Good day, and thank you for standing by. Welcome to the Flowers Foods Q4 and Fiscal Year 2021 Results Conference Call. At this time, all participants are on a listen only mode. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded and if you require any assistance during the call, please press star zero. I would now like to hand the conference over to your speaker today, Mr. J.T. Rieck, Senior Vice President of Finance and Investor Relations. The floor is yours. Thank you and good morning. I hope everyone had the opportunity to review our earnings release and listen to our pre-prepared remarks and view the slide presentation that were all posted yesterday evening on our investor relations website. After today's Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session we may make forward-looking statements about the company's performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods' business are fully detailed in our SEC filings. We 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 Ryals McMullian, President and CEO, and Steve Kinsey, our CFO. Operator, we're ready to start the Q&A, please. Thank you. Again, as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. One moment as we compile the Q&A roster. Our 1st question comes from Ben Bienvenu of Stephens. Your line is open. Hi, good morning, everyone. Jim Salera on for Ben. I want to ask a little bit about inflation moving into the new year. I guess, 1st of all, on the January 2022 price increase, how long do you think that'll take to get fully implemented? Then maybe you can talk a little bit about the cadence expectations for inflation in the new year. Sure. Thanks for the question. Well, the January price increases is in large measure. There's a few small pieces of it that's just due to, you know, contracts, rotating over, but the lion's share of the pricing, January price increases is already in for the year. Can you guys talk maybe a little bit about expectations kind of as the year progresses for inflation? Sure. I mean, when you look at the overall inflationary environment, obviously we were building in Q4. In 2022, as we said, we expect it to ramp, you know, throughout the year and then obviously Q4 comps. While we still will have inflation, you know, we'll pull back slightly. You should see a ramp and then Q2, Q3 would probably be the highest cost and then it pulls back slightly in Q4. Okay. If I could sneak in 1 more question. In regards to freight, do you guys have a hedging position on freight costs or do you have any visibility into what freight costs might do into 2022? 2 things on freight. 1, if you recall, our biggest transportation cost is around our DSD network. We term that a closed loop network. We actually have you know, 3 primary haulers who take products from the bakeries to the warehouses. Those contracts are usually known a couple of years in advance. You know, we are seeing elevated costs with those as well. From a kind of open market transaction on our warehouse business, we have to go, you know, to the market from time to time, for product delivery there. We do not hedge any of that. We try to buy it forward as much as we can. The reality is, you know, like most companies, we'll be in the, kind of, the current market on the 3PL situation. Okay, great. Thanks guys. I'll pass it on. Thank you. Thank you. Next we have Bill Chappell of Truist Securities. Your line is open. Hi, morning. This is Donald on for Bill. Just wanted to ask a question on any colour you could provide in your food service business versus 2019 levels. With regards to current inflation on the cost front, how much of that would you attribute towards labor? Do you believe there's a time where that could plateau at some point? Thank you. Sure. The food service business, as you saw, it did recover some in the Q4, and we saw that sort of through the H2 of the year last year. It's still below 2019 levels, but there has been some recovery there. As you know, we've been doing a lot of work on our food service business to improve the profitability of it as it does come back, because obviously we've been expecting at least some amount of reversion as we, you know, hopefully start to exit this pandemic situation. It does still, you know, remain below 2019 levels. Conversely, our branded retail business continues to hold up really, really well. You know, given the continued at-home eating trends, you know, our investments in our premium brands, et cetera, have all helped that business to maintain its place as part of the mix. You want to address the plan? Yeah, when you look at, I think your question was around labor inflation. I mean, we're really no different than other companies. I mean, the labor market is really tight, as you know. We're expecting kind of low to mid single-digit labor inflation throughout the year, depending on which market you're in. Okay. Thank you very much. Thank you. Thank you. Up next, we have Rob Dickerson of Jefferies. Your line is open. Great. Thanks so much. Just a couple questions. I guess 1st one, I missed the like 1st minute of the call, so sorry if you already spoke to this. Just in terms of the gross margin and, you know, EPS potential cadence for the year. I know in the prepared remarks, you're, you know, just kind speaking to kind H1, back half-ish, with some moving pieces obviously, you know, in the back half. Kind given, you know, what we saw in Q4, you know, should the market kind be expecting, let's say, you know, similar year-over-year gross margin that kind plays out in Q1, you know, despite the higher pricing? Just kind of in earnings, you know, are we kind of, you know, implied kind of flattish in Q1? Just, whatever you're willing to disclose would be great. Thanks. Yeah, sure, Rob. I mean, obviously we don't give guidance on gross margin specifically, and definitely not by quarter. But I'd say overall, you know, we are expecting some pressure on the gross margin line, so it should be down on a year-over-year basis when we get through the full year. From a cadence perspective, obviously our inflationary costs will build throughout the year, and then because of the experience in Q4, we'll see some of that pull back, if you will. And then, you know, Riles talked briefly about pricing. You may not have heard the comments, but we do have our January price increase that's pretty much in, and then we anticipate in certain categories or certain distribution segments, more pricing coming, so that will build through the H1 as well. Depending on the inflationary, you know, what really happens with the inflationary environment, because while we do have hedges on and we said we're about 70% covered for the year, obviously we still have some open coverage in the back half that, you know, there could be potential that, you know, if things don't moderate somewhat, you know, we would need to look again at some pricing initiatives as well. We expect kind of the, like we said in the release, the cadence things will build. A lot of our savings initiatives start to come in Q3, so we do anticipate, you know, a build from that perspective with regard to overall margin for the year. Okay, perfect. That was helpful. Then, kind of simplistically, again, probably for you, Steve, and then I have 1 for Ryals. Just, you know, in the top line guide for the year, you know, I'm assuming kind of what we're seeing is maybe, you know, all of that's driven by pricing, maybe volumes you've kind of implied or maybe down low single digit, and I'm just kind basing this off of kind level of pricing I saw in Q4, but then also kind of what we already see in the January data set on the track side. Just kind of any kind perspective on kind of that rate of pricing as of now, excluding any additional pricing. Sounds like you're kind talking high single digit-ish. Is that fair? When you look at the tracked channel data, I mean, you know, we're still seeing some positive mix, so that's also helping drive, but obviously as in Q4, pricing is a big driver of that. I would expect you would see that throughout most of the year. Okay. Fair. Rob, we're Go ahead. Rob, to add to that a little bit, we're pretty optimistic thus far on elasticities. You know, if you look at the syndicated data, this is from IRI for period one, which is essentially January of this year, and this would've followed, you know, the significant price increase in January. We're up 15.3% in dollars, but we're also up 5.3% in units, with both of which are ahead of the category. Point is, the early returns on the price increase is holding and those volumes holding up, particularly for branded retail, are pretty optimistic. That gives us confidence going into the year. We'll have to continue to watch it and see what the consumer does, how much they're able to absorb, but early returns are looking promising. Yeah. I think your volumes are actually up year-over-year sequentially relative to December, despite the price increase. That's a good sign. Just a lot to still play out. All right, cool. Then just, Ryals for you know, Bakeries of the Future, right? You've been speaking about this for some time. It sounds like, you know, given your prepared remarks that, you're, you know, have a number of pilots that'll be in the market across a lot of your bakeries by the end of this year. Yeah. You know, the savings you're speaking to kind of, you know, so far and through 2022 doesn't seem like it's really, you know, contingent on Bakery of the Future, but obviously Bakery of the Future would provide, I would think, some material savings, you know, in the out years. You know, is that something that kind starts to, you know, go into your network this year and that's kind of more of a 2023 and forward, you know, optimization upside potential piece? Just, you know, anything you have there. Yeah. No, exactly. I mean, we do expect to start to see benefits from Bakery of the Future this year. As you saw in the prepared remarks, we'll have it rolled out to half of the bakeries this year, you know, on the back of you know, 3 or 4 pilots that we've done over the last several months. We do expect the cadence of savings to begin this year, but we also expect, as you indicate, that will ramp up in 2023 and 2024. All right, cool. Thank you. Pass it on. Thanks, Rob. Thank you. Up next we have Mitchell Pinheiro of Sturdivant & Co. Your line is open. Hey, good morning. Hey, Mitch. Hey, just to follow up there on Bakery of the Future. So number 1, you know, how disruptive is it to change over a bakery, you know, in, you know, into, you know, from current to a, to the Bakery of the Future mode? Is it like, what are we talking, what's happening? Is it just, you know, you're moving some servers around and things like that? Or are you shutting down lines and things like that? Can you talk about that a little bit? Yeah, sure. From an operational standpoint, it's not disruptive. You know, we're not having to shut things down. It's mostly data-driven type stuff at this point. I mean, obviously we're doing some automation work, robotics and that type of thing, which is a little bit of a different story. As you know, we did that in Navy Yard. You know, the pure initial for us to Bakery of the Future is mostly around data. Better data, more real-time data, you know, driving out inefficiencies, lowering scrap costs, et cetera. From an operational standpoint, Mitch, it's not disruptive hardly at all. The way that it is somewhat disruptive is it does require us to change the mindset of the bakeries, and that does take a little bit of time. You know, these folks have operated a, you know, a certain way for a very long time, and you know, you bring in all this fancy, you know, digital equipment and try to sell them on the prospects for improvement that it can provide. That takes a little bit of time to educate them on how it can benefit them, make their daily lives easier and improve the performance of the bakery. It's really as much of a change management exercise as it is anything else. So far, we've been very pleased with the receptivity of the bakeries. A lot of that is. How does that dovetail with the new ERP program? I mean, I haven't been shopping for an ERP program personally, but I was sort of stunned to see, you know, $275 million the cost over 5 years. What, where is that being spent? Like, where is that being spent? Is that just all software costs with a little bit of hardware? I mean, what? That's a big number. Or maybe is it not a big number? Yeah. I mean, you know, when you look at these projects and you can look kind of across our peer set as well, I mean, these are not cheap projects if you will. As we said in the release, you know, about 40% to 50% of the costs will be capitalized, and the rest will be the cost of primarily implementing and rolling out the project itself. When you look at the ERP itself, a lot of that is technology driven and will be kind of a foundation or an enabler for Bakery of the Future. The majority of the cost runs through ERP, not necessarily through kind of the digital work around Bakery of the Future. Yeah. To your point, you know, it's not an insignificant, you know, cash flow item. You know, the large part of the ERP cost from a capital standpoint will come this year. You should, you know, you'll begin to see that tail off some over the next 4 years or so. Okay. You know, when you go back and just look at some of the balance sheet numbers, like if you look at your fixed asset turns and things like that, they've been kind stuck. Like I was sort of expecting as we sort of roll through Bakery of the Future and, you know, as you like, sort of adjust your capacity and things like that, are we going to see, I mean, are we going to see better fixed asset turns going forward? I mean, I realize that baking is a regional business when it comes to manufacturing. You need to be near your markets. Are we going to see some leverage here where you can go several years without adding capacity because you're, you know, finding it through your efficiencies? Or, you know, or is what your fixed asset turns, is it going to be sort of set for a while? We're really not going to see much improvement there. Can you talk a little bit about that, please? Well, a couple of things there, Mitch. 1, you know, obviously our aim is to significantly improve the efficiency of the bakery. So that, you know, that in and of itself will help us create some capacity. But also remember, you know, we are doing some work, you know, via our customer strategy to over time, you know, as we shift more of the mix to branded retail, to convert some of that lower margin business into our branded business. And, you know, you've seen examples of that in Tuscaloosa and Lynchburg with the organic conversions, and we'll continue to do that. But, you know, those customer strategies also open up opportunities for us to further optimize the network. You point out that, you know, in a fresh business we do need to be relatively close to the market, but we don't have to be as close as we used to be. You know, with some of the enzyme technology that's out there now that we're already utilizing, you know, that old 250-mile radius is not as relevant as it once was. That opens up additional opportunities for us as well. Okay. Moving on. As far as food service, what type of initiatives are you taking to improve profitability there? Can you give us some examples? Yeah, sure. I mean, you know, look, price is the most obvious 1. You know, we've said many times that, you know, we do have some accounts that are underperforming, so we continue to work on those. Some of those are under contracts, so they do take some time. But price is certainly 1 lever. You know, our own efficiencies are another. You know, this is not all about the customer. It's incumbent upon us to be as efficient as possible. So those are 2 things. Also, you know, method of delivery too, because, you know, some of these accounts are still DSD, which is a pretty expensive route to market, as you know. You know, converting them to a more optimized distribution model can help as well. Those are just a few of the levers we're pulling. Okay. Final question on M&A. You know, your balance sheet is in terrific shape. You have some great low cost fixed debt. You know, now, you have ample room on your revolvers. You'll still generate plenty ample free cash flow next year based on my estimates. I know that you're going to stay disciplined, you're going to find the right thing, but I mean, how close are we? You know, should we expect to see some M&A this coming year? I know you can't predict timing, but are we, you know, I mean, is it still like nothing's really on the radar right now, or is there things that are working that we shouldn't be surprised to see something in 2022? Yeah. Mitch, I mean, we've been saying for some time now that, you know, our appetite rather for M&A is certainly high. It's been a while since we've done 1. We have a good pipeline of opportunities that we continue to look at. Just for, you know, for 1 reason or another, we haven't pulled the trigger on ` because of fit or price or a combination of the 2. But we continue to be active in the space and, you know, I can't predict what's going to happen this year and wouldn't wanna sort of prognosticate there, but just know that we're, you know, we continue to be active in that market. Okay. All right. Thanks for the time. Thanks, Mitch. Thank you. Again, to ask a question, please press star 1 on your telephone. To withdraw your question, please press the pound key. Our next question comes from Ryan Bell of Consumer Edge Research. Your line is open. Morning. I just had a quick question about the ERP upgrade. In sort of the efficiencies that would be provided by it, is there sort of any savings number that you could talk to? We saw something on the cost side, just kind understand exactly what you get out of that program. Yeah, Ryan, I think a couple of things on the ERP upgrade. 1, you know, SAP is our enterprise-wide ERP system. The reality is, I wouldn't say we're forced, but we, you know, we had to make a move because SAP is moving to their S/4HANA platform across the whole. So at some point, you know, service for our ECC platform will drop off. So, you know, that's driving a portion of the move and the cost. Secondly, because we have to make that move and because of the digital initiatives, you know, then we're looking at, you know, things that will enable, you know, productivity needs or hopefully drive long-term efficiencies, you know, across the bakeries. So there will be efficiency gains that come out of this initiative, but, you know, we're not disclosing those at this point. Okay, thanks. Just a broader question about the evolution of your portfolio as we're seeing a bit more normalization of the environment. Obviously the branded part of your business has been doing really well. And just trying to understand how you think about the shift in the migration towards branded, how much of that can continue. In terms of the private label trends, you know, why do you think that they're, you know, actually so soft despite some of the pricing that's coming through from the industry standpoint? Sure, yeah. This is Ryals. So on the private label side, I mean, we're really seeing the continuation of a trend that's been going on for over five years now. You know, it certainly seemed to accelerate during the pandemic, but you know, even as we kind of you know, get towards the end of that, we're seeing similar trends. I mean, it was down rather significantly again in the Q4. You know, we're seeing it down in units. It's up a little bit in dollars so far this year, but in terms of units, it's down even as we start this year. You know, what we would point to through our research is, you know, you're seeing a premiumization trend in the category where people are really gravitating towards more differentiated items. Obviously we benefited significantly from that with the branded portfolio that we have today, particularly when you think about Dave's Killer Bread and Canyon, and then on the Nature's Own side, particularly the Perfectly Crafted sub-line for Nature's Own have done extremely well. You know, Canyon and Dave's were both up double digits in the Q4. We're seeing that trend continue even after you know those are already premium items and after the price increase in January, we're seeing that trend continue. It really demonstrates the consumer's preference for a premium quality differentiated item. Typically with private label in our category, you don't see a lot. So that's kind of the primary driver. Then as we think about the prospects for our brands going forward, you know, with the innovation we're bringing to market, you know, we mentioned the DKB snack bars that we're really excited about, and early returns on those have been fantastic. Really shows you that, you know, these strong brands can play across categories, which obviously gives us opportunity outside of our core space, if you will. Hey, Ron, this is Steve. Just 1 quick follow-up on your benefit question around ERP Plus. You know, when we started this project, you know, the discussion there was, and Rob has said it many times as well, you know, part of this initiative really is going to be an enabler to drive productivity that helps us hit the long-term targets we have out there. We truly expect, you know, in those target ranges, you know, to see the benefit from the digital and ERP initiative, and that, you know, hopefully will drive us somewhere to the, you know, the upper end of our range. That's really how we're looking at it more internally. Thanks. Just 1 last one for me. In terms of what you're seeing from a pricing standpoint, I know you're talking about the premiumization trend across the category. Just is there a sense as to how much of the pricing is actually being driven by mix shift and stronger demand for products like Canyon and Dave's, versus, you know, sort of pricing on an individual product basis? I mean, with the pricing we took, and I think Rob has talked about it briefly with the current IRI data from period 1, we're seeing it really across the whole branded portfolio. Obviously, your premium products are going to drive more any, you know, any increases. You know, we've taken pricing across, you know, I would say the whole. It's not specifically, you know, 1 brand. Thanks. That's it for me. Thank you. Thank you. Again, to ask a question, please press star 1 on your telephone. We have a follow-up from Rob Dickerson of Jefferies. Your line is open. Great. Just a clarification question, Steve. On cash flow in Q4, it was a little light. I'm assuming there were probably some working cap headwinds on the inventory side. Maybe just explain if that's right. The only other question I have is just the purchase of the lease portfolio. I haven't really seen that line item pop up, and I'm not sure if that's, you know, part of the Bakery of the Future optimization plans. Maybe just those 2 quick questions. Yeah. I mean, when you look at kind of the Q4, on the lease portfolio, you know, there was an opportunity that came to us kind of mid-quarter with regard to that. It was, you know, a collection of several warehouses, and it fits in with our, kind of warehouse optimization strategy. So it did give us the ability to, take out some leases, and now we have some flexibility to look at how we're going, utilize these warehouses or potentially, you know, combine some warehouses. So that does fit kind of with that long-term strategy. And then, you know, the remainder of the elevated CapEx, you know, in Q4 was primarily driven around, you know, some of the project work, if you will, the transformation. Obviously, you alluded to the, kind of working capital increase. Got it. All right, cool. Thank you. Thank you. Thank you. I'm seeing no further questions in the queue. I'll turn it back over to the speakers for closing comments. Well, thank you for your interest in Flowers Foods. Appreciate your time today. Hope everybody has a good weekend. Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day and enjoy your weekend.