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spk18: Good morning, and thank you for standing by. Welcome to the Flowers Foods fourth quarter and full year 2023 results conference call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your opening speaker today, J.T. Rick, Executive Vice President of Finance and Investor Relations. Please go ahead, sir.
spk04: Thank you, Norma, and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation that were all posted yesterday evening on our investor relations website. After today's Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session, we may make forward-looking statements about the company's performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our 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 Riles McMullen, Chairman and CEO, and Steve Kinsey, our CFO. Riles, I'll turn it over to you. Okay, thanks JT. Good morning everybody.
spk09: Thanks for joining the fourth quarter call. We're proud of our team's accomplishments in the challenging consumer environment we're facing. Our brands performed very well, gaining unit and dollar share for the first time since the first quarter of 2022. Dave's Killer Bread was a particular standout, reaching $1 billion in retail sales and growing unit volume 10%, while the overall bread category declined 2.6%. We're excited about the multitude of future growth prospects for Dave's and our other brands, and we are investing in marketing and innovation to capitalize on that potential. Our 2024 forecast calls for continued solid results despite these category headwinds. We expect these results to be first-half weighted, benefiting from wraparound pricing and branded retail, new pricing and selected food service accounts, and moderating commodity costs. Our second-half forecast incorporates more caution due to the uncertain consumer and promotional environment. We remain focused on the significant longer-term opportunities we see ahead of us, filling in white space and geographic and product adjacencies, while leveraging innovation to push into new categories. I've never been more confident in our long-term potential, and I look forward to building on our strong base throughout 2024.
spk16: So with that, Norma, we can open it up for questions. Norma, can you still hear us?
spk18: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Robert Dickerson with Jefferies. Your line is now open.
spk23: Great. Thanks so much. Good morning, everyone. Hey, guys. Just a couple quick questions.
spk02: I guess kind of just first piece, maybe this is more for Steve. As we think through the year, especially kind of first half, second half, how are you feeling about gross margin progression, just given some of the pullback in your inputs, but then also maybe some ongoing kind of promotional reinvestment? potential takes.
spk09: Yeah, Rob, let me start, and Steve can certainly fill in. So from a gross margin standpoint, we expect better results. We saw a nice gross margin increase in the fourth quarter, and we'd expect that to continue. A couple of other factors, though, to think about impacting bottom line performance. One, we are investing in the business. So whether that's ERP or or our marketing investments, et cetera, behind Dave's and Nature's Own and the new bar launches and everything, you know, we are spending more marketing dollars, you know, investing in the business. So, you know, that'll somewhat pressure margins from an EBITDA or bottom line standpoint. But obviously those are intended to fuel future growth and our investments we're happy to make. But we would expect some improvement in gross margin. But one other thing to note, somewhat offsetting that, We talked in the prepared remarks about stranded overhead from the strategic exits. That does, particularly from a labor standpoint, affect those margins somewhat. However, the exciting thing about that for us is the opportunity we have ahead to refill that capacity with higher margin volume, which was the intention all along. Now, obviously, that won't come all at once. It'll take a little bit of patience. But we've got a really significant opportunity ahead of us to refill that, you know, extreme low margin business that we've exited with much more profitable business. Steve, you want to add?
spk03: Sure, yeah. I mean, you know, as Riles commented, as you saw in the script, too, you know, we are being a little more cautious on the consumer in the back half. So when you think about overall cadence currently kind of in the guidance range, you know, we do see stronger performance in the first half. A lot of that, as Riles said, you know, be driven by some positives and negatives you know specifically to some of the i think commodity moderation pressure if you think about last year um you know the first half was tougher than the back so from an overall comp perspective you know that will be driving some of the improvement in the first half as we've seen things pull back somewhat you know we do expect first half of 2024 to benefit more than the back half with regard to overall commodity inputs
spk02: Okay, perfect. All right, and I guess just secondly, you know, I think in hearing in the guide is, you know, potential for ongoing volume declines. You know, clearly I understand, you know, little pressure consumer backdrop. Clearly, you know, a decent amount of pricing has gone through. Dave's doing well, but I guess that's a little different. So I'm just curious, like, you know, if we listen to a number of other companies that are all kind of going through some, you know, form of volume pressure, there is kind of this expectation, so to speak, that as we get through the back half of 24, the probability should increase, you know, that volumes actually start to grow again, you know, partially just driven by lower base and easier comp in the back half of 23. So, I mean, it sounds like you're being a little bit, you know, more cautious and maybe you're, A bit more rational than than others. So, you know, kind of the straight question is just, you know, kind of why not you do forecast a little bit, you know, more on the positive volume side as you get through the year. Or maybe that could play out. It's just, you don't really know if it does. And that's probably realistic.
spk09: Yeah, look, it's a fair point. And, you know, it's clearly obvious, you know, the category continues to be under pressure and, you know, with private label trade down. But, you know, if you look at our market share performance, it's been quite admirable, you know, what we've been able to do, you know, even in this environment. Now, certainly we understand that, you know, that market share performance in a declining category doesn't necessarily translate into bottom line profitability. But it does show, you know, the investments that we're making in our brands are enable us to continue, you know, relative strong performance in a pressured category. Now, you know, as to the volume outlook for the year, I don't disagree with you. I mean, there's certainly a possibility as the market adjusts to, you know, sort of post-pandemic reality that, you know, the category finds its equilibrium, which is what I think it's trying to do. And we could see, you know, more positive volume performance in the second half, but But at the same time, part of our reason for caution is the offset of what a higher promotional environment could look like in that circumstance. I mean, if the category, in order to drive unit volume, decides it needs to become more promotional, then that could be an offset. The other thing that I would note, though, is our volume performance continued to improve throughout 23. And we finished the year with branded retail volume only down 30 basis points, which was a substantial improvement and overall volume improved. We were down, I think, 2.4 in the fourth quarter as opposed to 4.1 if you look back to the third quarter. So the sequence has been good. And so that's certainly a reason for optimism, which I think we're capturing at the upper end of guidance. you know, again, just given the uncertainty and the relative weakness of the category, we thought, you know, caution was prudent, at least at this point.
spk02: All right. And then, pardon me for asking a third quickly, just the California legal decision, you had said the prepared remarks, your decision shouldn't be made any, you know, anytime sooner than March 1st. Could you just maybe just add a little color as to kind of what that decision could imply? Like, you know, if decision goes one way, you know, we likely would incur, you know, punitive damage or what have you, not sure, you know, or, you know, probably there's not some material impact and just trying to understand kind of what that could mean relative to the current guide.
spk09: Yeah, so we, you know, we've already, you know, announced what, you know, what the settlement will be in terms of cost to the company. I think probably the more relevant answer to your question is, what happens post-March 1st if the settlement is approved? And what will happen, if that is the case, is that we will then set about converting all of the distributors in California to an employee-based model. That is, at least out the gate, likely to be somewhat dilutive to our results out in California, at least in the short term. you know, until we can get everybody trained up, et cetera, you know, bring all the employees on. The good news there is, though, it will be a phased-in approach, Rob. So we have 12 months from the date of the settlement to get that done. So, you know, we'd expect, and I think we said in the prepared remarks, probably first quarter of 25, that conversion should be complete.
spk02: Yep, awesome. All right, great. Thank you so much. Okay, thanks, Rob.
spk18: Thank you. One moment for our next question, please. Okay. Our next question comes from the line of Bill Chappelle with Chewist Securities. Your line is now open.
spk19: Thanks. Good morning. Good morning, Bill.
spk07: Just a little bit more maybe commentary on the food service, the cake business, kind of the thoughts there in particular, kind of what initiatives we're looking at to kind of improve on the tasty cake side or or just the cake in general and kind of how you see the trends play out for there versus the core?
spk09: Yeah. So I think we've mentioned this a couple of times on prior quarter calls, but good question. I'd like to discuss it some more. So clearly pricing has been important in both of those areas, all of those areas, private label food service and the cake business. And we've also, as you know, done some pretty significant skew rationalization. and strategic business exits, primarily in food service and cake, but also a little bit in private label. However, the profitability of all three of those businesses has improved markedly. So the strategy is working from that standpoint. Now, obviously, there are offsets in other parts of the business. The soft variety and white bread area bill, as you know, is the most susceptible to private label trade-downs. Obviously, that's a negative. and then offset by the DKB performance in terms of unit volume. But frankly, even DKB's profitability was down last year pretty significantly because we had substantially higher organic wheat costs last year. Now, the margins are still very attractive for Dave's. I know we don't disclose particular numbers there, but still among the highest in the portfolio. But they were down roughly 500 basis points last year just because of the increased organic wheat cost, which this year will moderate somewhat. So we'll recapture some of that. So really good progress on those parts of the business, somewhat offset by category weakness and commodity cost and those effects on other parts of the business.
spk07: Okay. No, thanks. And then a little bit on the commodity front, I guess historically you've just kind of said, Hey, we had six to nine months out. I know it's most of the same thing, but this time you're saying, Hey, we're 70% locked on your, on your input costs. So is there any change to how you're looking at things or we're just using percentages versus months?
spk03: No, not really. We continue to look at our strategy to be six to roughly 12 months out. So probably, you know, more on the longer term of that in some cases. But, you know, the reality is I think last year coming into the year, we were roughly 60, 65% covered. So, you know, we stay pretty steadfast to our overall strategy. You know, we do, we have added some things kind of to the toolkit, if you will, to try to manage the volatility, you know, in the training there better, but no changes to how we think about coverage and how, you know, how long we're planning, how long we're willing to go.
spk07: Got it. No, and actually one follow-up on the DKB bars. Is there, and I'm sorry if you already covered this, but is there something you can, you know, you're seeing repeat rates or something that gives you, because again, a little pushback we hear is it's a crowded category. And I know DKB has a great brand, but how you differentiate yourself or get incremental shelf space, versus the 20 other bars that are there, and what gives you that confidence, what you've seen over the past three, four months in terms of as you expand this year?
spk09: Yeah, so, you know, as we noted in the prepared remarks, you know, really pleased with the results in 23. We got a lot more stores than we had targeted. You know, first of all, it's a great product. And we think that's what differentiates us. I mean, that's what differentiates the loaf items and the breakfast items. It's just the superior quality. It's a baked bar, great flavor and texture, great nutritional panel on it. A lot of the bars in that category are cold-pressed, so we have more of that fresh-baked flavor, which if you've tried them, you can certainly attest to. But you are right about shelf space. I mean, we're only three SKUs on the shelf. And so positioning is really important. And what we're seeing where our positioning is strong, kind of middle, eye level on the shelf, even with those three SKUs, the standout colors we have are really drawing consumers to the brand, whether they're current DKB shoppers or they're new to the brand, which is net incremental to the DKB consumer base. I do think it's going to help us tremendously as we bring in the three additional protein SKUs this year, you know, giving us more visibility on the shelf. And, you know, as we said before, those protein bars in test market are proving incremental to the first three SKUs, so we're kind of reaching a wider consumer base with that higher protein offering. So, you know, velocities are in line with the categories, so we're all good there. We can always do better, and we will get better. We've said many times, you know, we're treating this as a startup business. You know, we're learning a bit as we go, too, Bill. But so far, so good. And then, of course, behind that, we've got a nice innovation pipeline for Dave's coming with the StackBytes in the back half and even more beyond that in 25. So we're off to a good start. We've got nice momentum. The team's excited. Consumers and retailers alike are excited about it. So we're feeling really good about where we are so far. It's early days, but we're in good shape.
spk07: Great. Thanks so much for the color. Thanks, Bill.
spk18: Thank you. One moment for our next question, please. Our next question comes from the line of Jim Solera with Stevens. Your line is now open.
spk08: Hi, guys. Good morning. Thanks for taking our question. In your prepared remarks, you know, you mentioned some uncertainty in 2024, obviously around the consumer and promotions. I think we all get kind of the consumer piece of that. But to double click on the promotion side, is the concern that some of the larger competitors in the category are going to maybe revert to how they behaved in the past where they, they really aggressively chase volume? Um, or is it more that, you know, retailers are going to come to you guys expecting price deflation and using promotion as a tool to achieve that?
spk09: Yeah, Jim, definitely the former. Um, you know, we, we've seen this in our category before. We haven't seen it in a long time. Um, And even though, as we noted in our remarks, we even promoted a bit more in the fourth quarter just because it was seasonality in our business, not being a big dinner roll supplier, that the fourth quarter can be a little bit volatile. So we promoted a bit more to drive more unit volume, got good effectiveness out of those promotions, but we also didn't spend nearly as much in trade to get it and maintained one of the highest average price points in the category. But yeah, the caution is much more around the other competitors in the space than it is pressure from retailers, which we really have not felt to date.
spk08: Okay, great. Because it seems like, and we've talked about this in the past, but part of the challenge is you have this channel shift dynamic that's going on. And from the branded retailer's perspective, or the branded food company's perspective rather, if you're putting promo dollars in the channel, but the consumer is in the wrong channel, you're essentially just giving price away. At least that's kind of the way we viewed it. And so would we have to wait until the consumer shifts back to traditional grocery before we see those promotional increases be put into place? Or is it something that even with the consumer's still in kind of value-oriented channels. Competitors might just put promo in the channel anyway just to see what comes up on the other side.
spk09: Yeah, I mean, it could be either. I think that's just going to need to be a wait and see and monitor the environment and react accordingly.
spk01: Okay, great.
spk08: And then maybe if I could sneak in one more. In the breakdown for the 2024 sales guide, I know you guys mentioned you have some wraparound pricing benefit in the first half. and some business exits that negatively impact the volume side. If we just think about, you know, there was a pull forward on business exits into 2023. So I would have thought that would give you guys a more favorable lap in the back half of 2024. So if you can maybe just kind of separate of the volume decline, how much of it that you anticipate is still coming from business exits versus just, you know, kind of organic volume declines.
spk09: Yeah, most of it is still going to be business exits. And I do want to note, if folks didn't pick up on it in the prepared remarks, barring something unforeseen, we do expect this to be the last year of strategic exits. I mean, we're done with what we wanted to do. And I mentioned earlier that what we're thrilled about is the opportunity we have in front of us. And believe me, there is a lot of opportunity to go back and refill that capacity with higher margin business. which will not only drive profitability, but go a long way to help bring the unit volume back up. But you are correct. It is first half weighted. You'll see most of that effect in the first half, and then as we move into the back half, it'll be much less significant. And then, again, that should be it. Okay, great.
spk08: Thanks, guys.
spk09: I'll hop back in the queue.
spk08: Thanks.
spk18: Thank you. One moment for our next question, please. Our next question comes from the line of Mitchell Pinheiro with Sturtevant and Company. Your line is now open.
spk05: Yeah, hey, good morning. So just a couple questions. When it comes to the gross margin in 2024, excluding sort of your input costs, your commodity costs, are we seeing like a flattish gross margin because of stranded fixed costs as you exit these businesses? You know, or are we seeing, is there, is there something else happening that, that needs to be called out? Like I would expect that some of your digital, you know, transformation is, would start to show up in fiscal 24 a little bit, you know, improved operational sort of the overall equipment effectiveness and things like that. When should we start to see real gross margin improvement absent, you know, your commodity costs and some things like that?
spk09: Yeah, so as we said, we do expect gross margin improvement this year, and you're right. Some of it will be the commodity moderation. There's puts and takes there. You know, flour's better. There's some other cost buckets that are up. But net-net, you know, we expect to see overall gross margin improvement for that. And frankly, also aided by all the things that you just said. Banker of the future delivering, you know, better OEE results. And then, you know, some of that will, you know, what we've experienced is that's been somewhat offset by, you know, primarily labor, and that is some of that stranded overhead cost showing up. And again, I want to emphasize that's temporary, because we will refill that capacity, and eventually that'll go away. But right now, it is a little bit of strain. And then as you move down the P&L, thinking about marketing and ERP costs, a little bit of labor and SD&A too, where some of that stranded overhead shows up. is what's pressuring the EBITDA margin line a bit, at least at this time. Though, again, we expect as we go through the year, and then particularly in the 25, for all of those things to improve as we refill that capacity and cover this stranded cost.
spk05: I know you have – so you're a little cautious on the second half. You just talked about it, questioned before about promotion, the potential for – you know, maybe a little more promotional environment. But you guys have invested in your promotional management tools. Can you talk about that as it might apply to the back half?
spk09: Yeah, I think it's a great question. And it's timely because that really showed up in the fourth quarter. You know, if you look, at the syndicated data, you'll see, as I said, that we had among the highest average prices in the category, and yet our units on promotion were up a bit. We did promote more, but we did so much more effectively and with much less trade spend than we might have historically needed to use. Really good display execution in support of those promotions. And for the first time in a while, you know, actually saw, you know, a nice lift and got a good return off of those promotions. And, you know, for the past few years, we've been talking about how, you know, promotions had not been very effective, you know, not seeing a lot of lift from them. But in the fourth quarter, for the first time in a while, we did. So that trade promotion management tool that you reference is enabling us to be a lot more effective when we do promote.
spk05: Okay, thank you. And then anything to call out from a geography performance point of view? Were there any geographies that were stronger than you expected or weaker in the last quarter?
spk09: Yeah, not stronger and weaker than expected, but we continue to really do well in the Northeast. It's a great growth market for us. We've talked in the past, Mitch, about what a SharePoint is worth up there, some $35 million or so at retail. And we've still got a lot of room to grow. So when you think about opportunities for future growth, whether it's there, Pac Northwest, still on the West Coast, and then particularly the upper Midwest where we're really not present, we're excited about the prospects we have in front of us, retailer excitement about having us move into those areas, etc., you know, bringing AtraZone, Days, and Canyon to those consumers, you know, there's still quite a bit of headroom left for us.
spk05: Okay. And then I guess last question on your comments in the prepared remarks regarding M&A. So are you at the point now where you can kind of see past, you know, obviously the ERP implementation and and just the general, you know, your investments? Are we at the point where a more meaningful acquisition, besides just, you know, the Papapita, is in the works or contemplated? Or are we still, you know, a little bit a ways away before we want to make a bigger commitment?
spk09: No, we're ready when the right opportunity comes along. And that's the key is, you know, what will that opportunity be and when will it come? But when it does, we're absolutely ready to go. You know, we've got plenty of dry powder despite all the things we have going on. You know, we certainly have the capacity to do a meaningful acquisition. And as we said in the prepared remarks, you know, we're very proactive. I'm more optimistic about M&A activity, you know, seeing more founders and sellers that we talk to contemplating transactions. Don't know exactly when they'll come, but when they do, we'll be ready.
spk14: Okay. Thanks for the time. Okay. Thanks, Mitch.
spk18: Thank you. One moment for our next question, please. Our next question comes from the line of Connor Radigan with Consumer Edge.
spk17: Your line is now open.
spk13: Hey, guys, good morning. Thanks for the question.
spk10: Yes, so we've heard from other reporters to see so far this season that the breakfast occasion has remained remarkably resilient in food service channels and away from home with, you know, maybe some more weakness in the at-home. I guess, have you guys seen any differing levels of elasticity by day part or product types across your portfolio or just maybe within the category at large?
spk09: Connor, it was a little tough to hear you break it up a little bit, but I think I got the gist of it. But, you know, simply put, you know, elasticities have remained below our forecast and below historic levels, you know, kind of across all of those channels you mentioned.
spk10: Okay, got it. Hopefully you can hear me a little bit better now. Yeah, that's good. Okay. Okay, good, good. Also, so on Dave's Killer Bread, so it sounds like things are going great with the bars. I guess just my question is, on the 19,000 stores called out in the prepared remarks, could you maybe help us contextualize that number a little bit? I guess just maybe how much more room is there to run on distribution, you know, or maybe a quarter of the way there? And are there maybe any channels lagging behind others that you view as an opportunity?
spk09: Yeah, I mean, the ACV is still pretty low, Connor. So we've got a lot of runway. You know, we've got more opportunity in club. I think we mentioned convenience, which we really haven't even tapped into yet. You know, we started in our areas of strength, you know, in mass and grocery. So we've still got a lot of runway ahead of us. I don't have the number in front of me, but I want to say the ACV is somewhere still in the 30s. Is that directionally right? I think that's We'll double check that, but I think that's pretty close. So we've got a lot of one-way. And to give you a comparable, DKB is somewhere in the 75-ish ballpark from an ACV standpoint, just to give you something to compare it to.
spk11: Awesome. Thanks, guys. Okay. Thanks, Connor.
spk18: Thank you. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Riles McMillan, Chairman and Chief Executive Officer for closing remarks.
spk09: Okay, Norma, thank you. Just want to thank everybody for taking time today and joining us for questions. We very much appreciate your interest in our company. And as always, we look forward to speaking with you again next quarter. Everybody take care.
spk18: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
spk09: Thanks, Norma. Thank you. Thank you. Thank you. Thank you. you
spk18: Good morning, and thank you for standing by. Welcome to the Flowers Foods fourth quarter and full year 2023 results conference call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your opening speaker today, J.T. Rick, Executive Vice President of Finance and Investment Relations. Please go ahead, sir.
spk04: Thank you, Norma, and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation that were all posted yesterday evening on our investor relations website. After today's Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session, we may make forward-looking statements about the company's performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our 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 Riles McMullen, Chairman and CEO, and Steve Kinsey, our CFO. Riles, I'll turn it over to you. Okay. Thanks, JT. Good morning, everybody.
spk09: Thanks for joining the fourth quarter call. We're proud of our team's accomplishments in the challenging consumer environment we're facing. Our brands performed very well, gaining unit and dollar share for the first time since the first quarter of 2022. Dave's Killer Bread was a particular standout, reaching $1 billion in retail sales and growing unit volume 10%, while the overall bread category declined 2.6%. We're excited about the multitude of future growth prospects for Dave's and our other brands. and we are investing in marketing and innovation to capitalize on that potential. Our 2024 forecast calls for continued solid results despite these category headwinds. We expect these results to be first-half weighted, benefiting from wraparound pricing and branded retail, new pricing and selected food service accounts, and moderating commodity costs. Our second-half forecast incorporates more caution due to the uncertain consumer and promotional environment. We remain focused on the significant longer-term opportunities we see ahead of us, filling in white space and geographic and product adjacencies, while leveraging innovation to push into new categories. I've never been more confident in our long-term potential, and I look forward to building on our strong base throughout 2024. So with that, Norma, we can open it up for questions.
spk18: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Robert Dickerson with Jefferies. Your line is now open.
spk23: Great. Thanks so much. Good morning, everyone. Hey, guys. Just a couple quick questions.
spk02: I guess kind of just first piece, maybe this is more for Steve. As we think through the year, especially kind of first half, second half, how are you feeling about gross margin progression, just given some of the pullback in your inputs, but then also maybe some ongoing kind of promotional reinvestment potential? Thanks.
spk09: Yeah, Rob, let me start, and Steve can certainly fill in. So from a gross margin standpoint, we expect better results. We saw a nice gross margin increase in the fourth quarter, and we'd expect that to continue. A couple of other factors, though, to think about impacting bottom line performance. One, we are investing in the business. So whether that's ERP, or our marketing investments, et cetera, behind Dave's and Nature's Own and the new bar launches and everything, we are spending more marketing dollars investing in the business. So that'll somewhat pressure margins from an EBITDA or bottom line standpoint, but obviously those are intended to fuel future growth and our investments we're happy to make. But we would expect some improvement in gross margin. But one other thing to note, somewhat offsetting that, We talked in the prepared remarks about stranded overhead from the strategic exits. That does, particularly from a labor standpoint, affect those margins somewhat. However, the exciting thing about that for us is the opportunity we have ahead to refill that capacity with higher margin volume, which was the intention all along. Now, obviously, that won't come all at once. It'll take a little bit of patience. but we've got a really significant opportunity ahead of us to refill that extreme low margin business that we've exited with much more profitable business. Steve, you wanna add?
spk03: Sure, yeah. I mean, as Riles commented, as you saw in the script too, we are being a little more cautious on the consumer in the back half. So when you think about overall cadence, currently kind of in the guidance range, we do see stronger performance in the first half. A lot of that, as Riles said, will be driven by some positives and negatives, specifically to some of the commodity moderation pressure. If you think about last year, the first half was tougher than the back. So from an overall comp perspective, that will be driving some of the improvement in the first half. As we've seen things pull back somewhat, we do expect first half of 2024 to benefit more than the back half with regard to overall commodity inputs.
spk02: okay perfect um all right and i guess just secondly um you know i think in hearing in the guide is um is you know potential for ongoing volume declines um you know clearly i understand you know little pressure consumer backdrop uh clearly you know decent amount of pricing's going through um dave's doing well but i guess that's that's a little different um so i i'm just curious like you know if we listen to a number of other companies that are all kind of going through some, you know, form of volume pressure, there is kind of this expectation, so to speak, that as we get through the back half of 24, the probability should increase, you know, that volumes actually start to grow again, you know, partially just driven by lower base and easier comp in the back half of 23. So, I mean, it sounds like you're being a little bit, you know, more cautious and maybe you're, A bit more rational than than others. So, you know, kind of the straight question is just, you know, kind of why not you do forecast a little bit, you know, more on the positive volume side as you get through the year. Or maybe that could play out. It's just, you don't really know if it does. And that's probably realistic.
spk09: Yeah, look, it's a fair point. And, you know, it's clearly obvious, you know, the category continues to be under pressure and with private label trade down. But, you know, if you look at our market share performance, it's been quite admirable, you know, what we've been able to do, you know, even in this environment. Now, certainly we understand that, you know, that market share performance in a declining category doesn't necessarily translate into bottom line profitability. But it does show, you know, the investments that we're making in our brands are enable us to continue, you know, relative strong performance in a pressured category. Now, you know, as to the volume outlook for the year, I don't disagree with you. I mean, there's certainly a possibility as the market adjusts to, you know, sort of post-pandemic reality that, you know, the category finds its equilibrium, which is what I think it's trying to do. And we could see, you know, more positive volume performance in the second half, but But at the same time, part of our reason for caution is the offset of what a higher promotional environment could look like in that circumstance. I mean, if the category, in order to drive unit volume, decides it needs to become more promotional, then that could be an offset. The other thing that I would note, though, is our volume performance continued to improve throughout 23. We finished the year with branded retail volume only down 30 basis points, which was a substantial improvement and overall volume improved. We were down, I think, 2.4 in the fourth quarter as opposed to 4.1 if you look back to the third quarter. The sequence has been good, and so that's certainly a reason for optimism, which I think we're capturing at the upper end of guidance. you know, again, just given the uncertainty and the relative weakness of the category, we thought, you know, caution was prudent, at least at this point.
spk02: All right. And then, pardon me for asking a third quickly, just the California legal decision, you had said the prepared remarks, you know, decisions shouldn't be made any, you know, anytime sooner than March 1st. Could you just maybe just add a little color as to kind of what that decision could imply? Like, you know, if decision goes one way, you know, we likely would incur, you know, punitive damage or what have you, not sure, you know, or, you know, probably there's not some material impact. I'm just trying to understand kind of what that could mean relative to the current guide.
spk09: Yeah, so we, you know, we've already, you know, announced what, you know, what the settlement will be in terms of cost to the company. I think probably the more relevant answer to your question is, what happens post-March 1st if the settlement is approved? And what will happen, if that is the case, is that we will then set about converting all of the distributors in California to an employee-based model. That is, at least out the gate, likely to be somewhat dilutive to our results out in California, at least in the short term. you know, until we can get everybody trained up, et cetera, you know, bring all the employees on. The good news there is, though, it will be a phased-in approach, Rob, so we have 12 months from the date of the settlement to get that done. So, you know, we'd expect, and I think we said in the prepared remarks, probably first quarter of 25, that conversion should be complete.
spk02: Yep, awesome. All right, great. Thank you so much. Okay, thanks, Rob.
spk18: Thank you. One moment for our next question, please.
spk16: Okay.
spk17: Our next question comes from the line of Bill Chappelle with Truist Securities.
spk18: Your line is now open.
spk19: Thanks. Good morning. Good morning, Bill.
spk07: Just a little bit more maybe commentary on the food service, the cake business, kind of the thoughts there in particular, kind of what initiatives we're looking at to kind of improve on the tasty cake side or or just the cake in general and kind of how you see the trends play out for there versus the core?
spk09: Yeah. So I think we've mentioned this a couple of times on prior quarter calls, but good question. I'd like to discuss it some more. So clearly pricing has been important in both of those areas, all of those areas, private label food service and the cake business. And we've also, as you know, done some pretty significant skew rationalization. and strategic business exits, primarily in food service and cake, but also a little bit in private label. However, the profitability of all three of those businesses has improved markedly. So the strategy is working from that standpoint. Now, obviously, there are offsets in other parts of the business. The soft variety and white bread area bill, as you know, is the most susceptible to private label trade-downs. Obviously, that's a negative. and then offset by the DKB performance in terms of unit volume. But frankly, even DKB's profitability was down last year pretty significantly because we had substantially higher organic wheat costs last year. Now, the margins are still very attractive for Dave's. I know we don't disclose particular numbers there, but still among the highest in the portfolio. But they were down roughly 500 basis points last year just because of the increased organic wheat cost, which this year will moderate somewhat. So we'll recapture some of that. So really good progress on those parts of the business, somewhat offset by category weakness and commodity cost and those effects on other parts of the business.
spk07: Okay. No, thanks. And then a little bit on the commodity front, I guess historically you've just kind of said, hey, we had six to nine months out. I know it's mostly the same thing, but this time you're saying, hey, we're 70% locked on your input costs. So is there any change to how you're looking at things or we're just using percentages versus months?
spk03: No, not really, Bill. We continue to look at our strategy to be six to roughly 12 months out. So probably, you know, more on the longer term of that in some cases. But the reality is I think last year coming into the year, we were roughly 65% covered. So we stay pretty steadfast to our overall strategy. We have added some things kind of to the toolkit, if you will, to try to manage the volatility in the training there better, but no changes to how we think about coverage and how long we're willing to go.
spk07: Got it. No, and actually, one follow-up. On the DKB bars, is there – and I'm sorry if you already covered this, but is there something you can – you're seeing repeat rates or something that gives you – because, again, a little pushback we hear is it's a crowded category, and I know DKB has a great brand, but how you differentiate yourself or get incremental shelf space – versus the 20 other bars that are there, and what gives you that confidence, what you've seen over the past three, four months in terms of as you expand this year?
spk09: Yeah, so, you know, as we noted in the prepared remarks, you know, really pleased with the results in 23. We got a lot more stores than we had targeted. You know, first of all, it's a great product. And we think that's what differentiates us. I mean, that's what differentiates the loaf items and the breakfast items. It's just the superior quality. It's a baked bar, great flavor and texture, great nutritional panel on it. A lot of the bars in that category are cold-pressed, so we have more of that fresh-baked flavor, which if you've tried them, you can certainly attest to. But you are right about shelf space. I mean, we're only three SKUs on the shelf. And so positioning is really important. And what we're seeing where our positioning is strong, kind of middle, eye level on the shelf, even with those three SKUs, the standout colors we have are really drawing consumers to the brand, whether they're current DKB shoppers or they're new to the brand, which is net incremental to the DKB consumer base. I do think it's going to help us tremendously as we bring in the three additional protein SKUs This year, you know, giving us more visibility on the shelf. And, you know, as we said before, those protein bars in test market are proving incremental to the first three SKUs, so we're kind of reaching a wider consumer base with that higher protein offering. So, you know, velocities are in line with the categories, so we're all good there. We can always do better, and we will get better. We've said many times, you know, we're treating this as a startup business. You know, we're learning a bit as we go, too, Bill. But so far, so good. And, of course, behind that, we've got a nice innovation pipeline for Dave's coming with the snack bites in the back half and even more beyond that in 25. So we're off to a good start. We've got nice momentum. The team's excited. Consumers and retailers alike are excited about it. So we're feeling really good about where we are so far. It's early days, but we're in good shape.
spk07: Great. Thanks so much for the color. Thanks, Bill.
spk18: Thank you. One moment for our next question, please. Our next question comes from the line of Jim Solera with Stevens. The line is now open.
spk08: Hi, guys. Good morning. Thanks for taking our question. In your prepared remarks, you know, you mentioned some uncertainty in 2024, obviously around the consumer and promotions. I think we all get kind of the consumer piece of that. But to double-click on the promotion side, is the concern that some of the larger competitors in the category are going to maybe revert to how they behaved in the past where they, they really aggressively chase volume. Um, or is it more that, you know, retailers are going to come to you guys expecting price deflation and using promotion as a tool to achieve that?
spk09: Yeah, Jim, definitely the former. Um, you know, we, we've seen this in our category before. We haven't seen it in a long time. Um, And even though, as we noted in our remarks, we even promoted a bit more in the fourth quarter just because it was seasonality in our business, not being a big dinner roll supplier, that the fourth quarter can be a little bit volatile. So we promoted a bit more to drive more unit volume, got good effectiveness out of those promotions, but we also didn't spend nearly as much in trade to get it and maintained one of the highest average price points in the category. But yeah, the caution is much more around the other competitors in the space than it is pressure from retailers, which we really have not felt to date. Okay, great.
spk08: Because it seems like, and we've talked about this in the past, but part of the challenge is you have this channel shift dynamic that's going on. And from the branded retailer's perspective, or the branded food company's perspective rather, if you're putting promo dollars in the channel, but the consumer is in the wrong channel, you're essentially just giving price away. At least that's kind of the way we viewed it. And so would we have to wait until the consumer shifts back to traditional grocery before we see those promotional increases be put into place? Or is it something that even with the consumer's still in kind of value-oriented channels. Competitors might just put promo in the channel anyway just to see what comes up on the other side.
spk09: Yeah, I mean, it could be either. I think that's just going to need to be a wait and see and monitor the environment and react accordingly.
spk01: Okay, great.
spk08: And then maybe if I could sneak in one more. In the breakdown for the 2024 sales guide, I know you guys mentioned you have some wraparound pricing benefit in the first half. and some business exits that negatively impact the volume side. If we just think about, you know, there was a pull forward on business exits into 2023. So I would have thought that would give you guys a more favorable lap in the back half of 2024. So if you can maybe just kind of separate of the volume decline, how much of it that you anticipate is still coming from business exits versus just, you know, kind of organic volume declines.
spk09: Yeah, most of it is still going to be business exits. And I do want to note, if folks didn't pick up on it, the prepared remarks. Barring something unforeseen, we do expect this to be the last year of strategic exits. I mean, we're done with what we wanted to do. And I mentioned earlier that what we're thrilled about is the opportunity we have in front of us. And believe me, there is a lot of opportunity to go back and refill that capacity with higher margin business. which will not only drive profitability, but go a long way to help bring the unit volume back up. But you are correct. It is first half weighted. You'll see most of that effect in the first half, and then as we move into the back half, it'll be much less significant. And then, again, that should be it. Okay, great.
spk08: Thanks, guys. I'll hop back in the queue. Thanks.
spk18: Thank you. One moment for our next question, please. Our next question comes from the line of Mitchell Pinheiro with Sturtevant and Company. Your line is now open.
spk05: Yeah, hey, good morning. So just a couple questions. When it comes to the gross margin in 2024, excluding sort of your input costs, your commodity costs, are we seeing like a flattish gross margin because of stranded fixed costs as you exit these businesses? You know, or are we seeing, is there, is there something else happening that, that needs to be called out? Like I would expect that some of your digital, you know, transformation, you know, would start to show up in fiscal 24 a little bit, you know, improved operational sort of the overall equipment effectiveness and things like that. When should we start to see real gross margin improvement absent, you know, your commodity costs and some things like that?
spk09: Yeah, so as we said, we do expect gross margin improvement this year, and you're right. Some of it will be the commodity moderation. There's puts and takes there. You know, flour's better. There's some other cost buckets that are up. But net-net, you know, we expect to see overall gross margin improvement to that. And frankly, also aided by all the things that you just said. Banker of the future delivering, you know, better OEE results. And then, you know, some of that will, you know, what we've experienced is that's been somewhat offset by, you know, primarily labor, and that is some of that stranded overhead cost showing up. And again, I want to emphasize that's temporary, because we will refill that capacity, and eventually that'll go away. But right now, it is a little bit of a strain. And then as you move down the P&L, thinking about marketing and ERP costs, a little bit of labor and SD&A, too, where some of that stranded overhead shows up is what's pressuring the EBITDA margin line a bit at least at this time, though, you know, again, we expect as we go through the year and then particularly in the 25, for all of those things to improve as we refill that capacity and cover this stranded cost.
spk05: I know you have, you know, so, you know, you're a little cautious on the second half. You just talked about it, questioned before about, you know, promotion, the potential for, you know, maybe a little more promotional environment. But you guys have invested in your promotional management tools. Can you talk about that as it might apply to the back half?
spk09: Yeah, I think it's a great question. And it's timely because that really showed up in the fourth quarter. If you look at the syndicated data, you'll see, as I said, that we had among the highest average prices in the category. And yet, you know, our units on promotion, you know, were up a bit. We did promote more, but we did so much more effectively and with, you know, much less trade spend than we might have historically needed to use, you know, really good display execution in support of those promotions. And for the first time in a while, you know, actually saw, you know, a nice lift and got a good return off of those promotions. And, you know, for the past few years, we've been talking about how promotions had not been very effective, not seeing a lot of lift from them. But in the fourth quarter, for the first time in a while, we did. So that trade promotion management tool that you referenced is enabling us to be a lot more effective when we do promote.
spk05: Okay, thank you. And then anything to call out from a geography performance point of view? Were there any geographies that were – stronger than you expected or weaker in the last quarter?
spk09: Yeah, not stronger and weaker than expected, but we continue to really do well in the Northeast. It's a great growth market for us. We've talked in the past, Mitch, about what a SharePoint is worth up there, some $35 million or so at retail, and we've still got a lot of room to grow. So when you think about you know, opportunities for future growth, whether it's there, you know, Pac Northwest, still on the West Coast, and then particularly the upper Midwest where, you know, we're really not present. You know, we're excited about the prospects we have in front of us, retailer excitement about having us, you know, move into those areas, et cetera, you know, bringing Nature's Own Days and Canyon to those consumers. You know, there's still quite a bit of headroom left for us.
spk05: Okay. And then, I guess last question on, um, uh, your comments in the prepared remarks regarding M&A. Um, so, um, are you at the point now where, um, you can kind of see past, you know, the, the, you know, obviously the ERP implementation and, and just the general, you know, your, your investments, is it, are we at the point where a more meaningful acquisition besides just, you know, the Papapita, um, is in the works or contemplated? Or are we still, you know, a little bit a ways away before we want to make a bigger commitment?
spk09: No, we're ready when the right opportunity comes along. And that's the key is, you know, what will that opportunity be and when will it come? But when it does come, we're absolutely ready to go. You know, we've got plenty of dry powder despite all the things we have going on. You know, we certainly have the capacity to do a meaningful acquisition. And as we said in the prepared remarks, you know, we're very proactive. I'm more optimistic about M&A activity, you know, seeing more, you know, founders and sellers that we talk to, you know, contemplating, you know, transactions. Don't know exactly when they'll come, But when they do, we'll be ready.
spk14: Okay. Thanks for the time. Okay. Thanks, Mitch.
spk18: Thank you. One moment for our next question, please. Our next question comes from the line of Connor Rattigan with Consumer Edge.
spk17: Your line is now open.
spk13: Hey, guys. Good morning. Thank you for the question. Good morning.
spk10: Yes, so we've heard from other reporters so far this season that the breakfast occasion has remained remarkably resilient in food service channels and away from home with, you know, maybe some more weakness in the at-home. I guess, have you guys seen any differing levels of elasticity by day part or product type across your portfolio or just maybe within the category at large?
spk09: Connor, it was a little tough to hear you break it up a little bit, but I think I got the gist of it, but You know, simply put, you know, elasticities have remained below our forecast and below historic levels, you know, kind of across all of those channels you mentioned.
spk10: Okay, got it. Hopefully you can hear me a little bit better now. Yeah, that's good. Okay, good, good. Also, so on Dave's killer bread, so it sounds like things are going great with the bars. I guess just my question is, On the 19,000 stores called out and the prepared remarks, could you maybe help us contextualize that number a little bit? I guess just maybe how much more room is there to run on distribution? You know, are we maybe a quarter of the way there? And are there maybe any channels lagging behind others that you view as an opportunity?
spk09: Yeah, I mean, the ACV is still pretty low, Connor, so we've got a lot of runway there. You know, we've got more opportunity in club. I think we mentioned convenience, which we really haven't even tapped into yet. You know, we started in our areas of strength, you know, in mass and grocery. So we've still got a lot of runway ahead of us. I don't have the number in front of me, but I want to say the ACV is somewhere still in the 30s. Is that directionally right? I think that's – we'll double-check that, but I think that's pretty close. So we've got a lot of runway. And to give you – a comparable DKB is somewhere in the 75-ish ballpark from an ACV standpoint, just to give you something to compare it to.
spk11: Awesome. Thanks, guys. Okay. Thanks, Connor.
spk18: Thank you. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Riles McMullen, Chairman and Chief Executive Officer, for closing remarks.
spk09: Okay, Norma, thank you. Just want to thank everybody for taking time today and joining us for questions. We very much appreciate your interest in our company, and as always, we look forward to speaking with you again next quarter. Everybody take care.
spk18: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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