Q4 2019 Earnings Call
Our operator for today's call at this time all participants are in listen only mode. Later, we will conduct a question and answer session. During the question answer session. If he ever question. Please press Star then one on your Touchtone phone. Please note that this conference call is being recorded I'd now turn the call Ritu J.T. Rex Treasurer and vice.
I've Investor Relations, Sir you may begin.
Thank you Sheryl and good morning, everyone yesterday evening, we released our fourth quarter results. Our earnings release in quarterly Slide presentation are posted in the investors section of the flowers foods website, we anticipate filing our 10-K with the FCC on February 19th.
Before we begin our discussion please be aware that it may include 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 matters will discuss during the call important factors relating to flowers foods business are fully detailed and receive.
Volumes.
Especially on the call. This morning arrivals are rolling our CEO and Steve Kinsey, our CFO roles I'll turn the call over to you. Okay. Thanks JJ. Good morning, everybody. Thanks for joining the call.
Before we get to the details of the core.
I want to take a moment to remind you about our four strategic priorities to drive value creation.
And they are focusing on our brands.
Prioritizing margins pursuing smart M&A and developing our team.
Executing on each of these priorities is how we intend to deliver on our long term goals to grow sales, 2% to 4% and earnings 8% to 10%.
To achieve these goals there are two foundational themes.
I need to execute against.
First we recognize that sustainable profitable top line growth.
Is essential for long term value creation. So it's imperative that we cultivate a portfolio of brands and products that anticipates, our consumers needs and delights our customers.
And second to create value with our portfolio we.
Consistently deliver margin expansion by managing cost.
Dusing valueless complexity, and driving efficiencies up and down the supply chain.
Says you listen to our remarks this morning unlikely to bear in mind several proof points against those two foundational themes that we believe are evidence of progress toward our goals.
One the investments, we're making in our key brands are driving solid topline growth, particularly from dk be canyon and nature's own.
To margin improvement efforts from our portfolio and supply chain optimization program are now underway and we have high confidence that once executed.
These efforts will remove valuables complexity.
Improve our operational efficiency and deliver meaningful earnings growth.
In fact, we saw some early evidence suggests that in the fourth quarter with some modest margin improvement.
The third Proofpoint is the investments investments, we've made to improve the capabilities of our team.
Giving them tools and the motivation they need to make more informed.
Faster decisions around the key drivers of our business.
And underlying all of this is complete by and from the senior leadership team.
It was operating against clear expectations and committed to creating a culture of action and accountability.
With that I'll turn it over to Steve to review the details of the quarter and share our guidance for 2020.
And then.
I'll come back around to review our operational priorities before we open it up for your questions Steve.
Thank you, Rob and good morning, everyone.
We were pleased to report record sales and operating cash flow for the year.
Through the fourth quarter solid momentum continued.
Driven primarily by sales growth in the retail channel and stable.
Version of the non retail channel.
Consolidated sales increased 37.1 million or 4.2% quarter over quarter.
I Didnt bake health contributed approximately 3% of this increase.
And the base business improved price mix drove 2.1% of the sales increase while lower.
Lower volumes reduced the topline by 90 basis points.
Price realizations improved across most of our channels and product classes, which help to address inflationary headwinds we experienced in recent quarters.
Volumes were down primarily due to reduced promotional activity for traditional low freds.
And last.
Service business.
Looking at the sales channel.
Brendan retail sales increased 29 million or 5.5%.
Canyon Baghouses branded products accounted for more than half of these incremental sales dollars.
The balance was largely driven by continued growth from Dave's killer bread.
Nature's own perfectly crafted partially offset by lower other traditional life sales.
Store branded retail sales increased 9.8 million or 7.5%.
Much of the sales increases attributed to the acquired Canyon Banco store brand business.
The balance of the growth was split between.
Pricing and volume growth due to increased distribution with existing customers.
Offset by lower volumes about store branded cake and breakfast items.
Foodservice and other non retail sales decreased by 1.7 billion or 80 basis points.
Lower volumes.
Drove most of the decline due in part to lost business from the injury use disruption we experienced in 2018 and also more institutional volumes.
In the quarter gross margin was flat at 47% themselves.
Improved price realizations were offset by higher workforce.
Cost lower manufacturing efficiencies as a percentage of sales.
Excluding the items affecting comparability detailed in the press release adjusted EPS DNA expenses decreased 20 basis points as a percentage of sales primarily due to lower distribution distributor distribution fees and logistics costs.
Partially offset by higher workforce and marketing cost.
GAAP diluted EPS for the quarter was one cents per share.
We did reach resolution on several.
DP related lawsuits as a result reported EPS was reduced this quarter.
Legal settlements.
Words of approximately 10 cents per share.
Excluding this.
The other items affecting comparability detailed in the release adjusted diluted EPS in the quarter was 18 cents per share up two cents compared to the prior year.
Canyon bag house was accretive to both EBITDA and EPS in the quarter.
And for the year.
A few comments on leverage and cash flow.
Year to date, we've unit operating cash flows of 367 million and make capital expenditures of approximately 104 million.
Accordingly cash flows year to date have been solid.
We paid 160 million in dividends to.
Shareholders and reduced our indebtedness by 114 million.
At quarter end, our net debt to trailing 12 month adjusted EBITDA stood at approximately two times.
This brings us now to 22 any guidance.
First let me remind you that 2020 is a 53 week year.
We are for.
Casting sales growth in the range of 2% to 4%.
This includes the 50, Threerd week, which is expected to contribute approximately 1.5%.
The balance of our topline outlook is driven by continued growth of dk be and Canyon bake House.
Market share gains from nature's own and wonder.
And improvement in cake in foodservice sales.
For the broader category, we expect growth to be driven primarily by consumer shifts to differentiated products rather than volume growth.
For 2020, we are targeting adjusted EPS in the range of $1.12 dollars per share.
The midpoint of this.
Range reflects approximately 8.3% growth over the.
2019, adjusted earnings per share of 96 cents.
Earnings growth and 22, and he is expected to be driven by leveraging sales growth as well as executing our supply chain optimization initiatives and improving manufacturing efficiencies.
As we have disclosed for several quarters, we plan to complete the termination of our largest defined benefit plan and the first quarter of 2020.
In connection with this transaction, we expect to make a cash contribution in the first quarter of approximately 17 to 35 million and recognize a noncash settlement.
Charge of approximately 125 to 143 million.
For 2020, we are targeting capital expenditures in the range of 105 to 115 million, which includes approximately 19 million related to the conversion of our Lynchburg bakery to organic production.
We expect.
Can you strong free cash flow generation and our capital allocation priorities remain consistent with our focus on maximizing return on invested capital and growing shareholder value.
Continue to invest in our brands and bakeries, as well as and ways to strengthen the cap of capabilities of our team.
Strategic.
The diversified and hence the.
Profitability of our portfolio will also be a priority.
We intend to do this while maintaining an investment grade financial position and continuing to return to shareholder value to shareholders through dividends and opportunistic share repurchases now I'll turn the call back to rials. Okay. Thank you see.
I am so as I said the outside of the call. Please keep in mind those three proof points branded sales growth portfolio and supply chain optimization to drive margin expansion.
And our team investments.
So starting with sales growth in the fourth quarter, our topline momentum continued as consumer shifted the differentiated on trend brands like Dave's killer bread.
Canyon Bay counts and nature's own perfectly crafted.
According to IRI. These three brands together experienced strong double digit growth in the fourth quarter compared to the fresh packaged breads category, which was only up 30 basis points.
The the integration of Canyon Bake House has gone exceedingly well.
Not only to canyon growth from the numbers.
Three gluten free bread brand in the country, all the way to number one.
We also exceeded both our sales targets and earnings contribution goals for the year Jane has got to creative and entrepreneurial team based up here in Colorado and I do want to thank them for all their hard work and for over delivering in 2019.
Dk be just continues to be a true.
Remarkable growth story.
We acquired the kv just over four years ago.
And since then it's grown to become our second largest Brian with retail sales of approximately $581 million.
So just think about that for a second that's more than half of nature's own at retail in Arizona was introduced over 40 years ago.
And it's almost as much as all of our white bread brands combined.
And the best News is we still have plenty of room to grow.
In certain underdeveloped geographies and with additional customers, who either don't carry de Kb today.
Or or who are not currently within our current DSD footprint.
Furthermore, household penetration of.
Panic breads is still under index relative to other organic products and that presents additional opportunity.
The brand loyalty, we've seen from consumers. We believe the de Kb can also play in other segments of the bake foods category and in fact, we've already proven that with the success with the success of our de Kb breakfast products and we'll continue.
Due to bring innovative idea as to our passionate dk be consumers going forward.
To support Dk be stronger Ambrose and growth and as part of our supply chain optimization strategy.
In January we announced the conversion of our Lynchburg, Virginia bakery to organic production.
We've got a very capable team at the Lynchburg bakery and they're really.
Really excited about the new growth mission.
Converting lynchburg will enable us to serve east coast markets with fresher product.
Lower costs.
And we expect that converted facility to be operational in the fall of this year.
In addition to de Kb in Canyon, we saw good share gains from both nature's own perfectly crafted and wonder.
And we're excited about.
Plans for tasty cake in this is fresh lease as we saw the business began to stabilize in the back half of the year at even even show some modest growth in the fourth quarter.
So as you can tell we are seeing solid results in the branded portfolio and given that this growth is being driven by leading brands and segments benefiting from powerful consumer trends, we're confident the.
It is well positioned for continued growth.
Turning now to the second proof point margin expansion.
In the fourth quarter I am I am pleased to report adjusted EBITDA margin expansion for the first time and eight quarters.
We're encouraged by improved price realizations better control sale and stabilization.
And our cake and food service businesses.
And yet we still have a lot to do to reach our goals.
Now primarily we're concentrating our efforts on the three areas of focus I mentioned to you last quarter.
Execution against these is how we intend to achieve consistent margin expansion overtime.
The first area of focus is portfolio and supply chain.
Optimization.
Last quarter I am I mentioned, the aggressive review, we had underway to shift the portfolio to a more margin accretive growth profile.
To streamline our supply chain to support that optimize portfolio.
And to reduce complexity in our operations.
Just last week, we finished up this review which includes the.
Element of a more holistic customer and proud product profitability tool and with this tool we're able to take a much more informed view of product economics and cost to serve.
Coming out of the review, we now have actionable insights and a formulaic specific plans to among other things improve certain direct input cost consolidate our distribution.
Improved utilization for lower volume products and prioritize improvement efforts at underperforming bakeries.
The work we've done to date gives us a high degree of confidence the initial savings from these projects can be realized this year.
And as a result, we've incorporated them into our 2020 guidance range.
And we'll be investing outside.
Resources to support timely delivery of results from the various initiatives.
We expect most of the benefits to begin accruing in the second half of the year and we've included 10 to 20 million of benefit for 2020 in our guidance.
And as we begin to execute against the projects and the amount and timing of additional savings actions come into clear focus.
We'll update you accordingly.
The bakery improvements.
Work will be critical to capturing savings and improving margins.
While the tight labor market has affected the efficiency of virtually all of our plants. The impact has been particularly acute at six flags and those will be our initial areas of intense focus.
As I mentioned, we are bringing outside resources to help us and I think thats I think thats, particularly critical in the areas of operations improvement and accountability, we're making this investment in our team to give them additional support and to increase the devalue.
Turning to our second area of focus reinvigorating and investing in our cake business.
Now.
Here, we are doing several critical things from both the sales and operation standpoint.
In January we conducted an intensive workshop to develop a comprehensive and detailed improvement plan for our Navy yard bakery.
Which has been experiencing lower efficiencies and high scrap rates.
The team now has a clear course of specific actions.
Focused on improving processes standards and operational discipline.
We also expect to realize higher efficiencies with significant automation investments, we're making it the bakery this year.
From an overall sales standpoint for cake.
We're focused on strategic volume growth to drive cost absorption reduce complexity through skew.
Finalization.
Additional distribution opportunities and innovation.
An underlying all of these efforts is the reinforcement of a culture of excellence that delivers consistently high quality service and incremental innovation.
Our kids business is important to us and it is a key contributor our to our bottom line.
Providing focus and setting clear.
Ladies.
We intend to accelerate it towards this potential and drive meaningful earnings growth.
And finally, our third focus area stabilizing and growing our foodservice business.
At nearly 1 billion an annual sales our foodservice business enables operational scale and is a key source of cash flow to flowers.
To grow profitability.
Really the team is taking advantage of our product profitability tool to make more informed decisions around pricing and which product lines to grow.
There are also focused on winning new business and increasing customer engagement to drive growth going forward.
And that brings us to our final proofpoint team investments.
As I mentioned earlier, we are.
Making additional investments in the team and doing so accomplishes several key goals.
Improve standards and processes higher levels of operational discipline more structured approach is to improve efficiencies and greater see devalue.
The teams excited to receive these investments and they stand ready to tackle the challenges ahead.
And finally, we.
We have made further revisions to our incentive structure, which was quite successful on many fronts and 29 team and I believe the adjustments to our 20 in 2020 incentives.
Well do even more to drive to kind of effort and activity necessary to propel us towards our goals.
So to close out we enter 2020 on the right trajectory.
Demonstrate demonstrating clear progress against our dual imperatives of sales growth and margin expansion.
Powerful consumer trends are benefiting the top line. Despite some softness in the broader category our margins showed some improvement in the fourth quarter.
And we have have identified projects that can drive meaningful savings and operational improvements going forward.
And supporting all of that is a talented and dedicated team that has a clear understanding of our strategic priorities and is focused on executing against them.
And so with that Sheryl will open the line for questions.
Thank you we will now begin the question and answer question.
I'd like to ask a question. Please press Star then one on your touched.
Phone if you're using your speakerphone. Please pick up your handset first before pressing numbers once again, if you'd like to ask a question. Please press Star then one.
Your touchtone phone.
Our first question comes from Rob Dickerson from Jefferies. Your line is now open.
Great. Thank you so.
Good morning, everyone.
I guess.
Kind of just main general question is just around kind of the internal studied and portfolio optimization timing.
So the three pillars kind of vis-a-vis what you think there might be some incremental expense this year because.
Kind of what I'm hearing.
Is we've done a lot of work.
Hopefully at all sounds yeah. It's that's off at all obviously very positive and there's an outlook for flowers potentially over the next few years, because you have to improve price mix and optimize your your.
Plant network, what have you is ball take some time.
If we go back to just project Centennial and the road map that was kind of laid out you know are thinking in 17 18, the night and beyond are now in 20 so.
Based on what you're saying is.
Well, we're now in this beyond phase we have out.
Why is the go forward what all this might mean for the next few years and the first year, which is 20.
There are going to be benefits, but there might be a few offsets just in terms of investment for those benefits.
Then we'll tell you later.
What those benefits might mean to kind of a revisited March now walk if.
Actually in 21 and 22.
Yet.
Okay, well first of all Rob welcome banks could have you back in the in coverage.
I see back that you could.
So yes, we did just finish out the diagnostic last week and so what we've laid out today is the initial savings that we feel highly confident in for 2020.
I mean, clearly indicated that theres more to come on that but until we were fine the numbers and it's even even more than the numbers themselves. It's really the timing of achievement of those numbers until on until we have that refined I'm just not prepared to share that today. So we will update you guys as we go forward.
Frankly should have all that buttoned up for you on our first quarter.
Recall, but the 10 to 20 million represents what we're highly confident in for this year.
To achieve and you're right.
There are as part of this some short term medium term and long term components to it the the actual supply chain optimization piece.
When you start thinking about bakery optums.
Optimization is the most complex part of this.
And that that's the that's the longer term piece.
You got to take you got to take to take into account.
The makeup of your portfolio.
What if anything you may or not may or may not planned exit and how that how that affects the bakery network.
It's a.
Pretty complicated thing given all the reciprocal baking that that we do.
However on the optimization front there are some near in opportunities.
With regard to the distribution network.
Those are some things that we can we can take care of fairly fairly quickly on if you recall back to the project Centennial days one of the things.
We did in centennial with centralized a lot of functions and one of the things that used to be decentralize was the procurement of depots.
Those were typically done by each individual bakery kind of on their on their own account, we've now centralized that but some of the some of the legacy network issues that were created by.
Hi, those independent action still remain and those are the things that we can take care of in the near term with regard to investment.
We've talked a lot about with regard to centennial the savings that were captured.
The investments that were made back into the business in the form of innovation teams marketing teams.
Business units that that kind of thing and then obviously the an inflationary pressures that dug into some of those savings with regard to this project. What I can tell you is theres much less investment back into the business.
Net of the gross savings if that makes sense.
We have all of our capability stood up for the most part there'll be a.
Little bit of it but theres much less required.
To achieve the savings targets and the investment that we're making in our outside resources for this project are much lower than what we what we experienced with centennial. So hopefully that kind of covered most of your your thoughts there yeah, I know thats created very comprehensive and it makes complete sense.
So just looking forward.
The update later this year so thank you very much.
Welcome.
Our next question comes from.
Ryan Hollins from David Singh. Your line is now open.
Yeah. Thanks, good morning, everyone.
First question.
Okay.
Pricing, obviously pretty steady throughout the year price mix.
Tailwinds volume was a little bit soft in Q4.
And you know we look at the scanner data seeing some increased promotional intensity around the fresh bread category. So I guess.
Two part question first.
And forgive me if you.
This and I missed it during your prepared remarks, but the volume down in Q4 is that attributable to something strategic on your end skew rationalization et cetera or.
Or maybe is that attributable attributable to some competitive activity in the market and then the second part would be what are you seeing in the.
Market here, especially as you noted in your presentation that the ingredient costs were down in Q4.
Sure. So yes, we did have some softer volumes in the traditional low volumes in Q4, primarily.
To directly answer your question, whether it was kind of market forces Ross, we promoted a lot less in Q4.
And so we did see some volume slippage from that.
But overall looking at the year in totality, we were actually quite pleased with the with the trade that we made between lower promotions and.
And volume reductions on the year and balance.
As far as competitive activity over all.
It's pretty consistent.
Q4, this year over Q4 last year.
But there are some markets and even.
Some specific specific retailers, where competitive activity has been a little bit higher.
Okay, and so as we roll that forward obviously the year was good Q4, the volume a little bit softer.
As you noted, but you held your pricing promotions, Dan do you think that that's a are you comfortable that that dances sustainable given what you're seeing in the market there or or do you expect some leveling off either on the competitive side or that you might have to give some back.
Well, what I would say to that.
As we take a market by market look and I think we've said in prior quarters, we have a new trade promotion management tool here, there's been quite helpful to us and helping us be more targeted and smarter around promotions in the return we get all for those promotions. So obviously a week, we monitor the competitive activity market by market.
And we take action, where where we see where we see fit market by market.
Okay Fair enough and then just curious as we.
Yes, Sir to look forward I think one of the really interesting opportunities for you for the business here some of the.
The white space opportunities.
These and some adjacent categories I know that we've talked about that before any sense, you know thinking about breakfast and some some other occasions, maybe in store bakery et cetera, any sense as to or any update as to kind of progress against those initiatives and how you kind of think about getting bigger exploring those opportunities.
Ladies and in a more active way going forward.
Yeah, absolutely I mean, I think I think one is internal innovation right. So we moved into the breakfast space would dk be that's been quite successful and we will continue to innovate behind Asian as we said, it's it's extremely important, particularly if you want to think about the overall softness in the traditional low.
Even more important than ever that we both innovate internally as we did when nature's own perfectly crafted and through M&A as we've done with Teekay B and canyon, because that's kind of where the markets growing I certainly do see opportunities as I said my prepared remarks.
For frankly, both of those brands dk be and canyon to kind of.
Play outside of their traditional space and we are actively looking opportunities there and then obviously as as we always have done.
We look for M&A opportunities that can fill those gaps as well.
Thank you that's helpful covered last one for me I'm, just looking thinking about the the.
Gross margin and the overall margin construct in 2020. So obviously you have some plans in place and some some improved manufacturing efficiencies et cetera that are baked in there it looks like they'll drive some margin expansion, but just so I understand ingredient costs how do.
We expect that to trend over the course of 2020 and then obviously so the other headwind is on the labor front.
Which has been in place with you guys for little bit or while freight has been there is that we do we expect that to be more those components to be more or less steady or any relief. There. If you could just help us understand that and.
I'll pass it on thank you.
Sure. So I'll take the labor and freight piece of that and outlet Steve Cup comment on the commodities front. So from a labor standpoint, I mean, you saw we saw some continued elevated labor costs in the fourth quarter as we as we had through through 2019, yes. Those those same issue still persist.
Labor market remains very tight.
Turnover is an issue thus affecting efficiencies of the bakeries now as I mentioned last quarter. We do have a number of things underway that we're trying to improve quality of life and the bakeries.
Provide extra extra days off consecutive days off those kinds of things and we are beginning to see that turnover start to come down.
We haven't yet quite seen that read through from a cost standpoint, yet, but it's also is also still quite early in training and that sort of thing do do take a little bit of time to push through and then as you mentioned, even as part of your question the supply chain optimization piece should help relieve some of that cost going forward as well we have.
Seen the on the transportation market level off its still elevated but is not increasing the rate that we saw over the last year and a half or so.
Steve you want to comment on the commodity space sure. So when you look overall input cost.
Brian we're pretty much inline with our stated strategy of.
Covering six to kind of nine month timeframe, we still have some open coverage in the back half to be quite honest. So from that perspective, you know in our forecast.
We have some incremental improvement in overall input cost is nothing material I mean is very low single digit.
Improvements year over year, but again.
Thats very dependent on how we are able to come in and finish up our coverage in the back half of the year and we have seen a little lower run and some of the commodities and over the past several months. So we're we're watching that and trying to make sure we mitigate that where we can.
Very helpful. Thanks, again, but thought gentlemen.
Thank you.
Our next question comes from Mitch Pinheiro from alternative and your line is now open.
Hi, good morning.
Hi, guys, if I I just from the call late but.
Had a couple of questions.
Did you have you discussed.
When I'm looking at your bread share.
For the quarter dropped.
Into the 16.5% any any comments surrounding that.
Well, our total fresh packaged breads, we were we were up slightly.
In dollar share according to IRI.
Okay, I guess it dropped sequentially.
Actually sequentially, yet so we talked a little bit about maybe you missed it there was some softness in the traditional low segment in the fourth quarter that that likely accounts for that and it was offset by the growth of Dave's and canyon and nature's own perfectly crafted which are continued to do well.
And then.
Well when I'm also looking at the 2020 guidance the low end and if you adjust for the extra week, it's it theres not a lot of growth there.
Is there is there what are the factors affecting the low end of your range.
So you're looking into the low end of the.
Gains from the topline perspective, obviously, the the extra week adds about one and a half pursuant to the top line is traditionally a lower softer volume week from the overall sales perspective.
With regard to the rest of the business.
On the low and we're looking at nominal volume gross.
And we'll.
Up and get to the upper the range I think rasmus that earlier, new volume volume and mix or big contributors to the upper end, we continue to see nice gross.
In our recently acquired brands and they held really drive a nice mix improvement.
So from that perspective on the top line.
It was going to be.
Critical that we continues.
To see good growth from those brands with regard to Mark on the on the earnings in the margin perspective, again that we typically add somewhere around a.
A pity maybe opinion half the overall overall earnings again, it's a sulfur week when you look at.
The coverage there.
So again.
That's the big driver on on the low in the range the upper into range.
I'll talk a lot about our optimization efforts and hitting that tend to 20 million dollar range, we've put out which is primarily back half driven.
So it's going to be critical that no that we deliver all those.
Those items and projects for us to be able to hit in the upper into the range.
Okay.
Helpful and then.
Last question.
What are your.
Plans this year I'm on the food service side.
Yes, our particular, but is there any.
You are struggling a little bit there based on factors the inferior east issues, but.
What's your outlook for foodservice.
A bit better in 2020, Mitch I mean, we're going to lap all of that we'll lap the last of it I believe in the first quarter. This year. There is a little bit left just from a comparison standpoint due to.
The east issue, so we'll be able to stop talking about that.
But.
No. Good good plans for growth in foodservice as I said in the prepared remarks. It is an important piece of our business. It's a billion dollar business. It's a very important contributor and what the teams focused on now is one using the new product profitability tool that we have where we can see.
More true unit economics and cost to serve in case, you Miss that commentary match that really helps us be smarter about the types of business. We take on but they are there are focused on both winning new business and frankly, winning back some of the loss business as well and and we're actually going to see some of that come on come back on and the first quarter.
Which is encouraged as encouraging as we stabilize and then grow grow foodservice as we've said.
Okay.
Thank you for the questions sure. Thanks much.
Our next question comes from Dell Shapell from Suntrust. Your line is now open.
Thanks, Good morning.
Hey, can you talk a little bit more I guess, both about canyon and dk be and just kind of the the distribution opportunities with Canyon. I guess this is the first kind of spring, where you where you have full ownership and can kind of plan a little bit better. So trying to understand does that happen I mean these.
See distribution gains in the spring or is it with your DSD network more kind of intermittent throughout the year and it is the growth coming more from the fact out part of the business or are you still seeing some growth in frozen.
Great Great question, Let me, let me answer the first part of it last what we saw in 2019 was was growth in both I mean, you would certainly expect.
Out on the state fresh side as we initiated distribution there, but we're still seeing substantial growth.
On the on the frozen side, which is which is really encouraging.
As matter of fact, it the frozen piece actually outperformed our expectations the stay fresh piece slightly underperformed.
Our expectations, which I think I've said in.
The passage I believe thats largely due to consumer awareness about gluten free on the on the bread shelf.
Gluten free customers are accustomed to to shopping shopping for breads and the freezer case. So that's on us to increase that consumer awareness, which were which we're doing no. We do expect to continue to gain distribution.
And with thought with Canyon and one of the things it's really nice to see is even as we're increasing distribution. We're also seeing increased velocities as well so it's really nice to see both.
And then with the Kb, we still have a ton of opportunity to grow that both in geographies and with retailers that that may not carry it today. So we're really excited about.
The growth opportunities for both of those brands.
And just kind of follow up on Dk B. I mean, if your let's say you have.
20 feet of shelf space and a are you taking dk be in expanding to 24 per show Peter shelf space are using it to replace more wide or nature's own skews.
How does it it look as you as you get that expanded the demand course, it'll it'll differ by retailer, but we always look to expand our total footprint as far as shelf space guys.
But you're seeing that kind of across the board that they're giving incremental space for the Kb Yep.
Okay and last one from me just.
I don't I guess I don't fully understand how how you offset kind of the higher labor costs and you said, you're bringing in people to look at that and maybe give me a little more color on on how you offset that other than than just paying a more [laughter].
No.
Yes, it's a fair question, but what I want you to.
I think about it necessarily in terms of just pure labor costs being elevated what it really is lower efficiencies and the lower efficiencies are generated by the higher turnover that we're seeing from the tight labor market.
Now some of the things that we're doing to mitigate that will increase.
Labour costs. So for example to increase quality of life in the bakeries to give consecutive days all sometimes we have to add an additional shift okay. Well. That's that's additional labor costs, but if we can do that and reduce the significant amount of overtime that we're experiencing.
These turnover and increase efficiency and gain a net benefit from that that it's Dennis.
It's worth doing right. So we are being careful with it because you don't want to just go spray for shifts all over the country and 46 bakeries before its proven out but we're aware that as I said, we are seeing the turnover start to come down and with both that and then some of the efforts were putting into some of our underperforming bakeries.
Let say the focused efforts that were putting there I do expect efficiencies to go up this year.
So it's got more of the increasing the efficiency as opposed to thinking about it in terms of pure like wage inflation.
Got it alright, thanks, so much the color sure.
Our next question comes from.
Yeah Alway from Deutsche Bank. Your line is now open.
Yes, hi, good morning, Thank you.
So I guess so first question was I don't I didn't hear you say anything about.
Pricing I might've missed that.
Just wanted to get more color on how you're thinking about pricing as we look.
Into 2020, because it feels like with.
Radian cost.
Potentially missionary and I think your price gap versus private label might be a little bit high.
So just curious about how you're thinking my pricing there.
Well, we took some pricing last year, we took some pricing last year that that is.
If this year, but we don't typically comment about outlook for pricing on what I can say is yeah. We monitor as I said earlier, we monitor everything market by market and take action as we deem necessary.
Okay. Okay, and then just I guess, a clarifying question around the $10 million to $20 million.
Thank God.
Primarily or entirely.
Procurement savings and what's kind of like how might you either fall short or.
You know is is there upside to that as we think about the back half.
Right, it's not in any one area. The 10 to 20 is spread over.
We have five different initiatives that were working working on under the the halo of portfolio and supply chain optimization.
And what I said was the 10 to 20 million is a number that we're very confident in to achieve this year. In 2020. However, we just completed the diagnostic work just last week actually.
And while I have numbers on my desk I want to make sure that their refined to not we fully understand the timing to achieve those numbers before I share them publicly. So we'll update you probably in may as that comes into clear focus.
And just to clarify that they're all right.
Just to clarify.
Commented theirs.
Incremental.
Very little tailwind on the input costs on low single digit that's separate than the $10 million to $20 million buckets. So the 10 to 20 million is an incremental number.
Okay, but your guidance includes this $10 million to $20 million correct, yes. It does.
Okay, Okay, and then just.
Question is really around suites.
You mentioned the stabilization.
In 2020, as we look good.
Data it it doesn't seem like anything to improve so can you just talk about some of your initiatives within speed.
Sure. So so with regard to cake to two.
To that one is one is operational and that's primarily centered on our navy yard bakery up in Philadelphia.
That bakery has been underperforming.
Pretty low efficiencies they've been running some high scrap and so we have we have a team up there actually there there right now.
Working on the plan that we put in place to to improve.
The efficiencies at that at that bakery so.
Part of it is operational but then part of its on the sales and distribution side, we actually did see some modest growth in the fourth quarter from cake, which is really good. They went through some ski route and things last year cleaning up some some things.
And we did see a little bit of gross into in the latter part of the year, but we have.
We have both new innovation coming on for cake and a big piece of it frankly is.
Gaps and distribution.
We've actually assigned an experienced executive here to focus solely on that.
To improve improved distribution of both tasty cake emphasis freshly so it's both on the sales and on the operation side.
Slide that we that we seek improvement this year.
Alright, Thank you very much sure.
Our next question comes from Ryan Pao from consumer Edge. Your line is now open.
Good morning.
Would you hope to take a step back and talk about the health of the core categories.
You operate and hope to get some clarity on what might be driving the softer trends that we're seeing in scanner at a company awful and within the fresh bread category overall.
And then with respect to the SKU rationalization.
But you talked about it seems like from.
Your presentation that that might pipe.
Generally be within the cake business is there anything.
A wider level.
Might be in can consideration pool.
For SKU rationalization and would that be.
It's sort of a material impact on the topline.
For 2020.
So health of the core category first I mean, we'll we'll look at the same data and we've seen the softness in the in the traditional low segments and as I've said, that's that's why it's so critical for us to continue to cultivate.
Gross brands that are on trend.
Consumers current needs like daves.
And Canyon.
Internally, we've we've introduced nature's own perfectly crafted which has performed very very well. This year all of those are differentiated from the white and soft right close that we've traditionally seen on the bread aisle, yes, we look into as we look into this year and sort of how the year started you thought you probably seeing the category.
Little bit soft so far this year as well in the traditional segment and a lot of that's got a lot of comp issues that was storms last year and if you'll recall there were some double.
From a payments in January.
Anticipation of a possible government shutdown. So there's some noise in there that.
That.
I wouldn't call a trend.
At this point, but but it does highlight once again the need for us to continue to both internally and through M&A.
Grow brands that.
Directly consumers' needs as far as SKU rationalization goes as part of portfolio and supply chain optimization. Obviously, we're we're taking a close look at that I've talked a lot about.
Removing complexity from our operations and to the extent, we have slow moving skews.
We need to get them out of the system. If you think about it from a retailer standpoint, there cleaning up their their shelves too which is another reason why it's very important to have number one number two brands on the shelf light we do were quite fortunate because we're able to.
Directly partner with retailers to meet their needs. So.
As we go through as we go through the year, we're constantly evaluating the portfolio will make moves where we where we see fit but all that's incorporated into the into the guidance.
Great. Thank you that that's helpful and then in terms of.
Tack on M&A are you going to be thinking about doing anything sort of in the near term or the priority mostly going to be on the profitability of your business then month.
You go through some of these initiatives and you take a deeper look again.
The answer questions both.
You can't always control the timing of M&A.
M&A is often a very important important piece of our growth story and it will continue to be going forward. So we'll take those opportunities opportunistically and we're being and we're being proactive but by the same token we have to take care of the base business and that remains a priority as well see you really have to kind of yet operate on both fronts.
Great. Thank you Thats it for me.
We have no further questions at this time ill now turn the call back over to Rials Macmall Lane.
Okay, well. Thank you all very much for your time today and for your interest in flowers and and we look forward to speaking with you again on our first call recall in May Thank you very much.
And thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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