Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Flowers Foods Inc (NYSE:FLO)
Q4 2019 Earnings Call
Feb 6, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Flowers Foods Fourth Quarter and Full Year 2019 Results Conference Call. My name is Cheryl and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to JT Rieck, Treasurer and Vice President of Investor Relations.

Sir, you may begin.

JT Rieck -- vice president of investor relations

Thank you Cheryl, and good morning everyone. Yesterday evening, we released our fourth quarter results. Our earnings release, and quarterly slide presentation are posted in the Investors section of the Flowers Foods website. We anticipate filing our 10-K with the SEC on February 19. Before we begin our discussion, please be aware that it may include forward-looking statements about the company's performance. Although, we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially.

In addition to matters we'll discuss during the call, important factors relating to Flowers Foods business are fully detailed in our SEC filings. Participating on the call this morning are Ryals McMullian, our CEO and Steve Kinsey our CFO.

Ryals, I'll turn the call over to you.

A. Ryals McMullian -- president and chief executive officer

Okay. Thanks JT. Good morning, everybody. Thanks for joining the call. Before we get in to the details of the quarter, I want to take a moment to remind you about our four strategic priorities to drive value creation, and they are focusing on our brands, prioritizing margins, pursuing smart M&A and developing our team. Executing on each of these priorities is how we intend to deliver on our long-term goals to grow sales to 2% to 4% and earnings 8% to 10%.

To achieve these goals, there are two foundational themes we need to execute against. First, we recognize that sustainable, profitable top line growth is a central for long-term value creation. So, it's imperative that we cultivate a portfolio of brands and products that anticipates our consumers' needs and delights our customers. And second, to create value with our portfolio, we must consistently deliver margin expansion by managing cost, reducing value less complexity and driving efficiencies, up and down the supply chain.

So, as you listen to our remarks this morning, I'd like for you to bear in mind several proof points against those two foundational themes that we believe are evidence of progress toward our goals.

One, the investments we're making in our key brands are driving solid top line growth, particularly from DKB, Canyon the Nature's Own. Two, margin improvement efforts from our portfolio and supply chain optimization program are now under way, and we have high confidence that once executed, these efforts will remove value less complexity, improve our operational efficiency and deliver meaningful earnings growth.

In fact, we saw some early evidence of just that in the fourth quarter with some modest margin improvement. The third proof point is the investments -- investments we've made to improve the capabilities of our team, by giving them the tools and the motivation, they need to make more informed, faster decisions around the key drivers of our business, and underlying all of this is complete buy-in from the senior leadership team, who is operating against clear expectations and committed to creating a culture of action and accountability.

And so with that, I'll turn it over to Steve to review the details of the quarter and share our guidance for 2020, and then I'll come back around to review our operational priorities before we open it up for your questions. Steve?

R. Steve Kinsey -- chief financial officer and chief administrative officer

Thank you Ryals and good morning everyone. We were pleased to report record sales and operating cash flow for the year. In the fourth quarter, solid top line momentum continued, driven primarily by sales growth in the retail channel and stabilization in the non-retail channel. Consolidated sales increased $37.1 million or 4.2% quarter-over-quarter.

Canyon Bakehouse contributed approximately 3% of this increase. In the base business, improved price mix drove 2.1% of the sales increase, while lower volumes reduced the top line by 90 basis points. Price realizations improved across most of our channels and product classes, which helped to address inflationary headwinds, we experienced in recent quarters.

Volumes were down primarily due to reduced promotional activity for traditional loaf brands and lost foodservice business. Looking at the sales channel, branded retail sales increased $29 million or 5.5%. Canyon Bakehouse's branded products accounted for more than half of these incremental sales dollars. The balance was largely driven by continued growth from Dave's Killer Bread and Nature's Own Perfectly Crafted partially offset by lower other traditional loaf sales. Store branded retail sales increased $9.8 million or 7.5%.

Much of these sales increase is attributed to the acquired Canyon Bakehouse store brand business. The balance of the growth was split between improved pricing, and volume growth due to increased distribution with existing customers, offset by lower volumes of both store branded cake and breakfast items. Foodservice and other non-retail sales decreased by $1.7 million or 80 basis points.

Lower volumes drove most of the decline, due in part to lost business from the inferior yeast disruption, we experienced in 2018 and also lower institutional volumes. In the quarter, gross margin was flat at 47% of sales. Improved price realizations were offset by higher workforce costs and lower manufacturing efficiencies as a percentage of sales.

Excluding the items affecting comparability, detailed in the press release, adjusted SD&A expenses decreased 20 basis points, as a percentage of sales, primarily due to lower distributor distribution fees and logistics costs, partially offset by higher workforce and marketing cost. GAAP diluted EPS for the quarter was $0.01 per share.

We did reach a resolution on several IDP-related lawsuits. As a result, reported EPS was reduced this quarter, legal settlement charge of approximately $0.10 per share. Excluding this, and the other items affecting comparability detailed in the release, adjusted diluted EPS in the quarter was $0.18 per share, up $0.02 compared to the prior year.

Canyon Bakehouse was accretive to both EBITDA and EPS in the quarter and for the year. A few comments on leverage and cash flow. Year-to-date, we've generated operating cash flows of $367 million and made capital expenditures of approximately $104 million.

Accordingly, cash flows year-to-date have been solid. We paid $160 million in dividends to shareholders and reduced our indebtedness by $114 million. At quarter end, our net debt to trailing 12-month adjusted EBITDA stood at approximately 2 times.

This brings us now to 2020 guidance. First, let me remind you that 2020 is a 53-week year. We are forecasting sales growth in the range of 2% to 4%. This includes the 53rd week, which is expected to contribute approximately 1.5%. The balance of our top line outlook is driven by continued growth of DKB and Canyon Bakehouse. Market share gains from Nature's Own and Wonder, an improvement in cake and foodservice sales. For the broader category, we expect growth to be driven primarily by consumer shifts to differentiated products rather than volume growth. For 2020, we are targeting adjusted EPS in the range of $1 to $1.08 per share.

The midpoint of this range reflects approximately 8.3% growth over the 2019 adjusted earnings per share of $0.96. Earnings growth in 2020 is expected to be driven by leveraging sales growth, as well as executing our supply chain optimization initiatives and improving manufacturing efficiencies. As we have disclosed for several quarters, we plan to complete the termination of our largest defined benefit plan in the first quarter of 2020.

In connection with this transaction, we expect to make a cash contribution in the first quarter of approximately $17 million to $35 million and recognize a non-cash settlement charge of approximately $125 to $143 million. For 2020, we are targeting capital expenditures in the range of $105 million to $115 million, which includes approximately $19 million related to the conversion of our Lynchburg bakeries to organic production.

We expect continued strong free cash flow generation, and our capital allocation priorities remain consistent with our focus on maximizing return on invested capital, and growing shareholder value.

We will continue to invest in our brands and bakeries, as well as in ways to strengthen the capabilities of our team. Strategic acquisitions to diversify and enhance the profitability of our portfolio will also be a priority. We intend to do this while maintaining an investment grade financial position, and continuing to return to shareholder -- value to shareholders through dividends and opportunistic share repurchases.

Now, I'll turn the call back to Ryals.

A. Ryals McMullian -- president and chief executive officer

Okay, thank you Steve. As I said at the outset of the call, please keep in mind, those three proof points; branded sales growth portfolio and supply chain optimization to drive margin expansion and our team investments. So, starting with sales growth, in the fourth quarter our top line momentum continued as consumer shifted to differentiated on trend brands like Dave's Killer Bread, Canyon Bakehouse and Nature's Own Perfectly Crafted. According to IRI, these three brands together experienced strong double-digit growth in the fourth quarter, compared to the fresh packaged bread category, which was only up 30 basis points.

The integration of Canyon Bakehouse has gone exceedingly well. Not only did Canyon grow from the number three gluten-free bread brand in the country, all the way to number one, we also exceeded both our sales targets and earnings contribution goals for the year. Kane [Phonetic] has got a creative and entrepreneurial team based off here in Colorado, and I do want to thank them for all their hard work and for over-delivering in 2019.

DKB, just continues to be a truly remarkable growth story. We acquired DKB just over four years ago, and since then it's grown to become our second largest brand with retail sales of approximately $581 million. So, just think about that for a second. That's more than half of Nature's Own at retail and Nature's Own was introduced over 40 years ago, and it's almost as much as all of our white bread brands combined.

And the best news is, we still have plenty of room to grow in certain under-developed geographies and with additional customers, so we don't carry DKB today or who are not currently within our current DSD footprint. Furthermore, household penetration of organic breads is still under indexed relative to other organic products, and that presents additional opportunity.

And with the brand loyalty, we've seen from consumers we believe that DKB can also play in other segments of the baked foods category, and in fact, we've already proven that with the success of our DKB breakfast products and will continue to bring innovative ideas to our passionate DKB consumers, going forward.

To support DKB's strong brand growth, and as part of our supply chain optimization strategy in January we announced the conversion of our Lynchburg, Virginia bakery to organic production. We've got a very capable team at the Lynchburg bakery, and they're really excited about the new growth mission. Converting Lynchburg will enable us to serve East Coast markets with fresher product, at a lower cost and we expect that converted facility to be operational in the fall of this year.

In addition to DKB and Canyon, we saw good share gains from both Nature's Own Perfectly Crafted and Wonder, and we're excited about plans for Tastykake and Mrs. Freshley's as we saw the business begin to stabilize in the back half of the year and evens showed some modest growth in the fourth quarter. So, as you can tell, we are seeing solid results in the branded portfolio, and given that this growth is being driven by leading brands and segments benefiting from powerful consumer trends, we're confident the portfolio is well positioned for continued growth.

Turning now to the second proof point, margin expansion. In the fourth quarter, I am pleased to report adjusted EBITDA margin expansion for the first time in eight quarters. We're encouraged by improved price realizations, better control of sale and stabilization in our cake and foodservice businesses, and yet, we still have a lot to do to reach our goals.

Now, primarily, we're concentrating our efforts on the three areas of focus, I mentioned to you last quarter and execution against these is how we intend to achieve consistent margin expansion over time. The first area of focus is portfolio and supply chain optimization. Last quarter, I mentioned the aggressive review we had under way to shift the portfolio to a more margin-accretive growth profile, to streamline our supply chain to support that optimized portfolio and to reduce complexity in our operations.

Just last week, we finished up this review, which include the development of a more holistic customer and product profitability tool, and with this tool, we're able to take a much more informed view of product's economics and cost to serve. Coming out of the review, we now have actionable insights and are formulating specific plans to among other things improve certain direct input cost, consolidating our distribution network, improved cube utilization for lower-volume products and prioritize improvement efforts at underperforming bakeries.

The work we've done to-date gives us a high degree of confidence that the initial savings from these projects can be realized this year, and as a result, we've incorporated into our 2020 guidance range. And we will be investing it outside resources to support timely delivery of results from the various initiatives.

We expect most of the benefits to begin accruing in the second half of the year, and we've included $10 million to $20 million of benefit for 2020 in our guidance. Now, as we begin to execute against the projects and the amount and timing of additional savings actions come into clearer focus, we'll update you accordingly. The bakery improvements work will be critical to capturing savings and improving margins.

While the tight labor market has affected the efficiency of virtually all of our plants, the impact has been particularly acute at six plants, and those will be our initial areas of intense focus. As I mentioned, we are bringing outside resources to help us and I think that's -- I think that's particularly critical in the areas of operations improvement and accountability, and we're making this investment in our team to give them additional support and to increase speed to value.

Turning to our second area of focus, reinvigorating and investing in our cake business. Now here, we're doing several critical things from both the sales and operation standpoint. In January, we conducted an intensive workshop to develop a comprehensive and detailed improvement plan for our Navy Yard bakery, which has been experiencing lower efficiencies and high scrap rates.

The team now has a clear course of specific actions, focused on improving processes, standards and operational discipline. We also expect to realize higher efficiencies with significant automation investments we're making at the bakery this year. From an overall sales standpoint for cake, we're focused on strategic volume growth to drive cost absorption, reduce complexity through SKU rationalization, additional distribution opportunities and innovation.

And underlying all of these efforts is the reinforcement of a culture of excellence that delivers consistently high quality, service and incremental innovation. Our cake business is important to us and it is a key contributor to our bottom line by providing focus and setting clear priorities. We intend to accelerate toward its potential, and drive meaningful earnings growth.

And finally, our third focus area; stabilizing and growing our foodservice business. At nearly $1 billion in annual sales, our foodservice business enables operational scale and is a key source of cash flow to Flowers. To grow profitability, the team is taking advantage of our product profitability tool, to make more informed decisions around pricing and which product lines to grow. They are also focused on winning new business and increasing customer engagement to drive growth going forward.

And that brings us to our final proof point, team investments. As I mentioned earlier, we are making additional investments in the team, and doing so accomplishes several key goals; improve standards and processes, higher levels of operational discipline, more structured approaches to improve efficiencies and greater speed to value.

The team is excited to receive these investments and they stand ready to tackle the challenges ahead. And finally, we have made further revisions to our incentive structure, which was quite successful on many fronts in 2019. And I believe, the adjustments to our 2020 incentives will do even more to drive the kind of effort and activity, necessary to propel us toward our goals.

So to close out, we entered 2020 on the right trajectory, demonstrating clear progress against our dual imperatives of sales growth and margin expansion. Powerful consumer trends are benefiting the topline, despite some softness in the broader category. Our margins showed some improvement in the fourth quarter and we have identified projects that can drive meaningful savings and operational improvements going forward.

And supporting all of that, is a talented and dedicated team that has a clear understanding of our strategic priorities and is focused on executing against them. And so with that Cheryl, we'll will open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Rob Dickerson from Jefferies. Your line is now open.

Rob Dickerson -- Jefferies -- Analyst

Great, thank you so much. Good morning, everyone. I guess, kind of just main general question is just around kind of the internal study and portfolio optimization timing, the three pillars kind of vis-a-vis what you think there might be some incremental expense this year because kind of what I'm hearing is, we've done a lot of work, hopefully it all sounds -- it's all obviously very positive and there is an outlook for Flowers potentially over the next few years, because it's improved price mix and optimize your plant network, what have you is -- all take some time. If we go back to just Project Centennial in the roadmap that was kind of laid out for thinking in 2017, 2018, the 2019 and beyond, we are now in 2020.

So, basically what you're saying is, we're now in this beyond phase, we haven't outlined the go forward of what all this might mean for the next few years in the first year, which is 2020, there are going to be benefits but there might be a few offsets just in terms of investment for those benefits, and then we will tell you later what those benefits might mean to kind of a revisited margin outlook, if potentially in 2021 and 2022 that's it?

R. Steve Kinsey -- chief financial officer and chief administrative officer

Okay. Well, first of all Rob, welcome back, it's good to have you back in coverage. So yes, we did just finish up the diagnostic last week. And so, what we've laid out today is the initial savings that we feel highly confident in for 2020. I mean, clearly I indicated that there is more to come on that but until we refine the numbers and it's even more than the numbers themselves, it's really the timing of achievement of those numbers, until we have that refined I'm just not prepared to share that today. So, we'll update you guys as we go forward and frankly should have all that buttoned-up for you on our first quarter call.

But, the $10 to $20 million represents what we're highly confident in for this year to achieve, and you're right that here are, as part of this, some short-term, medium term and long-term components to it. The actual supply chain optimization piece -- when you start thinking about bakery optimization is the most complex part of this, and that's the longer-term piece.

You've got to take into account, the make up of your portfolio. What if anything you may or may not plan to exit and how that affects the bakery network, is a pretty complicated thing given all the reciprocal baking that we do. However, on the optimization front, there are some near end opportunities, with regard to the distribution network, and those are some things that we can take care of fairly, fairly quickly.

If you recall back to the Project Centennial days. One of the things that we did in Centennial was centralize a lot of functions, and one of the things that used to be decentralized was the procurement of depots. Those were typically done by each individual bakery, kind of on their on their own account. We've now centralized that, but some of the -- some of the legacy network issues that were created by those independent action still remain and those are the things that we can take care of in the near term.

With regard to investment -- we've talked a lot about with regard to Centennial, the savings that were captured, the investments that were made back into the business in the form of innovation teams, marketing teams business units that kind of thing, and then obviously the inflationary pressures that dug into some of those savings. With regard to this project, what I can tell you is, there is much less investment back into the business net of the gross savings, if that makes sense.

We have all of our capabilities stood up for the most part, there'll be a little bit of it, but there is much less required to achieve the savings targets and the investment that we're making in our outside resources for this project are much lower than what we experienced with Centennial. So, hopefully that kind of covered most of your thoughts there.

Rob Dickerson -- Jefferies -- Analyst

Yeah, no, that's great. It's very comprehensive and it makes complete sense. So, just looking forward to the update later this year. So thank you very much.

A. Ryals McMullian -- president and chief executive officer

You're welcome.

Operator

Our next question comes from Brian Holland from Davidson. Your line is now open.

Brian Holland -- DA Davidson -- Analyst

Yeah, thanks, good morning everyone. First question, pricing obviously pretty steady throughout the year. Price mix tailwinds, volume was a little bit soft in Q4 and we look at the scanner data seeing some increased promotional intensity around the fresh bread category. So, I guess two part question first, and forgive me if you touch this and I missed it during your prepared remarks, but the volume down in Q4, is that attributable to something strategic on your end skew rationalization et cetera or maybe is that attributable to some competitive activity, in the market and then the second part would be, what are you seeing in the market here, especially as you noted in your presentation that ingredient costs were down in Q4?

A. Ryals McMullian -- president and chief executive officer

Sure. So yeah, we did have some softer volumes in the traditional loaf items in Q4, primarily to directly answer your question, whether it was kind of market forces or us, we promoted a lot less in Q4, and so we did see some volume slippage from that. But overall, looking at the year in totality, we were actually quite pleased with the trade that we made between lower promotions and volume reductions on the year-end balance.

As far as competitive activity overall, it's pretty consistent Q4 of this year over Q4 last year, but there are some markets and even some specific retailers where competitive activity has been a little bit higher.

Brian Holland -- DA Davidson -- Analyst

Okay. And so, as we roll that forward, obviously, the year was good Q4 -- the volume, a little bit softer as you noted, but you held your price and promotion stance. Do you think that, that's -- are you comfortable that, that stance is sustainable given what you're seeing in the market there or do you expect some leveling off, either on the competitive side or that you might have to get some back?

A. Ryals McMullian -- president and chief executive officer

Well, what I would say to that is we take a market by market look, and I think we've said in prior quarters, we have a new trade promotion management tool here that's been quite helpful to us and helping us be more targeted and smarter around promotions in the return we get off of those promotions. So, obviously, we monitor the competitive activity market by market, and we take action where we see fit market by market.

Brian Holland -- DA Davidson -- Analyst

Fair enough. And then, just curious as we, I guess, start to look forward I think one of the really interesting opportunities for the business here is some of the white space opportunities in some adjacent categories. I know that we've talked about that before. Any sense thinking about breakfast and some other occasions may be in store bakery etc. Any sense as to, or any update as to kind of the progress against those initiatives and how you kind of think about getting bigger, or exploring those opportunities in a more active way going forward?

A. Ryals McMullian -- president and chief executive officer

Yeah, absolutely. I mean I think, I think one is internal innovation right. So, we moved into the breakfast space with DKB, that's been quite successful and we'll continue to innovate behind that, and as we said it's extremely important, particularly if you want to think about the overall softness in the traditional loaf, it's even more important than ever that we both innovate internally, as we did with Nature's Own Perfectly Crafted and through M&A, as we've done with DKB and Canyon because that's kind of where the market is growing.

I certainly do see opportunities, as I said in my prepared remarks for frankly both of those brands DKB and Canyon to kind of play outside of their traditional space and we are actively looking at opportunities there, and then, obviously, as we always have done, we look for M&A opportunities that can fill those gaps as well.

Brian Holland -- DA Davidson -- Analyst

Thank you. That's helpful color. Last one for me, just looking -- thinking about the gross margin and the overall margin construct in 2020. So, obviously you have some plans in place -- some improved manufacturing efficiencies etc that are baked in there, it looks like they'll drive some margin expansion. But, just so I understand, ingredient cost, how do we expect that to trend over the course of 2020, and then obviously the other headwind is on the labor front, which has been in place with you guys for a little bit -- while freight has been there.

Do we expect that to be more -- those components to be more or less steady or any relief there, if you could just help us understand that and I'll pass it on. Thank you.

A. Ryals McMullian -- president and chief executive officer

Yeah, sure. So, I'll take the labor and freight piece of that and let Steve comment on the commodities front. So, from a labor standpoint, I mean you saw -- we saw some continued elevated labor cost in the fourth quarter as we had through 2019. Those same issues still persist -- labor market remains very tight, turnover is an issue, thus affecting efficiencies of the bakeries.

Now, as I mentioned last quarter, we do have a number of things under way that we're trying to improve quality of life in the bakeries, provide extra days off -- consecutive days off, those kinds of things; and we are beginning to see that turnover start to come down. Haven't yet quite seen that read through from a cost standpoint yet, but it's also still quite early in training and that sort of thing, do take a little bit of time to push through.

And then as you mentioned, even as part of your question, the supply chain optimization piece should help relieve some of that cost going forward as well. We have seen the transportation market level off. It's still elevated, but is not increasing at the rate that we saw over the last year, year and a half or so. Steve, you want to comment on the commodities piece?

R. Steve Kinsey -- chief financial officer and chief administrative officer

Sure. So, when you look at overall input cost Brian, we're pretty much in line with our stated strategy of covering six to kind of nine month time frame. We still have some open coverage in the back half, to be quite honest. So, from that perspective, in our forecast, we have some incremental improvement in overall input cost, there's nothing material. I mean, it's very low single-digit improvements year-over-year, but again that's very dependent on how we were able to come in and finish up our coverage, in the back half of the year, and we have seen a little a little run in some of the commodities here over the past several months. So we're watching that and trying to make sure we mitigate that where we can.

Brian Holland -- DA Davidson -- Analyst

Very helpful. Thanks again. Best luck, gentlemen.

Operator

Our next question comes from Mitch Pinheiro from Sturdivant. Your line is now open.

Mitch Pinheiro -- Sturdivant -- Analyst

Hi, good morning. I apologize if I jumped on the call late, but I had a couple of questions. Have you discussed -- when I'm looking at your Bread share for the quarter dropped into the 16.5%. Any comments surrounding that?

A. Ryals McMullian -- president and chief executive officer

Well, our R&D in total fresh packaged breads, we were up slightly in dollar share according to IRI.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay. I guess it dropped sequentially?

A. Ryals McMullian -- president and chief executive officer

Sequentially, yes. So, we talked a little bit about, and maybe you missed it, there was some softness in the traditional loaf segment in the fourth quarter that likely accounts for that, and it's offset by the growth of Dave's and Canyon and Nature's Own Perfectly Crafted, which continue to do well.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay. And then when I'm also looking at the 2020 guidance, the low end and if you adjust for the extra week, there's not a lot of growth there. What are the factors affecting the low end of your range?

R. Steve Kinsey -- chief financial officer and chief administrative officer

So looking again at the low end of the range from a topline perspective, obviously the extra week adds about 1.5% to the top line. It's traditionally a lower softer volume week from the overall sales perspective. With regard to the rest of the business on the low end, we're looking at nominal volume growth, and on the up -- to get to the upper end of the range, I think Ryals may have said earlier, volume and mix are big contributors to the upper end.

We continue to see nice growth in our recently acquired brands, and they have really -- drive a nice mix improvement. So, from that perspective on the top line, it's going to be critical that we continue to see good growth from those brands. With regard to -- on the earnings and the margin perspective, again that we typically add somewhere around $0.01 maybe $0.015 to overall earnings. Again, it's a sell through week and when you look at kind of the coverage there. So, again that's the big driver on the low end of the range.

The upper end of the range, Ryals talked a lot about our optimization efforts and hitting that $10 million to $20 million range, we've put out, which is primarily back half driven. So, it's going to be critical that we deliver on those items and projects for us to be able to hit in the upper end of the range.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay, helpful. And then just last question, what are your plans this year on the foodservice side, QSR particular but is there any you struggled a little bit there based on the inferior yeast issues, but what's your outlook for foodservice?

A. Ryals McMullian -- president and chief executive officer

Better in 2020, Mitch. I mean, we're going to lap all of that -- we'll lap the last of it, I believe in the first quarter of this year. There is a little bit left, just from a comparison standpoint, due to the yeast issue, so we'll be able to stop talking about that, but no, good plans for growth in foodservice.

As I said in the prepared remarks. It is an important piece of our business, it's a $1 billion business, it's a very important contributor and what the team is focused on now is one using the new product profitability tool that we have, where we can see more true unit economics and cost to serve in case you missed that commentary, Mitch that really helps us to be smarter about the types of business we take on.

But they are focused on both winning new business, and frankly winning back some of the lost business as well. And, we're actually going to see some of that come on -- come back on in, in the first quarter, which is encouraging as we stabilize and then grow foodservice as we've said.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay, all right. Thank you for the questions.

A. Ryals McMullian -- president and chief executive officer

Sure. Thanks Mitch.

Operator

Our next question comes from Bill Chappell from SunTrust. Your line is now open.

Bill Chappell -- SunTrust -- Analyst

Thanks, good morning. Can you talk a little bit more I guess both about Canyon and DKB and just kind of the distribution opportunities with Canyon, I guess this is the first kind of spring where you have full ownership, and can kind of plan a little bit better. So, trying to understand, does that happen? I mean, do you see distribution gains in the spring or is it with your DSD network more kind of intermittent throughout the year? And is the growth coming more from the flacked out part of the business or are you still seeing some growth in frozen?

A. Ryals McMullian -- president and chief executive officer

Great question. Let me answer the first part of it last. What we saw in 2019 was growth in both. I mean, you would certainly expect that on the stay fresh side as we initiated distribution there. But, we're still seeing substantial growth on the frozen side, which is really encouraging. As a matter of fact, the frozen piece actually outperformed our expectations -- the stay fresh piece slightly underperformed our expectations, which I think I've said in the past.

I believe that's largely due to consumer awareness about gluten-free on the bread shelf. Most gluten-free customers are accustomed to shopping for breads in the freezer case. So, that's all on us to increase that consumer awareness, which we're doing. No, we do expect to continue to gain distribution with Canyon. And one of the things, that's really nice to see is even as we're increasing distribution, we're also seeing increased velocities as well.

So, it's really nice to see both, and then with DKB, we still have a ton of opportunity to grow that, both in geographies and with retailers that may not carry it today. So, we're really excited about the growth opportunities for both of those brands.

Bill Chappell -- SunTrust -- Analyst

And then, just kind of follow up on DKB, I mean, if you're -- let's say you have 20 feet of shelf space in -- are you taking DKB, and expanding it to 24 feet of shelf space or are you using it to replace more white or Nature's Own SKUs, how does it look as you get that expanded demand?

A. Ryals McMullian -- president and chief executive officer

Of course, it will differ by retailer, but we always look to expand our total footprint as far as shelf space goes.

Bill Chappell -- SunTrust -- Analyst

But, you're seeing that kind of across the board that they're giving incremental space for DKB?

A. Ryals McMullian -- president and chief executive officer

Yes.

Bill Chappell -- SunTrust -- Analyst

Okay. And last one for me. I guess, I don't fully understand how you offset kind of the higher labor costs, and you said you're bringing in people to look at that, and maybe give me a little more color on how you offset that other than just paying it more?

A. Ryals McMullian -- president and chief executive officer

No. Look, it's a fair question, but what I want you to -- don't think about it necessarily in terms of just pure labor cost being elevated, what it really is, is lower efficiencies and the lower efficiencies are generated by the higher turnover that we're seeing from the tight labor market. Now, some of the things that we're doing to mitigate that will increase labor costs. So, for example, to increase quality of life in the bakeries, to give consecutive days off, sometimes we have to add an additional shift, OK, well that's additional labor costs.

But, if we can do that and reduce the significant amount of over time that we're experiencing -- reduced turnover and increase efficiency, and gain a net benefit from that, then it's worth doing, right. So, we are being careful with it, because you don't want to just go (indiscernible) shifts all over the country and 46 bakeries before it's proven out. But, as I said, we are seeing the turnover started to come down and with both that and then some of the efforts we're putting into some of our underperforming bakeries, let's say, the focused efforts that we're putting there, I do expect efficiencies to go up this year.

So it's really more about increasing the efficiency as opposed to thinking about it in terms of pure, like wage inflation.

Bill Chappell -- SunTrust -- Analyst

Got it. All right. Thanks so much for the color.

A. Ryals McMullian -- president and chief executive officer

Sure.

Operator

Our next question comes from Faiza Alwy from Deutsche Bank. Your line is now open.

Faiza Alwy -- Deutsche Bank -- Analyst

Yes, hi, good morning. Thank you. So, I guess the first question was, I didn't hear you say anything about like your outlook for pricing. I might have missed it, but just wanted to get more color on how you're thinking about pricing, as we look into 2020 because it feels like with ingredient costs potentially deflationary, and I think your price gaps versus private label, might be a little bit high. So, just curious about how you're thinking about pricing next year.

A. Ryals McMullian -- president and chief executive officer

Well, we took some pricing last year. We took some pricing last year that is effective this year, but we don't typically comment about outlook for pricing. What I can say is, as you know, we monitor, as I said earlier -- we monitor everything market by market, and take action as we deem necessary.

Faiza Alwy -- Deutsche Bank -- Analyst

Okay. And then, just I guess a clarifying question around the $10 million to $20 million. It sounds -- am I right to think like that's primarily or entirely a procurement savings and what's kind of like -- how might you sort of either fall short or is there upside to that as we think about the back half?

A. Ryals McMullian -- president and chief executive officer

Right. It's not in any one area. The $10 million to $20 million is spread over -- we have five different initiatives that we're working -- working on under the halo of portfolio and supply chain optimization, and what I said was the $10 million to $20 million is a number that we're very confident in to achieve this year in 2020.

However, we just completed the diagnostic work just last week, actually. And while I have numbers on my desk, I want to make sure that they are refined, and we fully understand the timing to achieve those numbers before I share then publicly. So, we'll update you probably in May, as that comes into clear focus.

R. Steve Kinsey -- chief financial officer and chief administrative officer

And just to clarify, this is Steve -- I've commented there is incremental, very little tailwind on the input cost side low single digit, that's separate than the $10 million to $20 million bucket. So the $10 million to $20 million is an incremental number.

Faiza Alwy -- Deutsche Bank -- Analyst

Okay. But your guidance includes this $10 million to $20 million, correct.?

R. Steve Kinsey -- chief financial officer and chief administrative officer

Yes, it does.

Faiza Alwy -- Deutsche Bank -- Analyst

Okay. And then just last question is really around sweet snacks. I know you mentioned stabilization in 2020, but as we look at the data, it doesn't seem like anything is improved. So, can you just talk about some of your initiatives within sweet snacks?

A. Ryals McMullian -- president and chief executive officer

Sure. So, with regard to cake, two pieces to that; one is operational and that's primarily centered on our Navy Yard bakery up in Philadelphia that bakery has been underperforming -- pretty low efficiencies, they've been running some high scrap and so we have a team up there actually -- they're right now, working on the plan that we put in place to improve the efficiencies at that bakery.

So, part of it is operational, but then part of it is on the sales and distribution side. We actually did see some modest growth in the fourth quarter from cake, which is really good they went through some SKU, rat and things last year cleaning up some things, and we did see a little bit of growth in the latter part of the year, but we have both new innovation coming on for cake, and a big piece of it frankly is gaps in distribution and we've actually assigned an experienced executive here to focus solely on that, to improve distribution of both Tastykake and Mrs. Freshley's. So, it's both on the sales and on the operation side that we seek improvement this year.

Faiza Alwy -- Deutsche Bank -- Analyst

All right, thank you very much.

A. Ryals McMullian -- president and chief executive officer

Sure.

Operator

Our next question comes from Ryan Bell from Consumer Edge. Your line is now open.

Ryan Bell -- Consumer Edge -- Analyst

Good morning. Would you be able to take a step back and talk about the health of the core categories that you operate in, and help to give some clarity on what might be driving the softer trends that we're seeing in scanner at a company level, and within the fresh bread category, overall, and then with respect to those SKU rationalization that you talked about, it seems like from your presentation that, that might primarily be within the cake business, is there anything, at a wider level that might be in consideration pool for SKU rationalization, and would that be sort of a material impact on the top line for 2020?

A. Ryals McMullian -- president and chief executive officer

So, health is the core category first, I mean, we all look at the same data and we've seen the softness in the traditional low segments. And as I've said, that's why it's so critical for us to continue to cultivate growth brands that are on-trend, meet consumers' current needs like Dave's and Canyon. Internally, we've introduced Nature's Own Perfectly Crafted which has performed very, very well this year. All those are differentiated from the white and soft variety loaves that we've traditionally seen on the bread aisle.

As we look into this year, and sort of how the year started you, you've probably seen the category, a little bit soft so far this year as well on the traditional segment, and a lot of that -- that's got a lot of comp issues with storms last year, and if you recall there were some double government payments in January in anticipation of a possible government shutdown.

So, there's some noise in there that I wouldn't call a trend at this point, but it does highlight once again the need for us to continue to both internally and through M&A grow brands that directly meet consumers' needs. As far as SKU rationalization goes, as part of portfolio and supply chain optimization, obviously, we're taking a close look at that. I've talked a lot about removing complexity from our operations and to the extent, we have slow moving SKUs, we need to get them out of the system.

If you think about it from a retailer standpoint, they're cleaning up their shelves too, which is another reason why it's very important to have number one, number two brands on the shelf like we do. We're quite fortunate because we're able to directly partner with the retailers to meet their needs. So, as we go through -- as we go through the year, we're constantly evaluating the portfolio. We'll make moves where we see fit, but all of that's incorporated into guidance

Ryan Bell -- Consumer Edge -- Analyst

Great, thank you. That's helpful. And then in terms of tack on M&A, are you going to be thinking about doing anything sort of, in the near term or is the priority mostly going to be on the profitability of your business, and then once, you go through some of these initiatives then you'd take a deeper look, again?

A. Ryals McMullian -- president and chief executive officer

The answer to the question is both. You can't always control the timing of M&A. M&A has always been a very important piece of our growth story, and it will continue to be going forward. So, we'll take those opportunities opportunistically, and we're being proactive, but by the same token, we have to take care of the base business and that remains a priority as well. So, you really have to kind of get to operate on both fronts.

Ryan Bell -- Consumer Edge -- Analyst

Great, thank you. That's it from me.

Operator

We have no further questions at this time, I will now turn the call back over to Ryals McMullian.

A. Ryals McMullian -- president and chief executive officer

Okay, well thank you all very much for your time today, and for your interest in Flowers and we look forward to speaking with you again on our first quarter call in May. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

JT Rieck -- vice president of investor relations

A. Ryals McMullian -- president and chief executive officer

R. Steve Kinsey -- chief financial officer and chief administrative officer

Rob Dickerson -- Jefferies -- Analyst

Brian Holland -- DA Davidson -- Analyst

Mitch Pinheiro -- Sturdivant -- Analyst

Bill Chappell -- SunTrust -- Analyst

Faiza Alwy -- Deutsche Bank -- Analyst

Ryan Bell -- Consumer Edge -- Analyst

More FLO analysis

All earnings call transcripts

AlphaStreet Logo