Ladies and gentlemen, thank you for standing by, and welcome to the Flowers Foods Fourth Quarter and Full-Year 2020 Results Conference Call. At this time, all participant lines are on a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. 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, SVP of Finance and Investor Relations. Thank you. Please go ahead, sir.

Thank you, operator, and good morning. I hope everyone had the opportunity to review our earnings release and presentation, and also listen to our prepared remarks, all of which are available on our Investor Relations website. Following the conclusion of 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. Cindy, we're ready to start the Q&A, please.

And your first question comes from Bill Chappell with Truist Securities.

Thanks. Good morning.

Good morning, Bill.

Hey, I was struck by the commentary on the growth of Wonder Bread in the prepared remarks, almost as fast as Dave's Killer Bread for the year. I am trying to understand more about that, particularly how it relates to pricing and mix, especially since it is growing faster than Nature's Own. Is that primarily a result of gaining share from private label and store brands? And how sustainable is this growth as we go into 2021?

Sure, Bill. We are very pleased with the Wonder growth. Most of that is going to be on the bun and roll side, not as much on the bread side, which is exactly what we aimed to accomplish. As we discussed before, we were somewhat behind on our branded bun and roll growth, given that we traditionally had a mix of regional brands. We needed to align behind a national brand to run national programs with national retailers, and that's what we evolved to over the past few years. As some of the retail businesses have intentionally fallen off, we've managed to grow Wonder quite nicely, focusing particularly on the bun and roll side, which has been strategic.

That's helpful. Are you expecting the trend of consumers shifting to more branded products to continue, especially with the weakness in store brands?

Not yet. We're still focused on branded growth. Looking back at Q4, if you exclude the 53rd week, private label was actually a little bit worse sequentially than it was in Q3. There has been no change in that trend yet. However, our strategy remains focused on supporting brands like Wonder, Nature's Own, Canyon, and Dave's, which is a key priority for us.

One last question on the ERP implementation. It doesn't always ensure a successful outcome. Can you help us understand where you are in the process, especially with the transformation office, and what to expect once this is complete?

Sure. Historically, ERP initiatives raise concerns, but many have been successful in the last decade. We implemented SAP back in 2000, and we haven't seen major upgrades since. We're on track to upgrade to S/4HANA while selecting an implementation partner. This upgrade should be a part of a broader digital strategy, acting as key enablers for our strategic plan, from brand support to network optimization.

To add to that, we are early in the process. It's important to remember that this upgrade is not solely an IT project; it's part of a broader digital strategy. Overall, Flowers has lagged behind its competitors, so this upgrade is essential. Given our strong cash flows and excellent earnings, this is a perfect time for such investments.

Will we see benefits from this investment this year or more in the future?

Very little, if any, benefit will be realized this year. The investments will come this year, while the benefits will follow in 2022 and beyond. We will provide more specifics later this year as the business case becomes clearer.

Got it. Thanks.

Sure.

Your next question comes from Brian Holland from D.A. Davidson.

Good morning, Brian.

Thanks. About the guide for 2021. Ryals, you mentioned the guidance is aligned with your long-term targets using 2019 as a base. Understanding that mean reversion might occur, how do you factor in the current trends in your forecast?

You're correct. The bottom end of the guidance would be slightly below our algorithm. Also, we are making an estimated $0.05 investment in digital this year that affects that bottom end. The primary factors this year include when mix reversion occurs and to what extent, as well as the promotional environment. Currently, everything remains stable, but it's uncertain how things will shift as we proceed through the year.

I appreciate that. Is the logic regarding inflation as a net positive for Flowers still valid?

I believe that it's still relevant but perhaps not as impactful due to industry consolidation. While we have been promoting at a higher base price and seeing better returns from that, the dynamics have shifted over time. Brand power and promotional strategy play crucial roles here.

We stay true to our strategy, and inflation may ramp up later in the year. We expect to navigate this effectively, determining the right focus between volume and pricing.

Thanks! I'd like to inquire about the Navy Yard and Snack Cake segment performance moving forward.

We're pleased with the early progress. New leadership at Navy Yard has been doing an excellent job, and we expect material benefits from this operation as we continue to improve efficiency and address prior issues.

Thank you for the detailed insights.

Sure.

Your next question comes from Rob Dickerson with Jefferies.

Hi Rob.

Morning. Could you discuss your current M&A thoughts while managing the implementation of other strategies?

Absolutely. We believe that we can remain active in M&A while managing our ongoing initiatives effectively, particularly with the transformation office overseeing our strategic efforts. I am enthusiastic about potential opportunities in 2021 as things begin to heat up post-crisis.

Can you clarify why there would be little optimization savings in the back half of the year?

Most optimization benefits will be front-loaded in the year, continuing from initiatives we implemented in the past. While some benefits will be seen in the second half, the majority will be realized in the first half.

Okay, understood. Were there any learnings that might change where you want to focus in the market?

Not necessarily. We've observed the power of mix and remain committed to focusing on brands that align with our growth strategy.

Your next question comes from Faiza Alwy with Deutsche Bank.

Good morning.

Thank you. Can we get more insight on DKB and Canyon as long-term growth drivers in your branded portfolio?

Both DKB and Canyon are significant beneficiaries of our focus and continue to grow rapidly. DKB is now over an $800 million brand at retail, and Canyon has doubled its share in the gluten-free category. We have plenty of opportunities to grow both brands strategically as we expand their product offerings.

What types of brands or assets are you looking for in potential acquisitions?

We seek brands that are growing and complement our existing portfolio, ideally providing margin accretion. Strategic fit and cultural alignment are equally essential as we explore potential M&A opportunities.

We expect commodity cost inflation, particularly with wheat, which is our primary input cost. Hopefully, we can mitigate some of that inflation as we go.

Thank you for that clarification.

Thank you.

Your next question comes from Tim Perz with Stephens.

Good morning, Tim.

How are you thinking about sales trends and volume versus price mix for your guidance in 2021?

The trends we've observed in early 2021 have been fairly stable so far. However, as we approach more challenging comparisons in the quarters ahead, changes in consumer behavior will depend primarily on vaccination distribution and reopening. How normalization manifests and what 'normal' entails will significantly impact our guidance.

As Ryals said, the contributions of price mix and overall margin will be affected by how quickly we return to normalcy and whether in-home eating trends remain strong.

Lesson learned from the past year: we've made substantial organizational changes results in a more robust company. Emphasizing the power of mix has altered our entire approach and will guide our future strategies.

Regarding store brands, do you expect them to regain share in 2021?

We'll see. Private labels were already in decline before the pandemic, and we anticipate consumer demand for branded products will remain strong. If I were a retailer, I would focus on brands that consumers want.

Why do you anticipate a higher promotional environment later this year despite current stability?

We haven't observed it yet, but given how quickly things can shift back to normal, it's prudent to remain aware of the risk of increased promotional activity to maintain market share. Thank you, Mitch.

I'm showing no further questions at this time. I would now like to turn the conference back to Ryals McMullian for closing remarks.

Thank you very much, Cindy. I just wanted to thank everybody for their interest in Flowers, and we look forward to speaking with you again next quarter. Take care.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect and thank you for your participation.