Welcome to the Flowers Foods' Fourth Quarter and Full-Year 2017 Results and Webcast. My name is Paulette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to J.T. Rieck, Vice President of Investor Relations and Treasurer. You may begin.

Thank you, Paulette, and good morning everyone. Our fourth quarter results were released yesterday evening, and you'll find the earnings release on the Flowers Foods' Web site. You can find the slide presentation that supports our discussion for today posted on the Conference Call page in the Investors Center at flowersfoods.com. We are on track to file our 10-K on February 21. Before we begin, please be aware that our presentation today may include forward-looking statements about our company's performance. Although we believe those 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. Now, let's get started. Participating on the call today, we have Allen Shiver, Flowers Foods' President and Chief Executive Officer; and Steve Kinsey, our Executive Vice President and Chief Financial Officer. After their prepared remarks, we will open the line for questions. Allen, I'll turn the call over to you.

Thank you, J.T., and good morning everyone. Fiscal 2017 was a successful year for Flowers, as the team made substantial progress executing our Project Centennial plan. We believe we are well-positioned for a promising 2018. During the year, we implemented strategic priorities to increase our focus on the consumer, and remove complexity and cost from our business. We generated strong cash flow to reduce debt and support dividend growth. We're pleased with our progress as we execute on our objectives to accelerate profitable sales growth and drive down costs. Turning to our results, driven by a strong growth of Dave's Killer Bread, our sales increased to 1.1% for the quarter and 0.4% for the year excluding the divestiture. Adjusted earnings per share was $0.17 for the quarter and $0.89 for the year, in line with our guidance. We continue to focus on productivity and lowering cost. In the quarter, our manufacturing efficiencies increased and scrap tonnage decreased. Gross margin declined 40 basis points as a percentage of sales, due to higher outsourced contract labor costs. The decrease in gross margin was offset in part by a 30 basis point reduction in adjusted SG&A as a result of lower administrative overhead. The fourth quarter was the sixth consecutive quarter that Flowers' dollar share improved according to IRI, increasing 0.4 share points to 15.1. Share gains were driven primarily by Wonder and Nature's Own in the White Loaf segment, and Dave's Killer Bread in the Specialty/Premium and Breakfast segments. These gains were partially offset by share losses due to heightened competitive activity and cycling of promotions in the Soft Variety and Sandwich Buns/Rolls segments. As I've said in the past, we believe Flowers has significant long-term growth potential. We serve a $30 billion-plus market, so we have opportunity to grow share in…

Thank you, Allen, and good morning everyone. Let's start with the items affecting comparability in the quarter, most significantly the effects of tax reform. In the fourth quarter of 2017, we recognized a benefit of $48.2 million or approximately $0.23 per share due to the re-measurement of the net deferred tax liability. In addition, we recognized $3.6 million of restructuring charges, pension settlement charge of $1.6 million, and legal settlement charges of $1.5 million. Finally, Project Centennial consulting costs in the quarter were $5.5 million. Now, turning to the fourth quarter operating results, total fourth quarter consolidated revenue increased 0.6%, adjusting for the mix manufacturing business we divested during the year, sales increased to 1.1% this quarter compared to the prior year quarter. The consolidated top line increase was driven primarily by growth in the DSD segment. DSD segment revenue was up 1% in the fourth quarter, driven primarily by strong sales of Dave's Killer Bread, partially offset by lower sales of traditional bakery items. Price mix increased 3.4% while volume decreased 2.3%. Warehouse segment revenue was down 90 basis points in the fourth quarter excluding a 320 basis point decline associated with the divestiture of the mix manufacturing business. Price mix decreased 5.6%, while volume increased to 6.5%. The majority of this decrease was driven by lower sales in contract manufacturing and in our warehouse organic business. Consolidated adjusted margin was 6.7% of revenue compared to 6.8% in the quarter last year. The 10 basis point decrease was driven primarily by the Warehouse segment. Adjusted operating margin in our DSD segment was up 50 basis points as a percent of sales, driven primarily by sales increases due to improved price mix and overall lower SG&A cost. Adjusted warehouse operating margin was down 290 basis points as a percent of…

Thank you, Steve. To sum up, we're on pace with Project Centennial roadmap that we announced this time last year. We have been thoughtful and deliberate in our restructuring, and strong momentum is building across the company which gives us confidence in our outlook and the guidance that we've provided for sales and earnings growth in 2018. We are well positioned to leverage our new capabilities to drive shareholder value over the long-term. Now, let's open the line for your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Farha Aslam from Stephens. Please go ahead.

Hi, good morning.

Good morning, Farha.

Couple of questions about the top line, the SKU rationalization; are we finished with that, and how much did that impact '17 sales, and will it have any lingering impact on '18?

Yes, Farha, we are through with the SKU rationalization, we've made that adjustment in our product lines. And to really break that out as far as a component of our overall sales guidance we really don’t have that number. We can get that number for you, but they are -- the SKU rationalization has been incorporated into our guidance.

Okay. And then…

Steve, if you have any…

Yes, Farha, when you look at the fourth quarter overall we are pleased with the marketplace. We basically didn’t lose any shifts based on allocation with regard to the SKU rationalization. And basically the impact was minimal when you look at sales performance in the quarter. And going forward into 2018, we expect similar results.

Okay.

Farha, actually on the positive side, space is usually allocated based on turns per liner foot, and as the adjustment that we've made in our product line should generate better turns from a retailer standpoint looking at their shelf space allocation. So, the plan is to grow shelf space as we move forward.

That's helpful. And then as you focus on branding initiatives, as Project Centennial, could you share with us kind of how you're prioritizing your brands? Because we noticed that Wonder lately has gotten a surge in sales. Is that really volume from your regional brands going into Wonder? Could you share with us your brand architecture under Project Centennial?

Farha, we're really excited to have a new Chief Marketing Officer, Debo Mukherjee, onboard. And Debo is putting together a great team of existing team members as well as brining on new talent that as everything is designed to focus on building our brands that have a true, meaningful consumer point of difference. And as we -- we're right now putting together our marketing plans. Most of those are going to be implemented in the back half of the year. But there is tremendous excitement initiating in our marketing group and finding its way through to sales. So Debo and team have a lot of great things going on.

Okay. And then final question is on pricing. Steve, you mentioned that you're increasing pricing to offset the inflation. And inflation is about $40 million. So when we think about pricing is that really just on the DSD business you'll try and put all of that pricing or should we think about it on the entire portfolio? So should we think about 1% pricing or is it going to be less than that?

And when you look at the cost increases they are impacting both segments of the business, so our goal is to focus across the whole business from the project perspective. But we would not -- we have done more initiatives in the marketplace, you can see that in IRI data. So, for 2018, we know we do have pricing and some volume less in the guidance range on sales. I'd say it's roughly equal.

So, equal pricing and volume -- and the pricing has been accepted already by retailers?

Yes, you're already getting to see some of that into the IRI data.

Okay, perfect. Thank you so much.

Yes, thank you Farha.

Our next question comes from Brett Hundley from The Vertical Group. Please go ahead.

Hey, good morning guys.

Good morning, Brett.

I wanted to follow on that line of questioning related to pricing, because we are seeing some of your pricing in the data. And unless we're looking at something different I'm not seeing it as much with your competitive set. And you guys mentioned some heightened competitive activity in certain areas during Q4. Can you just help us a little bit with what you're seeing and feeling in the marketplace? It seems to me that you're striking a pretty confident tone with regards to price coverage of input cost inflation. But just given the nature of the category over time just curious kind of what you're seeing and what you expect going forward.

Brett, you can look at the IRI data and I think it reflects the impacts of the pricing that has already been taken. I really don’t want to get into detail about pricing, we can't do that. I think when you look at our brand; Dave's Killer Bread is a great example of a brand that has tremendously meaningful consumer points of difference. And our pricing on that particular brand shows that the ability to take pricing in this category if you have products with a really meaningful consumer point of difference. So, again, I really can't comment on what's taking place with the pricing in the market. We've announced the actions that we've already taken that are shown in IRI. But I think in the big picture, for this category to continue to grow at the rate that we expect we anticipate investing marketing dollars into brands, exactly like Dave's Killer Bread along with Nature's Own, and our other brands to give consumers a meaningful point of difference to justify the pricing as necessary.

Okay, that's fair. And I guess on the other side of that with the input cost inflation that you guys have called out. Is your centralized purchasing effort largely in place at this time?

Yes, Brett. When you look at our procurement group basically most of the negotiations take place with a centralized team, and then the bakeries, they handle all the ordering and consumption. So we are now centralized from an overall procurement perspective whether it's direct spend or indirect spend.

Okay, that's helpful. And then I wanted to ask you about your DSD asset in this freight environment. It was opinion that your DSD business might actually give you some near-term relative benefits in this freight environment particularly against some peers in certain areas that may not have that type of asset in place. I'd just be curious how you view that asset over the near-term in this environment, and any particular benefits it might give you competitively?

I think when you look at what's happening with freight today in transportation, especially with regard to DSD since it is the largest segment of our business, there's really two things happening. One goes back to commodity cost. There is a basis aspect in transportation there, so that is impacting overall commodity cost and input cost, and that's priced into the price increase as we've talked about with regard to input cost. Secondly, and I think more to your question, on from a distribution network perspective, we do use dedicated haulers who take our product from manufacturing facilities to our distribution centers. Those contracts tend to be a little -- were little longer-term, two to three years out. So we have most of that covers in place as well. But those companies are seeing some of the impacts of what's going on with transportation with driver shortages. So we're having to work to mitigate that cost with our suppliers. What I think one advantage of it is it's more of a closed loop system. So if you think about bakeries how we've talked about production, the 250 mile to 300 mile radius from a delivery perspective. So it does allow drivers to make daily runs and then make it back home for the evening, so that does, we believe, provide an advantage by using this closed loop system. So, generally, our DSD transportation costs are fairly -- any increase there is fairly immaterial. And we do believe the way the model works does give us some advantage with the current transportation situation.

Okay, that's really helpful. I'll pass it on. Thank you.

Good. Thank you.

Our next question comes from Akshay Jagdale from Jefferies. Please go ahead.

Good morning. Thanks for the question. I wanted to ask about the organizational change and how that's impacting execution, morale, et cetera. Can you give us a little bit more color on that and how you're managing through it? I mean, guys, this is a big change for the company, and I'm just curious as to how that's going and how you're thinking about that as being a potential risk in terms of disruption in any way.

Yes, Akshay, I couldn’t be more excited about the organizational changes that we've made. We really have had a regional structure to this company for most of my career. And if you look at the changes that we've made recently really focused on becoming a national branded company. I wish you could've attended one of our sales meetings that we had, our leadership team here, in Thomasville, over a 100 individuals that are leading our sales team together. And I've never seen a higher level of excitement in a room than what I saw with that meeting. So we have streamlined the organizational structure, we've provided incentives that are new to the organization. And just to be very honest and direct, well, there is tremendous excitement about the changes that are taking place in the org structure.

Great. And just one more for me, as it relates to the category itself, can you comment on the competitiveness. I mean I'm just thinking through all the consolidation that's happened. You guys are obviously getting a lot more smarter on your pricing, so maybe you can comment a little bit on the industry and where it is from competitive standpoint, and more specifically, on your pricing initiatives. It wasn’t too long ago where you had just started to implement the new system, if I'm not wrong. So can you give us an update on those too, and I'll pass it on. Thanks.

Sure. Akshay, as far as the category, I mentioned earlier that there remained opportunities to grow in our existing category business. There's independent bakers that are still doing a nice job in different parts of the country that would be very good fits with our company. So we continue to develop those relationships as well. We also are looking at adjacent categories. A lot of the action in the supermarket today is in the perimeter of the supermarket. There are product lines and product categories that we're currently not in that would be a very nice fit for our company moving forward to help us grow that top line with the right type of acquisition there. I yield to Steve on the question regarding pricing.

Yes, so when you look at -- I think you asked about the trade promotion management system we've talked about for a couple of quarters now. We have completed the implementation of that as far as brining the system up. We're not using it across the whole yet, but we are using it on major retail customers. And I think we'll begin to see benefits from having access to that data and insights as we move through 2018.

Perfect. I'll pass it on. Thank you.

Thank you, Akshay.

Our next question comes from Bill Chappell from SunTrust. Please go ahead.

Thanks. Good morning.

Good morning, Bill.

Just back to the pricing decision, maybe a little more color. I think back in the fall it was -- I believe it was $30 million of commodity costs, and that's gone to $40 million. So correct me if that's wrong. And so I guess the question is, one, is that a pretty firm number now in terms of where you're hedged for this year. And then two, the decision to raise prices because you were kind of indifferent, but weren’t committed to it back in the fall. Did you see Bimbo or other competitors raise price and you're following, or have you seen them follow since you led the pricing?

So when you look at the range we gave back in our investor day it was $30 million to $40 million. So we have ended up on the upper-end of that range. And in 2018, like any other year, we have pretty good visibility into our cost structure for the full-year from that perspective since we hedge and go forward. So it will be somewhere around that $40 million give or take range as we move through the year. On the pricing question, we would not speculate on competition and their behavior or how they’re thinking, you know, what we have always tried to do is, when we had significant cost increases, we try to take pricing actions where we can. And if we can’t get the pricing, then we have to work on operating efficiencies and taking other costs out of the business. So that’s really no different than you’ve seen in the past from Flowers.

Got it. I guess, the question is now that you have started pricing, are you seeing competitive pricing as well, or is it -- should we -- is there any concern that they don’t follow and you have to actually deal it back?

Bill, it’s really -- I think the IRI data is probably the best indicator of what’s taking place in the market from a pricing standpoint. And we don’t want to speculate about competitive activity in regards to their pricing decisions, but I would reference the IRI data is a good indicator by product category, by market with as much detail as you need.

Got it. And then, just on the outlook for this year and then the quarter on Dave's Killer Bread, how much of that, or how much are you seeing of distribution gains versus just velocity, and kind of maybe an update on where we stand and where you expect to be by year—end on Dave’s Killer Bread distribution?

Generally when you look at Dave’s and the fact that, I guess, it was April of 2016, we rolled that out across the whole DSD network. It’s primarily sales velocity. I mean, there're still few stores to get the product into and some of the markets where we’re under-penetrated, but generally that growth has been driven by higher sales velocity.

Okay. And then last one from me, I don’t think there was any comment about reinvestment of tax savings via dividend, or share repurchase, or anything else; anything else, any other commentary on that at this point?

I mean, yes, generally I would say it's very early in the game. I mean obviously there is going to be pretty significant benefit of -- or able to capture all the change in the rate year-over-year, but I’d say, from a priority perspective, we're not looking at things differently. So you'll continue to see us focus on investment in bakeries Bimbo brands, like I said earlier, as well as returning value to shareholders through dividends, opportunistic share repurchases, and as Allen mentioned, we still have M&A opportunities out there. So I don't see philosophically anything changing, but we have to make sure our investments are driving returns on the investments. So there's a laser-focus on that as well.

Got it. Thanks so much.

Thank you, Bill.

Our next question comes from Tim Ramey from Pivotal Research Group. Please go ahead.

Thanks so much. I was interested in the commentary on the tax rate, it was -- the projections were a little bit higher than I was thinking we might see, understand what you mentioned relative to the first quarter, but can you just give us some of your thinking about what we wouldn't be closer to the 21% statutory?

Yes, when you look at the Federal rate also, there is the state component. So that’s the major driver of bringing -- of the difference in the Federal statutory rates that's out there. And also there are few changes in deductions, so that is impacting the overall rate as well.

Okay, but if we looked historically, the state component above Federal wouldn't have contributed, say, 400 basis points. So it must relate to this lack of certain deductions. Is that right?

Right. And you're also losing things like the 199 deductions, which was a pretty substantial benefit for us as well.

Got it. Okay. And I was intrigued by the commentary that there are still meaningful regional bakers out there that -- I know you're not going to talk about specifics, but would you characterize that is bakers that are not in markets that you currently serve, or would you characterize that as infill in markets that you currently serve?

Yes. Tim, I would -- first of all, there are independent bakers that are in markets that we are currently serving that would be very good additions to our company. There are also opportunity in those adjacent product categories that I mentioned earlier.

Okay.

We are focused on the parameter of the stores. It’s really both.

Okay, terrific. Thanks for your help.

Okay, thank you.

Thanks, Tim.

[Operator Instructions] And our next question comes from Amit Sharma from BMO Capital Markets. Please go ahead.

Hi, good morning everyone.

Good morning, Amit.

Steve, can you help us understand of the 1.3% total price mix in ‘17 in DSD, how much was price and mix? Do you have a way to think about that?

Typically, we don’t give the breakout between price mix. I mean, when you look at the sales in the quarter and the lot of driven by Dave's Killer Bread. So, a lot of that is mix shift, which does give some pricing impact. Basically, it’s mix.

Okay. And the reason I am asking you if you are calling for about 8% of pricing in ‘18, and how should we think about that plus the mix, right? The mix component should continue in ‘18 as DKB will continue to provide most of the growth in that segment?

Generally, I think asset price, but we look at it as price mix. So you can look at the flat to up 1.6% or so half price mix, half volume.

Got it. And then, the $40 million input cost inflation that you gave, is there anything other bucket that we should think about as we are looking at pluses and minus for EBIT next year?

Amit, basically when you look across the whole I mean we have all the initiatives around Project Centennial to continue to drive cost out of the business. So from a cost increase perspective, the major thing happening is on the input cost. But, there is nothing else really that stands out because the focus is to drive other cost down where we can.

So, there isn’t really any other bucket of inflation whether inherent you know, in the operating sector…

Obviously, there is sideways inflation, but we did make the odd changes.

Right.

So, net-net overall we are looking at all cost being down year-over-year.

Okay. And the last one from me is so you talked a lot about you are shifting to higher brand. So there is obviously a mixed impact of that. Is there a margin impact of that as well? Are these brands the national brands, are they generally little bit more profitable than the regionals, or not necessarily?

I mean generally when you look at what’s happened in kind of what the mix shift, we are seeing some margin improvement. So hopefully, as we come into 2018 and focus on kind of the high performing brands, some we have talked about over the last six months or so, that there should be some margin improvement as well and that is the part of the goal for ‘18?

Amit, from a new product development standpoint, the items that are in the queue are items with a significant consumer point of difference that we expect will be successful selling at a higher retail price because we wanted. So the margin improvement -- any profit should improve with those new items as well.

Got it. And Allen, just last one on this. On DKB, is that true for DKB as well then. So you’ve talked about margins getting better for DKB. Are they above overall DSD margins now or not yet?

Again, penny profit with DKB is very acceptable, simply because of the consumer is paying the retail price that we’ve established. So both margin and certainly the penny profit associated with Dave's Killer Bread is exciting to me because it’s an indicator where this whole category can go.

Got it. Okay, thank you so much.

Thank you.

And we are showing no further questions, I will now turn the call back to Allen Shiver for closing remarks.

Thank you very much for your time today. Again, I want to recognize the hard work from our team that continues to take place. We are-laser focused on the work ahead for a successful 2018. Thank you for your support and your involvement this morning, and we will be adjourned.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank for participating and you may now disconnect.