thing. So the trend towards premiumization is definitely still there. Clearly, consumers are still looking for bargains, but that trend is headed in the right direction from our standpoint as we look to build our branded business. Mitch, I'd also point to, and we did mention this in the prerecorded commentary, Dave's had a great quarter, up 7% in units in the syndicated data. That's a really, really good sign. particularly given its premium positioning. If you recall, about 20% of Dave's Killer Bread shoppers are low-income households. It was a surprising number to me when I first found out, but that's where we were really starting to lose a lot of the unit volume. In fact, earlier in the year, Dave's units had turned negative. Well, now those low-income shoppers are coming back to the brand and helping us achieve that nice unit growth in the second quarter and were positive for the year. We did also gain some penetration in higher income households that helped. So just all of those factors put together give us some confidence that consumer health is improving. Now we did caution everyone that we're not ready to call the play yet, we'd like to see that trend you know, continue well into the third quarter before we, you know, conclude that it's here to stay, but definitely some, some really nice early signs.

Thank you. And then, um, looking at, you know, your food service, um, you know, in the other category, um, how, I mean, how much pricing is there still pricing to go there? Uh, number one, number two, uh, Are you seeing any pushback on pricing, you know, so far? And as these volumes, you know, come down, how does that have an impact on your gross margins?

Sure. So as far as pricing goes, we got in the pricing that we needed for the year. Now, there is some of it on the contractual business that will continue to trickle in, but I think it's fair to say most of it's out. As far as resistance goes, broadly speaking, everybody understands the inflationary environment. So again, we were able to get through all the pricing that we wanted. In terms of volume, remember a lot of the volume declines. First of all, overall, the volume declines are largely made up of food service and cake volume declines. And then most of that is intentional. So as we rationalize some of that lower margin business that we've been talking about, that certainly plays into it. You know, same thing on the CAKE side, just getting out of some of the cheaper business, focusing more on the branded business. You know, obviously that's having an effect on volumes. I think, you know, sequentially for CAKE, you should see that improve. It did improve this quarter quite markedly because we're really starting to lap some of the heavy ski rat that we did last year. And then finally, in terms of food service, you know, we did have some disruptions in the quarter from one of our cold storage suppliers that definitely impacted volume performance in the quarter.

And then just last question. So when it comes to, you know, you talked about, I was interested in the, you've moved some of your sales, I guess the bakery function away from the sales leadership and more to the supply chain leadership and you're seeing positive you know, benefits on both ends, better efficiency in the bakery, and also, you know, you pointed out how you're pleased with how the sales sort of have improved. And I'm just curious how that, you know, you have a lot of national customers, how much influence, you know, the local sales leadership has at each bakery, and whether Is there also a reduction in force at all as it relates to the sales, just having more salespeople out there?

Well, I'll answer your last question first. No, not from a material standpoint. Obviously, there's always a little bit of attrition and turnover, but I think the more important pieces of your questions are, yeah, it does have an effect at the local level, yes, A lot of national accounts now, you know, grocers have consolidated. We all know that. But, you know, the area sales director can have a major impact at the local store level, helping to sell in that additional display, for example. Those types of executional elements are critical. And I would point to that reorganization as one of the reasons we perform so well in the quarter. As you know, this is the big summer bun season. We had our best bun season ever. We achieved our highest bun share in the quarter. I think those are all proof points that the organizational restructure is working. Mitch, it's really a matter of focus, having our sales folks be able to focus only on sales, what they do best, and then similarly on the supply chain side, having that expertise solely focus on running those bakeries as efficiently as possible. And to your point, we've seen improvements on both fronts.

Okay. All right. Thank you very much for the questions.

Thanks, Mitch.

Thank you. One moment for our next question, please. Our next question comes from the line of Connor Radigan with Consumer Edge. Your line is now open.

Hey, guys. Good morning. Congratulations on the great quarter.

Thank you, Connor. Appreciate it.

Yeah. So, just kind of wanted to follow up on some of Mitch's questions there. So... So, you know, the private label share gain somewhat moderating in the quarter and sort of confined to the more, I guess, traditional low segment and sort of with those share law and, you know, I guess just trying to get a sense just how much of a factor is maybe makeshift, you know, shifting maybe more towards the bond segment or I guess these more differentiated segments, you know, in the summer months. And I guess maybe is there any concern that consumers are maybe just temporarily moving to different segments of the category where private label is under shared?

Yeah, well, you know, actually, you know, we've been seeing that trend for some time. If you go back, you know, quite a few quarters, I think we talked about that pretty heavily that, you know, even within the category, you know, we were seeing shifts more towards specially premium, more towards breads, buns, and rolls, more towards breakfast items, all of which, you know, tend to have a higher level of differentiation. and are certainly more premium products as well. For example, our Nature's Own perfectly crafted brioche buns have done extremely well. That's a differentiated item from just a standard white bun. The Dave's Killer Bread bagels, English muffins, et cetera, even the buns with Dave's have done really well as well as that broader specialty premium category. I think it's a trend we've been seeing for a while, somewhat disrupted by the inflationary environment because obviously we've talked a lot about trade down and households economizing. But I think over the longer pull, I think that trend remains in place. One of the things that we're focused on here is how can we bring more differentiation to that traditional loaf category? It is still our largest segment, so it's very important. from performance from a cash flow standpoint you know all of it so what can we do to further differentiate those mainline nature zone items is it from a quality standpoint a packaging standpoint you know different flavors etc so you know that's that's something that we're focused on here perfect and then um just back to skew rationalizations a little bit as well um so that was the volume headwind again in the quarter obviously and just i guess i was just wondering um

Was the headwind driven mostly by compares from prior rationalizations, or were there more skews actually eliminated during the quarter? And, I mean, I know you mentioned the impact is expected to lessen in the second half, but I guess just trying to get a sense for if there are a lot more skews potentially on the chopping block or if you're pretty much all finished.

I'm going to break that into two pieces because, you know, on the cake side, we're largely done. And I think, you know, we said at the beginning of the year, you'll see those volume declines start to moderate as we move to the back half of the year. And, you know, we saw that even in the second quarter. So that's on the cake side. I mean, you know, obviously there's always continued skew rationalization, but the bulk of it that we've been doing over the last couple of years, we're sort of through that. On the food service side, it's a little bit different because we still have some of that – that lower margin business that we'll be rationalizing over time. It's not all going to come at once. Some of it's under contract, and so that affects the timing. We did exit some more late in the quarter. I wouldn't say that that's heavily responsible for the volume decline in the second quarter. That's more the previous rationalizations we did, the disruption with the coal storage operator, et cetera, was more responsible for that. Um, on the food service side to sum up, I would say we're not done yet. Um, but it's, you know, it's not like it's going to come all at once. It'll be spread out over a number of years. And it's really, it's really about, um, you know, we intend to stay in food service. We like the food service business. It's really about, you know, exiting that lower margin business, margining up in food service, and even more importantly, shifting that capacity and production to branded retail.

All right, great. Thanks for the call, as always.

Okay, thank you, Connor.

Thank you. One moment for our next question. Our next question comes from the line of Jim Solera with Stevens. Your line is now open.

Hi, guys. Thanks for taking our question. You talked in the prepared remarks about the stabilization on the branded side. Do you feel like there's anything you can do in the near term to maybe juice that a little bit, whether it's from an advertising standpoint or a promotional standpoint? Do you feel that there's a way you can kind of help it along to get it going, the brand is going back in the right direction and gaining share?

Yeah, good question. I'm glad somebody asked about promotions. I was hoping we'd get that. Yeah, so to answer your question, we are doing things to juice it, to use your word. So, you know, if you look at S&A marketing, you know, was up in the quarter last I think that's something you can continue to expect to see from us. We're very committed to our marketing efforts to support these brands. I think that's always important. From a promotional standpoint, we did promote a little bit more in the quarter. I wouldn't call it out as anything terribly significant. I think overall in the category, promotions were up a little bit, but still well below historic or even pre-pandemic levels. So no significant movements there. The interesting bit that we're seeing is that even when we do promote, the incremental units aren't terribly attractive. So we have to be very selective about when we do promotions to ensure we're getting a good return on those promotions. And there are some good ones out there to be had, to be sure. But I think what that tells you is a little something else about the consumer. If you're putting an item on promotion and you're really not getting that lift that you normally see, what it tells me is the shopper is still not – they're only buying what they need. So it's another indication that consumers are still trying to economize in the household. So we'll see how those trends continue, but I think the takeaway is the category has not gotten terribly promotional, at least not yet. And to the extent that there are promotions, we're really not seeing that incremental lift that you might have seen in the past.

Great. That's helpful. And then maybe to drill down on kind of the balance between promotions versus marketing, because you mentioned step up on the marketing side. Do you have a sense for which one of those drives consumer engagement, especially with the less differentiated branded products? Is it better to have a low-priced I'm making this number up, $0.05 less, or is it better to have 5% more airtime or visibility so it has the brand top of mind for the consumer?

Yeah, I think they're both important. They may serve slightly different purposes. I mean, promotions can be very effective in driving trial, for example. So if you think about our bar launch, obviously we're doing ads and promotions for the bars because we're trying to bring new consumers in. to that. Certainly marketing can do that for you as well. But you almost look at marketing as much about retention as it is acquisition. And so it's really the combination of the two are really important depending on what you're trying to drive. In a more commoditized category, yes, promotions are probably at least historically a little bit more effective despite what I just got finished talking about. But I think the most important thing that we can do within our portfolio of brands is continue to drive differentiation and then drive consumers to that with a combination of promotions and marketing.

Great. That's very helpful. I'll pass it on. Thanks, Jim.

Thank you. I am currently showing no further questions at this time. I would now like to turn the conference back to Riles McMullen, Chairman, Chief Executive Officer, and President for closing remarks.

Great. Thank you, Norma. I just want to thank everybody for taking time today and joining us for questions. We really appreciate your interest in our company, and as always, we'll look forward to speaking with you next quarter. Everybody take care.

Thank you for your participation. You may now disconnect. Everyone have a wonderful day.