Flowers Foods, Inc. (FLO) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us to discuss Flowers Foods' results for the fourth quarter and full year 2020. I'm J.T. Rieck, Senior Vice President of Finance and Investor Relations. Just a reminder that our fourth quarter results came out on February 11, 2021. The release and the accompanying slide presentation are available in the Investors section of our website, and there you'll also find a transcript of the remarks our CEO and CFO are about to make. Everything is posted in the Investors section of flowersfoods.com. Before we begin, please note that what we present today may contain forward-looking statements regarding the company's performance. While we consider these statements reasonable, they carry risks and uncertainties that might cause actual results to differ materially; beyond what you'll hear in these remarks, the important factors concerning Flowers Foods' business are described in full in our SEC filings. Speaking today are Ryals McMullian, President and CEO, and Steve Kinsey, our CFO. Ryals, over to you.

Thanks, J.T., and I'm grateful for the interest everyone has shown in Flowers. Today's agenda centers on two key themes. The first is our 2020 performance — where we did well and where we still can get better. The second covers the actions we're taking to make the most of today's conditions so that we're set up for success over the long run; we'll look back at the past year using our four strategic priorities, which, to restate them, are building our team, concentrating on our brands, putting margins first and making wise acquisitions. Starting with building our team: despite the upheaval and uncertainty the pandemic brought, our sales and adjusted earnings reached record highs for the company. Such results could only have come about because of how exceptionally our people performed, above all those working on the front lines. I have made this point previously, yet it deserves saying again: their persistence means a great deal to me, and their commitment leaves me feeling deeply humbled. They have displayed remarkable bravery and a real commitment to making sure consumers get the products they require, and we are determined to do all we can to give them a workplace that is both healthy and safe. It gives me real satisfaction that, in acknowledgment of how devoted they have been, we managed to give our frontline team 2 employee appreciation bonuses over the course of the year. In my view, our team is the strongest in the industry, and the people we brought on during 2020 have made it even better. We added 4 new Board members whose broad mix of skills and experience will be extremely valuable as they help steer the company ahead. More recently, we brought in a Chief Supply Chain Officer along with a Chief Procurement Officer to help push operational improvements forward. We also set up new structures aimed at lifting performance, among them our strategic organizational realignment designed to drive brand growth and product innovation, which merged our 2 business units into one function led by Mark Courtney, who took on the title of Chief Brand Officer. Within that reorganization, David Roach became President of Cake Operations, tasked with making critical operational upgrades in that unit. We also set up a transformation office led by Heeth Varnedoe, now Chief Transformation Officer, to carry out important cross-functional efforts. I'll discuss that transformation office again shortly. Our second strategic priority—concentrating on brands—sits at the core of how we grow, and the power of our top brands proved vital to what we achieved in 2020. The pandemic produced remarkable amounts of product trial, and we are making every effort to spark repeat purchases. We've boosted what we put into marketing and advertising—especially on the digital side—because we want to grow the brand. That emphasis has paid off with yearly sales gains, leaving out the extra 53rd week, of roughly 17% at Nature's Own, 31% at Dave's Killer Bread, 28% at Wonder, and 36% at Canyon Bakehouse. Our approach to the portfolio puts our branded products first and advances margins, which is our third strategic priority. The pandemic-driven shift toward eating at home demonstrates why this portfolio approach is important. Volumes did drop 2.9% in 2020, yet our profitability rose sharply, with EBITDA margins gaining 160 basis points to reach 11.9%, and we're seeing right now just how strong the payoff can be when we concentrate on our brands. Beyond that margin gain, the portfolio optimization effort we kicked off in 2020 produced roughly $22 million in cost savings — more than our initial target of $10 million to $20 million — and switching our Lynchburg bakery over to higher-margin organic production will give margins another lift by cutting transport costs and boosting quality and service for the key Mid-Atlantic and Northeast markets. Smart M&A is our fourth priority. We stay proactive on the deal front while keeping the disciplined approach we have long followed. M&A has always formed, and will keep forming, a vital piece of our growth story. The criteria we apply to acquisition targets: they must be able to strengthen our branded portfolio, broaden our geographic reach, fit well culturally and add new capabilities to the company. We think our solid balance sheet affords us the flexibility to chase a broad range of deals, and we will be ready when the right one appears. What matters more than our 2020 achievements is what we are doing to take advantage of today's environment and set ourselves up for success over the long term. Driving growth, improving operations and containing costs are the 3 main areas of focus. I'll begin with our digital initiative, which touches on all 3; as I said on our third quarter call, this digital strategy effort is meant to transform the way we run the business. With the digital initiative we have 3 main goals: one, bring more agility to our business model by empowering the organization through a fundamental redesign of core business processes and how we work. Two, embed digital capabilities where they matter and change how we engage with consumers, customers and employees. And third, we're modernizing and simplifying the landscape of our applications and configuration — our ERP system — in order to remove existing obstacles and open up new ways of working; so think of our digital strategy as a crucial enabler across all of our strategic priorities. Successfully getting digital implemented will support our brand efforts, bring us closer to the consumer, boost operational efficiency and give the team better, real-time insights, which in turn helps the business make faster and better decisions. Together with the ERP upgrade, we've identified 11 domains in which we anticipate material gains from digital. To start with, however, we're focusing on 3 principal domains: e-commerce, autonomous planning and what we refer to as bakery of the future. Everybody is aware that grocery e-commerce received a major lift in 2020 because of the pandemic, and I have a strong conviction that this pattern is here to stay. Flowers has to succeed on the digital shelf just as much as in physical stores. On e-commerce, the aim is category leadership — meeting shoppers wherever they are, ensuring Flowers' brands are ranked as the leading online options, and assisting our retail partners with omnichannel so consumers enjoy a great experience. Autonomous planning covers predictive ordering for sales operations, network modeling, integrated business planning, and forecasting of supply and demand. Through autonomous planning, our goal is to predict what consumers will want with greater precision and to carry that knowledge from the point of sale throughout the supply chain — ensuring the right raw materials are present at the right moment, the right items emerge from the right bakery daily, and deliveries are tuned for strong on-shelf availability and customer service. And last, bakery of the future. What we seek there is best-in-class bakery performance and employee engagement by deploying industry-leading digital manufacturing tools — such things as real-time performance management, automating repetitive processes and performance visualization, standardizing processes and procedures across employees, shifts, lines and bakeries, plus sensor-based quality checks that increase consistency and cut reaction time to changes. This digital strategy is at an early stage of implementation, and we intend to start investing behind these primary domains this year.

As we proceed with this process across the quarters ahead, we intend to keep you informed about when these initiatives are expected to pay off and how large those benefits should be, with materialization anticipated over the next few years. At the same time, we'll stay focused on running things better, especially at bakeries that are lagging, Navy Yard included. Lifting performance at those bakeries is a realistic and meaningful way to improve profit for the entire company. When it comes to costs, the talent we've added—particularly the new Chief Supply Chain Officer and Chief Procurement Officer—ought to assist us in generating efficiencies and lowering expenses; those initiatives are extremely important considering the freight and commodity cost inflation we're facing. Also, as I mentioned before, our portfolio optimization efforts are anticipated to produce additional advantages in 2021. Right now, we expect savings of $30 million to $40 million, largely in the first half of the year. The reality that every one of these changes is landing during a robust stretch highlights that we aren't resting on our laurels. Constant improvement is at the heart of who we are, and we're dedicated to making sure we're set up to win no matter what the market does. Flowers is in the middle of a transformation, and we have a lot of initiatives underway aimed at generating growth and lifting profitability. Because these efforts matter so much to the company's success, we've created a transformation office to oversee them, headed by Heeth Varnedoe, our Chief Transformation Officer. Heeth brings years of operational experience as a longtime Flowers executive and has tremendous credibility across the organization. It's also worth pointing out that Heeth was in charge of our portfolio optimization work last year, and those results came in above target. The transformation office has four main objectives. First is overall program management: keeping our initiatives on schedule and within budget, and making the team answerable for results. Second is risk management: proactively spotting the major risks that could prevent successful outcomes and putting mitigation in place quickly. Third is value management: making sure our implementation plans are tightly tied to strategy and produce the expected benefits, and offering one objective source of truth to guide executive decisions. Fourth, and possibly most important, is change management: figuring out how the transformation will affect people, engaging change ambassadors across the company, creating communication plans that flow both top-down and bottoms-up, monitoring metrics and employee feedback to gauge progress, and building upskilling and training materials so the transition succeeds. We've taken lessons from what went right and what fell short in our first round of Project Centennial work. With the leaders we've picked to head these efforts, plus the creation of the transformation office, I think we'll be well positioned to capture the fullest value from these strategic initiatives. At this point I'll hand things over to Steve, who will walk through the quarter and the year in detail and cover our 2021 guidance. After that, I'll return to talk about how the business looks right now. Steve?

Thanks, Ryals, and good morning, everyone. I want to second what you said and give my heartfelt appreciation to our amazing team, whose work through this difficult period has been truly exceptional. Now, on to the quarter's results. Just to remind you, Flowers Foods had a 53-week year in 2020, and that extra week landed in the fourth quarter. COVID-19 kept exerting a major influence on how we performed. Overall sales climbed 11.5%, and the extra week accounted for 8.2% of that — up from the 2.4% growth rate we posted in the third quarter. Price/mix contributed 7.7% of the sales gain, driven mainly by a mix shift toward branded retail items as consumers ate more meals at home. Volume pulled total sales down by 4.4%, with notable softness in store-branded as well as foodservice and other nonretail channels. On sales by channel, the pattern broadly mirrored what we saw in the third quarter. Branded retail sales grew $124.5 million, or 22.6%, reaching $675.6 million. Our top brands keep powering the company's performance, with standout strength from Nature's Own, Dave's Killer Bread, Wonder and Canyon Bakehouse. New products — including extensions of our Nature's Own Perfectly Crafted line and DKB buns — stayed meaningful contributors. Store-branded retail sales fell $3.7 million, or 2.6%, to $137 million, with softness across every category as consumers kept moving toward branded products. What we're seeing matches industry-wide trends, with store brands' share extending its long-term slide — from 23.1% in 2019 to 20.4% in 2020, and down from 25.8% share in 2015. Foodservice and other nonretail sales dropped $15.5 million, or 6.8%, to $210.5 million. Most of that decline came from lower volumes stemming from the COVID-19 pandemic's impact; we saw decreases across every category of nonretail business apart from fast foods. Taking out the extra week's effect, branded retail sales rose 13.4%, store branded retail sales fell 9.8%, and nonretail and other sales declined 13.5%. During the quarter, gross margin as a percentage of sales — excluding depreciation and amortization — rose 200 basis points as mix moved toward higher-margin branded retail products. That gain was partly offset by $4.1 million in appreciation bonuses paid to frontline workers. Selling, distribution and administrative expenses as a percentage of sales declined 320 basis points in the fourth quarter. Excluding the items affecting comparability detailed in the press release, adjusted SD&A expenses rose 10 basis points, reflecting higher distributor discounts, workforce-related costs and increased marketing expenses, partly offset by a $3.9 million yeast recovery settlement and a $2.3 million positive adjustment to the nonretail accounts receivable reserve. The higher distributor discounts stemmed from a shift in product mix. Workforce-related costs rose mainly because of higher employee incentive costs tied to our improved financial performance, along with a $2 million appreciation bonus paid to frontline workers that wasn't allocated to cost of goods sold. GAAP diluted EPS for the quarter came to $0.26 per share. Leaving aside the comparability items outlined in the release, adjusted diluted EPS for the quarter came in at $0.28 per share, which is $0.10 higher than the same quarter last year. Now let's move on to the balance sheet, liquidity and cash flow. During fiscal 2020, cash flow from operating activities rose $87.5 million, reaching $454.5 million versus the year-ago period. Capital expenditures totaled $97.9 million, while dividends paid amounted to $167.3 million. Our financial position is still strong. At the close of the quarter, net debt to trailing 12-month adjusted EBITDA was roughly 1.3x, a decrease from 2x at the end of 2019. At year-end, cash and cash equivalents came to about $307 million, and we had roughly $501 million of remaining availability under our credit facilities. Let me now turn to our 2021 outlook. We project sales will fall between 2% and 4%. On the bottom line, adjusted EPS should land in the $1.07 to $1.17 range. Keep in mind that 2021 returns to 52 weeks, which is 1 fewer week than 2020. That extra week in 2020 added 1.8% to full year sales and roughly $0.02 to EPS. Entering quarter 1, the operating environment has stayed fairly consistent with what we saw in the fourth quarter. Among the factors we weighed when setting sales guidance were the pandemic's impact and how long consumer behavior would keep reflecting remote working and learning. Beyond that, our earnings guidance factored in inflationary commodity costs along with expenses tied to our growth initiatives, among them our strategic digital initiative; in a moment, Ryals will provide more color on the factors we're watching in 2021. We anticipate continued strong free cash flow generation, and our capital allocation priorities and philosophy stay consistent with our focus on maximizing return on invested capital and growing shareholder value. For 2021, we are targeting capital expenditures between $140 million and $150 million. That level is somewhat elevated relative to recent years, mainly because of targeted investments supporting supply chain optimization and our digital transformation. Thank you. And now I'll hand it back to Ryals.

Thanks, Steve. We came into 2021 from a strong position. The favorable mix shift that the pandemic created is carrying over into the new year, and our top brands are still doing very well. Steve laid out the guidance for 2021 in detail, and I want to stress that this is a transition year. We're assuming the pandemic's effect will fade as the year goes on and that demand will move back toward a more normal environment. If that holds true, it's fair to think results will come in below 2020's. When we put out our long-term financial targets last August, we made it clear that although we expected performance over time to align with those targets, any single year's results could differ. In 2020, we significantly beat those targets, so at least some reversion makes sense, particularly with 2021 having 1 fewer week than 2020. On top of that, because our cash flow and earnings were so strong in 2020, we've decided to make important investments for the future this year, especially in digital, which will hit 2021 results by roughly $0.05. We expect those investments to start paying off in 2022 and beyond. It's worth highlighting that the midpoint of our '21 guidance aligns with our long-term targets when 2019 is used as the base year. Among the factors that could move results within that range are the timing of the pandemic-related demand reversion, cost inflation, how quickly we make our long-term focused growth investments, digital included, and whether we succeed in achieving operational improvements at our lower-performing bakeries. The 3 biggest levers to watch this year are probably: one, mix reversion. We do expect some mix reversion as things normalize during the year, but a faster or deeper reversion than we anticipate could hurt margins. Number two, commodity inflation and our ability to offset it through cost savings, efficiency improvements and pricing where necessary; and three, we'll also need to watch the promotional environment closely — through the fourth quarter of last year and even into the first month of this year it has stayed stable; however, a significant pickup in promotional activity could weigh on our results as the year progresses. We'll also be keeping a careful eye on how effective our marketing investments are, to make sure they're delivering the return we want and supporting our brand growth efforts. Even with all of these factors in mind, I believe it's going to be a great year for Flowers. We've connected with millions of new households that have tried our top brands. We've concentrated our investments in marketing and brand support across both digital and physical domains; we expect our portfolio optimization savings to keep delivering in 2021. Our network optimization efforts are ongoing, which will help us increase efficiencies further. And most importantly, our team's morale is high. We are genuinely eager to dive into this year and challenge ourselves to extend what we achieved in 2020. Each year brings its own distinct hurdles, and this one is no exception, yet the Flowers team has never been in a stronger position to confront those hurdles directly and produce results that match or exceed our long-term targets. So thank you so much for your time. That brings our prepared remarks to a close. Thank you very much.

Something in the prepared remarks really caught my attention — the part discussing Wonder Bread's growth, which for the year was almost as rapid as Dave's Killer Bread. I'm hoping to get a little more detail on that, since my initial assumption would be that outpacing Nature's Own would work against price/mix. Yet clearly price/mix came in quite strong for both the quarter and the year. So is the driver simply share gains taken from private label and your store brand sales? Beyond a consumer moving up to a branded product even at fairly comparable price points, is there anything else at play? How sustainable is the Wonder strength, kind of, as we go into 2021?

Sure, Bill. We're actually quite happy with Wonder Bread. The bulk of it will land on the bun and roll side rather than bread, and that's precisely the outcome we were aiming for. As we've mentioned previously, we lagged somewhat in growing our branded buns and rolls since, historically, we had a scattered mix of regional labels — the Sunbeams of the world, that sort of thing; what we required was a line tied to a national brand so we could run national programs with national retailers. That's the shift we've made across recent years. As certain regional operations were deliberately scaled back, Wonder has expanded at a healthy pace. Once more, the bulk of that growth sits with buns and rolls, and that focus is very much by design.

All right, that's useful. So then, are you observing — I mean, broadly speaking, given that store brands keep underperforming, would you expect that shift toward branded products to hold up? Or is there some reversal happening, with shoppers sort of reverting to how they traditionally buy?

Not so far. Not so far. Naturally, that's among the major questions facing us this year, correct? It really comes back to considering possible mix reversion overall. But the private label patterns we observed in Q4 — in fact, if you take out the 53rd week, private label actually looks slightly worse on a sequential basis in Q4 compared with Q3. So no shift in those trends has appeared as of yet. Some of that might emerge later in the year. But clearly, our emphasis is on branded growth. So directing support — extra support — behind brands such as Wonder and Nature's Own, Canyon, Dave's, and the rest of them is a key strategic priority for us.

Understood. Then just one final question. Steve, I believe all of us know that when word comes of a big ERP rollout at a packaged food company, success isn't always guaranteed. So could you help us get a picture of where things stand with the systems, and how that fits into the transformation office? And what do you expect will come out of it once it's finished?

Certainly. Yes. I suppose — in the past, I suppose, whenever an ERP initiative or upgrade is announced, investors get a bit nervous. Yet the truth is, I think, across roughly the last ten years, most of these have turned out reasonably well; we brought in SAP back in — back in 2000. So that's roughly 20 years, and we haven't experienced or observed any big or meaningful upgrades to our system. Right now, we remain on track to keep SAP as our main ERP system. And an upgrade to S/4HANA is underway. So essentially, we'll align with that. And we're currently choosing an implementation partner. Once that's settled, we'll determine which modules go into an actual upgrade. But on the whole, we believe that with the transformation office and the plan we've set out, we'll approach this very carefully and prudently. So this isn't us swapping out our ERP platform. It's genuinely an upgrade of what we already run.

And Bill, to build on that point, we're quite early on here. As Steve mentioned, we're only now choosing the SI. So it's early stages, but it also matters — you saw this in the prepared remarks — to keep in mind that this isn't purely an IT effort; it's merely one piece of a wider digital strategy. And the way I'd suggest you view it is that the ERP upgrade in particular, along with the remainder of the digital strategy, will truly serve as crucial enablers for carrying out our wider strategic plan, whether that means brand support, network optimization, or plant upgrades. Frankly, looking at digital overall, Flowers trails its peer group and, honestly, its competitors. So this is something we've needed to tackle for a good while. Clearly, after a very strong year, with great cash flows and very strong earnings, yes, this was an excellent moment to make that investment.

No. I understand. And might those benefits show up this year? Or do they land more in the next year, for some of these efforts?

Yes. Very little — an immaterial gain this year. The investments happen this year. The payoffs arrive in '22 and beyond. We'll speak more specifically about that later in the year, once the business case comes into clear focus.

I'd like to ask about the 2021 guidance. Ryals, I believe in your prepared remarks you mentioned that the guidance aligns with the targets — with your long-term targets, using 2019 as the base. So my thinking would be that this backdrop should be net favorable. Obviously it was hugely favorable in 2020, and obviously mean reversion is coming in 2021. You've still got a quarter — or at minimum two months — that ought to look roughly like what we've seen across the last several months. After that, even if things start turning around, we'll still be dealing with a greater share of remote work, plus a gradual move toward herd immunity, and so on. Given all of that, is it really as straightforward as commodity inflation plus the digital investments serving as offsets that hold us to the algorithm — rather than letting us say we'll be above the algorithm for one more year, or if we frame it using the '19 to '21 trajectory? Is there anything else we ought to be considering in how you're projecting the year?

No, no. I'd say you're basically right on target. The one thing I'd mention is perhaps a small adjustment: the lowest end of our guidance would come in a bit under algorithm; and keep in mind, there's roughly $0.05 of digital investment we're putting in this year that does burn that; we aren't adjusting for it, but it's something to factor in; still, that $1.07 at the low end would be a touch below, though again, we're making those investments so that over the longer term we can land within or above algorithm. So that's what I'd say first. Regarding what drove the year, I believe you covered all of those correctly. I'm not certain commodities would be at the very top of my list, though. For me, two items stand out most. First, when does the mix reversion occur, and how far does it go? How substantial is that shift back toward, say, 2019 levels? My own view is that it won't return completely, though some reversion will take place. And when that happens would ultimately affect where you land within the range. That's the first one. The second would be the promotional environment. At present, during the fourth quarter, conditions remain stable. My answer five weeks into the new year would be unchanged. Yet as the year progresses and conditions return to normal, how much will the category need to lean on promotions in order to hold onto the 2020 gains?

Let me quickly tack on a follow-up to that last point. Looking back through history at this category and at what Flowers Foods has faced, the intuitive reasoning has been that inflation actually helps Flowers on balance, since you're competing against a disproportionate number of independent bakers who maybe don't do as much forward buying and lack a sophisticated hedging practice, so they might need to respond to higher wheat costs immediately. That leaves you with either the flexibility to raise prices gradually and capture the wider spread, or perhaps to keep things managed thanks to your hedging, so that maybe that inflation reaches you a bit later. You could push the promotional angle harder and gain more share. Either way, you're in a pretty favorable spot. I suppose the reverse would also hold somewhat true once deflation starts to appear. So maybe two things. First, is that logic outdated when it comes to the setup? And second, if it isn't, if it still applies, how do you plan to manage that over the next 12 months? Is the emphasis on volume? Or is it on getting the price through and passing it along to margins?

Yes. I'll begin, and I might invite Steve to add his perspective as well. No, that reasoning doesn't strike me as obsolete. Still, I'd argue it may not carry the same weight it once did, what with all the consolidation in the industry. After all, there simply aren't the same number of independents that existed previously, correct? Their sway, therefore, isn't quite so large, even if it persists; and everything you mentioned rings true to me. My sense is just that it likely packs less of a punch than it did ten years back. Another point I'd make — and this has been evident all through 2020 especially — is that we've managed to raise prices from a higher starting point. Our promotions are now generating greater dollar gains for us. Much of that, in my view, stems from the price-promotion capabilities we've developed that simply weren't there previously. Basically, we've become far more sophisticated regarding the manner, location, and timing of our promotions. That lets us achieve a stronger return. Beyond that, I believe the broader branded strategy contributes significantly as well. After all, as you're aware, we're partnered with genuinely powerful brands. That, I think, carries considerable weight too. Steve, is there anything you'd like to add?

No, Brian, what I mean is that our philosophy and strategy have remained quite consistent. And I'd say that has served us reasonably well across the bulk of my career. So, to pick up on Ryals' point, we take coverage somewhere in that 6- to 9-month window. And clearly, in certain years that works in our favor. In other years, as you mentioned, things turn deflationary and perhaps we call it. But largely for 2021, we have a certain feeling about the coverage we're carrying, and we'll watch inflation begin to climb somewhat toward late in the second quarter, though it truly accelerates in the back half. And how the crops turn out really determines that. So while we anticipate pretty meaningful inflation in the back half, new opportunities may still exist there.

Got it. And once more, in your — I appreciated how you laid out so many of the initiatives in your prepared remarks from last evening. And obviously, you've got quite a lot going on. A few might take somewhat longer. Others could move through faster. One that really jumps out at me — I don't know whether it's my Philadelphia roots or perhaps just some conversations I've had with you folks off-line — but I'm genuinely curious about the Navy Yard and that underperforming snack cake segment for you. Could we just sort of walk through how fast we think we can improve the performance there with the new leadership and perhaps a sharper focus on that, and sort of what the mechanics look like.

Sure. Glad to. Well, I'm happy to say we're already making solid progress. I mean, the changes we've made, putting David up there to oversee those efforts, especially at the Navy Yard and, honestly, the team we have there at Navy Yard, they've really done a terrific job getting the operation moving toward a turnaround. We're not there yet; but we're really beginning to see some encouraging progress toward the end of the year and that's carried on into this year. For those folks, we've set a rather ambitious goal this year. Should they manage to reach it—and nothing leads me to think they won't—then, as I've noted previously, the entire company stands to gain substantially, and not only Navy Yard. As I believe we've said in the past, we've made some equipment upgrades at that facility, invested capital there, automated portions of the lines—especially around packaging—and brought in robotics. That has done a great deal to lower scrap rates, which had been a serious problem at that site and a major driver of the financial trouble they were facing. We're clearly headed toward recovery. We aren't there yet, but we anticipate substantial progress in that area during this year. I'd add that our efforts aren't limited to operations. I'm referring specifically to Navy Yard and Tasty at this point; however, we're also taking action commercially, streamlining how we operate. We're reducing SKUs. Our attention is on pricing and promotion to ensure we get those right. We're achieving the returns we need. So this is a combined push involving both operational and commercial enhancements.

Yes. So my question is just about how you're thinking about M&A going forward. Obviously it sounds like there are a few different things in motion this year as you work through a larger optimization plan and ERP strategy. CapEx is up. But as Ryals mentioned, you ended the year with a great cash position — probably the best ever, I think. Leverage looks fairly well contained. And then your long-run EPS target, I think, relative to the sales and EBITDA target does include some M&A, right? Given that you've described this as more of a transition year and considering where internal attention is directed, would you say you're not really positioned at the moment to go after a robust acquisition pipeline aggressively? Or could the organization still remain active on the acquisition front even as you're putting the other parts of the strategy in place? That's just my first question.

Absolutely, Rob. And put briefly, my view is that we're fully capable of continuing to play an active role in that area. I think that — especially since the transformation office is now in place, along with the government — the governance protocols we have set up to oversee all these strategic initiatives mean we're better positioned to be flexible. So even if we need to pause something briefly in order to — I mean, M&A opportunities come along and you have to strike while the iron's hot, right? The timing isn't always up to you. But I think we'd have plenty of flexibility to shift our attention to an M&A opportunity if one should come up. I'm actually pretty excited about this year from an M&A standpoint. Basically, activity is beginning to pick up once more now that we're past the crisis period, so to speak. Quite a few assets are being offered for sale, and there's considerable chatter regarding what may emerge later on. As a result, the pipeline still looks solid. Our approach will stay fairly disciplined; even so, it appears the opportunities are beginning to rebound.

All right, great. And real quick — apologies if this was already raised by someone, since I unfortunately joined the call late. In yesterday's prepared remarks, there's a sentence saying there are optimization savings of $30 million to $40 million, and it sounds like those are weighted more toward the front half of the year. So maybe you could — this is probably for you, Steve — just walk us through why there wouldn't be incremental optimization savings in the back half of the year, that's the first thing; and second, is there potential upside from those optimization savings that could hopefully partially offset some of the promotional and overall cost inflation risk later in the year.

Sure. There are some benefits in the back half. It's just that most of them land in the first half. And Rob, this is basically a continuation of the portfolio optimization savings we captured in the back half of last year. It's all the same initiatives on overhead and procurement and all those things we discussed last year. We just begin to lap them in the second half of the year, which is why the benefit is not as great.

All right, I'll fit in a last quick question. What I'm really asking is how the mix of your business has changed over roughly the last ten months. Did any broad lessons emerge that would make you rethink where you want to play? My guess is you still want capacity coming back in parts of foodservice and in some of the private label side. But if that business never returned, would it actually be such a bad outcome for Flowers, considering the price/mix and margin trends we've observed?