Flowers Foods - Earnings Call - Q4 2019
February 6, 2020
Transcript
Speaker 0
Welcome to the Flowers Foods Fourth Quarter and Full Year twenty nineteen Results Conference Call. My name is Cheryl, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference call is being recorded.
I will now turn the call over to J. T. Rick, Treasurer and Vice President of Investor Relations. Sir, you may begin.
Speaker 1
Thank you, Cheryl, and good morning, everyone. Yesterday evening, we released our fourth quarter results. Our earnings release and quarterly slide presentation are posted in the Investors section of the Flowers Foods website. We anticipate filing our 10 ks with the SEC on February 19. Before we begin our discussion, please be aware that it may include forward looking statements about the company's performance.
Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters we'll discuss during the call, important factors relating to Flowers Foods business are fully detailed in our SEC filings. Participating on the call this morning are Ryals McMullen, our CEO and Steve Kinsey, our CFO. Ryals, I'll turn the call over to you.
Speaker 2
Okay. Thanks, JT. Good morning, everybody. Thanks for joining the call. Before we get to the details of the quarter, want I to take a moment to remind you about our four strategic priorities to drive value creation.
And they are focusing on our brands, prioritizing margins, pursuing smart M and A, and developing our team. Executing on each of these priorities is how we intend to deliver on our long term goals to grow sales 2% to 4% and earnings eight to 10%. To achieve these goals there are two foundational themes we need to execute against. First, we recognize that sustainable, profitable top line growth is essential for long term value creation. So it's imperative that we cultivate a portfolio of brands and products that anticipates our consumers' needs and delights our customers.
And second, to create value with our portfolio, we must consistently deliver margin expansion by managing cost, reducing valueless complexity, and driving efficiencies up and down the supply chain. As you listen to our remarks this morning, I'd like for you to bear in mind several proof points against those two foundational themes that we believe are evidence of progress toward our goals. One, the investments we're making in our key brands are driving solid top line growth, particularly from DKB, Canyon and Nature's Own. Two, margin improvement efforts from our portfolio and supply chain optimization program are now underway and we have high confidence that once executed, these efforts will remove value less complexity, improve our operational efficiency, and deliver meaningful earnings growth. In fact, we saw some early evidence of just that in the fourth quarter with some modest margin improvement.
The third proof point is the investments we've made to improve the capabilities of our team by giving them the tools and the motivation they need to make more informed, faster decisions around the key drivers of our business. And underlying all of this is complete buy in from the senior leadership team who is operating against clear expectations and committed to creating a culture of action and accountability. And so with that, I'll turn it over to Steve to review the details of the quarter and share our guidance for 2020. And then I'll come back around to review our operational priorities before we open it up for your questions. Steve?
Speaker 3
Thank you, Ryals, and good morning, everyone. We were pleased to report record sales and operating cash flow for the year. In the fourth quarter, solid top line momentum continued, driven primarily by sales growth in the retail channel and stabilization in the non retail channel. Consolidated sales increased 37,100,000.0 or 4.2% quarter over quarter. Canyon Bakehouse contributed approximately 3% of this increase.
In the base business, improved price mix drove 2.1% of the sales increase while lower volumes reduced the top line by 90 basis points. Price realizations improved across most of our channels and product classes, which helped to address inflationary headwinds we experienced in recent quarters. Volumes were down primarily due to reduced promotional activity for traditional loaf breads and lost food service business. Looking at the sales channel, branded retail sales increased $29,000,000 or 5.5%. Canyon Bakehouse's branded products accounted for more than half of these incremental sales dollars.
The balance was largely driven by continued growth from Dave's Killer Bread and Nature's Own Perfectly Crafted, partially offset by lower other traditional loaf sales. Store branded retail sales increased $9,800,000 or 7.5%. Much of the sales increase is attributed to the acquired Canyon Bakehouse store brand business. The balance of the growth was split between improved pricing and volume growth due to increased distribution with existing customers, offset by lower volumes of both store branded cake and breakfast items. Foodservice and other non retail sales decreased by $1,700,000 or 80 basis points.
Lower volumes drove most of the decline due in part to lost business from the inferior yeast disruption we experienced in 2018 and also lower institutional volumes. In the quarter, gross margin was flat at 47% of sales. Improved price realizations were offset by higher workforce costs and lower manufacturing efficiencies as a percentage of sales. Excluding the items affecting comparability detailed in the press release, adjusted SD and A expenses decreased 20 basis points as a percentage of sales primarily due to lower distribution distributor distribution fees and logistics costs, partially offset by higher workforce and marketing costs. GAAP diluted EPS for the quarter was $01 per share.
We did reach a resolution on several IDP related lawsuits. As a result, reported EPS was reduced this quarter by a legal settlement charge of approximately $0.10 per share. Excluding this and the other items affecting comparability detailed in the release, adjusted diluted EPS in the quarter was $0.18 per share, up $02 compared to the prior year. Canyon Bakehouse was accretive to both EBITDA and EPS in the quarter and for the year. A few comments on leverage and cash flow.
Year to date, we've generated operating cash flows of $367,000,000 and made capital expenditures of approximately $104,000,000 Accordingly, flows year to date have been solid. We paid $160,000,000 in dividends to shareholders and reduced our indebtedness by $114,000,000 At quarter end, our net debt to trailing twelve month adjusted EBITDA stood at approximately two times. This brings us now to 2020 guidance. First, let me remind you that 2020 is a fifty three week year. We are forecasting sales growth in the range of 2% to 4%.
This includes the fifty third week, which is expected to contribute approximately 1.5%. The balance of our top line outlook is driven by continued growth of DKB and Canyon Bakehouse. Market share gains from Nature's Own and Wonder, and improvement in cake and food service sales. For the broader category, we expect growth to be driven primarily by consumer shifts to differentiated products rather than volume growth. For 2020, we are targeting adjusted EPS in the range of $1 to $1.08 per share.
The midpoint of this range reflects approximately 8.3% growth over the 2019 adjusted earnings per share of $0.96 Earnings growth in 2020 is expected to be driven by leveraging sales growth as well as executing our supply chain optimization initiatives and improving manufacturing efficiencies. As we have disclosed for several quarters, we plan to complete the termination of our largest defined benefit plan in the first quarter of twenty twenty. In connection with this transaction, we expect to make a cash contribution in the first quarter of approximately 17,000,000 to $35,000,000 and recognize a non cash settlement charge of approximately 125,000,000 to $143,000,000 For 2020, we are targeting capital expenditures in the range of 105,000,000 to $115,000,000 which includes approximately $19,000,000 related to the conversion of our Lynchburg bakery to organic production. We expect continued strong free cash flow generation and our capital allocation priorities remain consistent with our focus on maximizing return on invested capital and growing shareholder value. We'll continue to invest in our brands and bakeries as well as in ways to strengthen the capabilities of our team.
Strategic acquisitions that diversify and enhance the profitability of our portfolio will also be a priority. We intend to do this while maintaining an investment grade financial position and continuing to return to value shareholders through dividends and opportunistic share repurchases. Now I'll turn the call back to Ryals.
Speaker 2
Okay. Thank you, Steve. So as I said at the outset of the call, please keep in mind those three proof points: branded sales growth, portfolio and supply chain optimization to drive margin expansion, and our team investments. So starting with sales growth, in the fourth quarter our top line momentum continued as consumer shifted to differentiated on trend brands like Dave's Killer Bread, Canyon Bakehouse, and Nature's Own Perfectly Crafted. According to IRI, these three brands together experienced strong double digit growth in the fourth quarter compared to the fresh packaged bread category, which was only up 30 basis points.
The integration of Canyon Bakehouse has gone exceedingly well. Not only did Canyon grow from the number three gluten free bread brand in the country all the way to number one, we also exceeded both our sales targets and earnings contribution goals for the year. Canyon's got a creative and entrepreneurial team based out there in Colorado and I do want to thank them for all their hard work and for over delivering in 2019. DKB just continues to be a truly remarkable growth story. We acquired DKB just over four years ago and since then it's grown to become our second largest brand with retail sales of approximately $581,000,000 So just think about that for a second.
That's more than half of Nature's Own at retail and Nature's Own was introduced over forty years ago. And it's almost as much as all of our white bread brands combined. And the best news is we still have plenty of room to grow in certain underdeveloped geographies and with additional customers who either don't carry DKB today or who are not currently within our current DSD footprint. Furthermore, household penetration of organic breads is still under index relative to other organic products and that presents additional opportunity. And with the brand loyalty we've seen from consumers, we believe that DKB can also play in other segments of the baked foods category.
And in fact, we've already proven that with the success of our DKB breakfast products and we'll continue to bring innovative ideas to our passionate DKB consumers going forward. To support DKB's strong gram growth as part of our supply chain optimization strategy, in January we announced the conversion of our Lynchburg, Virginia bakery to organic production. We've got a very capable team at the Lynchburg bakery and they're really excited about the new growth mission. Converting Lynchburg will enable us to serve East Coast markets with fresher product at a lower cost and we expect that converted facility to be operational in the fall of this year. In addition to DKB and Canyon, saw good share gains from both Nature's Own Perfectly Crafted and Wonder.
And we're excited about plans for Tasty Cake and Mrs. Freshley's as we saw the business begin to stabilize in the back half of the year and even show some modest growth in the fourth quarter. So as you can tell, are seeing solid results in the branded portfolio and given that this growth is being driven by leading brands and segments benefiting from powerful consumer trends, we're confident the portfolio is well positioned for continued growth. Turning now to the second proof point, margin expansion. In the fourth quarter, I am pleased to report adjusted EBITDA margin expansion for the first time in eight quarters.
We're encouraged by improved price realizations, better control of sale and stabilization in our cake and food service businesses. And yet we still have a lot to do to reach our goals. Now primarily we're concentrating our efforts on the three areas of focus I mentioned to you last quarter and execution against these is how we intend to achieve consistent margin expansion over time. The first area of focus is portfolio and supply chain optimization. Last quarter I mentioned the aggressive review we had underway to shift the portfolio to a more margin accretive growth profile to streamline our supply chain to support that optimized portfolio and to reduce complexity in our operations.
Just last week we finished up this review which included the development of a more holistic customer and product profitability tool and with this tool we were able to take a much more informed view of product economics and cost to serve. Coming out of the review we now have actionable insights and are formulating specific plans to among other things improve certain direct input costs, consolidate our distribution network, improve cube utilization for lower volume products, and prioritize improvement efforts at underperforming bakeries. The work we've done to date gives us a high degree of confidence the initial savings from these projects can be realized this year. And as a result, we've incorporated them into our 2020 guidance range. We will be investing in outside resources to support timely delivery of results from the various initiatives.
We expect most of the benefits to begin accruing in the second half of the year and we've included 10,000,000 to $20,000,000 of benefit for 2020 in our guidance. As we begin to execute against the projects and the amount and timing of additional savings actions come into clearer focus, we'll update you accordingly. The bakery improvements work will be critical to capturing savings and improving margins. While the tight labor market has affected the efficiency of virtually all of our plants, the impact has been particularly acute at six plants and those will be our initial areas of intense focus. As I mentioned, we are bringing in outside resources to help us and think that's particularly critical in the areas of operations improvement and accountability.
We're making this investment in our team to give them additional support and to increase speed to value. Turning to our second area of focus, reinvigorating and investing in our cake business. Here, we're doing several critical things from both a sales and operations standpoint. In January, we conducted an intensive workshop to develop a comprehensive and detailed improvement plan for our Navy Yard bakery which has been experiencing lower efficiencies and high scrap rates. The team now has a clear course of specific actions focused on improving processes, standards and operational discipline.
We also expect to realize higher efficiencies with significant automation investments we're making at the bakery this year. From an overall sales standpoint for cake, we're focused on strategic volume growth to drive cost absorption, reduce complexity through SKU rationalization, additional distribution opportunities, and innovation. Underlying all these efforts is the reinforcement of a culture of excellence that delivers consistently high quality service and incremental innovation. Our cake business is important to us and it is a key contributor to our bottom line. By providing focus and setting clear priorities, we intend to accelerate it towards its potential and drive meaningful earnings growth.
And finally, third focus area, stabilizing and growing our food service business. At nearly $1,000,000,000 in annual sales, our food service business enables operational scale and is a key source of cash flow to Flowers. To grow profitability, the team is taking advantage of our product profitability tool to make more informed decisions around pricing and which product lines to grow. They're also focused on winning new business and increasing customer engagement to drive growth going forward. And that brings us to our final proof point, team investments.
As I mentioned earlier, we are making additional investments in the team and doing so accomplishes several key goals, improved standards and processes, higher levels of operational discipline, more structured approaches to improve efficiencies and greater speed to value. The team's excited to receive these investments and they stand ready to tackle the challenges ahead. And finally, we have made further revisions to our incentive structure which was quite successful on many fronts in 2019. And I believe the adjustments to our 2020 incentives will do even more to drive the kind of effort and activity necessary to propel us towards our goals. So to close out, we enter 2020 on the right trajectory, demonstrating clear progress against our dual imperatives of sales growth and margin expansion.
Powerful consumer trends are benefiting the top line despite some softness in the broader category. Our margins showed some improvement in the fourth quarter and we have identified projects that can drive meaningful savings and operational improvements going forward. And supporting all of that is a talented and dedicated team that has a clear understanding of our strategic priorities and is focused on executing against them. And so with that, Cheryl, we'll open the line for questions.
Speaker 0
Thank you. We will now begin the question and answer session. Our first question comes from Rob Dickerson from Jefferies. Your line is now open.
Speaker 4
Great. Thank you so much. Good morning, everyone. I guess, know, kind of just main general question is just around kind of the internal study and portfolio optimization timing, you know, the three pillars kind of vis a vis what you think there might, you know, be some incremental expense this year because kind of what I'm hearing, is, you know, we've done a lot of work. Hopefully, it all sounds, you know, it's it's all it's all obviously very positive.
And there's an outlook for Flowers potentially over the next few years because to improve pricemix and optimize your plant network, what have you, all take some time. If we go back to just Project Centennial and the road map that was kind of laid out, you know, we're thinking 'seventeen, 'eighteen, and 'nineteen and beyond, we're now in 'twenty. So, you know, is basically what you're saying is, you know, we're now in this beyond phase. We have outlined, you know, the go forward of what all this might mean for the next few years. In the first year, which is 'twenty, you know, there are going to be benefits, but there might be a few offsets just in terms of investment for those benefits.
And then we'll tell you later, you know, what those benefits might mean to kind of a revisited margin outlook if, you know, potentially in 2021 and 2022. That's it.
Speaker 2
Okay. Well, first of all, Rob, welcome back. It's good to have you back in coverage. So Nice to be back.
Speaker 1
Thank you.
Speaker 3
Yeah. Good.
Speaker 2
So, yeah, we did just finish up the diagnostic last week. And so what we've laid out today is the initial savings that we feel highly confident in for 2020. I mean, clearly, I indicated that there's more to come on that. But until we, you know, refine the numbers and it's even even more than the numbers themselves, it's really the the timing of achievement of those numbers. Until I'm until we have that refined, I'm just not prepared to share that today.
So we'll we'll update you guys as we go forward and frankly should have all that buttoned up for you on our first quarter call. But the 10,000,000 to $20,000,000 represents what we're highly confident in for this year, to achieve. And you're right that there are as part of this some short term, medium term, and long term components to it. The actual supply chain optimization piece, you start thinking about bakery optimization, is the most complex part of
Speaker 1
this
Speaker 2
and that's the longer term piece. You've got to take into account the makeup of your portfolio, what if anything you may or may not plan to exit and how that affects the bakery network is a pretty complicated thing given all the reciprocal baking that we do. However, on the optimization front, there are some nearer end opportunities with regard to the distribution network. And those are some things that we can can take care of fairly fairly quickly. If you recall back to the project Centennial days, one of the things that we did in Centennial was centralize a lot of functions.
And one of the things that used to be decentralized was the procurement of depots. Those were typically done by each individual bakery kind of on their own account. We've now centralized that, but some of the some of the legacy network issues that were created by those independent actions still remain, and those are the things that we can take care of in the near term. With regard to investment, we've talked a lot about with regard to Centennial, the the savings that were captured, the investments that were made back into the business in the form of innovation teams, marketing teams, business units, that kind of thing, and then obviously the inflationary pressures that dug into some of those savings. With regard to this project, what I can tell you is there's much less investment back into the business net of the gross savings, if that makes sense.
We have all of our capabilities stood up for the most part. There'll be a little bit of it, but there's much less required, to achieve the savings targets. And the investment that we're making in our outside resources for this project are much lower than what experienced with Centennial. So hopefully that kinda covered most of your thoughts there.
Speaker 4
Yeah, no, that's great. It's very comprehensive and it makes complete sense. So just looking forward to the update later this year. So thank you very much.
Speaker 3
You're welcome.
Speaker 0
Our next question comes from Brian Holland from Davidson. Your line is now open.
Speaker 5
Yes, thanks. Good morning, everyone. First question, pricing, obviously pretty steady throughout the year, pricemix tailwinds. Volume was a little bit soft in q four. And, you know, we look at the scanner data, seeing some increased promotional intensity around the fresh bread category.
So I guess a two part question. First, and forgive me if you touched this and I missed it during your prepared remarks, but the volume down in Q4, is that attributable to something strategic on your end, SKU rationalization, etcetera? Or maybe is that attributable to some competitive activity in the market? And then the second part would be, what are you seeing in the market here, especially as you noted in your presentation that ingredient costs were down in Q4?
Speaker 2
Sure. So, yeah, we did have some softer volumes in the traditional loaf items in Q4 primarily to directly answer your question whether it was kind of market forces or us, we promoted a lot less in Q4. And so we did see some volume slippage from that. But overall looking at the year in totality, we were actually quite pleased with the trade that we made between lower promotions and volume reductions on the year end balance. As far as competitive activity overall, it's pretty consistent Q4 this year over Q4 last year, but there are some markets and even some specific retailers where competitive activity has been a little bit higher.
Speaker 5
Okay. And so as we roll that forward, obviously the year was good Q4, volume a little bit softer, as you noted, but you held your price and promotion stance. Do you think that that's are you comfortable that, that stance is sustainable given what you're seeing in the market there? Or do you expect some leveling off either on the competitive side or that you might have to give some back?
Speaker 2
Well, what I would say to that is we take a market by market look and I think we've said in prior quarters, we have a new trade promotion management tool here that's been quite helpful to us in helping us be more targeted and smarter around promotions and the return we get off of those promotions. So obviously, we monitor the competitive activity market by market and we take action we see fit market by market.
Speaker 5
Fair enough. And then just curious as we, I guess, start to look forward, I think one of the really interesting opportunities for the business here is is some of the the white space opportunities, and some adjacent categories. I know that we've talked about that before. Any sense you know, thinking about breakfast and and some some other occasions, maybe in store bakery, etcetera. Any sense as to or any update as to kind of the progress against those initiatives and how you kind of think about getting bigger or exploring those opportunities in a more active way going forward?
Speaker 2
Yeah, absolutely. I mean, I think one is internal innovation, right? So we moved into the breakfast space with DKB. That's been quite successful and we'll continue to innovate behind Asia. As we said, it's extremely important, particularly if you want to think about the overall softness in traditional loaf.
It's even more important than ever that we both innovate internally as we did with Nature's Own Perfectly Crafted and through M and A as we've done with DKB and Canyon because that's kind of where the market's growing. I certainly do see opportunities as I said in my prepared remarks for frankly both of those brands, DKB and Canyon to kind of play outside of their traditional space. And we are actively looking at opportunities there. Then obviously as we always have done, we look for M and A opportunities that can fill those gaps as well.
Speaker 5
Thank you. That's helpful cover. Last one for me. Just looking thinking about the the gross margin and and the overall margin construct in 2020. So obviously, you have some plans in place, improved manufacturing efficiencies, etcetera, that are baked in there.
It looks like they'll drive some margin expansion. But just so I understand, ingredient costs, how do we expect that to trend over the course of 2020? And then obviously, the other headwind is on the labor front, which has been in place with you guys for a little bit while freight has been there. Do we expect those components to be more or less steady or any relief there? If you could just help us understand that and I'll pass it on.
Thank you.
Speaker 2
Yeah, sure. So I'll take the labor and freight piece of that and let Steve comment on the commodities front. So from a labor standpoint, I mean, you saw, you know, we saw some continued elevated labor costs in the fourth quarter as had as we had through through 2019. You know, those same issues still persist. Labor market remains very tight.
You know, turnover is an issue thus affecting efficiency of the bakeries. Now, as I mentioned last quarter, we do have a number of things underway that we're trying to improve quality of life in the bakeries, provide extra days off, consecutive days off, those kinds of things. And we are beginning to see that turnover start to come down. Haven't yet quite seen that read through from a cost standpoint yet, but it's also still quite early and, you know, training and that sort of thing do take a little bit of time to push through. And then as you mentioned, even as part of your question, the supply chain optimization piece should help relieve some of that cost going forward as well.
We have seen the transportation market level off. It's still elevated, but is not increasing at the rate that we saw over the last year and a half or so. Steve, do want comment on the commodities piece?
Speaker 3
Sure. So when you look at overall input cost, Brian, we're pretty much in line with our stated strategy of covering six to kind of nine month timeframe. We still have some open coverage in the back half, to be quite honest. So from that perspective, in our forecast, we have some incremental improvement in overall input cost. It's nothing material.
I mean, it's very low single digit improvements year over year. But again, that's very, dependent on how we are able to come in and finish up our coverage, in the back half of the year. We have seen a little run-in some of the commodities, over the past several months. So we're watching that and trying to make sure we mitigate that where we can.
Speaker 5
Very helpful. Thanks again. Best of luck,
Speaker 6
Thank you.
Speaker 0
Our next question comes from Mitch Pinheiro from Sturtevant. Your line is now open.
Speaker 7
Hi, good morning. I apologize if I jumped on the call late, but I had a couple of questions. Have you discussed when I'm looking at your bread share for the quarter dropped into the 16.5%. Any any comments surrounding that?
Speaker 2
Well, our our in total fresh package breads, we were we were up slightly in dollar share according to our eye.
Speaker 7
I guess it dropped sequentially.
Speaker 2
Sequentially, yeah. So we talked a little bit about it, maybe you missed it, that there was some softness in the traditional loaf segment in the fourth quarter that likely accounts for that. And it's offset by the growth of Dave's and Canyon and Nature's Own Perfectly Crafted, which continue to do well.
Speaker 7
Okay. Then when I'm and also looking at the 2020 guidance, the the low end, and if you adjust for the extra week, it's it there's not a lot of growth there. Is there is there what what are the factors affecting the low end of your range?
Speaker 3
So you know, looking at the low end of the range from the top line perspective, you know, obviously, the the extra week adds about one and a half percent to the top line. It's traditionally a a lower softer volume week, from the overall sales perspective. With regard to the rest of the business, on the low end, we're looking at nominal volume growth. On the up end, to get to the upper end the range, I think Ryals may have said earlier, and mix are big contributors to the upper end. Continue to see nice growth in our recently acquired brands and they help really drive a nice mix improvement.
From that perspective, the top line, it's going be critical that we continue to see good growth from those brands. With regard to the earnings and the margin perspective, again, that week typically adds somewhere around a penny, maybe a penny and a half, the overall earnings. Again, it's a softer week when you look at kind of the coverage there. So again, that's the big driver on the low end of the range. The upper end of the range, know, Ryals talked a lot about our optimization efforts and hitting that 10,000,000 to $20,000,000 range we've put out, which is primarily back half driven.
So it's going to be critical that we deliver on those items and projects for us to be able to hit in the upper end of the range.
Speaker 7
Okay. Helpful. And then, just last question. What what are your plans this year, on on the food service side, QSR in particular. But is there any, you know, you struggled a little bit there, you know, based on, you know, factors is the inferior yeast issues.
But, what what's your outlook for for food service?
Speaker 2
Better in 2020, Mitch. I mean, we're gonna lap all of that. We'll lap the last of it. I believe in the first quarter of this year, there's a little bit left just from a comparison standpoint due to the yeast issue. So we'll be able to stop talking about that.
No, good plans for growth in food service. As I said in the prepared remarks, it is an important piece of our business. It's a billion dollar business. It's a very important contributor. And what the team is focused on now is one, using the new product profitability tool that we have where we can see more true unit economics and cost to serve in case you missed that commentary, Mitch.
That really helps us be smarter about the types of business we take on, But they are focused on both winning new business and frankly winning back some of the lost business as well. And we're actually going to see some of that come back on in the first quarter, which is encouraging as we stabilize and then grow foodservice as we've said.
Speaker 7
Okay. All right. Thank you for the questions.
Speaker 2
Sure. Thanks, Mitch.
Speaker 0
Our next question comes from Bill Chappell from SunTrust. Your line is now open.
Speaker 6
Thanks. Good morning. Good morning. Can you talk a little bit more, I guess, both about Canyon and DKB and just kind of the distribution opportunities with Canyon? I guess this is the first kind of spring where you have full ownership and can kind of plan a little bit better.
So trying to understand, does that happen? I mean, you see distribution gains in the spring or is it with your DSD network more kind of intermittent throughout the year? And is the growth coming more from the flacked out part of the business, or are you still seeing some growth in frozen?
Speaker 2
Great. Great question. Let me let me answer the first part of it last. What we saw in 2019 was was growth in both. I mean, you would certainly expect that on the stay fresh side as we initiated distribution there, But we're still seeing substantial growth on the frozen side, which is really encouraging.
As a matter of fact, frozen piece actually outperformed our expectations. Stay fresh piece slightly underperformed our expectations, which I think I've said in the past is I believe that's largely due to consumer awareness about gluten free on the bread shelf. Most gluten free customers are accustomed to shopping shopping for breads in the freezer case. That's on us to increase that consumer awareness, which we're doing. Now we do expect to continue to gain distribution with Canyon.
And one of the things that's really nice to see is even as we're increasing distribution, we're also seeing increased velocities as well. So it's really nice to see both. And then with DKB, we still have a ton of opportunity to grow that both in in geographies, and with retailers that, that may not carry it today. So we're we're really excited about the growth opportunities for both of those brands.
Speaker 6
And just kind of a follow-up on DKB. I mean, if you're let's say you have 20 feet of shelf space, and are you taking DKB and expanding to 24 per shelf feet of shelf space, or are you using it to replace more white or nature zone SKUs? How does it look as you get that expanded demand?
Speaker 2
Of course, it'll differ by retailer, but we always look to expand our total footprint as far as shelf space goes.
Speaker 6
But you're seeing that kind of across the board that they're giving incremental space for DKB?
Speaker 3
Yep.
Speaker 6
Okay. And last one for me. Just I don't I guess I don't fully understand how how you offset kind of the higher labor costs, And you said you're bringing in people to look at that. Maybe give me a little more color on how you offset that other than just paying them more.
Speaker 2
No. Look, it's a fair question. But what I want you to don't think about it necessarily in terms of just pure labor cost being elevated. What it really is is lower efficiencies. And and the lower efficiencies are are generated by the the higher turnover that we're seeing from the tight labor market.
Now some of the things that we're doing to mitigate that will increase labor costs. So for example, to increase quality of life in the bakeries, to give consecutive days off, sometimes we have to add an additional shift. Okay. Well, that's that's additional labor cost. But if we can do that and reduce the significant amount of overtime that we're experiencing, reduce turnover and increase efficiency and gain a net benefit from that, then it's then it's worth doing.
Right? So we we are being careful with it because you don't wanna just go spray four shifts all over the country in in 46 bakeries before it's it's it's proven out. But we're as I said, we we are seeing the turnover start to come down. And with both that and then some of the efforts we're putting into some of our underperforming bakeries, let's say, the focused efforts that we're putting there, I do expect efficiencies to go up this year. It's really more about increasing the efficiency as opposed to thinking about it in terms of pure like wage inflation.
Speaker 1
Got it. Alright. Thanks so
Speaker 3
much for the color. Sure.
Speaker 0
Our next question comes from Fazia Elway from Deutsche Bank. Your line is now open.
Speaker 8
Yes. Hi. Good morning. Thank you.
Speaker 9
Good morning.
Speaker 8
So I guess the first question was I don't I didn't hear you say anything about like your outlook for pricing. I might have missed it. But just wanted to get more color on how you're thinking about pricing as we look into 2020 because it feels like with, you know, ingredient costs potentially deflationary, and I think your price gaps versus private label might be a little bit high. So just curious about how you're thinking about pricing next year.
Speaker 2
Well, we took some pricing last year. We took some pricing last year that is effective this year, but we don't typically comment about outlook for pricing. What I can say is, as I said earlier, we monitor everything market by market and take action as we deem necessary.
Speaker 8
Okay. Okay. And then just, I guess, a clarifying question around the 10 to $20,000,000. It sounds am I right to think, like, that's primarily or entirely procurement savings? And, you know, what's kind of like, how might you sort of either fall short or, you know, is is there upside to that as we think about the back half?
Speaker 2
Right. It's it's It's not in any one area. The 10 to 20 is spread over, we have, five different initiatives that we're working, working on under the halo of portfolio and supply chain optimization. And what I said was the 10 to 20,000,000 is a number that we're very confident in to achieve this year in 2020. However, we just completed the diagnostic work just last week actually.
And while I have numbers on my desk, I wanna make sure that they're refined and we fully understand the timing to achieve those numbers before I share them publicly. We'll update you probably in May as that comes into clearer focus. Just to clarify,
Speaker 3
I've commented there's incremental, very little tailwind on the, input cost side, low single digit. That's separate than the ten to twenty million dollar bucket. So the 10 to 20,000,000 is an incremental number.
Speaker 8
Okay. But your guidance includes this 10 to $20,000,000. Correct?
Speaker 3
Yes. It does.
Speaker 8
Okay. Okay. And then just last question is really around sweet snacks. I know you mentioned stabilization in 2020, but as you look at data, it doesn't seem like anything's improved. So can you just talk about some of your initiatives within sweet snacks?
Speaker 2
Sure. So so with regard to cake, two two pieces to that. One is one is operational, and that's primarily centered on our Navy Yard bakery up in Philadelphia. That bakery has been underperforming, pretty low efficiencies. They've been running some high scrap, And so we have we have a team up there.
Actually, they're there right now, working on the plan that we put in place to, to improve the efficiencies at that at that bakery. So part of it is operational, but then part of it's on the sales and distribution side. We actually did see some modest growth in the fourth quarter from cake, which is really good. They went through some SKU rat and things last year cleaning up some some things, and we did see a little bit of growth in the in the latter part of the year. But we have both new innovation coming on for cake and a big piece of it frankly is gaps in distribution.
And we've actually assigned an experienced executive here to focus solely on that to improve distribution of both Tasty Cake and Mrs. Freshly. So it's both on the sales and on the operations side that we seek improvement this year.
Speaker 8
Alright. Thank you very much.
Speaker 0
Sure. Our next question comes from Ryan Zelle from Consumer Edge. Your line is now open.
Speaker 9
Good morning. Would you be able to take a step back and talk about the health of the core categories that you operate in and help to get some clarity on what might be driving the softer trends that we're seeing in scanner at a company level and within the fresh bread category overall. And then with respect to the SKU rationalization, that you talked about, it seems like from your presentation that that might, primarily be within the cake business. Is there anything, at a wider level, that might be the consideration pool for skew rationalization and would that be, sort of a material impact on the top line, for 2020?
Speaker 2
So health is the core category first. I mean, we all look at the same data and we've seen the softness in the traditional low segments. And as I've said, that's why it's so critical for us to continue to cultivate growth brands that are on trend, meet consumers' current needs like Dave's and Canyon. Internally, we've introduced Nature's Own Perfectly Crafted, which has performed very, very well this year. All those are differentiated from the white and soft variety loaves that we've traditionally seen, on the bread aisle.
As we look into this year and sort of how the year started, probably seen the category a little bit soft so far this year as well in the traditional segment. And a lot of that, that's got a lot of comp issues in it with storms last year. And if you recall, there were some double government payments in January in anticipation of a possible government shutdown. So there's some noise in there that that I wouldn't call a trend at this point, but it does highlight once again the need for us to continue to both internally and through M and A, grow brands that directly meet consumers' needs. As far as SKU rationalization goes, as part of portfolio and supply chain optimization, obviously, we're taking a close look at that.
I've talked a lot about removing complexity from our operations. And to the extent we have slow moving SKUs, we need to get them out of the system. If if you think about it from a retailer standpoint, they're cleaning up their their shelves too, which is another reason why it's very important to have number one, number two brands on the shelf like we do. We're we're quite fortunate because we're able to to directly partner with the retailers to meet their needs. So, you know, as we go through the year, we're constantly evaluating the portfolio.
We'll make moves where we see fit, but all that's incorporated into the guidance.
Speaker 9
Great. Thank you. That's helpful. And then in terms of tack on M and A, are you going to be thinking about doing anything sort of in the near term or is the priority mostly going to be on the profitability of your business? And then once you go through some of these initiatives, then you take a deeper look again.
Speaker 2
The answer to the question is both. You can't always control the timing of M and A. M and A has always been a very important piece of our growth story and it will continue to be going forward. So we'll take those opportunities opportunistically and we're being proactive. But by the same token, we have to take care of the base business and that remains a priority as well.
So you really have to kind of get to operate on both fronts.
Speaker 9
Great, thank you. That's it for me.
Speaker 0
We have no further questions at this time. I will now turn the call back over to Ryals McMullen.
Speaker 2
Okay. Well, you all very much for your time today and for your interest in Flowers. And we look forward to speaking with you again on our first quarter call in May. Thank you very much.
Speaker 0
And thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect.