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Flowers Foods Inc (NYSE:FLO)
Q3 2020 Earnings Call
Nov 6, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

J.T. Rieck -- Vice President of Investor Relations and Treasurer

Hello, everyone. This is J.T. Rieck, SVP of Finance and Investor Relations for Flowers Foods. As a reminder, Flowers Foods released its third quarter results on November 5, 2020. You can find the release and related slide presentation in the Investors section of our website. Our 10-Q was also filed and can be found on the SEC website.

This quarter we have made a change to our usual earnings format. Instead of hosting a live earnings call, and webcast that includes both prepared remarks and the Q&A session, we are now posting recorded remarks from our CEO and CFO, along with the release of our earnings.

After our earnings release, we will host a live Q&A session for the third quarter of 2020. This call will be held on Friday, November 6 at 8:30 AM Eastern. The details are posted in the Investors section of flowersfoods.com. We hope this new format gives analysts and investors more flexibility and more time to prepare for the live Q&A session.

Before we get started, keep in mind that the information presented here 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. And in addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our SEC filings. Providing remarks today are Ryals McMullian, President and CEO; and Steve Kinsey, our CFO.

Ryals, I'll turn it over to you.

A. Ryals McMullian -- President and Chief Executive Officer

Thanks, JT, and thanks everybody for their interest in Flowers. We're very pleased with our results in the third quarter, which remains strong and reflect the continued trend of elevated in-home meeting that began at the onset of the pandemic. This has been a very challenging year on a lot of fronts. Our everyday lives and work have been impacted in ways we never could have imagined, but throughout our Flowers team members have demonstrated their unwavering commitment to serve our markets. I'm grateful for their perseverance, I'm humbled by their dedication, particularly from our frontline workers, and they have shown tremendous courage and a devotion to ensuring that our consumers have the products we need and we are committed to doing everything in our power to provide a healthy and safe work environment for them.

Our performance this quarter is a reflection of our four strategic priorities, developing our team, focusing on our brands, prioritizing margins, and pursuing smart M&A. Executing on each of these priorities is how we intend to deliver on our long-term goals to grow sales 1% to 2%, EBITDA of 4% to 6%, and EPS of 7% to 9%. We continue to develop our team to ensure that we have the proper capabilities to achieve our goals. On previous calls, we've discussed our work to optimize our portfolio and supply chain, and we've restructured our organization to meet those objectives.

During the third quarter, we hired a new Chief Supply Chain Officer and a Chief Procurement Officer, who are advancing our expertise in each of those areas. Our brand focus is progressing as well. New product introductions such as DKB Buns, and extensions of our Nature's Own Perfectly Crafted line are delivering excellent early returns. We've made further progress in standing up our new innovation capabilities and we are developing plans to deliver more distinctive and differentiated items that meet our consumers' changing needs. And building upon our foundational consumer research, we're developing a roadmap for profitable growth that's intended to optimize our resource allocation.

As part of this work, we've segmented our portfolio into four distinct roles ranging from high growth brands to business with limited profitability. Segmenting our portfolio. This role establishes clear roles for the brands and products within our portfolio, which is designed to drive more targeted decision-making around our brand investments to deliver the highest return. And I do want to emphasize that while some of our private label and foodservice business does underperformed from a margin standpoint, each continues to play an important supporting role in the portfolio.

Our intention is to improve their performance working collaboratively with our customers. We believe this could be accomplished with price certainly in some cases, but that's not the only way. As strategic partners to our customers, we're working to find ways to improve profitability on our side of the table as well. That could include more efficient distribution, manufacturing, different formulation, packaging and other options. While there will likely be cases where we're unable to find a mutually acceptable solution to achieving the levels of profitability we require, our intention at the outset, is to continue serving our customers and in a way that is beneficial to both parties.

With regard to the portfolio and supply chain optimization work we launched at the end of last year, we expect to deliver at least $20 million of savings from those efforts in 2020. These savings are coming from a number of different initiatives including procurement, overhead streamlining, network optimization and bakery operations improvement. Now as a reminder, we were originally projecting those savings to be between $10 million and $20 million this year. So I'm happy to report that we're ahead of our prior expectations. We also expect to realize additional benefits from this work as we move into 2021.

Another area of focus for improving margins relates to information technology. As many of you know, we operate in an SAP environment, and we'll need to update to a more robust platform S/4HANA over the next few years as SAP winds down support of our current platform. We installed SAP over 20 years ago and many improvements have been made since then. The upgrade is expected to improve data management and efficiencies while automating many of our processes. But rather than approaching this as a purely an IT project back in August, we launched a digital strategy initiative, that's designed to transform how we operate our business.

Our three primary goals with this new strategic initiatives are one, to enable more agility in our business model, empowering the organization by fundamentally redesigning core business processes, and our ways of working. Two, embed digital capabilities where it matters and transform the way we engage with our consumers, our customers and our employees. And three, modernize and simplify our application and configuration landscape to remove existing roadblocks and support our new ways of working with the new ERP system becoming a key enabler of our business strategies.

We're currently in the process of completing the initial planning and road mapping work but much remains ahead of us as we move into 2021, and we expect to provide you an update on our fourth quarter call in February. The current environment and the resulting mix shift to branded retail products are also clearly -- clearly driving margin improvement. As I've discussed on earlier calls, we began our portfolio strategy work before the onset of COVID, and we're already moving toward a more brand centric focus. But the mix shift that we've experienced this year has demonstrated the value of our strategy and has helped accelerate our adoption of it.

The total volumes have been down in 2020. Our profitability has improved markedly, as we're now seeing the true power of focusing on our brands. So as we're working to capitalize on the opportunities before us, we also recognize that we're operating from a position of strength. With our portfolio of top brands like Nature's Own, Dave's Killer Bread, Canyon Bakehouse and Wonder. We expect that focus to allow us to retain many of our new consumers even as the demand environment begins to moderate.

Regarding M&A, we remain proactive in the deal space, but we are maintaining our long established disciplined approach. M&A has always been and will continue to be an important part of our growth story. Our criteria for M&A candidates are those that can enhance our branded portfolio, extend our geographic presence, our strong cultural fit, and that bring enhanced capabilities to our Company. We believe our strong balance sheet gives us the flexibility to pursue a wide range of deals and when the right deal comes along that meets these criteria, we will be ready.

Now, I'll turn it over to Steve to review the details of the quarter and update our guidance for 2020, and then I'll come back on the back end to discuss the current business environment. Steve.

R. Steve Kinsey -- Chief Financial Officer and Chief Accounting Officer

Thank you, Ryals, and hello everyone. I'd like to echo your comments and express my sincere thanks to our incredible team, as efforts during this difficult time have been outstanding. Again, thank you.

Now turning to the quarterly results. Our results continue to be strongly influenced by COVID-19, though its impact is diminishing slightly. Total sales in the quarter rose 2.4%, a decrease compared to our second quarter growth rate of 5.1%. Price mix drove 8.1% of the sales increase, with the main factor being the shift in mix to branded retail items due primarily to consumers eating more meals at home. Volumes reduced overall sales by 5.7% with particular weakness in store branded and foodservice and other non-retail channels.

Looking at sales by channel, directionally results followed the same pattern as in the second quarter though at a more moderate level. Branded retail sales increased $71.2 million or 12.2%. Our leading brands continue to drive company performance, with particular strength from Nature's Own, Dave's Killer Bread and Wonder. As Ryals mentioned, new products such as DKB Buns and extensions of our Nature's Own Perfectly Crafted line were significant contributors. Store branded retail sales decreased $14.4 million or 9.5% with the weakness across the board as consumers shifted to branded products.

Foodservice and other non-retail sales decreased by $33.7 million or 14.7%. Lower volumes due to the impact of the COVID-19 pandemic drove most of the decline. We saw these declines across most categories of our non-retail business particularly food service, schools and other institutions. In the quarter, gross margin excluding depreciation and amortization increased 240 basis points, as the mix shifted to higher margin branded retail products. Partially offsetting that benefit was $1.9 million related to the start-up cost incurred with the conversion of our Lynchburg, Virginia facility to an organic bakery.

SD&A increased 160 basis points in the third quarter. Excluding the items affecting comparability detailed in the press release, adjusted SD&A expenses increased 50 basis points as a percentage of sales. A shift in product mix drove more sales through our DSD network, resulting in higher independent distributor fees. Workforce related costs increased primarily due to higher employee incentive costs due to our improved financial performance. GAAP diluted EPS in the quarter was $0.21 per share. Excluding the items affecting comparability, detailed in the release which are largely restructuring costs related to employee and lease terminations and impairments driven by our strategic initiatives, adjusted EPS in the quarter was $0.29 per share, up $0.07 compared to the prior year quarter.

Turning now to our balance sheet, liquidity and cash flow. Year-to-date, cash flow from operating activities increased $86.3 million to $364.4 million compared to the year-ago period. Capital expenditures were $68.3 million, and dividends paid were $124.9 million. Our financial position remains strong. At the end of the quarter, net debt to trailing 12 month adjusted EBITDA stood at approximately 1.4 times, down from 2 times at 2019 year end. At quarter end, we had approximately $326 million in cash and cash equivalents and had $478 million of remaining availability on our credit facilities.

Now turning to our outlook for the remainder of 2020. With only one quarter remaining in the year, we are raising our 2020 guidance. We are now forecasting sales growth in the range of 5.5% to 6%, and increasing our earnings guidance range, which is a $1.23 to $1.28, up from prior guidance of $1.15 to $1.25. As a reminder, 2020 includes an extra week, which is expected to contribute approximately 1.5% to our annual sales growth. As we moved into Q4, the operating environment has remained relatively consistent with what we experienced in the third quarter. Some of the factors, however we considered when adjusting guidance were higher incentive compensation and an uncertain holiday season that favors dinner rolls over loaf bread, and changes in our scrap and steel rates, which have been favorable year-to-date.

In a moment, Ryals will share more color on the factors we considered when looking out into 2021. We expect continued strong free cash flow generation and our capital allocation priorities and philosophy remain consistent with our focus on maximizing return on invested capital, and grow our shareholder value. For 2020, we are targeting capital expenditures in the range of $85 million to $95 million, which includes approximately $19 million related to converting our Lynchburg bakery to organic production.

Thank you. And now, I'll turn it back to Ryals. Ryals?

A. Ryals McMullian -- President and Chief Executive Officer

Thank you, Steve. So the environment does remain favorable for our branded business. Demand is moderating somewhat from the peak levels of the first quarter that we saw. But our strong brands and operational execution continue to drive attractive share gains and margin improvement.

In contrast to the strong branded retail sales, foodservice results remain pressured as many customer locations operate with capacity restrictions and reduced demand. Nobody knows how long this environment will last but our aim is to maximize our current performance while at the same time, preparing for the time when demand normalizes. If nothing else, we believe the current environment validates our portfolio strategy to drive margin improvement as we shift our focus to our branded retail products.

I spoke earlier about our roadmap for continued profitable growth and how we expect it to drive our results going forward. The process of segmenting our portfolio instills renewed and increased discipline and focus. we're fortunate to operate in a business that generates ample free cash flow. In order to drive meaningful shareholder returns, we've got to focus our resources on areas offering the most of attractive risk-adjusted returns. Our portfolio strategy, together with our recent organizational restructuring will help to optimize these allocation decisions.

Going forward, capital will be allocated to areas throughout the company to further enhance our market-leading products and improve efficiencies to drive margin growth over time. A perfect example of this is the conversion of our Lynchburg bakery to organic production, which we began back in March and I'm happy to report that since early October the bakery has been up and running and producing great quality DKB products for the market. This additional production is intended to help us improve our days of service, our quality in the critical Northeast markets, and provide some needed relief to our other bakeries currently serving that market.

DKB is still growing at a rapid clip, with 2020 retail sales now expected to exceed $800 million, and Lynchburg is a powerful example of our strategy to reorient production to the highest margin and highest growth with portfolio segments. As part of our effort to prioritize margin and manage cost, we're also allocating capital to improve returns at our underperforming Navy Yard bakery. Recall that as part of our organizational restructuring, we named David Roach, President of Cake Operations, with the sole objective of improving performance of the Navy Yard. In this particular case, our primary goal is not to drive growth in the near term, but rather to improve operations. We've automated our production lines, upgraded the management team and improved efficiencies.

Now our work is far from complete but I am pleased to report that we're beginning to see the green shoots of improvement after a rather protracted period of underperformance. And I expect those trend lines to continue to improve as we move into 2021. As I've mentioned before getting that bakery up to its operational potential represents a material profitability improvement to the Company as a whole. Finally, I recognize that at this point in the calendar, much of the investment community has focused its attention on 2021 and beyond. We're working to formulate our plans for next year taking into consideration the anomaly that 2020 has been and bringing our best insights to bear in an effort to forecast what the demand environment will look like next year.

There are a multitude of factors to consider as I'm sure you can appreciate, including those that we can't control, such as the macroeconomic outlook, commodity prices, one fewer week in the next fiscal year, the political landscape and of course the trajectory of the COVID situation. But there are also factors that are within our control, including new product introductions and investments in talent, marketing, digital as I mentioned earlier and innovation. These investments, which are essential to achieving our long-term growth targets, and increasing shareholder value will begin to accelerate in 2021.

Speaking of long-term targets, as we outlined during our Investor Day in August, we remain committed to generating performance in line with those targets in fiscal 2022, with 2019 as the base year. We will provide more detail about our expectations for 2021 when we announce our fourth quarter earnings in February. Currently, we're seeing continued strong branded retail performance combined with weakness in store brand products and foodservice, while certainly off peak branded retail remains elevated well above pre-COVID levels. The real question, as we move into 2021, is how long these trends will last, and what the trajectory of normalization will be?

However, no matter what the operating environment is, we believe we have the right strategies in place to thrive in any environment. We've got a portfolio of top brands and we're focused on allocating resources behind them. I can promise you that our talented and dedicated team is working hard to effect positive change and optimize our performance. We're focused on what we can control, even as we plan for a post-COVID environment, consider how the world may look two to three years down the road and strive to develop strategies that we believe will best position our company for future success.

By continuing to execute against our four strategic priorities we believe we can meet or exceed our long-term financial goals. So I'd like to thank you for your time this morning. This concludes our prepared remarks. I invite you to listen to our live question-and-answer webcast, which will begin at 8:30 AM Eastern on Friday, November 6, and will be available for replay on the Investors section of flowersfoods.com. Thank you for your time.

Operator

Thank you for standing by, and welcome to the Flowers Foods' Third Quarter Question-and-Answer Session Conference Call. I would now like to hand the conference over to J.T. Rieck, Senior Vice President, Finance and Investor Relations. Thank you. Please go ahead, sir.

J.T. Rieck -- Vice President of Investor Relations and Treasurer

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 on 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 -- joining me today are Ryals McMullian, President and CEO; and Steve Kinsey, our CFO. And with that, Deborah, can we begin the Q&A? Deborah, we're ready to start the Q&A, please.

Questions and Answers:

Operator

Thank you. Can you hear me now?

J.T. Rieck -- Vice President of Investor Relations and Treasurer

Yes.

Operator

Okay, I'm sorry. [Operator Instructions] Your first question comes from Bill Chappell with Truist Securities.

Bill Chappell -- Truist Securities -- Analyst

Thanks. Good morning.

A. Ryals McMullian -- President and Chief Executive Officer

Good morning, Bill.

Bill Chappell -- Truist Securities -- Analyst

Hey, I guess, can you talk a little bit more about just what you're doing or what you're seeing on the price mix. I mean in terms of the move of consumers more to branded and trying to understand, I guess first of all, manufacturing standpoint, I mean are you starting to change your mix where you're actually making less private label and making more branded just to reduce kind of sales and then at the same point, is this really all just brand migration or is there any pricing in?

A. Ryals McMullian -- President and Chief Executive Officer

Yeah. So to start with the manufacturing concept, Bill, I mean, as you know, we have pretty flexible manufacturing facilities. So the same plant that makes brand oftentimes makes private label too, so it's very easy for us to ship, along with the consumer dynamics from private label to brand. But to layer on top of that, if you think about the Lynchburg bakery is probably a great example of moving up the mixed chain or up the margin chain, how you want to look at it toward our higher margin products and adding production capacity to serve the market that way.

From a pricing standpoint, not too much -- we haven't seen too much pure pricing this year, but the promotional environment is certainly well beneath historical levels. So average base prices are I guess are up some. We have seen that start to tick back up a little bit more recently, but still well off the historical levels.

Bill Chappell -- Truist Securities -- Analyst

Got it. And then I guess, I'm -- just that what I'm trying to understand the migration of brands, I mean there is one benefit from going from private label to Wonder, there is another one going up to Dave's Killer Bread. I mean, which is the bigger driver or is it kind of all the above.

A. Ryals McMullian -- President and Chief Executive Officer

Yeah, I mean it's -- you are kind of in totality, you're right in what you say, I mean the DKB margins and the Nature's Own margins together would be higher than Wonder and some of the other brands, but any shift out of that lower margin business to higher margin business in totality helps the bottom line.

Bill Chappell -- Truist Securities -- Analyst

Okay.

A. Ryals McMullian -- President and Chief Executive Officer

The DKB obviously is a tremendous growth driver, Canyon has been a bigger growth driver this year, and both of those carry very high margins.

Bill Chappell -- Truist Securities -- Analyst

Yeah. And then looking to next year, I realize you're not giving guidance, but two questions. One, yeah, what kind of impact on your business is the fact that 70% of US school children are going to school at home or virtually or hybrid and that that might change hopefully for a lot of us, sometime in 2021. Does that -- is it a positive or a negative impact? And then the same thing, I think, Steve, you had mentioned there was a variable comp component which understandably everyone is having a good year. What kind of switch does that turn into a tailwind as you kind of reset that to more normal numbers for next year. Thanks.

A. Ryals McMullian -- President and Chief Executive Officer

Yeah. Yes, sure. Bill, let me take the schoolchildren piece and I'll pass it to Steve for the incentive comp. Yeah, I mean, there are sort of puts and takes to the kids being home, right. I mean, yeah, we sort of missed the back to school bump that we normally get in the fall with all the kids staying home or having gone and getting pulled back, but then again on the other side of the equation, you have elevated in-home meeting if the children are home all day, which is really what we saw at the outset of this, right, I mean everybody sitting around at home, kids at home, parents at home. So you get that -- you get that increase and at-home meetings.

So there is a little bit of a balance and puts and takes that it's a little hard to separate them and quantify them. But yeah, I guess at the end of the day you know, I know there's probably going to be a lot of questions about '21 this morning. Some others will go ahead and make a few comments around that now. Obviously, as you might, as I'm sure you can appreciate it, it's pretty tough to plan for next year just given the outsize here that 2020 has been, but there's two ways you can think about it. You can sit here and try to guess what the demand environment is going to be in 2021 and beyond or you can sit here and figure out what strategies do you need to put in place to drive that demand environment. And that's what we're trying to do through our portfolio strategy, through the brand support that we continue to increase and bring to bear to grow our brands.

So you can either take what you're given or control what you can control and try to drive that brand environment with good innovation, great quality and brand support. So that's kind of how we're approaching next year. Steve, you want to address the incentive comp?

R. Steve Kinsey -- Chief Financial Officer and Chief Accounting Officer

Sure. Obviously, Bill, you're right. As you look at the year and you can see through the -- through the comments in the financials that and the fact we've raised guidance and brought at the lower end as the year progressed, that it has been an outperformance compared to where we thought coming into the year. So obviously that's flowing through the P&L this year. As we plan for next year, and we set targets and goals, we won't give you specifics around incentive comp, but we do expect things to normalize somewhat because obviously we'll set our goals in line with what we think expectations are, and while there'll be a bit of a tailwind for this year, we expect that incentive comp would be somewhat more normal going into 2021.

Bill Chappell -- Truist Securities -- Analyst

Okay, great, thanks so much.

A. Ryals McMullian -- President and Chief Executive Officer

Thank you, Bill.

Operator

Your next question comes from Brian Holland of DA Davidson.

Brian Holland -- D.A. Davidson -- Analyst

Thanks, good morning, and congrats on the continued strong results. I just wanted to ask first about 4Q, you cleared what was at least in my model pretty high bar that I've set for you in Q3. And if I look at the guidance revision, the low-end is above what my model applies for Q4. Now, certainly it's possible that just not doing something -- modeled it for Q4, but assuming that there is no real issue there, I'll ask the question, anything incrementally stronger building into year end because it does feel like a pretty marked improvement in guidance.

A. Ryals McMullian -- President and Chief Executive Officer

Yeah, I'll let Steve comment here as well, but nothing specific I would call out, I mean we, as I said earlier, we continue to see pretty good trends from the branded retail standpoint, I mean, you see that data as well still pretty, pretty elevated and we don't -- as far as we can see, we don't see that dropping off substantially. The headwinds in Q4 are always the holidays for us, which is a very strong rolls season, which is not a huge part of our portfolio. So it kind of depends on how the holidays go to, but on the upper end of the range, we're seeing continued elevated branded retail as we have been seeing, it's sort of in recent weeks kind of plateaued, and been pretty steady kind of week-over-week. So we continue to see that, we feel good about the upper end, obviously, the lower end of it will reflect some relatively meaningful drop off in the branded retail mix. Steve, any other commentary you want to make.

R. Steve Kinsey -- Chief Financial Officer and Chief Accounting Officer

Not specifically. I mean, I think Ryals covered the majority of it, but just to remind folks, Q4 is typically our toughest quarter as you look at the year and as things progress and Ryals did call out is the fact and we did call out in the release, the pre-recorded conference. There's actually there's three holidays in the fourth quarter, this year, even with the extra week and typically that business that was roll business and our strength is more on the low side. So we've -- we are taking a little cautionary look kind of around the holidays. But as Ryals said, if this branded mix continues to perform well, things should shape out rather nicely for the quarter.

Brian Holland -- D.A. Davidson -- Analyst

Yeah. And I should just clarify, I do have the extra week in, but I'm looking for mid-single digits in the branded retail segment Q4, you're clearly outperforming that in the scanner data, we can see thus far so right. Anyway, just to clarify that on my end. If two dynamics that seem to be rearing its head based on some other food companies that we have reported in this earnings season that had weighed on you in the past. One, we're hearing about tight labor markets you know and costs related to that and then also we have freight. Labor seems like that's a particularly acute issue for you guys given the manual intensive manufacturing.

And then on the freight side, 2017, 2018, you guys actually had a lag impact as I -- as I recall kind of given the way you go about that, but just curious, obviously, any comments on the labor side, how we should be thinking about that going forward. And then on the freight side, just thinking about how you manage that what we saw in 2017 into 2018 and how that impacted you and maybe what changes did you make that might allow you to mitigate those factors in 2021 if this continues. Thanks.

A. Ryals McMullian -- President and Chief Executive Officer

Sure. Thanks, Brian. I'll take the labor market piece and maybe let Steve address the transportation side of it. Yeah, look, the labor markets continue to be a bit of a challenge, depending on where you are. It's not -- it's not acute everywhere, but we certainly have some areas where we continue to struggle a bit, just kind of keeping people, keeping turnover down. Then you have the overlay of COVID, so you have folks calling out for one reason or another. And it does present some challenges in the plants.

In fact, despite our excellent results, we still have a lot of opportunity in our plants. Our efficiencies are down a bit, even from last year. That may seem counterintuitive with the results that we've had, but you've got the volume drop off, plus you have higher scrap rates and things like that that are directly attributable to the stability of your -- of your labor force. So a lot of effort to try to bed that down and particularly where it's -- where it has been most acute because there is some meaningful improvements that we can -- that we can make there. I think beyond that we've talked about before really working on our overall work environment, making sure that our pay scale is obviously are competitive.

That's one element, but also working on things like scheduling because we find as many other companies have found that there is a huge quality of life component at play today that's oftentimes equally or more important than the compensation. So working on our scheduling to give more clarity to particularly our frontline employees on when they will have time off, trying to ensure that they have consecutive days off where possible, which is a significant departure from the norm in our industry. Those types of things really do make a difference. So we continue to work on that as well. Steve, on freight.

R. Steve Kinsey -- Chief Financial Officer and Chief Accounting Officer

Sure. Bill, I'd say we've benefited somewhat this year from the fact that our mix is more DSD driven. So, as you recall that, we determine that's a closed loop system. We actually have three to four primary care carriers for our DSD products that deliver to our DCs. So those contracts are usually negotiated on a 12 to 24 months cycle, so we're not in the, we're not in the true market buying so much freight as we do typically on our warehouse business. So we have seen some benefit for that. So if this mix continues into 2021, we would expect some of that to continue until we begin to lap some of it late in Q1.

Also I would say, as Ryals alluded to, on the labor side and be more efficient that we've got more efficient from a production standpoint and our runs. We have better transportation and run efficiency as well because we were spending forward trucks to these DCs versus sending half loads, so that's impacted us as well. And again, that's a mix -- that's mix driven. So if that continues through 2021, I would expect to continue to see somewhat stable transportation going into next year as well. And then obviously fuel costs will impact that as well, and so I would say those are probably the three or four factors that really influence transportation for us.

Brian Holland -- D.A. Davidson -- Analyst

Thanks, I appreciate all the color. I'll leave it there. Best of luck going forward. Thanks again.

A. Ryals McMullian -- President and Chief Executive Officer

Thanks, Brian.

Operator

Your next question comes from Mitch Pinheiro with Sturdivant & Co.

Mitch Pinheiro -- Sturdivant -- Analyst

Thanks, good morning.

A. Ryals McMullian -- President and Chief Executive Officer

Hey, Mitch.

Mitch Pinheiro -- Sturdivant -- Analyst

Hey, so just looking at current trends, how has foodservice been ramping for you, if you could break that out fairly QSR and casual?

A. Ryals McMullian -- President and Chief Executive Officer

Sure. The QSR business, I think we mentioned this on the last quarter. So it's kind of a continuation of the trend. The foodservice -- the fast foods, excuse me, QSR business has been a bit quicker to recover just by its nature drive-throughs that sort of thing, the Chick-Fil-A's, the ones I see. The lines are double wrapped around the store. So, they're doing, they're doing pretty well. The sit-down fast casual type stuff is still lagging. Mitch, it's off the bottom but still well down, you can see that in the non-retail numbers that we put out down roughly 14.5% or so, but off the lows that we saw early in the year.

So slow recovery there. I think it's going to be a long time as my personal opinion and you kind of have to factor into that, well, what happens with COVID, you have another surge, it's really going to get hurt, you're seeing that start to happen in Europe with the new lockdowns and that migrate its way over here as we move into flu -- flu season, we'll have to see. So it's trying to come back, but it is -- it is slow and I think it will be -- I think it'll be protracted.

Mitch Pinheiro -- Sturdivant -- Analyst

And is that -- so is this off the bottom, like in the, in the third quarter as you, as we're here in the fourth quarter, is it just sort of stabilized, is that what you are saying?

A. Ryals McMullian -- President and Chief Executive Officer

Yeah. In the second quarter, non-retail for us was down 15.8% and in the third quarter, it was down 14.7%. So better, but not a whole lot.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay. And then as you look at '21 just broadly speaking in broad terms, what type of cost savings, supply chain savings you are all -- part of that $20 million that you had this year. I mean, are we talking about the same type of level of cost savings next year or does it drop off. Any color around that?

A. Ryals McMullian -- President and Chief Executive Officer

I'd rather stop short of actually quantifying it, but it is a continuation of many of the same initiatives we had in place this year. So it will be, it will be largely first half weighted, until we lap it in the second half, Mitch, but it's across those same categories. Right. The overhead streamline we did, procurement, depot consolidation, all the things that we've talked about. That is not to say that we're not working on additional incremental things but that's -- those -- some of those are still in the planning stages, but it will be, it will be meaningful but it will also be mostly first half weighted.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay and then just some more. So has the current environment affected your ability to gain new distribution or new -- getting new products on the shelf in your newer territories. Have you -- are there -- has this been good for you, has this been neutral? Any color around that.

A. Ryals McMullian -- President and Chief Executive Officer

You know, it really has it. I mean, we've continued to introduce new products, the DKB Buns, the Perfectly Crafted line extensions that we've talked about in the prepared remarks, all that's happened in the midst of all this and we're not the only ones. I mean our competitors have put new products forth, we've gained new shelf space during this period. Mitch, no really meaningful geographic expansion during this, but by the same time, we weren't trying to. We're really focused, as we've talked about before on places like the Northeast where we're still relatively low share. So we are there but really trying to gain deeper penetration by gaining incremental shelf space and putting forth our brand support those types of things. So from that standpoint, it really hasn't -- Steve unless I'm missing something. It really hasn't impacted us negatively.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay, and then just last question on Tasty Baking. So --

A. Ryals McMullian -- President and Chief Executive Officer

Hey Mitch, let me cut you off there. I do want to add one more thing to your question as I sit here thinking about it. I do think in some ways that the COVID circumstance has been a positive relative to new product introductions, because what we have seen in the mix shift is somewhat of a shift away from traditional loaf to buns and rolls and to breakfast items, right. And so as we've introduced new items in those categories from that standpoint, it's actually been a positive rather than a neutral.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay, got you. Thank you. I just wanted one more question about Tastykake, Tasty Baking. So where are we right now here in the fourth quarter with Tasty Baking. Is it -- are we -- are the operations sort of optimized you know where you wanted to be. Is this something that we're going to see slowly build into the first half of next year? And were Tastykake's sales up, or can you talk about up, down in the third quarter.

A. Ryals McMullian -- President and Chief Executive Officer

I'll answer your question bluntly to start and then add some color. We are not where we want to be, period. We are making improvements. I'm extremely pleased with the job that David Roche is doing. As you know, he is one of our more seasoned operational executives. He is doing a great job up there with a very, a very difficult task. We have installed new automation, most of that is complete. We have made some management upgrades, we have even brought in some outside help to improve our operational processes.

We've been through union contract negotiation. And that is all settled down now. So things are getting better, Mitch, I think that you're -- I forget the exact phrasing you used, but I think it's spot on that. I expect to see slow steady progress as we move through next year. But if we're successful I believe that slow, steady progress will culminate in a meaningful improvement for the company next year.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay.

A. Ryals McMullian -- President and Chief Executive Officer

Oh yeah, Tasty was flat for the quarter, but let me point something out there. The operational inefficiencies that we've been experiencing at Navy Yard has impacted their top line too because we've had to cut because of those inefficiencies and scrap that we've had to cut product which obviously impacts your topline. So making these improvements will not only help the bottom line, but it will improve the top line as well.

Mitch Pinheiro -- Sturdivant -- Analyst

Okay and one more thing, just, I do like the new conference call format.

A. Ryals McMullian -- President and Chief Executive Officer

Good, thanks.

Mitch Pinheiro -- Sturdivant -- Analyst

So I appreciate you doing that.

A. Ryals McMullian -- President and Chief Executive Officer

Sure. You bet.

Operator

Your next question comes from Ryan Bell of Consumer Edge Research.

Ryan Bell -- Consumer Edge Research -- Analyst

Hi, everyone.

A. Ryals McMullian -- President and Chief Executive Officer

Good morning.

Ryan Bell -- Consumer Edge Research -- Analyst

Is there any way you could provide detail about the direction of store branded and the non-retail part of your business throughout the quarter, kind of talking about where they were to start the quarter and where they came at the end just to see where the momentum is being pushed.

A. Ryals McMullian -- President and Chief Executive Officer

So the -- the intra-quarter trajectory of private label, is that what you're asking?

Ryan Bell -- Consumer Edge Research -- Analyst

Yeah. For the private label and then also the non-retail portion of the business. I know that slowed down and improved a little bit but it's harder to get the magnitude and sort of the month-to-month to figure out where that might be going.

A. Ryals McMullian -- President and Chief Executive Officer

I'm with you, Ryan. I don't have that in front of me, I have the totals, which you already have from the release. We can look into that and come back to you, though. I want to say, it was fairly steady for the quarter, but let me check that.

Ryan Bell -- Consumer Edge Research -- Analyst

Okay, thank you. And then when we're talking a little bit more about private label at the industry level, we've been seeing that down pretty significantly in Canyon. Would you be able to share some of your perspective about the drivers of the industry decline obviously producers so have the ability to favor branded over store brand to the margin advantage and other reason, but is there any commentary you could have about that on the industry level.

A. Ryals McMullian -- President and Chief Executive Officer

Yeah. I've talked a little bit about this before, but it's a kind of a key question, Ryan. I think it all started at the outset of the pandemic, because you had this massive shift to brand because of capacity constraints. Right. So, yeah, everybody was pumping out as much branded product as they could in a limited SKU assortment, but now as we've may be found something akin to a new normal, now what's driving it.

Well I think e-commerce is one, it's the brands are a bit more prominent on the e-commerce platform and obviously that's playing a much larger role today. I think it's time spent in in-store is a lot shorter now, number of trips were shorter, people don't want to spend a lot of time wandering around the gross store. So they go for what they -- for what they want. And in this particular case, brand delivers more of what they want, than perhaps the private label does. There's more differentiation there. There's more innovation there, some of which we're happy to have brought to the category. So yeah, I think those are probably the primary drivers.

Ryan Bell -- Consumer Edge Research -- Analyst

Okay, and then that kind of seems like as you're looking out to 2021 that private label probably is not going to be picking up quite as much given what you're talking about overall.

A. Ryals McMullian -- President and Chief Executive Officer

Yeah, I mean I'd certainly, thanks, I mean if we do -- if we do our job correctly and we bring a compelling brand proposition to the consumer then naturally hope that should lead them to stay with -- with our branded products. If you think about a deeper recessionary environment and stimulus money running out and that sort of thing. Yeah, you could see some trade down, but the good news for us is that we play across a variety of different price point. So you've got your super premiums up in the Dave -- Dave's and Canyon areas, you've got the premium Nature's Own and you've got a little bit more value in the Wonder -- in the Wonder area.

So we're kind of, we're kind of able to address all those price points with the brands that we have, which we believe provides us some insulation should you encounter a recession. If you think back to '08-'09, the last one we had, we fared pretty well through that environment as we have through prior recessions.

Ryan Bell -- Consumer Edge Research -- Analyst

Thank you, that's it from me.

A. Ryals McMullian -- President and Chief Executive Officer

Okay, thanks.

Operator

Thank you, gentlemen. Do you have any closing remarks?

A. Ryals McMullian -- President and Chief Executive Officer

No, not -- except to thank you everybody for their time and for your -- for your interest in the company. I certainly hope you like the new format. We certainly like it better, able to dedicate a little more time to your questions. So we appreciate you joining the call this morning.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

J.T. Rieck -- Vice President of Investor Relations and Treasurer

A. Ryals McMullian -- President and Chief Executive Officer

R. Steve Kinsey -- Chief Financial Officer and Chief Accounting Officer

Bill Chappell -- Truist Securities -- Analyst

Brian Holland -- D.A. Davidson -- Analyst

Mitch Pinheiro -- Sturdivant -- Analyst

Ryan Bell -- Consumer Edge Research -- Analyst

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