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

Thanks, and good morning to everyone. I trust you all had a chance to go through our earnings release, hear the prepared remarks we recorded, and take a look at the slide deck — all of which went up earlier today on the Investor Relations section of our site. Once this Q&A wraps up, an audio replay of the call will be made available as well. Before we get into questions, I want to flag that during this session we might share forward-looking statements regarding how the company is performing. While we consider those statements reasonable, risks and uncertainties surround them, and those could lead actual results to come out materially different. Beyond whatever you hear from us in these remarks, you can find important factors tied to Flowers Foods' business laid out in full in our SEC filings. On top of that, we offer non-GAAP financial measures, and the disclosure along with reconciliations for those appears in the earnings release and at the close of the slide presentation posted on our website. With me right now are Ryals McMullian, our Chairman and CEO, along with Steve Kinsey, who serves as our CFO. Ryals, the floor is yours.

Alright, thank you, JT. Good morning, everyone. Although nobody on this call is pleased with how we performed on an absolute basis this quarter, we managed to maintain our unit share in a category that saw declines larger than anticipated. Those outcomes, against an economic backdrop full of uncertainty, really underscore how vital our portfolio approach is and how strong our brands have proven to be. To counter this softness in the category, we keep putting money behind innovation that aligns with current trends and going after major opportunities in categories and adjacent spaces that are expanding more quickly. By bringing our portfolio in line with shifting consumer preferences and pursuing new white space for growth, our goal is to squeeze out the best possible near-term results while simultaneously building up our brands and capabilities so we can deliver sustainable growth over the long haul. I still have every confidence that the steps we've already put in motion will let us boost shareholder value and expand consistent with our long-term financial targets. Michelle, with that said, we're ready for your questions.

Hi, everyone. Morning. Appreciate you fielding our question. I'd like to kick things off, and maybe just ask about the core package bread category. I understand some of the share losses you all pointed out, along with the strength of certain better-for-you items, Dave's Killer and Keto, clearly. If we consider what it takes to push either your specific brands or the category back to, say, just a point of stabilization, what ought we to watch for to see unit share stabilize and ideally return to positive territory? Is that something we think could occur this year, or are we already looking more toward 2026 at this stage?

Yeah, Jim, thanks for asking. A lot is happening. Everything stays pretty dynamic and fluid, from consumer health to economic uncertainty, the entire tariff situation, etc. That makes forecasting very, very hard when you're operating in that kind of environment. I got a similar question, I believe, back in February, when I figured things might get better. Back then, I said, "Probably not before the second half." Honestly, with the trends we observed in the first quarter, where things actually got weaker than we'd expected, my thinking has already shifted to 2026. I'm not sure we'll see a tremendous amount of improvement this year. Of course, for our business, particularly with the new business wins we're landing that are just now coming online, meaningful space gains we've secured in the spring, resets that are just now coming online, we believe we have levers there to offset some of those headwinds. I think the biggest positive factor for our results going forward will be better consumer health. If you examine what's happening in the category, there's clearly a premiumization versus value dynamic at play here. What's getting squeezed is the middle. The middle, unfortunately, is where we have the most exposure. That traditional open white bread, those traditional open white bread segments of the category. We believe the key to reinvigorating that part of the business is further differentiation. We have plans in that regard that we're putting in place. That's a huge segment for us; we need to address it and further differentiate ourselves from the competition. Our philosophy is when we're in economic situations like this, the way out is not to try to promote your way out. We believe in using promotion primarily to drive trial, particularly as we bring out new innovative products and brands, and not necessarily to drive volumes, because that can devalue our business and the category; we are focused on smart promotion, certainly, but heavily focused on brand investment and innovation. Once consumer health improves, given how we've set up our brands, I believe we'll be strongly placed to gain when that recovery comes—and come it will, in time. That was a lengthy reply, Jim, yet that's the way we view it.

No, no, no. I’m grateful for every bit of that detail. Perhaps I could ask something that goes a bit deeper into the Wonder cake innovation. From what I recall in the prepared remarks, you mentioned it’s running ahead of what you’d anticipated when it comes to distribution, and it even played a part in the unit share gain. At those retailers putting that lineup on their shelves, would you say it adds volume on top of your other products, or does it mostly replace your existing cake business, with Wonder simply doing a better job? On balance, it lifts unit share. Whatever specifics you can share would be useful.

Yeah, it’s a bit soon to say. As of now, it has more than made up for the rest of the cake business. And remember, it just came out. One retailer moved a bit ahead of schedule, yet it has only been on shelves at that retailer for several weeks. I believe a bit more time is needed before we understand how everything settles out. With luck, when the next quarter arrives, we’ll likely have a somewhat clearer view of how that trade-off plays out.

That's excellent. Thanks for your assistance. I'll rejoin the queue.

Hello, and thank you for taking my question. It seems your position regarding promotions has shifted somewhat, especially given the prepared remarks, which suggest you've recently been observing stronger lifts; that appears to have prompted you to pursue promotions somewhat more aggressively than you previously would have expected. I'm thinking specifically about Dave's Killer Bread along with a few of your other differentiated products. Could you share some thoughts on what you're observing from consumers, how that's encouraging you to perhaps increase promotional activity, and what that might mean for price mix, especially within branded retail during this year? Many thanks.

Of course. The bulk of that rise in promotional efforts centered on our more differentiated products, such as Dave's Killer Bread. Much of it occurred near the close of the quarter and in period four. As I told Jim a moment ago, we have never ranked as the most heavily promoted participant in the fresh packaged bread segment; we prefer to deploy it selectively, and we mainly deploy it to generate trial. Naturally, occasions do arise where promotions can deliver some volume lift. If you examine this category and recognize that base sales account for 93% of the total, there isn't much room for incremental volume gains beyond that. From our standpoint, promoting at extremely high levels—our philosophy has consistently held that doing so will simply produce reduced volumes and reduced sales over time while diminishing your brand's value. We frequently discuss our trade promotion system capabilities, which have sharpened our grasp of how promotions function and how effective they are, enabling us to be far more granular when considering our promotional strategy so we can confirm that we're achieving a solid return on that investment.

Understood. Thanks. So, returning to what Jim asked about bread, I get that much of what we are observing stems from consumers focusing on health, which drives them to hunt for value, and that is dragging the category down—something you noted ought to get better eventually. You are also pinning the softness on a wider move toward eating more healthily. My guess is that rising GLP-1 usage plays a role too. I am interested in that aspect. Given those pressures are probably structural in nature, how do you envision the bread category climbing out of the slump it is in now? Many thanks.

Yes. Yes; that ties into what I was hinting at when I responded to Jim. There is only so much I can share at this point, but we have strategies to tackle that head-on. From a health and wellness angle, we already have many initiatives underway, considering what we provide through DKB, Canyon Bakehouse, and clearly our keto items. With the Simple Mills acquisition now joining us, those represent excellent options for consumers who care about health and wellness. Soft variety and white breads, which make up the biggest portion of the category, lean less in that direction. Within the category, we view ourselves as an innovation leader. As we move ahead, we plan to keep being an innovation leader in the category and to meet those consumer needs.

Thanks a lot.

Morning. If I look at the guidance you've given for EBITDA margin, it's roughly 30 to 40 basis points lower than what was previously stated. How should we expect that to split between gross margin and SD&A?

I guess, if you consider what's really driving that, clearly we mentioned that category trends play a major role when we assemble our guidance chain. Clearly, that will have an effect on the gross margin line. Tariffs clearly have an effect on the input costs. That's mostly gross margin. From a cost-saving angle, we're taking certain actions, mainly within SD&A, to attempt to offset and soften part of the impact from the top-line challenge along with the tariffs. I'd say that most of that, we would anticipate seeing flow through the gross margin line rather than SD&A.

Understood. So when you consider your long-range objectives of an EBITDA margin between 12% and 14%, while we'll be sitting in the low 10s — Ryals, how confident are you about reaching that? Has anything shifted regarding the path to get there, meaning fixed cost leverage, a greater branded mix, and so on? Is there any difference in how you see your long-term EBITDA margin?

Well, Mitch, the longer-term picture hasn't shifted at all. We do need to recognize that the conditions we're currently operating in represent something of a setback, correct? It could take slightly more time while all of us, collectively as a nation, navigate our way through this present circumstances. The components underlying that plan, along with the route we'll follow to reach it, stay unchanged.

All right. I suppose, once more, I don't want to keep dwelling on better-for-you diets or those movements, yet when you examine how the shopper base has split in two, bread along with sandwiches, plus that easy-to-carry, handy quality of newly baked loaves, has historically tilted toward — it has consistently served as an advantage and a source of expansion for, shall we say, the groups earning less. So then, why would that pattern not be showing up at present? Has there truly been a shift toward healthier consumption? Does that even apply among those with smaller incomes, toward what used to be, I suppose, pricier goods? I'm simply wondering if there's any further detail you might provide on that point.

Right. I definitely believe that when we zero in on that lower-income bracket, a portion of that is certainly present. And I'd add that, considering the broader conditions, a general decline in spending has shown up among all income tiers. That factor is contributing too.

Okay. All right. That's all I have. Thank you.