Good day, and thank you for standing by. Welcome to the Flowers Foods Q4 and fiscal year 2022 results Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, J.T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead. Thank you, Tanya. 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 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. Riles, I'll turn it over to you. Thanks, J.T. Rieck. Good morning, everybody. Thanks for joining the Q4 call. I'm really proud of our accomplishments in 2022 and would once again like to thank our Flowers team for their hard work in making that performance possible. Despite the challenging macro macroeconomic environment, we generated record sales, we advanced our innovation pipeline, and we made important progress with our digital and supply chain initiatives. We expect to build on that progress this year in 2023. We'll be making additional investments in digital and supply chain, as well as marketing support for the DKB bar launch. Although these investments alongside continued inflationary pressures will impact our near-term results, I'm confident by enhancing our already strong foundation, we're positioning the company for future long-term success. With that, Tanya, we're ready to take questions. Certainly. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please wait while we compile the Q&A roster. One moment. Our first question will come from Bill Chappell of Truist. Your line is open. Thanks. Good morning. Morning, Bill. Hey, Ryals, can you give us a little more color on this stepped- up marketing behind the snack bars? I guess, you know, it had been growing, it had been in test market, it had been doing well, but we didn't really have a a quantification of how big it is or how big it's expected to be this year. You know, maybe you could talk about what and when is being invested behind the brand, you know, what impact that's having on gross margin or on earnings specifically versus just overall brand spend or marketing step up. Thanks. Sure. Bill, as you know, we're beginning the nationwide rollout as we speak. It'll, you know, it'll ramp up as production builds up and as we gain shelf space and retailers throughout the year. It'll be a build throughout the year. Most of the support behind that is gonna be marketing support, digital spend, display execution, all those kinds of things that you really need to activate a new product. You know, DKB is a known quantity, but obviously this is a new space for DKB. We're being very intentional about the investments we put behind the introduction of the new snack line. Mostly marketing support. Again, it'll be a build throughout the year. As far as magnitude goes, we're not, you know, gonna disclose that separately. As we gain traction during the year, we can start to give you guys additional color on how the products are performing overall in the marketplace. Got it. I guess looking at the initial guidance, which is below where we were, and granted you hadn't given guidance before, I mean, is this a $0.05 headwind to earnings? Is it a $0.10 headwind to earnings? Just trying to understand how much of that versus other market dynamics going into the guidance. You mean the marketing support itself for the bars? What headwind is it? Correct. Correct. I mean, maybe two or three cents probably. Okay. No, that helps. Yeah. Just second, looking at the private label trends you talked about in your prepared remarks. I mean, is there an expectation now that pricing is ormalized for private label at the one mass customer, that it's stable as we move through this year, that it actually improves, you mean, in terms of branded share improves? You know, what's your outlook for share as we move over these next couple quarters? The pricing dynamics have started, the retail pricing dynamics, I should say, for private label one mass have started to come up some, which is a good development. I think it's too early to call the play as to, you know, what the overall private label performance will be in 23. You know, towards the end of last year, you know, as we saw private label build the second half of the year gaining share, it did sort of plateau at the end of the year. Through our first period that we just completed this year, you know, that same dynamic is at play. It's a to-be-determined, and of course, that's kinda factored into our guidance range. That's one of our, you know, that's one of our watch outs for the year is how those... You know, how is the consumer overall, and how does that translate into private label performance? The divergence between mass and grocery does continue, though. You know, in the first period, private label was up, you know, pretty significantly in line with what it had been, you know, the last couple periods of last year. It was actually down, from a unit share standpoint in the grocery segment. That's, you know, if that continued, that's obviously, you know, an encouraging trend in and of itself. Got it. Thanks. I'll turn it over. Thank you. One moment. Our next question comes from Robert Dickerson of Jefferies. Your line is open. Great. Thanks so much. I have a bunch of questions, but I'm gonna kinda try to keep it short. Ryals, maybe also Steve, just, I'm curious, in terms of the top line guidance, the essentially 8%-9% year-over-year, is a lot of that coming from, it sounds like some incremental pricing in food service and private label. I'm just asking because obviously there's already been some pricing take in right on the branded side, which I would think would decelerate through the year. Volumes overall for the business were still down a little bit, so just seems a little high to me. Maybe there's also some tailwind coming from the bar rollout. Just any additional color on that would be awesome. Yeah, definitely a little bit of tailwind expected from the bar launch. You know, more impactful. You know, remember Rob, we've got, you know, roughly five months of wraparound pricing from last year. That may be something you're missing there. Plus, you know, we have gone back with additional pricing on top of that this year. You know, a lot of that top line guidance range is additional price, you know, as we continue to experience higher costs. Okay, got it. Then in terms of the gross margin, you know, it sounds like, you know, Q1 is a tough comp. You do have some pricing. Sounds like maybe, you know, there could be some easing costs as you get through the year just in terms of the hedging, the hedging strategy. You know, how would you paraphrase the year in terms of the gross margin side? Is it, like, probably flattish, maybe it's down a little bit, maybe it's a little second half, you know, better than first half? Again, any other color would be great. I mean, when you look at the full year, Rob, I think you're gonna you're gonna see probably pretty much flattish. you know, as we said, we're expecting, you know, some significant inflation to continue through 2023. Even with the additional pricing, you know, that Ryals just discussed, from a top, you know, from an overall margin perspective, I would say pretty flattish and pretty, you know, even throughout the year, with some pressure coming in Q1, obviously, because if you go back and look, Q1 was, you know, a very strong start, you know, the last year. Okay, perfect. That's good enough. Lastly for me is just, you know, Riles, in the prepared remarks, there a lot of discussion, commentary on the spending side, you know, for future benefits and then also some commentary around what those benefits could mean longer term. I think the line was, you know, meaningful margin expansion potential. Obviously you're spending to make the business stronger and hopefully with that strength and some mixed benefits longer term, there would be margin expansion potential. You know, I'm just curious, like if we're thinking about timing that, you know, some of that spending will continue, you know, through either 2023 and then assuming 2024 and then maybe it starts to decelerate 2025, 2026, but still some there. You know, if we just kinda hold, let's say commodities constant or everything else being equal, right? Which is tough to do, but just conceptually, you know, how do you think of kind of, you know, that flow through on the benefit? Is it, you know, again, this is more broad-based. Is it more like, yeah, we need to really We're spending more, right, in 2023 and then we'll still be spending in 2024, but as we get through these benefits then we would expect to see, right, that margin expansion maybe play out in year three or four or what have you. That's all. Thanks. First of all, I would certainly hope that, you know, that this is not, you know, the new normal as far as commodities go. Hopefully, you know, relief coming as we get through this year and into next year. No, good question, Rob, and I think you've largely got it. You know, obviously, you know, investment has to come before benefit, right? I think we've laid out that, you know, due to inflation and the consumer and other things, it's gonna be a pretty challenging year for us and others in the food space. We remain steadfast about continuing to invest in this business for the future. We're not slowing down. We see no reason to slow down. We will continue to roll out the bars. We'll put marketing support behind that. We're investing in supply chain this year. We've talked a lot about the efficiency improvements that we need in the bakeries. We think these investments are gonna unlock that as well. Obviously you have the digital ERP spending, and I think that's where, you know, you'll see a peak spending this year with that beginning to moderate in the years to come. Of course you have the expected benefits that will be rolling in as well. You know, investments going down and benefits coming up, all of which we think will contribute to substantial margin improvement. Got it. All right, thanks guys. One moment. Our next question will come from Ben Bienvenu of Stephens. Your line is open. Hey, good morning, guys. Jim Salera on for Ben. Morning, Ben. Wanted to ask some questions around demand elasticity. I know in the, in the prepared remarks, you guys called out, you know, a significant portion of the volume decline was due to SKU rationalization. Can you just give us an idea for maybe what the branded volume sort of looked like ex the cake SKU rationalization? I assume in the other, the whole volume decline is probably all eliminated SKUs, but on the branded side, is that like half SKU rationalization, half demand elasticity? We don't have that to disclose for you today, that breakout. I mean, you know, what I can tell you is you're right that, you know, the lion's share of the volume declines are in cake and food service, and a lot of that is strategic and intentional. We pulled back on a lot of underperforming SKUs in cake. We pulled back on a lot of underperforming business in food service, and we'll continue to attempt to optimize that business, if you will. You know, when you think about volume declines, and certainly there, you know, there has been some softness on the branded side, you know, as we've seen this, you know, mix shift to private label, and I don't think that's a surprise to anybody. As you think about the overall business, it's heavily weighted towards cake and food service. Okay. On the pricing for 2023, is that evenly spread across the portfolio, or is that more targeted on food service and private label? My thought is, as the value gap at, you know, mass is narrowing, if you guys put pricing, does that reopen that gap back up, or is it still gonna trend to a narrower gap? I think They should stay pretty stable throughout the year. I mean, overall, you know, there's gonna be more, you know, sort of total dollar in private label and food service overall, but, you know, the pricing is across the entire business, but, probably a little bit more heavily weighted towards private label and food service. I would expect the gaps to, you know, assuming, you know, this is us talking and, you know, depending on what the, you know, the retailers can always do something different, but I would expect the gaps to maintain where they are. Okay. Maybe one more question on that. From the consumer perspective, do you think if they have traded down, whether it's from a, you know, high premium to just a normal branded or from normal branded to private label, do you think that there needs to be promo in the channel to get them to make the switch back up the value chain? As the gaps narrow, do you think they'll just naturally go back to buying the more premium SKUs? Yeah, I mean, certainly my hope is that it's the, you know, the latter. You know, that's just something we'll have to wait and see what happens. You know, so far the competitive environment has continued to be stable. Haven't seen any, you know, meaningful uptick. I would certainly hope that, you know, any consumers that might have left a Nature's Own or a DKB to trade down to something else will come back. That's also, remember, you know, the reason that we're continuing with our marketing spend. You know, we're not slashing that for the year because it's gonna be a difficult year. We're continuing to invest in our brands, you know, when the time comes and some of this pressure, you know, is relieved on the consumer, I think that they, you know, they recognize the differentiated aspects of our top brands. I think that alone, in addition to the marketing support will help drive them back to us. Okay, great. Thanks, guys. Hope I helped. One moment. I'm going to remove Mitchell from the platform. One moment. Our next question will come from Connor Rattigan, Consumer Edge, your line's open. Hey, guys. Good morning. Thanks for the question. Morning. Yeah. It sounds like you guys have a really exciting innovation pipeline coming from, you know, Dave's bars and Snack Bites to Nature's Own breakfast pastries. Clearly the snack occasion is totally incremental to the, to the existing portfolio. I guess on the breakfast pastry, you know, in your research, do you guys see this as a substitute to your current breakfast products like bagels or English muffins? You know, is this really bringing in a new customer or a new occasion? Yeah. We actually think it'll be incremental, Connor, which is a pretty exciting prospect. Now, remember, you know, those breakfast pastries are still just in test. You know, the thesis is, you know, bringing something additionally differentiated. What's interesting about these breakfast pastries is that we would intend actually to market those in the bread aisle. I see it as an incremental item to a bagel or an English muffin, something like that distinguishes those from the DKB bars, which of course are, you know, warehouse distributed, and they're in the the traditional bar aisle. Okay. No, that's great. That's really interesting. Also too, just a little bit on the basics of the, of the future initiatives. You know, if possible, could you guys maybe share some of the data points you're collecting or maybe some of the insights you've gleaned thus far and, you know, maybe any cost savings initiatives those have led you to pursue? Yeah, I mean, a big one for us is scrap or waste reduction. You know, having greater data insights into how the bakeries are running, allows us to be smarter about how we run the lines and reduce that waste. Waste is a big cost for us, so it's not immaterial at all. The other thing it helps us do is, it helps us with preventive maintenance, you know, understanding, you know, when breakdowns may occur so that we can plan for downtime instead of having unplanned downtime, which is costly. Then there's the whole notion of micro stops on a line. You have your normal downtime for cleaning or whatever, or if you have a mechanical problem, but it's the tiny stops, the 10, 15, 20, 30-second, 1-minute stops that build up day by day, week by week, month by month, throughout the year, that become a big expense as well. You know, all this data that we're able to gather, is gonna help us alongside of, you know, leadership capabilities and process improvements, things like that, help us gain those efficiencies in the bakeries that we've needed for some time now. All right, thanks. That was great. Appreciate it. I'll pass it on. Thanks, Connor. One moment. Our next question will come from Mitchell Pinheiro of Stifel Nicolaus. Your line is open, Mitchell. Hey, good morning. Morning, Mitch. Of your sales guidance, is any Papa Pita included in that? Yes. Okay. What should we assume is that, it's small, but what% of the sales guidance comes from Papa Pita? Yeah, we can't break that out specifically, Mitch. I mean, it's not tremendous. Remember, they were a co-manufacturer for us. Yeah. The overall top line sales impact is not that huge. Okay, but it is included in there, right? Whatever incremental you expect to get out of that would be included. It's in the sales guidance, yes. Okay. Of the sales guidance, what's the breakdown of volume and mix, pricing and mix, in the year? I mean, it's primarily price mix, Mitch. Yeah. Okay. Maybe another, let me ask you this. What would be the SKU rationalization this year? Is it the same 3% of sales? Is that included in there? We should see the effect of SKU rationalization decline as we get throughout the year. Again, we'll continue to do SKU rationalization, you know, the volume losses that you've been seeing, you know, over the last year or so, that should start to moderate as we move through the year. Okay. When I look in terms of, you know, you're, your gonna try to take some pricing in food service and private label, when I'm looking at slide 8 of your Q4 presentation. You have, you know, some of your store brands and the priority and some of your store brands tactical. What% of your store brands are in each of those categories, and where are you gonna be taking the price? We're taking price across the portfolio, Mitch. Okay. The price has already been taken. Okay. I mean, what percentage is your, is your store brand, you know, the breakout between priority and tactical? Is it 50/50? Is it mostly priority? Can you describe that? I'll have to get back to you on that. I don't have that in front of me. another question, you know, just sort of on interest expense. You expect it to go up this year, but, you know, most of your debt's fixed. When I look at your cash flow, just based on the preliminary guidance, you know, you're gonna have free cash flow, so I wouldn't anticipate debt to rise. Am I wrong? I mean, you'll have the financing of the Papa Pita acquisition. What you will see it rise, you know, for a moment in time until we're able to delever and pay back down. From an investment perspective, you know, we're still investing in ERP this year. Although last year was the highest cash flow year, you know, it's still pretty significant in 2023 as well. Okay. Finally, as you look at the, your guidance range, let's say your EBITDA guidance range, EPS, if you were down, if you're down at the bottom, what would cause that to be down at the very low end? Is there be more private label pressure, you know, commodity cost spikes? What gets you to the low end? Yeah, it's not really gonna be on the commodity side just because of our, of our hedging program. We pretty much, you know what our costs are gonna be for the year, Mitch. I think you're spot on. It's mostly gonna be the overall health of the consumer. You know, how does this private label, you know, uptick trend play out throughout the year? You know, what happens with the competitive environment to an earlier question? You know, do we start seeing much higher promotions as perhaps, you know, we move into the back of the year and some of this inflation subsides, do people start trying to, you know, win consumers back with promotions? Finally, it's our ability to execute on our savings programs. I mean, you saw in the prepared remarks, we have additional savings of $20 million to $30 million in the plan for this year. You know, it's up to us to execute on that. You know, those are the biggest swing factors that we could see during the year that could move you know, higher or lower on the guidance spectrum. You know, then I would also note that, you know, once again, in addition to those items pressuring EPS this year are the investments that we're making behind the bars, behind our supply chain capabilities, additional investment in digital. You know, that's pretty much a $0.09 headwind on the digital ERP side alone this year. Plus, you have the additional DNA from the Papa Pita acquisition and the ERP Plus program that are pressuring EPS as opposed to EBITDA. That's helpful. Have you made any or included in your guidance continued growth margin improvement, I guess, in the cake business? Is that not in your guidance? Do you anticipate that in your guidance, I should ask? Yeah. I mean, every year we're making improvements with the, with the cake business. I mean, you know, last year, despite some of the syndicated data that you all see that doesn't pick up nearly all of our cake business, the profitability in our cake business improved substantially last year. Okay. That should continue? I mean, I remember I thought earlier in the year it was still struggling a little bit. Is there incremental growth there? Well, remember that a lot of times, Mitch, when we're talking about the cake business, some of the struggles that we focus on are the struggles at the Navy Yard specifically, and the Navy Yard is not all of the cake business, right? Significant improvements have been made at the Navy Yard. Alongside that, you know, we've done really well with our SKU rat program, getting rid of all the unprofitable well, not all of them, but a lot of the unprofitable SKUs, taking pricing to improve profitability, innovation, et cetera, has done a lot to improve the profitability overall of the cake business. Okay. All right. That's all I have. Thank you. Thank you, Mitch. I would now like to turn the conference back to Ryals McMullian for closing remarks. Okay. Thank you, Tanya. Thanks, everybody, for your interest in Flowers Foods. We certainly look forward to speaking with you again next quarter. Everybody, take care. This concludes today's Conference Call. Thank you for participating. 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