Q4 2023 Flowers Foods Inc Earnings Call - Q&A

February 9, 2024

Okay.

Speaker Change: Good morning, and thank you for standing by and welcome to the flowers foods fourth quarter and full year 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 opening speaker today J T Rex Executive Vice President of Finance and Investor Relations. Please go ahead.

Operator: Good morning, and thank you for standing by. Welcome to the Flowers Foods fourth quarter and full year 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 opening speaker today, J.T. Rick, Executive Vice President of Finance and Investor Relations. Please go ahead, sir.

Speaker Change: Sir.

J.T. Rick: Thank you, Norma, and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation that we 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 FCC file. We also provide non-GAAP financial measures for which disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website.

Speaker Change: Thank you Norma and good morning, I hope everyone had the opportunity to review our earnings release listened to our prepared remarks and view the slide presentation that we're all posted yesterday evening at our Investor Relations website.

Speaker Change: After today's Q&A session. We will also post an audio replay of this call.

Speaker Change: Please note that in this Q&A session. We may make forward looking statements about the company's performance.

Speaker Change: Although we believe these statements to be reasonable they are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker Change: In addition to what you hear in these remarks important factors relating to flowers foods' business are fully detailed in our SEC filings.

J.T. Rick: Joining me today are Riles McMullin, Chairman and CEO, and Steve Kinsey, our CFO. Riles, I'll turn it over to you. Okay. Thanks, JT. Good morning, everybody.

Speaker Change: Joining me today are hours like Boeing Chairman, and CEO and Steve Kinsey, Our CFO Ross I'll turn it over to you.

Steve Kinsey: Okay. Thanks, J T. Good morning, everybody.

Riles McMullin: Thanks for joining us on the fourth quarter call. We're proud of our team's accomplishments in the challenging consumer environment we're facing. Our brands performed very well, gaining unit and dollar share for the first time since the first quarter of 2022. Dave's Killer Bread was a particular standout, reaching $1 billion in retail sales and growing unit volume 10% while the overall bread category declined 2.6%.

Ross: Thanks for joining the fourth quarter call.

Ross: We're proud of our teams.

Ross: Complishments.

Ross: In the challenging consumer environment, we're facing.

Ross: Our brands performed very well gaining unit and dollar share for the first time since the first quarter of 2022.

Ross: Dave's killer bread was a particular standout reaching $1 billion in retail sales and growing unit volume, 10%, while the overall bread category declined two 6%.

Riles McMullin: We're excited about the multitude of future growth prospects for Dave's and our other brands, and we are investing in marketing and innovation to capitalize on that potential. Our 2024 forecast calls for continued solid results despite these category headwinds. We expect these results to be first-half weighted, benefiting from wraparound pricing and branded retail, new pricing and selected food service accounts, and moderating commodity costs. Our second half forecast incorporates more caution due to the uncertain consumer and promotional environment.

Ross: We're excited about the multitude of future growth prospects for Dave's and our other brands and we are investing in marketing and innovation to capitalize on that potential.

Ross: Our 2020 forecast calls for continued solid results. Despite these category headwinds. We expect these results to be first half weighted benefiting from wrap around pricing and branded retail.

Ross: Pricing in selected foodservice accounts and moderating commodity cost or.

Ross: Our second half forecast incorporates more caution due to the uncertain consumer and promotional environment.

Ross: We remain focused on the significant longer term opportunities. We see ahead of us filling in white space in geographic and product adjacencies, while leveraging innovation to push into new categories.

Riles McMullin: We remain focused on the significant longer-term opportunities we see ahead of us, filling in white space and geographic and product adjacencies while leveraging innovation to push into a new category. I've never been more confident in our long-term potential, and I look forward to building on our strong base throughout 2024. So with that, Norma, we can open it up for questions. Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again.

Ross: I've never been more confident in our long term potential and I look forward to building on our strong base throughout 2024.

Speaker Change: So with that normal we can open it up for questions.

Speaker Change: Thank you as a reminder to ask.

Speaker Change: A question you will need to press star one on your telephone to withdraw your question. Please press star one again.

Speaker Change: Please standby, while we compile the Q&A roster one woman for first question.

Operator: Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Robert Dickerson with Jeffreys. Your line is now open. Great. Thanks so much.

Speaker Change: Our first question comes from the line of Robert Dickerson with Jefferies. Your line is now open.

Rob Dickerson: Great. Thanks, so much good morning, everyone.

Rob Dickerson: Okay.

Rob Dickerson: Hey, guys.

Rob Dickerson: Hey, guys, just a couple quick questions. I guess kind of just the first piece. Maybe this is more for Steve. Yeah, as we think through the year, kind of, you know, especially kind of first half, second half, how are you feeling about gross margin progression? Go back to your inputs, and all.

Rob Dickerson: Yes, so couple of quick questions.

Rob Dickerson: Just kind of just first piece.

Speaker Change: Maybe this is more for Steve.

Steve Kinsey: As we think through the year.

Steve Kinsey: Especially kind of first half second half.

Steve Kinsey: How are you feeling about gross margin progression just given some of the pullback in your inputs.

Steve Kinsey: But then also may be some ongoing kind of promotional reinvestment.

Speaker Change: Potential thanks.

Riles McMullin: Yeah, Rob, let me start, and Steve can certainly fill in. So from a gross margin standpoint, you know, we expect better results. We saw a nice gross margin increase in the fourth quarter, and we'd expect that to continue. There are a couple of other factors, though, to think about impacting bottom line performance. One, we are investing in the business, so whether that's ERP or our marketing investments, etc., behind Dave's and Nature's Own and the new bar launches and everything, we are spending more marketing dollars investing in the business.

Speaker Change: Yeah, Rob Let me, let me start and Steve can certainly fill in so from a gross margin standpoint.

Speaker Change: We expect that.

Speaker Change: Other results.

We saw a nice gross margin increase in the fourth quarter and we'd expect that to continue a couple of other factors, though to think about impacting bottom line performance one.

Speaker Change: We are investing in the business, so whether that's ERP or our marketing investments et cetera.

Speaker Change: Behind Dave's and nature's own and the new bar launches and everything we are spending more marketing dollars investing in the business. So that will that will somewhat pressure margins from an EBITDA bottomline standpoint.

Riles McMullin: That will somewhat pressure margins from an even dollar bottom line standpoint, but obviously, those are intended to fuel future growth in our investments we're happy to make. But we would expect some improvement in gross margins. But one other thing to note, somewhat offsetting that, you know, we talked in the prepared remarks about stranded overhead from the strategic exits. You know, that does, you know, particularly from a labor standpoint, affect those margins somewhat. However, you know, the exciting thing about that for us is the opportunity we have ahead to refill that capacity with higher margin volume, which, you know, was the intention all along. Now, obviously, that won't come all at once. It'll take a little bit of patience, but we've got a really significant opportunity ahead of us to replace that extremely low margin business that we've exited with a much more profitable business. Steve, do you want to add anything?

Speaker Change: But obviously those were intended to fuel future growth in our investments, we're happy to make but we would expect some some improvement in gross margin.

Speaker Change: But one other thing to note somewhat offsetting that we.

Speaker Change: We talked in the prepared remarks about stranded overhead from the strategic exits.

Speaker Change: That does particularly from a labor standpoint.

Speaker Change: Affect those those margins somewhat.

Speaker Change: However, the.

Speaker Change: The exciting thing about that for US is the opportunity. We have ahead to refill that capacity with higher margin volume, which was the intention all along now.

Speaker Change: Obviously that won't come all at once it will take a little bit of patience.

Speaker Change: But we got a we've got a really significant opportunity ahead of us to refill that extreme low margin business that we've exited with with much more profitable business, Steve do you want to yes I.

Steve Kinsey: Sure, yeah. I mean, as Raul commented and as you saw in the script, too, we are being a little more cautious with the consumer in the back half. So when you think about overall cadence, it's currently kind of in the guidance range, and we do see stronger performance in the first half.

Steve Kinsey: I mean as Rob commented as you saw in the script too.

Steve Kinsey: We are being a little more cautious on the consumer in the back half. So when you think about overall cadence currently.

Steve Kinsey: I think kind of in the guidance range, yes.

Steve Kinsey: We do see stronger performance in the first half a lot of that is Ralph that yield.

Steve Kinsey: A lot of that, as Ryle said, will be driven by some positive and negative factors, you know, specifically some of the, I'd say, commodity moderation pressure. If you think about last year, the first half was tougher than the second, so from an overall comp perspective, that will be driving some of the improvement in the first half. As we've seen things pull back somewhat, you know, we do expect the first half of 2024 to benefit more than the back half with regard to overall commodity prices. Okay, perfect. All right. And I guess just secondly, you know, I think, in hearing in the guide is, you know, the potential for ongoing volume declines, you know, clearly understand, You know, a little pressure consumer backdrop, clearly, pricing's going through. Dave's doing well, but I guess that's a little different. So I'm just curious, like, you know...

Steve Kinsey: It will be driven by some positive and negatives specifically to some of the.

Steve Kinsey: I'd say commodity moderation pressure, if you think about last year.

Steve Kinsey: The first half was tougher than the back so from an overall comp perspective.

Steve Kinsey: That will be driving some of the improvement in the first half.

Steve Kinsey: As we've seen things pull back somewhat.

Steve Kinsey: We do expect first half of 2024 to benefit more than the back half with regard to overall commodity inputs.

Speaker Change: Okay perfect.

Speaker Change: Alright, and then I guess just secondly.

Speaker Change: I think been hearing in the guide is.

Speaker Change: Is.

Speaker Change: Potential for ongoing volume declines.

Speaker Change: Clearly I understand.

Speaker Change: Little pressure consumer backdrop, clearly decent amount of pricing going through.

Speaker Change: Dave is doing well, but I guess, that's a little different so I'm just curious like.

Speaker Change: If we listened to a number of other companies that are all kind of going through some form of volume pressure. There is kind of this expectation so to speak that yeah as we get through the back half of 'twenty for the profitability should increase that volumes actually start to grow again.

Speaker Change: Partially just driven by lower base, an easier comp in the back half of 'twenty three so it sounds like you are being a little bit more cautious.

Rob Dickerson: If we listen to a number of other companies that are all kind of going through some form of volume pressure, there is kind of this expectation, so to speak, that as we get through the back half of 24, the probability should increase, you know, that volumes actually start to grow again, partially just driven by a lower base and easier comp in the back half of 24. So, I mean, it sounds like you're being a little bit, you know, more cautious, and maybe you're a bit more rational than others. So, you know, kind of the straight question is just, you know, kind of why not forecast a little bit more on the positive volume side as you get through the year. Or maybe that could play out; it's just you don't really know if it will, and that's probably a good thing.

It may be your.

A bit more rational than than others. So kind of the straight question is just kind of.

Speaker Change: Why not you do.

Speaker Change: <unk> forecast a little bit more.

Speaker Change: More on the positive volume side as you get through the year.

Speaker Change:

Speaker Change: Or maybe that could play out it just you don't really know if it does and thats probably realistic.

Speaker Change: Yes.

Speaker Change: It's a fair point.

Speaker Change: It's clearly obvious the category continues to be under pressure and with private label trade down.

Speaker Change: But if you look at our market share performance has been quite admirable.

Speaker Change: We've been able to do even that even in this environment now certainly we understand that that market share performance in a declining category doesn't necessarily translate into the bottom line profitability, but it does show the investments that we're making in our brands enable.

Speaker Change: To enable us to continue relative strong performance.

Speaker Change: In a pressured category now as to the as to the volume outlook for the year.

Speaker Change: I'll disagree with you.

Speaker Change: Lee a possibility as the market adjusts to sort of post pandemic reality that the category find its equilibrium, which is what I think it is trying to do.

Riles McMullin: Yeah, look, it's a fair point. And you know, it's clearly obvious that the category continues to be under pressure and with private label trade down. But you know, our market share performance has been quite admirable, you know, what we've been able to do, you know, even in this environment. Now, certainly, we understand that, you know, that market share performance of a declining category doesn't necessarily translate into bottom line profitability. But it does show, you know, the investments that we're making in our brands enable us to continue, you know, relatively strong performance in a pressured category. Now, you know, as to the volume outlook for the year, I don't disagree with you. I mean, there's certainly a possibility as the market adjusts to, you know, sort of the post-pandemic reality that, you know, the category finds its equilibrium, which is what I think it's trying to do, and we could see, you know, more positive volume performance in the second half. But, But at the same time.

Speaker Change: We could see more positive volume performance in the second half but.

Speaker Change: But at the same time.

Speaker Change: Part of our reason for caution is the offset for the higher promotional environment could look like in that circumstance.

Speaker Change: Yes, the category in order to drive unit volume decides it needs to become more promotional.

Speaker Change: That could be an offset.

Speaker Change: The other thing that I would note, though is our volume performance continued to improve throughout 'twenty three and we finished the year with branded retail volume only down 30 basis points, which was a substantial improvement and overall volume improve we were down I think two four.

Speaker Change: In the fourth quarter as opposed to $4. One if you look back to the third quarter. So the sequence has been has been good and so thats certainly a reason for optimism, which I think we're capturing at the upper end of guidance, but again, just given the uncertainty in the relative weakness of the category. We thought caution was prudent at least at this point.

Speaker Change: Alright, and then pardon me for asking a third quickly just the California legal decision you had said the prepared remarks <unk>.

Speaker Change: Decision shouldnt be made any anytime sooner than March one.

Speaker Change: Could you just maybe just add a little color as to kind of what that decision could imply like if decision goes one way.

Riles McMullin: Part of our reason for caution is the offset of what a higher promotional environment could look like in that circumstance. I mean, if the category, in order to drive unit volume, decides it needs to become more promotional, then that could be an offset. The other thing that I would note, though, is that our volume performance continued to improve throughout 23. And we finished the year with branded retail volume only down 30 basis points, which was a substantial improvement, and overall volume improved. We were down, I think, 2.4 in the fourth quarter as opposed to 4.1 if you look back at the third quarter.

Speaker Change: Likely would incur.

Speaker Change: Period of damage or what have you got share or.

Speaker Change: Probably there is not some material impact I'm, just trying to understand kind of what that could mean relative to the current guide.

Speaker Change: Yes, so we have already announced what.

Speaker Change: What the settlement will be.

Speaker Change: In terms of cost to the company.

Speaker Change: I think probably the more the more relevant answer to your question is what happens post March 1st if the settlement is approved and what will happen if that.

It is the case is that we will then set about converting all of the distributors in California to an employee based model.

Speaker Change: That is at least out the gate likely to be somewhat dilutive to our results out in California.

Rob Dickerson: So the sequence has been good, and so that's certainly a reason for optimism, which I think we're capturing at the upper end of guidance. But again, just given the uncertainty and the relative weakness of the category, we thought caution was prudent, at least at this point. All right, and then pardon me for asking a third question quickly, just the California legal decision, you had said the prepared remark. The decision shouldn't be made any time sooner than March 1st.

Speaker Change: At least in the short term.

Speaker Change: Until we can get everybody trained up et cetera.

Speaker Change: Bring all employees on the good news there is though it will be a phased in approach Rob.

Speaker Change: So we have 12 months from the date of the settlement to to get that done. So we would expect and I think we said in the prepared remarks, probably first quarter of 'twenty five that conversion should be complete.

Speaker Change: Awesome alright, great. Thank you so much.

Speaker Change: Okay. Thanks, Rob. Thank you one moment for our next question. Please.

Speaker Change: Our next question comes from the line of Bill Chapell with <unk> Securities. Your line is now open.

William B. Chappell: Thanks, Good morning.

Riles McMullin: Yeah, could you maybe just add a little color as to kind of what that decision could imply? Like, you know, if the decision goes one way, we likely would incur some damage or what have you, not sure, you know, or, you know, probably there's not some material impact. Just trying to understand kind of what that could mean relative to the current guide. Yeah, so we've already, you know, announced what the settlement will be, in terms of cost to the company. I think probably the more relevant answer to your question is, you know, what happens post-March 1, if the settlement is approved, and what will happen, if that is the case, is that we will then set about, you know, converting all of the distributors in California to an employee-based model. You know, that is, at least out of the gate, likely to be somewhat dilutive to our results out in California, at least in the short term, you know, until we can get everybody trained up, etc., etc., you know, bring all the employees on board.

William B. Chappell: Good morning, Bill just.

William B. Chappell: A little bit more maybe commentary on the.

William B. Chappell: The foodservice the cake business kind of the thoughts there in particular kind of.

William B. Chappell: Yes.

William B. Chappell: What initiatives, we're looking at to kind of improve on the on the tasty cake side or or just to kick in general and kind of how you see the trends play out for there versus the core.

William B. Chappell: Yes.

William B. Chappell: So I think we've mentioned this a couple of times.

Speaker Change: On prior quarter calls, but good question I would like to discuss some more.

Speaker Change: So clearly pricing has been important.

Speaker Change: In both of those area all of those areas private label food service and the cake business and.

Speaker Change: And we've also as you know done some pretty significant SKU rationalization and strategic business exits primarily.

Speaker Change: In foodservice and cake, but also a little bit and in.

Speaker Change: In private label however.

Speaker Change: However, the profitability of all three of those businesses has improved markedly.

Speaker Change: So the strategy is working from that standpoint, and obviously there are offsets in other parts of the business.

Speaker Change: The.

Speaker Change: The soft variety and white bread area Bill as you know is the most susceptible to private label trade down. So obviously, that's a negative.

Speaker Change: And then offset by the Dk B performance in terms of unit volume, but frankly.

Speaker Change: Even <unk> profitability was down last year pretty significantly because we had substantially higher.

Speaker Change: Organic costs last year.

Speaker Change: Now the margins are still very attractive for daves.

Speaker Change: We don't disclose particular numbers, there, but still among the highest in the portfolio, but they were down roughly 500 basis points last year, just because of the.

Riles McMullin: The good news there is, though, it will be a phased in approach, Rob. So we have 12 months from the date of the settlement to get that done. So we'd expect, and I think we said in the prepared remarks, probably the first quarter of 25, that conversion should be. Yep, awesome. All right, great. Thank you so much.

Speaker Change: The increased organic wheat costs, which.

Speaker Change: This year will moderate somewhat so we will recapture some of that so really good progress on those parts of the business somewhat offset by category weakness in commodity cost and those effects on other parts of the business.

Speaker Change: Okay. Thanks, and then.

Speaker Change: A little bit on the commodity front I guess historically, you've just kind of said hey, we hedge six to nine months out I know, it's most of the same thing, but this time you are saying, hey, we're 70% locked on.

Rob Dickerson: Okay, thanks, Rob. Thank you. One moment for our next question, please. Our next question comes from the line of Bill Chappell with Chewist Securities. Your line is now open.

Speaker Change: On your input costs. So is there any change to how youre looking at things are we're just using percentages versus months.

William B. Chappell: Thanks, good morning. All right, Bill, just a little bit more maybe commentary on the food service, the cake business, kind of the thoughts there, in particular, kind of what initiatives we're looking at to kind of improve on the tasty cake side or, or just the cake in general, and kind of how you see the trends playing out for them versus the core. Yeah, so I think we've mentioned this a couple of times on prior quarter calls, but good question; I'd like to discuss it some more. So clearly, pricing has been important in both of those areas, all of those areas, private label food service, and the cake business. And we've also, as you know, done some pretty significant SKU rationalization and strategic business. It's primarily in food service and cake, but also a little bit in private label. However, the profitability of all three of those businesses has improved.

Speaker Change: No not really a buildup we continue to look at our strategy to be 6% roughly 12 months out.

Speaker Change: So probably.

Speaker Change: More of the longer term of that in some cases.

Speaker Change: But the reality is I think last year coming into the year, we were roughly 60%, 65% covered so we stay pretty steadfast to our overall strategy.

Speaker Change: We do we have added some things kind of to the toolkit. If you will try to manage the volatility.

Speaker Change: Trading there are better but note no changes to how we think about coverage and how how long were planted how long we're willing to go.

Speaker Change: Got it and actually one follow up.

Speaker Change: The DJ be bars.

Speaker Change: Is there and I'm sorry, if I'm if you already covered this but is there something you can yes you.

Speaker Change: Are you seeing repeat rates or something that gives you.

Speaker Change: Yes.

Speaker Change: We hear us.

Speaker Change: Category and I know <unk> has a great brand, but how you differentiate yourself or get incremental shelf space versus the 20. Other bars that are there and what gives you that confidence what you've seen over the past three four months in terms of as you expand this year.

Riles McMullin: So the strategy is working from that standpoint. Now, obviously, there are offsets and other parts of the business. The soft variety and white bread area, Bill, as you know, is the most susceptible to private label trade downs. Obviously, you know, that's a negative.

Speaker Change: Yes, so as we noted in the prepared remarks.

Speaker Change: Really pleased with the results in 'twenty, three and we've gotten a lot more stores than we had targeted.

Speaker Change: First of all it.

Speaker Change: It's a great product and we think thats, what differentiates us I mean, thats, what differentiates the low <unk> and the breakfast items, just the the superior quality, it's a baked bar.

Riles McMullin: And then, you know, offset by the DKB performance in terms of unit volume. But Frankly, you know, even DKB's profitability was down last year pretty significantly because we had substantially higher organic wheat costs last year. Now, the margins are still very attractive for Dave's. I know we don't disclose particular numbers there, but they are still among the highest in the portfolio.

Speaker Change: Great flavor and texture great.

Speaker Change: Nutritional panel on it a lot of the borrowers in that category or cold pressed. So we have even more of that that fresh baked flavor, which you can if you've tried them. You can you can certainly a test too but.

Riles McMullin: But they were down roughly 500 basis points last year just because of the increased organic wheat costs, which this year will moderate somewhat. So we'll recapture some of that. Really good progress on those parts of the business, somewhat offset by, you know, category weakness and commodity costs and those effects on other parts. Okay. No, thanks.

Speaker Change: But you are right about shelf space, but were only three skus on the shelf and so positioning is is really important.

Speaker Change: And what we're seeing where our positioning is strong kind of middle high level on the shelf, even with those three skus.

Speaker Change: Fanned out colors, we have are really drawing consumers to the brand whether their current dk be shoppers or they're new to the brand which is net incremental.

To the <unk> consumer base.

William B. Chappell: Amen. A little bit on the commodity front, I guess, historically, you've just kind of said, hey, we hedged six to nine months out. I know it's mostly the same thing.

Speaker Change: I do think it's going to help us tremendously as we bring in the three additional protein skus this year.

Speaker Change: Giving us more and more visibility on the shelf.

Speaker Change: As we said before those protein bars and test market are improving incremental to the first three skus. So we're kind of reaching a.

Steve Kinsey: But this time, you're saying, hey, we're 70% locked in on your input costs. So is there any change to how you're looking at things? Or are we just using percentages versus months? No, not really, Bill.

Speaker Change: A wider consumer base with that with that higher protein offering. So velocities are in line with the category. So we're all good there we can always do better and we will get better. We said many times, we're treating this as a startup business, we're learning a bit as we go to bill.

Steve Kinsey: We continue to look at our strategy to be six to roughly 12 months out. So probably, you know, more of the lower term of that in some cases. But the reality is, I think, last year, coming into the year, we were roughly 65% covered. So, you know, we stay pretty steadfast on our overall strategy. We do, we have added some things kind of to the toolkit, if you will, to try to manage the volatility, and to the training there better, but no changes to how we think about coverage and how long we're.., how long we're willing to. Got it. And no, and actually one follow-up on the DKB bars. Is there, and I'm sorry if you already covered this, but is there something you can, you know, you're seeing repeat rates or something that gives you that, because again, a little pushback we hear is that it's a crowded category. And I know DKB has a great brand, but how do you differentiate yourself or get incremental shelf space versus the 20 other bars that are there?

Speaker Change: But so far so good and then of course.

Speaker Change: Behind that we've got a nice innovation pipeline for daves coming with the snack bites in the back half and even more beyond that at 25%. So we're off to a good start we've got nice momentum the team's excited.

Speaker Change: <unk> and retailers alike are excited about it. So we're feeling really good about where we are so far it's early days, but we're in good shape.

Speaker Change: Great. Thanks, so much for the color.

Speaker Change: Thanks Bill.

Speaker Change: One moment for our next question please.

Speaker Change: Our next question comes from the line of Jim <unk> with Stephens. Your line is now open.

Jim: Hi, guys. Good morning, Thanks for taking our questions.

Jim: <unk>.

Jim: In your prepared remarks, you mentioned some uncertainty in 2024, obviously around the consumer and promotions.

Jim: We all get kind of a consumer piece of that but to double click on the promotion side is.

Jim: Is the concern that some of the larger competitors in the category.

Jim: Maybe revert to how they behaved in the past where they they really aggressively chase volume.

Or is it more that retailers are going to come to you guys.

Riles McMullin: And what gives you that confidence, what you've seen over the past three, four months in terms of as you expand this year? Yeah, so, as we noted in the prepared remarks, really pleased with the results in 23. We got a lot more stores than we had targeted. You know, first of all, it's a great product, and we think that's what differentiates us. I mean that's what differentiates the loaf items and the breakfast items. It's just the, you know, superior quality. It's a baked bar, great flavor and texture, great, you know, the nutritional panel on it.

Jim: Expecting price deflation and using promotion as a tool to achieve that.

Jim: Yes, Jim definitely the former.

Jim: We've seen this in our category before we haven't seen in a long time.

Jim: And so even though it is.

Speaker Change: We noted in our remarks, we even promoted a bit more in the fourth quarter, just because that was seasonality in our business not being a big.

Speaker Change: Dinner roll.

Speaker Change: The supplier.

Speaker Change: The fourth quarter can be a little bit volatile. So we promoted a bit more to to drive more unit volume got good effectiveness.

Speaker Change: Out of those promotions, but we also didn't spend nearly as much in trade to get it and.

Speaker Change: And maintained one of the highest average price points in the category.

Riles McMullin: A lot of the bars in that category are cold pressed, so we have more of that fresh baked flavor which you can, you know, if you've tried them, you can certainly attest to. But you are right about shelf space. I mean, we're only three SKUs on the shelf, and so positioning is really important, and what we're seeing where our positioning is strong, you know, kind of middle, you know, eye level on the shelf. Even with those three SKUs, the standout colors we have are really drawing consumers to the brand, whether they're current DKB shoppers or they're new to the brand, which is, you know, net incremental to the DKB consumer base.

Speaker Change: But yes, the caution is much more around.

Speaker Change: Other competitors in the space than it is pressure from retailers, which we really have not felt to date.

Speaker Change: Okay, great because it seems like.

Speaker Change: And we've talked about this in the past, but part of the challenge is you have this channel shift dynamic that's going on and from the branded retailers perspective over the branded food companies perspective, rather.

Speaker Change: If you're putting promo dollars into channel, but the consumer is in the wrong channel you are essentially just giving price away at least that's kind of the way we viewed it and so.

Speaker Change: Would we have.

Speaker Change: Have to wait until the consumer shifts back to traditional grocery before we see those promotional increases.

Riles McMullin: I do think it's going to help us tremendously as we bring in the three additional protein SKUs this year, giving us more visibility on the shelf, and, as we said before, those protein bars in the test market are proving to be incremental to the first three SKUs, so we're kind of reaching a wider consumer base with that higher protein offering. So you know velocities are in line with the category, so we're, you know, we're all good there.

Speaker Change: We put into place or is it something that even with the consumers still in kind of value oriented channels competitors might just put promo in the channel anyway, just to see what comes up on the other side.

Speaker Change: Yes.

Speaker Change: It could be it could be either I think thats I think thats, just going to need to be a wait and see and monitor the environment and react accordingly.

Speaker Change: Okay, Great and then maybe if I could sneak in one more in the breakdown for the for the 2024 sales Guide I know you guys mentioned you have some wrap around pricing benefit in the first half and some business exits that negatively impact the volume side.

William B. Chappell: We can always do better, and we will get better. We've said many times that we're treating this as a startup business, and we're learning a bit as we go to Bill, but so far, so good, and then, of course, behind that, we've got a nice innovation pipeline of four days coming with the snack bites in the back half and and and even more beyond that in 25. So you know we're off to a good start. We've got nice momentum, the team is excited, consumers and retailers alike are excited about it, so you know we're feeling really good about where we are so far. It's early days, but we're in good shape. Great. Thanks so much for the cover.

Speaker Change: We just think about there was a pull forward on business exits.

Speaker Change: Into 2023, so I would've thought that you guys are more favorable lap in the back half of 2024. So if you can maybe just kind of separate of the volume decline how much of it that you anticipate is still coming from business exits versus just kind of organic volume declines.

Speaker Change: Yes, yes, most of it is still going to be business exits and I do want to note.

Speaker Change: Folks didn't pick up on the prepared remarks, barring something unforeseen we do expect this to be the last year of strategic exits I mean.

Speaker Change: Done with what we wanted to do.

Jim Salera: Thank you. One moment for our next question. Our next question comes from the line of Jim Salera with Stevens. Your line is now open. Hi, guys. Good morning.

Speaker Change: And I mentioned earlier.

Speaker Change: What we're thrilled about is the opportunity we have in front of US and believe me. There is a lot of opportunity to go back and refill that debt.

Speaker Change: That capacity with higher margin business.

Jim Salera: Thanks for taking our questions. In your prepared remarks, you mentioned some uncertainty in 2024, obviously around the consumer and promotions. I think we all get kind of a piece of that.

Speaker Change: Which will which will not only drive profitability, but go a long way to help.

Speaker Change: The unit volume back up but you're correct. It is it is first half weighted youll see most of that effect.

Speaker Change: In the first half and then as we move into the back half you are going to be much less significant and then again that that should be it.

Jim Salera: But to double-click on the promotion side, is the concern that some of the larger competitors in the category are going to maybe revert to how they behaved in the past, where they really aggressively chase volume? Or is it more that, you know, retailers are going to come to you guys, expecting price deflation and then using promotion as a tool to achieve that? Yeah, Jim, definitely the former.

Speaker Change: Okay, great. Thanks, guys I'll hop back in the queue.

Speaker Change: Thanks.

Speaker Change: One moment for our next question please.

Speaker Change: Our next question comes from the line of Mitchell Pinheiro with Sturtevant <unk> Company. Your line is now open.

Mitchell Brad Pinheiro: Yeah, Hey, good morning.

Mitchell Brad Pinheiro: Yes.

Mitchell Brad Pinheiro: So just a couple of questions.

Mitchell Brad Pinheiro: When it comes to the gross margin in 2024.

Riles McMullin: You know, we've seen this in our category before. We haven't seen it in a long time, and, you know, even though, as we noted in our remarks, we even promoted a bit more in the fourth quarter just because, you know, there was seasonality in our business, not being a big, you know, dinner roll supplier, that the fourth quarter can be a little bit volatile. So, you know, we promoted a bit more to drive more unit volume, got good effectiveness out of those promotions, but, you know, we also didn't spend nearly as much in trade to get it and maintained, you know, one of the highest average price points in the category. But, yeah, the caution is much more around, you know, the other competitors in the space than it is pressure from retailers, which we really have not felt to date.

Mitchell Brad Pinheiro: Excluding.

Mitchell Brad Pinheiro: Sort of.

Mitchell Brad Pinheiro: Your input costs of your commodity costs.

Mitchell Brad Pinheiro: Yes.

Mitchell Brad Pinheiro: Yeah.

Mitchell Brad Pinheiro: Are we seeing a flattish gross margins.

Mitchell Brad Pinheiro: Because of stranded fixed costs.

Mitchell Brad Pinheiro: As you exit these businesses.

Mitchell Brad Pinheiro: Or are we seeing is there is there something else happening.

Mitchell Brad Pinheiro: Needs to be called out.

I would expect that some of your digital.

Mitchell Brad Pinheiro: Transformation.

Mitchell Brad Pinheiro: But start to show up in fiscal 'twenty for a little bit.

Mitchell Brad Pinheiro: Improved operational sort of the overall equipment effectiveness and things like that.

Mitchell Brad Pinheiro: When do we when should we start to see real gross margin improvement.

Absent your commodity costs and things like that.

Speaker Change: Yes, so as we said we do expect gross margin improvement this year and Youre right. Some of it will be the commodity moderation. There is puts and takes there flowers better or are there. Some other cost buckets that are up but net net we expect to see.

Riles McMullin: Okay, great. Because it seems like, and we've talked about this in the past, but part of the challenge is that you have this channel shift dynamic that's going on. And from the branded retailer's perspective, or the branded food company's perspective, rather, if you're putting promo dollars in the channel, but the consumer is in the wrong channel, you're essentially just giving price away. At least that's kind of the way we viewed it.

Speaker Change: Overall gross margin improvement to that and frankly also aided by all the things that you just said banker the future delivering better results.

Speaker Change: And then.

Speaker Change: Some of that will.

Speaker Change: What we've experienced is that's been somewhat offset by primarily.

Jim Salera: And so would we have to wait until the consumer shifts back to traditional groceries before we see those promotional, you know, increases be put into place? Or is it something that even with the consumers still in kind of value-oriented channels, competitors might just put a promotion in the channel anyway, just to see what comes up on the other side? Yeah, I mean, it could be, it could be either. I think that's, I think that's just going to need to be a wait and see and monitor the environment and react accordingly. Okay, great. And then maybe if I could sneak in one more, in the breakdown for the 2024 sales guide, I know you guys mentioned you have some wraparound pricing benefits in the first half and some business exits that negatively impact the volume side. Yeah, we just think about, you know, there was a pull forward on business exits into 2023. So I would have thought that gives you guys a more favorable lap in the back half of 2024.

Speaker Change: Labor and that is some of that stranded overhead costs showing up.

Speaker Change: And again I want to emphasize thats temporary because we will refill that capacity and eventually that will go away, but right now as it is a little bit of strain and then as you move down the P&L.

Speaker Change: About marketing and ERP cost a little bit of labor and SG&A to that where some of that stranded overhead shows up is what's pressuring the.

Speaker Change: The EBITDA margin line a bit at least at this time, though again, we expect as we go through the year and then particularly in the 25%.

Speaker Change: For all of those things to improve as we refill that capacity and cover the stranded cost.

Speaker Change: I know you have so youre, a little cautious on the second half.

Speaker Change: <unk> talked about it.

Speaker Change: A question before about <unk>.

Speaker Change: Promotion the promote potential for.

Speaker Change: Maybe I'm a little more promotional environment, but you guys have invested in your promotional management tools.

Speaker Change: Can you talk about that.

Speaker Change: It might apply to the back half.

Speaker Change: Yeah, I think it's a great question.

Riles McMullin: So if you can maybe just kind of separate the volume decline, how much of it that you anticipate is still coming from business exits versus, you know, kind of organic volume decline? Yeah, yeah, most of it is still business exits. And I do want to know if folks didn't pick up on it, the prepared remarks. You know, barring something unforeseen, we do expect this to be the last year of strategic exits. I mean, we're done with what we wanted to do.

Speaker Change: And it's timely because that really showed up in the fourth quarter.

Speaker Change: If you look.

Speaker Change: At the syndicated data Youll see.

Speaker Change: As I said that we had among the highest.

Speaker Change: Average prices in the category.

Speaker Change: Our units on promotion, yes, we're up a bit.

Speaker Change: Did promote more.

Speaker Change: But we did so much more effectively and with much less trade spend and we might have historically.

Speaker Change: To us really good display execution in support of those promotions and for the first time in a while actually saw a nice lift.

Riles McMullin: And, you know, I mentioned earlier that, you know, what we're thrilled about is the opportunity we have in front of us. And believe me, there is a lot of opportunity to go back and refill that capacity with higher-margin business, which will not only drive profitability but go a long way to help bring unit volume back up. But you're correct.

Speaker Change: And got a good return off of those promotions and for the past few years, we've been talking about how.

Speaker Change: Promotions have not been very effective you know not not seeing a lot of lift from them, but but in the fourth quarter for the first time in a while we did so that trade promotion management tool that you reference is.

Speaker Change: Enabling us to be a lot more effective when we do promote.

Speaker Change: Okay. Thank you and then anything to call out from a geography performance point of view were there any geographies that were.

Riles McMullin: It is first half weighted. You'll see most of that effect in the first half, and then as we move into the back half, it'll be much less significant. And then again, that should be it. Okay, great. Thanks guys. I'll hop back in the queue.

Speaker Change: It was stronger than you expected or weaker.

Speaker Change: In the last quarter.

Speaker Change: Yes, not stronger and weaker than expected, but we continue to really do well in the northeast.

Speaker Change: It's a great growth market for us we've talked in the past much about.

Jim Salera: Thank you. One moment for our next question. Our next question comes from the line of Mitchell Pinheiro with Cerdavant and Company. Your line is now open.

Speaker Change: What a share point is worth that theres, some $35 million or so at retail.

Speaker Change: And we still got a lot of room to grow.

Mitchell Brad Pinheiro: Yeah, hey, good morning. So, just a couple questions. When it comes to the gross margin in 2024, at, you know, excluding sort of, you know, your input costs, your commodity costs, are we seeing a flattish gross margin because of stranded fixed costs as you exit these businesses?

Speaker Change: So when you think about.

Speaker Change: Opportunities for future growth, whether it's there.

Speaker Change: Northwest still on the West Coast, and then, particularly the upper Midwest, where we're really not present.

Speaker Change: We're excited about the prospects we have in front of us.

Speaker Change: Retailer excitement about having us moving into those areas et cetera.

Speaker Change: Nitrous own Dave's and canyon to those consumers, there's still quite a bit of headroom left for us.

Riles McMullin: Or are we seeing, is there something else happening that needs to be called out? Like, I would expect that some of your digital transformation would start to show up in fiscal 24 a little bit. You know, improved operational efficiency, sort of the overall equipment effectiveness, and things like that. But when should we start to see real gross margin improvement without, you know, your commodity costs and some things like that? Yeah, so as we said, we do expect gross margin improvement this year, and you're right, some of it will be commodity moderation. And there's puts and takes there, you know, flowers better, there's some other cost buckets that are up. But net, net, you know, we expect to see overall gross margin improvement on that. And, frankly, also aided by all the things that you just said, Banker of the Future delivering, you know, better OEE results.

Speaker Change: Okay, and then I guess last question on them.

Speaker Change: Your comments in the prepared remarks regarding M&A.

Speaker Change: So.

Speaker Change: Are you at the point now where.

Speaker Change: You can kind of see pass.

Speaker Change: Obviously, the ERP implementation and just the general your investments is it are we at the point where.

Speaker Change: A more meaningful acquisition, besides just the comp Peter.

Speaker Change: As in the works or contemplated.

Speaker Change: Or are we still are.

Speaker Change: A little bit a ways away before we want to make a bigger a bigger commitment.

Speaker Change: No.

Speaker Change: Were ready when the right opportunity comes along.

Speaker Change: And that's the key is what will that opportunity be and when will it come but when it does we're absolutely ready to go we've got we've got plenty of dry powder. Despite all of the things we have going on.

Speaker Change: Yes, we certainly have the capacity to do a meaningful acquisition and as we said in the prepared remarks, yeah. We're we're very proactive I'm more optimistic.

Riles McMullin: And then, you know, some of that will, you know, what we've experienced is that's been somewhat offset by, you know, primarily labor and that that is some of that stranded overhead cost showing up. And again, you know, I want to emphasize that's temporary because we will refill that capacity. And you know, eventually that'll go away. But right now, there is a little bit of strain.

Speaker Change: About M&A activity seeing more.

Speaker Change: Founders and sellers that we talk to.

Speaker Change: Contemplating transactions.

Speaker Change: Don't know exactly when they will come but but when they do we'll be ready.

Speaker Change: Okay.

Speaker Change: Okay. Thanks, Thanks for the time.

Speaker Change: Okay. Thanks, Mitch. Thank you one moment from next question. Please.

Speaker Change: Our next question comes from the line of Conor Rattigan with consumer edge. Your line is now open.

Riles McMullin: And then as you move down the P&L, you know, thinking about marketing and ERP costs, a little bit of labor, and SDNA to that where some of that stranded overhead shows up is what's pressuring the, you know, the EBITDA margin line a bit, at this time, though, you know, again, we expect as we go through the year, and then particularly in the 25, all of those things to improve as we refill I know you have, you know, so you're, you're a little cautious about the second half, you just talked about it, the question before about promotion, the potential for, you know, maybe a little more promotional environment, but you guys have invested in your promotional management tools. What can you talk about that and how it might apply to the back half? Yeah, I think it's a great question. And it's timely because that really showed up in the fourth quarter.

Conor Rattigan: Hey, guys. Good morning, Thanks for the question.

Speaker Change: Bob.

Speaker Change: Yes.

Conor Rattigan: Our reporter so far this season that breakfast occasion has remained remarkably resilient and foodservice channels and away from home with.

Speaker Change: Yes, maybe more.

Speaker Change: The at home I guess have you guys seen any different levels of Alaska.

Speaker Change: In APAC, the harp product types across our portfolio.

Speaker Change: Maybe within the category at large.

Speaker Change: Color was a little tough to hear you break it up a little bit, but I think I got the gist of it but.

Speaker Change: Simply put Alaska the elasticities.

Speaker Change: Remain below our forecast and below historic levels kind of across all all of those channels you mentioned.

Okay got it hopefully you can hear me a little bit better now.

Speaker Change: Yes, but.

Speaker Change: Okay. Good good.

Speaker Change: So on Dave's killer bread. So it sounds like things are going great bars, I guess, that's my question.

Speaker Change: On the 90000 stores called out in the prepared remarks could you maybe help us contextualize that number a little bit I guess to maybe.

Speaker Change: Maybe how much more room is there to run on distribution or we maybe a quarter of the way there and are there maybe any channels lagging behind others that you view as an opportunity.

Riles McMullin: You know, if you look at the syndicated data, you'll see, as I said, that we had among the highest average prices in the category, and yet our units on promotion were up a bit. We did promote more, but we did it so much more effectively and with much less trade spend than we might have historically needed to use. Really good display execution and support of those promotions, and for the first time in a while, we actually saw a nice lift and got a good return on those promotions. For the past few years, we've been talking about how promotions have not been very effective, not seeing a lot of lift from them, but in the fourth quarter, for the first time in a while, we did. That trade promotion management tool that you referenced is enabling us to be a lot more effective when we do promote. Okay, thank you. And then, anything to call out from a geography performance point of view? Were there any geographies that were, you know, stronger than you expected or weaker?

Speaker Change: Yes, I mean, the ACB is still pretty low Conor. So we've got it we've got a lot of runway.

Speaker Change: Yes.

Speaker Change: Got more opportunity in club I think we mentioned convenience, which we really haven't even tapped into yet we started in our areas of strength in mass and grocery.

Speaker Change: So we've still got a lot of runway ahead of us.

Speaker Change: I don't have the number in front of me, but I want to say the ACB is some we're still in the in the thirties is that Directionally right.

Speaker Change: I think that's we'll double check that but I think thats pretty close so we've got a lot of a lot of runway and to give you.

Speaker Change: Our comparable <unk> is somewhere in the 75 ish.

Speaker Change: Ballpark from an ACB standpoint, just to give you something to compare it to.

Speaker Change: Yeah.

Speaker Change: Awesome. Thanks, guys.

Speaker Change: Okay. Thanks, Cotter, Thank you and I'm currently showing no further questions at this time I'd like to hand, the conference back over to Mr. Brian Ross Macmillan, Chairman and Chief Executive Officer for closing remarks.

Speaker Change: Okay. Nora. Thank you just want to thank everybody for taking time today and joining us for questions.

Speaker Change: We very much appreciate your interest in our company and as always we look forward to speaking with you again next quarter everybody take care.

Mitchell Brad Pinheiro: in the last quarter. Yeah, not not stronger and weaker than expected. But you know, we continue to really do well in the Northeast. It's a great growth market for us. You know, we've talked in the past Mitch about, you know, what a share point is worth up there, some 35 million or so at retail, and we still have a lot of room to grow. So when you think about opportunities for future growth, whether it's the Pac Northwest, still on the West Coast, and then particularly the upper Midwest where, you know, we're really not present.

Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

Nora: Thanks Paula.

Nora: [music].

Nora: Okay.

Nora: Sure.

Nora: Yeah.

Riles McMullin: We're excited about the prospects we have in front of us. Retailer excitement about having us, you know, move into those areas, etc. You know, bringing Nature Zone, Days, and Canyon to those consumers. There's still quite a bit of headroom left for us. Okay, and then, I guess, last question on your comments in the prepared remarks regarding M&A. So.

Nora: [music].

Nora: Yeah.

Nora: [music].

Riles McMullin: Are you at the point now where you can kind of see past, you know, obviously the ERP implementation and just the general, you know, your investments? Are we at the point where a more meaningful acquisition besides just, you know, the Papapita is in the works or contemplated? Or are we still, you know, a little bit a ways away before we want to make a bigger, a bigger commitment? No, we're ready when the right opportunity comes along. And that's the key, you know; what will that opportunity be? And when will it come?

Nora: Sure.

Nora: [music].

Nora: Yes.

Nora: [music].

Nora: Yes.

Riles McMullin: But when it does, we're absolutely ready to go. You know, we've got plenty of dry powder despite all the things we have going on. You know, we certainly have the capacity to do a meaningful acquisition. And as we said in the prepared remarks, we're, you know, we're very proactive. I'm more optimistic about M&A activity, you know, seeing more founders and sellers that we talked to, contemplating, you know, transactions. Don't know exactly when they'll come, but when they do, we'll be ready. Okay, thanks for the time.

Nora: Okay.

Nora: [music].

Nora: Okay.

Nora: [music].

Nora: Okay.

Nora: Yeah.

Nora: [music].

Nora: Yeah.

Nora: [music].

Mitchell Brad Pinheiro: Okay, thanks, Mitch. Thank you. One moment for our next question, please. Our next question comes from the line of Conor Rattigan with Consumer Edge. Hey guys, good morning. Thanks for the question. Yes, so far this season, we've heard from some other reporters that the breakfast occasion has remained remarkably resilient in food service channels and away from home with maybe some more weakness in the home. I guess, have you guys seen any differing levels of elasticity by day part or product types across your portfolio or just maybe within the category at large?

Nora: Okay.

Okay.

Nora: [music].

Conor Rattigan: Connor, it was a little tough to hear you break it up a little bit, but I think I got the gist of it. But, you know, simply put, elasticity, and elasticities have remained below our forecast and below historic levels, you know, kind of across all those channels you mentioned. Okay.

Nora: Yes.

Nora: [music].

Conor Rattigan: Hopefully, you can hear me a little bit better now. Okay, good, good. Also, so on Dave's Killer Bread, it sounds like things are going great with the bars. I guess just my question is, on the 19,000 stores called out in the prepared remarks, could you maybe help us contextualize that number a little bit? I guess just maybe how much more room is there to run on distribution?

Riles McMullin: You know, are we maybe a quarter of the way there? And are there maybe any channels lagging behind others that you view as an opportunity? Yeah, I mean, the ACV is still pretty low, Connor.

Riles McMullin: So we've got it. We've got a lot of runway. You know, we've got more opportunity in the club. I think we mentioned convenience, which we really haven't even tapped into yet.

Nora: Okay.

Nora: [music].

Riles McMullin: You know, we started in our areas of strength, you know, in math and grocery shopping. So we've still got a lot of runway ahead of us. I don't have the number in front of me.

Riles McMullin: But I want to say the ACV is somewhere still in the 30s. Is that directionally right? I think I think that's, we'll double check that, but I think that's pretty close. So we've got a lot of a lot of one way, and to give you a comparable DKB is somewhere in the 75-ish ballpark from an ACV standpoint, just to give you something to compare it to. Okay.

Nora: Okay.

Nora: [music].

Conor Rattigan: Thanks, guys. Okay, thanks, Connor. Thank you. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Riles McMillan, Chairman and Chief Executive Officer, for closing remarks.

Nora: Yes.

Nora: Okay.

Nora: Yeah.

Okay.

Nora: [music].

Nora: Alright.

Nora: [music].

Operator: Okay, Norma, thank you. Just want to thank everybody for taking the time today and joining us for questions. We very much appreciate your interest in our company. And, as always, we look forward to speaking with you again next quarter. Everybody take care.

Nora: Yes.

Nora: [music].

Okay.

Nora: Okay.

Nora: [music].

Riles McMullin: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

Operator: Thanks, Norma. Akshay Jagdale, Rob Dickerson, Akshay Alwy, Mitchell Pinheiro, Brian Holland, Ryan Bell, Flowers Foods Inc Akshay Jagdale, Rob Dickerson, Brian Holland, Ryan Bell, Flowers Foods Inc, ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? www.flowersfoods.com ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Good morning and thank you for standing by. Welcome to the Flowers Foods fourth quarter and full year 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 opening speaker today, J.T. Rick, Executive Vice President of Finance and Investor Relations. Please go ahead, sir.

Nora: Okay.

Nora: Sure.

Nora: Yes.

Nora: Okay.

Nora: Sure.

Nora: Yes.

Nora: Okay.

Nora: Right.

Nora: [music].

Nora: Yes.

Nora: Yeah.

[music].

J.T. Rick: Thank you, Norma, and good morning. I hope everyone 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 FCC file. We also provide non-GAAP financial measures for which disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website.

Nora: Yes.

Nora: [music].

Nora: Sure.

Nora: Yeah.

Nora: Okay.

Nora: Sure.

Nora: Yes.

Nora: Okay.

Nora: [music].

Nora: Yes.

Nora: Okay.

Nora: Yes.

Nora: Okay.

J.T. Rick: Joining me today are Riles McMullen, Chairman and CEO, and Steve Kinsey, our CFO. Riles, I'll turn it over to you. Okay. Thanks, JT. Good morning, everybody.

Nora: Okay.

Nora: [music].

Nora: Okay.

Nora: Yes.

Nora: [music].

Riles McMullin: Thanks for joining us on the fourth quarter call. We're proud of our team's accomplishments in the challenging consumer environment we're facing. Our brands performed very well, gaining unit and dollar share for the first time since the first quarter of 2022. Dave's Kilmer Bread was a particular standout, reaching $1 billion in retail sales and growing unit volume 10% while the overall bread category declined 2.6%.

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Nora: Thanks.

Nora: Yes.

Nora: Okay.

Nora: Thank you.

Nora: Okay.

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Nora: Yes.

Nora: [music].

Rob Dickerson: Good morning, everyone. Hey guys, just a couple quick questions. I guess kind of just the first piece. Maybe this is more for Steve.

Nora: Thanks.

Nora: Okay.

Nora: Yes.

Nora: [music].

Rob Dickerson: Yeah, as we think through the year, kind of, you know, especially the first half and second half, how are you feeling about gross margin progression? www.flowersfoods.com and all.

Nora: Yes.

Nora: Great.

Nora: Okay.

Nora: Thanks.

Nora: Okay.

Nora: Yes.

Nora: Okay.

Rob Dickerson: Yeah, Rob, let me start, and Steve can certainly fill in. So from a gross margin standpoint, you know, we expect better results. We saw a nice gross margin increase in the fourth quarter, and we'd expect that to continue. There are a couple of other factors, though, to think about impacting bottom line performance. One, we are investing in the business, so whether that's ERP or our marketing investments, etc., behind Dave's and Nature's Own and the new bar launches and everything, we are spending more marketing dollars investing in the business.

Nora: Okay.

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Yes.

Thanks.

Nora: [music].

Nora: Okay.

Nora: Hum.

Riles McMullin: That will somewhat pressure margins from an even dollar bottom line standpoint, but obviously, those are intended to fuel future growth in our investments we're happy to make. But we would expect some improvement in gross margins. But one other thing to note, somewhat offsetting that, you know, we talked in the prepared remarks about stranded overhead from the strategic exits. You know, that does, you know, particularly from a labor standpoint, affect those margins somewhat. However, the exciting thing about that for us is the opportunity we have ahead to refill that capacity with higher margin volume, which was the intention all along. Now, obviously, that won't come all at once. It'll take a little bit of patience, but we've got a really significant opportunity ahead of us to replace that extremely low margin business that we've exited with a much more profitable business. Steve, do you want to add anything?

Nora: Okay.

Nora: Hi.

Nora: Okay.

Nora: Thank you.

Nora: [music].

Nora: Okay.

Nora: Great.

Nora: Okay.

Yes.

Nora: Okay.

Nora: Hi.

Nora: Yes.

Nora: Thanks.

Nora: Okay.

Nora: Yes.

Nora: Okay.

Sure.

Nora: Great.

Nora: Okay.

Nora: Yes.

Nora: Right.

Nora: Okay.

Nora: Yes.

Nora: Okay.

Nora: Yes.

Nora: Okay.

Nora: Yes.

Nora: <unk>.

Nora: Yes.

Nora: [music].

Speaker Change: Good morning, and thank you for standing by and welcome to the flowers foods fourth quarter and full year 2023 results conference call.

Steve Kinsey: Sure, yeah. I mean, as Riles commented, and you saw in the script too, we are being a little more cautious with the consumer in the back half. So when you think about overall cadence, currently, it is kind of in the guidance range, and we do see stronger performance in the first half. A lot of that, as Ryle said, you will be driven by some positive and negative, you know, specifically some of the, I'd say, commodity moderation pressure. If you think about last year.

Speaker Change: Be advised for today's event is being recorded I would now like to hand, the conference over to your opening speaker today J T. Rick Executive Vice President of Finance and Investor Relations. Please go ahead Sir.

Speaker Change: Thank you Darla and good morning, I hope everyone had the opportunity to review our earnings release listened to our prepared remarks and view the slide presentation that we're all posted yesterday evening at our Investor Relations website.

Steve Kinsey: Um, you know, the first half was tougher than the back. So from an overall comp perspective, that will be driving some of the improvement in the first half. As we've seen things pull back somewhat, you know, we do expect the first half of 2024 to benefit more than the back half with regard to overall commodity prices. Okay, perfect. Alright, and I guess just secondly, you know, I think, in hearing in the guide is, you know, potential for ongoing volume declines, you know, clearly, I understand, you know, a little pressured consumer backdrop, clearly, pricings going through. Dave's doing well, but I guess that's a little different.

Speaker Change: 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.

Speaker Change: In addition to what you're hearing these remarks important factors relating to flowers foods' business are fully detailed in our SEC filings.

Speaker Change: We also provide non-GAAP financial measures for which disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are Ross Macmillan, Chairman and CEO and Steve Kinsey, Our CFO Ross I'll turn it over to you.

Rob Dickerson: So I'm just curious, like, you know, If we listen to a number of other companies that are all kind of going through some form of volume pressure, there is kind of this expectation, so to speak, that as we get through the back half of 24, the probability should increase, you know, that volumes actually start to grow again, partially just driven by a lower base and easier comp in the back half of 24. So, I mean, it sounds like you're being a little bit, you know, more cautious, and maybe you're a bit more rational than others. So, you know, kind of the straight question is just, you know, kind of why not you forecast a little bit more on the positive volume side as you get through the year. Or maybe that could play out; it's just, you don't really know if it does, and that's probably, Yeah, look, it's a fair point.

Ross Macmillan: Okay. Thanks, J T. Good morning, everybody.

Ross Macmillan: Thanks for joining the fourth quarter call.

Ross Macmillan: We're proud of our team's comp.

Ross Macmillan: Complishments.

Ross Macmillan: In the challenging consumer environment, we're facing.

Speaker Change: Our brands performed very well gaining unit and dollar share for the first time since the first quarter of 2022.

Speaker Change: Dave's killer bread was a particular standout reaching $1 billion in retail sales and growing unit volume, 10%, while the overall bread category declined two 6%.

Speaker Change: We're excited about the multitude of future growth prospects for Dave's and our other brands and we are investing in marketing and innovation to capitalize on that potential.

Speaker Change: Our 2024 forecast calls for continued solid results. Despite these category headwinds. We expect these results to be first half weighted benefiting from wrap around pricing and branded retail.

Speaker Change: Pricing in selected foodservice accounts and moderating commodity cost or.

Speaker Change: Our second half forecast incorporates more caution due to the uncertain consumer and promotional environment.

Speaker Change: We remain focused on the significant longer term opportunities. We see ahead of us filling in white space in geographic and product adjacencies, while leveraging innovation to push into new categories.

Riles McMullin: And you know, it's clearly obvious, you know, the category continues to be under pressure and with private label trade down. But you know, if you look at our market share performance, it has been quite admirable, you know, what we've been able to do, you know, even in this environment. Now, certainly, we understand that, you know, that market share performance in a declining category doesn't necessarily translate into, bottom line profitability. But it does show that the investments that we're making in our brands enable us to continue, you know, relatively strong performance in a pressured category. Now, you know, as to the volume outlook for the year, I don't disagree with you. I mean, there's certainly a possibility as the market adjusts to, you know, sort of the post-pandemic reality that, you know, the category finds its equilibrium, which is what I think it's trying to do. And we could see, you know, more positive volume performance in the second half, but, But at the same time.

Speaker Change: Never been more confident in our long term potential and I look forward to building on our strong base throughout 2024.

Speaker Change: So with that normal we can open it up for questions. Thank.

Speaker Change: As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again.

Speaker Change: Please standby, while we compile the Q&A roster when Walmart for first question.

Speaker Change: Our first question comes from the line of Robert Dickerson with Jefferies. Your line is now open.

Rob Dickerson: Great. Thanks, so much good morning, everyone.

Okay.

Rob Dickerson: Hey, guys.

Rob Dickerson: Yes, so couple of quick questions.

Rob Dickerson: I guess kind of just first piece.

Speaker Change: Maybe this is more for Steve.

We think through the year.

Steve Kinsey: Especially kind of first half second half.

Steve Kinsey: How are you feeling about gross margin progression just given some of the pullback in your inputs.

Steve Kinsey: But then also maybe some ongoing kind of promotional reinvestment.

Speaker Change: Potential thanks.

Speaker Change: Yeah, Rob Let me, let me start and Steve can certainly.

Speaker Change: So from a gross margin standpoint.

Speaker Change: We expect better results.

Speaker Change: We saw a nice gross margin increase in the fourth quarter and we'd expect that to continue a couple of other factors though.

Riles McMullin: Part of our reason for caution is the offset of what a higher promotional environment could look like in that circumstance. I mean, if the category, in order to drive unit volume, decides it needs to become more promotional, then that could be an offset. The other thing that I would note, though, is that our volume performance continued to improve throughout 2013. And, you know, we finished the year with branded retail volume only down thirty basis points, which was a substantial improvement, and overall volume improved. We were down, I think, two points four in the fourth quarter as opposed to four points one if you look back to the third quarter.

Speaker Change: To think about it.

Speaker Change: Impacting bottom line performance one.

Speaker Change: We are investing in the business so whether that's ERP.

Speaker Change: Our marketing investments et cetera.

Speaker Change: But obviously those were intended to fuel future growth in our investments we are happy to make but we would expect some some improvement in gross margin.

Speaker Change: But one other thing to note somewhat offsetting that.

Speaker Change: We talked in the prepared remarks about stranded overhead from the strategic exits.

Speaker Change: That does particularly from a labor standpoint.

Speaker Change: Affect those margins somewhat.

Riles McMullin: So, you know, the sequence has been good. And so that's certainly a reason for optimism, which I think we're capturing at the upper end of guidance. But, you know, again, just given the uncertainty and the relative weakness of the category, we thought caution was prudent, at least in this. All right, and then pardon me for asking a third question quickly, just the California legal decision, you had said the prepared remark, that decision shouldn't be made any time sooner than March 1st. Yeah, could you maybe just add a little color as to kind of what that decision could imply? Like, you know, if the decision goes one way, we likely would incur a period of damage or what have you, not sure, you know, or, you know, probably there's not some material impact. Just trying to understand kind of what that could mean relative to the current guide.

Speaker Change: However, the.

Speaker Change: The exciting thing about that for US is the opportunity. We have ahead to refill that capacity with higher margin volume, which was the intention all along now.

Speaker Change: Obviously that won't come all at once it will take a little bit of patience.

Speaker Change: But we've got a we've got a really significant opportunity ahead of us to refill that extreme low margin business that we've exited with with much more profitable business, Steve you want to.

Speaker Change: As Ron commented as you saw in the script too.

Steve Kinsey: We are being a little more cautious on the consumer in the back half. So when you think about overall cadence currently.

Steve Kinsey: I'm kind of in the guidance range.

Steve Kinsey: We do see stronger performance in the first half a lot of that is Ralph that yield will be driven by some positive and negatives specifically to some of the let's say commodity moderation pressure. If you think about last year.

Steve Kinsey: The first half was tougher than the back so from an overall comp perspective.

Steve Kinsey: That will be driving some of the improvement in the first half.

As we've seen things pull back somewhat.

Steve Kinsey: We do expect first half of 2024 to benefit more than the back half with regard to overall commodity inputs.

Speaker Change: Okay perfect.

Rob Dickerson: Yeah, so we've already announced what the settlement will be in terms of cost to the company. I think probably the more relevant answer to your question is, you know, what happens post-March 1, if the settlement is approved, and what will happen, if that is the case, is that we will then set about, you know, converting all of the distributors in California to an employee-based model. You know, that is, at least out of the gate, likely to be somewhat dilutive to our results out in California, at least in the short term, you know, until we can get everybody trained up, etc. You know, bring all the employees on board.

Speaker Change: Alright, and then I guess just secondly.

Speaker Change: I think in here.

Speaker Change: Airing in the guide is.

Speaker Change: Is potential.

Speaker Change: Potential for ongoing volume declines.

Speaker Change: Clearly I understand.

Speaker Change: Little pressure consumer backdrop, clearly decent amount pricing going through.

Speaker Change: With Dave is doing well, but I guess, that's a little different.

Speaker Change: Just curious like.

Speaker Change: If we listened to a number of other companies that are all kind of going through some form of volume pressure. There is kind of this expectation so to speak that yeah as we get through the back half of 'twenty for the probability should increase that volumes actually start to grow again.

Speaker Change: Partially it is driven by lower base, an easier comp in the back half of 'twenty three so I mean, it sounds like you are being a little bit more cautious.

Speaker Change: And maybe your.

Speaker Change: A bit more rational than than others. So kind of the straight question is just kind of why not you do forecast a little bit more.

Speaker Change: More on the positive volume side as you get through the year.

Speaker Change:

Speaker Change: Or maybe that could play out it just you don't really know if it does and thats probably realistic.

Speaker Change: Yes.

Speaker Change: Thats a fair point.

Speaker Change: It's clearly obvious the category continues to be under pressure and with private label trade down.

Rob Dickerson: Okay, thanks, Rob. Thank you. One moment for our next question, please. Our next question comes from the line of Bill Chappell with Chewist Securities. Your line is now open.

Speaker Change: If you look at our market share performance has been quite admirable.

William B. Chappell: Thanks, good morning. All right, Bill, just a little bit more maybe commentary on the food service, the cake business, kind of the thoughts there, in particular, kind of what initiatives we're looking at to kind of improve on the on the tasty cake side, or, or just the cake in general, and kind of how you see the trends playing out for there versus the core. Yeah, so I think we've mentioned this a couple of times on prior quarter calls, but good question; I'd like to discuss it some more. So clearly, pricing has been important in both of those areas, all of those areas, private label food service, and the cake business. And we've also, as you know, done some pretty significant SKU rationalization and strategic business, primarily in food service and cake, but also a little bit in private label. However, the profitability of all three of those businesses has improved.

Speaker Change: Enable us to continue realm.

Speaker Change: Relative strong performance.

Speaker Change: In a pressured category now as to the as to the volume outlook for the year.

Speaker Change: I don't disagree with you I mean, there's certainly a possibility as the market adjusts to sort of post pandemic reality that category find its equilibrium, which is what I think it is trying to do and.

Speaker Change: And we could see more positive.

Speaker Change: <unk> performance in the second half but.

Speaker Change: At the same time.

Speaker Change: Part of our reason for caution is the offset for the higher promotional.

Speaker Change: Actual environment could look like in that circumstance.

Speaker Change: It's a category in order to drive unit volume decides it needs to become more promotional.

Speaker Change: That could be an offset.

Speaker Change: The other thing that I would note though is.

Speaker Change: Our volume performance continued to improve throughout 2003, and we finished the year with branded retail volume only down 30 basis points, which was a substantial improvement and overall volume improve we were down I think two four.

Speaker Change: In the fourth quarter as opposed to $4. One if you look back to the third quarter. So the sequence has been has been good and so that's certainly a reason for optimism, which I think we're capturing at the upper end of guidance, but again, just given the uncertainty in the relative weakness of the category. We thought caution was prudent at least at this point.

Alright, and then.

Speaker Change: <unk> quickly just the California legal decision you had said in the prepared remarks decision shouldnt be made any anytime sooner than March 1st.

Speaker Change: Yes.

Speaker Change: Just maybe just add a little color as to kind of what that decision could imply like if decision goes one way.

Speaker Change: Likely would incur.

Speaker Change: Period of damage or what have you got share or.

Riles McMullin: But they were down roughly 500 basis points last year, just because of the increased organic wheat costs, which this year will moderate somewhat, so we'll recapture some of that. So really good progress on those parts of the business, somewhat offset by, you know, category weakness and commodity costs and those effects on other parts. Okay. No, thanks.

Speaker Change: Probably there is not some material impact and just trying to understand kind of what that could mean relative to the current guide.

Speaker Change: Yes, so we have already announced what.

What the settlement will be.

Speaker Change: In terms of cost to the company.

Speaker Change: I think probably the more the more relevant answer to your question is what happens post March 1st if the settlement is approved and what will happen if that.

Speaker Change: It is the case is that we will then set about converting all of the distributors in California to an employee based model.

William B. Chappell: Amen. A little bit on the commodity front, I guess, historically, you've just kind of said, hey, we had six to nine months out, I know, it's mostly the same thing. But this time, you're saying, hey, we're 70% locked on your input costs. So is there any change to how you're looking at things? Or are we just using percentages versus months? No, not really, Bill.

Speaker Change: That is at least out the gate likely to be somewhat dilutive to our results out in California.

Speaker Change: At least in the short term.

Speaker Change: Until we can get everybody trained up et cetera.

Speaker Change: Bring all of the employees on the good news there is though it will be a phased in approach Rob.

Steve Kinsey: We continue to look at our strategy to be six to roughly 12 months out. So probably, you know, more on the longer term of that in some cases. But, you know, the reality is, I think last year coming into the year, we were rough. Thanks.

Speaker Change: Awesome alright, great. Thank you so much.

Speaker Change: Okay. Thanks, Rob. Thank you one moment for our next question. Please.

Speaker Change: Our next question comes from the line of Bill Chapell with <unk> Securities. Your line is now open.

William B. Chappell: Thanks, Good morning.

William B. Chappell: Good morning, Bill just.

William B. Chappell: A little bit more maybe commentary on the.

William B. Chappell: We stay pretty steadfast to our overall strategy. We have added some things to the toolkit, if you will, to try to manage the volatility, and the training there better, but no changes to how we think about coverage and how long we're willing to go. Got it. And no, and I actually want to follow up on the DKB bars. Is there, and I'm sorry if I'm, if you already covered this, but is there something you can, you know, you're seeing repeat rates or something that gives you, because again, a little pushback we hear is that it's a crowded category and I know DKB has a great brand, but how do you differentiate yourself or get incremental shelf space versus the 20 other bars that are there? And what gives you that confidence?

William B. Chappell: The foodservice the cake business kind of the thoughts there in particular kind of.

William B. Chappell: So what what initiatives, we're looking at to kind of improve on the on the tasty cake side or or just to kick in general and kind of how you see the trends play out for there versus the core.

William B. Chappell: Yes.

William B. Chappell: So I think we've mentioned this a couple of times.

Speaker Change: On prior quarter calls, but good question I would like to discuss some more.

Speaker Change: So clearly pricing has been important.

Speaker Change: In both of those area all of those areas private label food service and the cake business and.

Speaker Change: And we've also as you know done some pretty significant SKU rationalization and strategic business exits primarily.

Speaker Change: In foodservice and cake, but also a little bit in in.

Riles McMullin: What have you seen over the past three, four months in terms of, as you expand this year? Yeah, so, as we noted in the prepared remarks, we are really pleased with the results in 23. We got a lot more stores than we had targeted. You know, first of all, it's a great product, and we think that's what differentiates us. I mean that's what differentiates the loaf items and the breakfast items. It's just the, you know, superior quality. It's a baked bar, great flavor and texture, great, you know, the nutritional panel on it.

Speaker Change: In private label however.

Speaker Change: However, the profitability of all three of those businesses has improved markedly.

Speaker Change: So the strategy is working from that standpoint, and obviously there are offsets in other parts of the business.

Speaker Change: The.

Speaker Change: The soft variety and white bread area Bill as you know is the most susceptible to private label trade down. So obviously, that's a negative.

Speaker Change: And then offset by the Dk B performance in terms of unit volume, but frankly.

Speaker Change: Even <unk> profitability was down last year pretty significantly because we had substantially higher.

Speaker Change: Organic <unk> costs last year.

Speaker Change: Now the margins are still very attractive for daves.

Speaker Change: We don't disclose particular numbers, there, but still among the highest in the portfolio, but they were down roughly 500 basis points last year, just because of the.

Speaker Change: The increased organic wheat costs, which.

Speaker Change: This year will moderate somewhat so we will recapture some of that so really good progress.

Speaker Change: Aggress on those parts of the business somewhat offset by category weakness in commodity cost and those effects on other parts of the business.

Speaker Change: Okay, no. Thanks and then.

Speaker Change: On your input costs. So is there any change to how youre looking at things are we're just using percentages versus months.

Speaker Change: No not really a buildup we continue to look at our strategy to be 6% roughly 12 months out.

Speaker Change: So probably.

Speaker Change: More of the longer term of that in some cases.

But the reality is I think last year coming into the year, we were roughly 60% 65% covered.

Riles McMullin: We can always do better, and we will get better. We said many times we're treating this as a startup business, and we're learning a bit as we go too, Bill, but so far, so good, and of course, behind that, we've got a nice innovation pipeline of four days coming with the snack bites in the back half and, and even more beyond that in 25. So you know we're off to a good start. We've got nice momentum, the team is excited, consumers and retailers alike are excited about it, so you know we're feeling really good about where we are so far. It's early days, but we're in good shape. Great. Thanks so much for the cover.

Speaker Change: We stay pretty steadfast to our overall strategy.

We do we have added some things kind of to the toolkit. If you will to try to manage the volatility.

Speaker Change: The trading there are better but note no changes to how we think about coverage and how how long were appointed Hello, we're willing to go.

Speaker Change: Got it and actually one follow up on that.

Speaker Change: Teekay <unk> bars.

Speaker Change: Is there and I'm sorry, if you already covered this but is there something you can youre seeing repeat rates or something that gives you.

Speaker Change: The pushback, we hear us.

Speaker Change: It's a crowded category and I know <unk> has a great brand, but how you differentiate yourself or get incremental shelf space versus the 20. Other bars that are there and what gives you that confidence what you've seen over the past three four months in terms of as you expand this year.

William B. Chappell: Thank you. One moment for our next question. Our next question comes from the line of Jim Salera with Stevens. Your line is now open. Hi, guys. Good morning.

Yes, so as we noted in the prepared remarks.

Speaker Change: Really pleased with the results in 'twenty, three and we got a lot more stores than we had targeted.

Speaker Change: First of all it's a great product.

Jim Salera: But to double-click on the promotion side, is the concern that some of the larger competitors in the category are going to maybe revert to how they behaved in the past, where they really aggressively chase volume? Or is it more that, you know, retailers are going to come to you guys, expecting price deflation and using promotion as a tool to achieve that? Yeah, Jim, definitely the former. We've seen this in our category before. We haven't seen it in a long time.

Speaker Change: And we think Thats, what differentiates us I mean, thats, what differentiates the low <unk> and the breakfast items, just the the superior quality, it's a baked bar.

Speaker Change: Great flavor and texture great.

Speaker Change: But you are right about shelf space, but were only three skus on the shelf and so positioning is is really important.

Riles McMullin: And even though, as we noted in our remarks, we even promoted a bit more in the fourth quarter just because it was seasonality in our business, not being a big dinner roll supplier, that the fourth quarter can be a little bit volatile. So we promoted a bit more to drive more unit volume, and got good effectiveness out of those promotions, but we also didn't spend nearly as much in trade to get it, and we maintained one of the highest average price points in the category. But yeah, the caution is much more around the other competitors in the space than it is pressure from retailers, which we really have not felt to date. Okay, great. Because it seems like, and we've talked about this in the past, but part of the challenge is that you have this channel shift dynamic that's going on. And from the branded retailer's perspective, or the branded food company's perspective, rather, if you're putting promo dollars in the channel, but the consumer is in the wrong channel, you're essentially just giving price away.

Speaker Change: And what we're seeing where our positioning is strong kind of middle high level on the shelf, even with those three skus.

Speaker Change: Handout colors, we have are really drawing consumers to the brand whether their current dk shoppers or they're new to the brand which is net incremental.

Speaker Change: To the <unk> consumer base.

Speaker Change: I do think it's going to help us tremendously as we bring in the three additional protein skus this year.

Giving us more more visibility on the shelf.

Speaker Change: As we said before those protein bars and test market are improving incremental to the first three skus that were kind of reaching a.

Speaker Change: But so far so good and then of course.

Speaker Change: Behind that we've got a nice innovation pipeline for daves coming with the snack bites in the back half.

Speaker Change: And even more beyond that at 25%. So we're off to a good start we got nice momentum the team is excited.

Jim Salera: At least that's kind of the way we viewed it. And so would we have to wait until the consumer shifts back to traditional groceries before we see those promotional, you know, increases be put into place? Or is it something that even with consumers still in kind of value-oriented channels, competitors might just put a promotion in the channel anyway, just to see what comes up on the other side. Yeah, I mean, it could be, it could be either. I think that's, I think that's just going to need to be a wait and see and monitor the environment and react accordingly. Okay, great. And then maybe I could sneak in one more in the breakdown for the 2024 sales guide. I know you guys mentioned you have some wraparound pricing benefit in the first half and some business exits that negatively impact the volume side. Yeah, we just think about, you know, there was a pull forward on business exits into 2023. So I would have thought I'd give you guys a more favorable lap in the back half of 2024.

Speaker Change: <unk> and retailers alike are excited about it. So we're feeling really good about where we are so far it's early days, but we're in good shape.

Speaker Change: Great. Thanks, so much for the color.

Speaker Change: Thanks Bill.

Speaker Change: Thank you one moment for our next question. Please.

Speaker Change: Our next question comes from the line of Jim <unk> with Stephens. Your line is now open.

Hi, guys. Good morning, Thanks for taking my questions.

Speaker Change:

Jim: In your prepared remarks, you mentioned some uncertainty in 2024, obviously around the consumer and promotions.

Jim: We all get kind of a consumer piece of that but to double click on the promotion side is.

Jim: Is the concern that some of the larger competitors in the category.

Jim: We're going to maybe revert to how they behaved in the past where they they really aggressively chase volume.

Jim: Or is it more that.

Jim: Retailers are going to come to you guys.

Jim: Expecting price deflation and using promotion as a tool to achieve that.

Speaker Change: Yes, Jim definitely the former.

Speaker Change: We've seen this in our category before we haven't seen a long time.

Speaker Change: And so even though as we noted in our remarks, we even promoted a bit more in the fourth quarter, just because of seasonality in our business not being a big yes.

Speaker Change: Dinner roll.

Speaker Change: The supplier.

Speaker Change: The fourth quarter can be a little bit volatile. So we promoted a bit more to drive more unit volume got good effectiveness.

Riles McMullin: So if you can maybe just kind of separate the volume decline, how much of it that you anticipate is still coming from business exits versus, you know, kind of organic volume decline? Yeah, yeah, most of it is still gonna be business exits. And I do want to note, if folks didn't pick up on it, the prepared remarks: barring something unforeseen, we do expect this to be the last year of strategic exits. I mean, we're done with what we wanted to do.

Out of those promotions, but we also didn't spend nearly as much in trade to get it in.

Speaker Change: And maintained one of the highest average price points in the category.

Speaker Change: Yes, the caution is much more around.

Speaker Change: The other competitors in the space than it is pressure from retailers, which we really have not felt to date.

Speaker Change: Okay, great because it seems like.

Speaker Change: We've talked about this in the past, but part of the challenge is you have this channel shift dynamic that's going on and from the branded retailer perspective.

Speaker Change: The branded food companies perspective, rather if you're putting promo dollars in the channel, but the consumer is in the wrong channel you are essentially just giving price away at least that's kind of the way we did it and so.

Speaker Change: Would we have to wait until the consumer shifts back to traditional grocery before we see those promotional increases.

Speaker Change: <unk> put into place or is it something that even with the consumers still in kind of a value oriented channels competitors might just put promo in the channel anyway, just to see what comes up on the other side.

Speaker Change: Yes.

Riles McMullin: You'll see most of that effect in the first half, and then as we move into the second half, it'll be much less significant. And then again, that should be it. Okay, great. Thanks guys. I'll hop back in the queue.

Speaker Change: It could be it could be either I think thats I think thats, just going to need to be a wait and see and monitor the environment and react accordingly.

Speaker Change: Okay, Great and then maybe if I could sneak in one more in the breakdown for the for the 2024 sales guide and you guys mentioned you have some wrap around pricing benefit in the first half and some business exits that negatively impact the volume side.

Jim Salera: Thank you. One moment for our next question. Our next question comes from the line of Mitchell Pinheiro with Cerdavant and Company. Your line is now open.

Speaker Change: We just think about there was a pull forward on business exits.

Mitchell Brad Pinheiro: Yeah, good morning. So just a couple questions. When it comes to the gross margin in 2024, at, you know, excluding sort of, you know, your input costs, your commodity costs, are we seeing a flattish gross margin because of stranded fixed costs as you exit these businesses?

Speaker Change: Yes, yes, most of it is still going to be business exits and I do want to note.

Speaker Change: Folks didn't pick up on it in the prepared remarks, barring something unforeseen we do expect this to be the last year of strategic exits I mean.

Mitchell Brad Pinheiro: Um, you know, or are we seeing something else that needs to be called out? Like, I would expect that some of your digital transformation would start to show up in fiscal 24, a little bit, you know, improved operational sort of the overall equipment effectiveness and things like that. When are we going to, when should we start to see real gross margin improvement absent, you know, your commodity costs and some things like that?

Speaker Change: Done with what we wanted to do.

Speaker Change: And I mentioned earlier that what we're thrilled about is the opportunity. We havent followed US and believe me there is a lot of opportunity to go back and refill that debt.

Speaker Change: That capacity with higher margin business.

Speaker Change: Which will which will not only drive profitability, but to go a long way to help.

The unit volume back up but you are correct. It is it is first half weighted youll see most of that effect.

Speaker Change: In the first half and then as we move into the back half you are going to be much less significant and then again that that should be it.

Riles McMullin: Yeah, so as we said, we do expect gross margin improvement this year, and you're right, some of it will be commodity moderation. And there's puts and takes there, you know, flowers better, there's some other cost buckets that are up. But net net, you know, we expect to see overall gross margin improvement on that. And frankly, also aided by all the things that you just said, Baker of the Future delivering, you know, better results.

Speaker Change: Okay, great. Thanks, guys I'll hop back in the queue.

Speaker Change: Thanks.

Speaker Change: One moment for our next question please.

Speaker Change: Our next question comes from the line of Mitchell Pinheiro with startup and company. Your line is now open.

Mitchell Brad Pinheiro: Yeah, Hey, good morning.

Mitchell Brad Pinheiro: Yeah.

Mitchell Brad Pinheiro: So just a couple of questions.

Mitchell Brad Pinheiro: When it comes to the gross margin in 2024.

Mitchell Brad Pinheiro: Excluding.

Mitchell Brad Pinheiro: Sort of.

Mitchell Brad Pinheiro: Your input costs of your commodity costs.

Mitchell Brad Pinheiro: Yes.

Mitchell Brad Pinheiro: Are we seeing a flattish gross margins.

Mitchell Brad Pinheiro: Because of stranded fixed costs.

Riles McMullin: And then, you know, some of that will, you know, what we've experienced is that's been somewhat offset by, you know, primarily labor, and that that is some of that stranded overhead costs showing up. And again, you know, I want to emphasize that's temporary, because we will refill that capacity. And you know, eventually that'll go away. But right now, there is a little bit of strain.

Mitchell Brad Pinheiro: As you exit these businesses.

Mitchell Brad Pinheiro: Or are we seeing is there is there something else happening.

Mitchell Brad Pinheiro: Needs to be called out.

Mitchell Brad Pinheiro: I would expect that some of your digital.

Mitchell Brad Pinheiro: Transformation.

Mitchell Brad Pinheiro: But start to show up in fiscal 'twenty for a little bit.

Mitchell Brad Pinheiro: Improved operational sort of the overall equipment effectiveness and things like that.

Mitchell Brad Pinheiro: When do we when should we start to see real gross margin improvement.

Riles McMullin: And then as you move down the P&L, you know, thinking about marketing and ERP costs, a little bit of labor, and SDNA to that where some of that stranded overhead shows up is what's pressuring the EBITDA margin line a bit, at this time, though, we expect as we go through the year, and then particularly in the 25, all of those things to improve as we refill that capacity and cover this stranded cost I know you have, you know, so, you're, you're a little cautious about the second half, you just talked about it, the question before about promotion, the potential for, you know, maybe a little more promotional environment, but you guys have invested in your promotional management tools. What can you talk about that and how it might apply to the back half? Yeah, I think it's a great question. And it's timely because that really showed up in the fourth quarter.

Mitchell Brad Pinheiro: Absent your commodity costs and things like that.

Yes, so as we said we do expect gross margin improvement this year and Youre right. Some of it will be the commodity moderation. There is puts and takes there flowers better or are there. Some other cost buckets that are up but net net we expect to see.

Mitchell Brad Pinheiro: Overall gross margin improvement to that and frankly also aided by all the things that you just said banker of the future are delivering better results.

Mitchell Brad Pinheiro: And then.

Mitchell Brad Pinheiro: Some of that will.

Mitchell Brad Pinheiro: What we've experienced is thats been somewhat offset by primarily.

Mitchell Brad Pinheiro: Labor and that is some of that stranded overhead costs showing up.

Mitchell Brad Pinheiro: And again I want to emphasize thats temporary because we will refill that capacity and eventually that will go away, but right now as it is a little bit of strain and then as you move down the P&L, yes, thinking about marketing and ERP costs, a little bit of labor and SG&A to that where some of that stranded overhead shows up is.

Mitchell Brad Pinheiro: What's pressuring the.

Riles McMullin: If you look at the syndicated data, you'll see, as I said, that we had among the highest average prices in the category, and yet our units on promotion were up a bit. We did promote more, but we did it so much more effectively and with much less trade spend than we might have historically needed to use, really good display execution in support of those promotions.

Mitchell Brad Pinheiro: EBITDA margin line a bit at least at this time, though again, we expect as we go through the year and then particularly into 'twenty five.

Mitchell Brad Pinheiro: For all of those things to improve as we refill refill that capacity and cover the stranded cost.

Mitchell Brad Pinheiro: I know you have so youre, a little cautious on the second half.

Mitchell Brad Pinheiro: Just talked about it.

Mitchell Brad Pinheiro: A question before about <unk>.

Riles McMullin: And for the first time in a while, we actually saw a nice lift and got a good return on those promotions. And for the past few years, we've been talking about how promotions have not been very effective, not seeing a lot of lift from them. But in the fourth quarter, for the first time in a while, we did.

Mitchell Brad Pinheiro: Promotion to promote potential for.

Maybe I'm a little more promotional environment, but you guys have invested in your promotional management tools.

Speaker Change: Can you talk about that.

Speaker Change: It might apply to the back half.

Speaker Change: Yeah, I think it's a great question.

Speaker Change: It's timely because that really showed up in the fourth quarter.

Speaker Change: If you look.

Speaker Change: At the syndicated data Youll see.

Riles McMullin: So that trade promotion management tool that you referenced is enabling us to be a lot more effective when we do promote. Okay, thank you. And then, anything to call out from a geography performance point of view? Were there any geographies that were, you know, stronger than you expected or weaker?

Speaker Change: As I said that we had among the highest.

Speaker Change: Average prices in the category.

Speaker Change: Our units on promotion, yes, we're up a bit we did promote more.

Speaker Change: But we did so much more effectively and with much less trade spend than we might have historically.

Speaker Change: Needed to use really good display execution in support of those promotions.

Speaker Change: And for the first time in a while actually saw a nice lift.

Speaker Change: And got a good return off of those promotions and for the past few years, we've been talking about how.

Speaker Change: Promotions had not been very effective not not seeing a lot of lift from them, but but in the fourth quarter for the first time in a while we did so that trade.

Speaker Change: Promotion management tool that you reference is.

Speaker Change: Enabling us to be a lot more effective when we do promote.

Speaker Change: Okay. Thank you and then anything to call out from a geography.

Speaker Change: <unk> point of view were there any geographies that were.

Speaker Change: And a stronger than you expected or weaker.

Speaker Change: In the last quarter.

Speaker Change #100: Yes, not stronger and weaker than expected, but we continue to really do well in the northeast.

Speaker Change #100: Great growth market for us we've talked in the past Mitch about what a share point is worth that there are some $35 million or so at retail.

Speaker Change #100: And we still got a lot of room to grow.

Speaker Change #100: So when you think about.

Speaker Change #100: Opportunities for future growth, whether it's there.

Mitchell Brad Pinheiro: You know, bringing NatureZone, Days, and Canyon to those consumers, there's still quite a bit of headroom left for us. Okay, and then, I guess, last question on your comments in the prepared remarks regarding M&A. So. Are you at the point now where you can kind of see past, you know, the, you know, obviously the ERP implementation and, and just the general, you know, your investments? Are we at the point where a more meaningful acquisition, besides just the Papa Pita, is in the works or, or contemplated? Or are we still, you know, a little bit a ways away before we want to make a bigger, a bigger commitment?

Speaker Change #100: Northwest still on the West coast and in particularly the upper Midwest, where we're really not present.

Speaker Change #100: We're excited about the prospects we have in front of us.

Speaker Change #100: Retailer excitement about having us moving into those areas et cetera.

Nature's own Dave's and canyon to those consumers, there's still quite a bit of headroom left for us.

Speaker Change #101: Okay, and then I guess last question on them.

Speaker Change #101: Your comments in the prepared remarks regarding M&A.

Speaker Change #101: So.

Speaker Change #101: Are you at the point now where.

Speaker Change #101: <unk>.

Speaker Change #101: You can kind of see pass.

Speaker Change #101: Obviously, the ERP implementation and just the general your investments is it are we at the point where.

Speaker Change #101: A more meaningful acquisition, besides just the comp Peter.

Speaker Change #101: As in the works or contemplated.

Speaker Change #101: Or are we still.

Speaker Change #101: A little bit a ways away before we want to make a bigger a bigger commitment.

Riles McMullin: No, we're ready when the right opportunity comes along. And that's just the key is, you know, what will that opportunity be? And when will it come?

Speaker Change #101: No.

Speaker Change #101: We're ready when the right opportunity comes along.

Speaker Change #101: And that's the key is what will that opportunity be and when will it come but when it does we're absolutely ready to go we've got we've got plenty of dry powder. Despite all of the things we have going on.

Riles McMullin: But when it does, we're absolutely ready to go. You know, we've got plenty of dry powder despite all the things we have going on. You know, we certainly have the capacity to do a meaningful acquisition, and as we said in the prepared remarks, you know, we're, you know, we're very proactive. I'm more optimistic about M&A activity. You know, seeing more founders and sellers that we talked to, contemplating, you know, transactions. I don't know exactly when they'll come, but when they do, we'll be ready.

Yes, we certainly have the capacity to do a meaningful acquisition and as we said in the prepared remarks here. We are we're very proactive I'm more optimistic.

Speaker Change #101: About M&A activity seeing more.

Speaker Change #101: <unk> founders and sellers that we talk to.

Speaker Change #101: Contemplating transactions.

Speaker Change #101: I don't know exactly when they'll come but but when they do we'll be ready.

Speaker Change #101: Okay.

Mitchell Brad Pinheiro: Okay, thanks. Thanks for the time. Okay, thanks, Mitch. Thank you. One moment for our next question, please. Our next question comes from the line of Conor Rattigan with Consumer Edge.

Speaker Change #102: Okay. Thanks, Thanks for the time.

Speaker Change #103: Okay. Thanks, Mitch. Thank you one moment from next question. Please.

Speaker Change #103: Our next question comes from the line of Conor Rattigan with consumer edge. Your line is now open.

Conor Rattigan: Hey guys, good morning. Thanks for the question. Yes, so we've heard from some other reporters this week that so far this season, the breakfast occasion has remained remarkably resilient in food service channels and away from home with, you know, maybe some more weakness in the at-home. I guess, have you guys seen any differing levels of elasticity by day part or product type across your portfolio or just maybe within the category at large?

Conor Rattigan: Hey, guys. Good morning, Thanks for your question.

Conor Rattigan: Bob.

Conor Rattigan: Yes.

Conor Rattigan: The reporter so far this season that breakfast occasion has remained remarkably resilient and foodservice channels and away from home with maybe.

Conor Rattigan: Maybe some more.

Conor Rattigan: The at home I guess have you guys seen any different level of elasticity by the hardware product types across your portfolio or maybe.

Conor Rattigan: Maybe within the category at large.

Riles McMullin: Connor, it was a little tough to hear you break it up a little bit, but I think I got the gist of it. But, you know, simply put, elasticities have remained below our forecast and below historic levels, you know, kind of across all those channels you mentioned. Okay, I got it. Hopefully, you can hear me a little bit better now. Okay, good, good. Also, on Dave's Killer Bread, so it sounds like things are going great with the bars. I guess just my question is, on the 19,000 stores called out in the prepared remarks, could you maybe help us contextualize that number a little bit? I guess just maybe how much more room is there to run on distribution?

Speaker Change #104: Color was a little tough to hear you break it up a little bit, but I think I got the gist of it but.

Speaker Change #105: Simply put Alaska elasticities have remained below our.

Speaker Change #105: Forecast and below historic levels kind of across all all of those channels you mentioned.

Speaker Change #106: Okay got it hopefully you can hear me a little bit better now.

Speaker Change #105: But.

Speaker Change #107: Okay. Good good.

Speaker Change #107: Also so on Dave's killer bread.

Speaker Change #107: It sounds like things are going great bar I guess my question is on the 90000 stores called out in the prepared remarks could you maybe help us contextualize that number a little bit I guess.

Speaker Change #107: Maybe how much more room is there to run on distribution or we maybe a quarter of the way there and are there maybe any channels lagging behind others that you view as an opportunity.

Conor Rattigan: You know, are we maybe a quarter of the way there? And are there maybe any channels lagging behind others that you view as an opportunity? Yeah, I mean, the ACV is still pretty low, Connor. So we've got we've got a lot of runway. You know, when we've got more opportunity in the club, I think we mentioned convenience, which we really haven't even tapped into yet. We started in our areas of strength, you know, in mass and grocery. So we've still got a lot of runway ahead of us. I don't have the number in front of me, but I want to say the ACV is somewhere still in the 30s.

Speaker Change #108: Yes, I mean, the ACB is still pretty low Conor. So we've got it we've got a lot of runway.

Speaker Change #108: We've got more opportunity in club I think we mentioned convenience, which we really haven't even tapped into yet we started in our areas of strength in mass and grocery.

Speaker Change #108: So we've still got a lot of runway ahead of us.

Conor Rattigan: I don't have the number in front of me, but I want to say the ACB is some we're still in the in the <unk> is that Directionally right.

Riles McMullin: Is that directionally right? I think I think that's, we'll double check that, but I think that's pretty close. So we've got a lot of it all one way, and to give you a comparable DKB, it's somewhere in the 75 ish ballpark from an ACV standpoint, just to give you something to compare it to.

Conor Rattigan: I think that's we'll double check that but I think thats pretty close so we've got a lot of lot of one way and to give you.

Our comparable <unk> is somewhere in the 75 ish.

Conor Rattigan: Ballpark from an ACB standpoint, just to give you something to compare it to.

Conor Rattigan: Awesome. Thanks, guys. Okay, thanks, Connor. Thank you. And I'm currently showing no further questions at this time.

Speaker Change #109: Awesome. Thanks, guys.

Speaker Change #109: Okay. Thanks, Scott. Thank you and I'm currently showing no further questions at this time I'd like to hand, the conference back over to Mr. Ross Macmillan, Chairman and Chief Executive Officer for closing remarks.

Riles McMullin: I'd like to hand the conference back over to Mr. Riles McMillan, Chairman and Chief Executive Officer, for closing remarks. Okay, Norma. Thank you. Just want to thank everybody for taking the time today and joining us for questions. We very much appreciate your interest in our company. And, as always, we look forward to speaking with you again next quarter. Everybody take care. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day. Thanks, Norma.

Ross Macmillan: Okay. Nora. Thank you just want to thank everybody for taking time today and joining us for questions.

Ross Macmillan: Very much appreciate your interest in our company and as always we look forward to speaking with you again next quarter everybody take care.

Speaker Change #110: This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

Nora: Thanks Paula.

Q4 2023 Flowers Foods Inc Earnings Call - Q&A

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