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

Good morning, everyone. I'm J.T. Rieck, Executive Vice President of Finance and Investor Relations. Thanks for joining us to discuss Flowers Foods' results for the second quarter of 2025. Before we begin, please remember that what we present today may contain forward-looking statements regarding how the company will perform. While we consider those statements reasonable, they carry risks and uncertainties that might make actual outcomes differ materially; beyond what you hear in these remarks, the significant factors affecting Flowers Foods' business are described in full in our SEC filings. Speaking today are Ryals McMullian, our Chairman and CEO, and Steve Kinsey, our CFO. Ryals, over to you.

Thanks, J.T., and I appreciate everyone being on the call today. The strides we've taken to reposition the portfolio so it lines up better with what consumers want give me a lot of confidence in our ability to deliver steady growth over the long haul. Our spending on innovation and the Simple Mills deal have moved a larger portion of our sales into higher-margin Branded Retail products, and those made up 67% of sales this quarter versus 64% in the same period last year. Carrying out this transition is going to take some time, but we anticipate added gains as we carry out our portfolio strategy and build out our substantial innovation pipeline. Quarterly results felt the effect of the persistently difficult economic backdrop and evolving consumer patterns that have weighed disproportionately on the bread category. Bread sales trailed the broader food category, with tracked-channel volumes falling 3% against a 1% drop in food. Traditional loaf products — a segment where our exposure is especially heavy — came under particular strain, sliding 6%. Given those difficulties and sharper competitive intensity, we are revising our outlook for 2025 results. To offset these headwinds, we're going after pockets of growth across various subsegments of the category and using our strong brands to move into adjacent categories. In the near term, these steps haven't been sufficient to completely offset weakness at the core of our category, yet we remain confident that over the long run they are the correct strategies and will put Flowers in position for stronger growth ahead. Even though the bread category as a whole is strained, differentiated items — especially those carrying better-for-you claims — are performing better. For instance, organic and keto category sales climbed 3% and 4%, respectively; we think our leading share across these and other appealing subcategories leaves us well placed to seize the growth opportunities out there. We're leveraging our strong brands to extend our product lines past bread into spaces with significant potential for market share where we think we can legitimately succeed. Our DKB snacking portfolio is just the initial example of this strategy. The Simple Mills acquisition also accelerates this transition, providing entry into the growing natural snacking segment. Wonder's launch into cakes, which has begun well, is another instance of stretching our brands where appropriate. And across all these segments, we intend to innovate vigorously, introducing new items that meet consumer needs not yet addressed. Our results do not satisfy us. Rather than sitting back and hoping our category rebounds, we're taking aggressive steps to reshape the portfolio via innovation and M&A so it lines up better with what consumers want. By addressing the things we can control, we intend to get the most out of near-term results while also fostering steadier growth over the long run; these efforts are building momentum, which underscores what we see as the strength of our brands and how well our strategy is working. I'll begin by reviewing the second quarter through the lens of the four strategic priorities we've established: strengthening our team, keeping our brands prominent, prioritizing margins, and pursuing smart M&A. After I finish, Steve will walk through the financial results and guidance, and then I'll wrap up by covering the key themes ahead. To begin, I want to thank our team members for their steadfast dedication to giving customers the industry's best products and service. What they do strengthens my belief in what we can achieve over the long term. When we acquired Simple Mills in the first quarter, it brought a wave of new talent into our industry-leading team. That integration is going smoothly, and I'm excited about the skills and knowledge their people are adding to Flowers. Having the right talent matters, but so does giving team members the right incentives to create shareholder value. While we navigate this challenging period, I'd like to highlight the alignment between our team's interests and those of shareholders. Each strategy, tactic, choice and step we make is designed to generate long-term shareholder value; our incentive framework backs that objective, featuring performance-based compensation and long-term incentive plans connected to value creation. As an example, yearly cash incentive awards are linked to revenues and adjusted EBITDA results. Additionally, longer-term incentive compensation via performance shares is connected to return on invested capital relative to our cost of capital, as well as to total shareholder return versus our peer group. Every member of our team is working tirelessly to boost results and increase shareholder value. The second thing we're focused on strategically is our brands, and that's especially important given the conditions right now; that focus is delivering results, helping us outperform in a number of areas; overall we maintained our unit share, with especially solid performance in sandwich buns and rolls, breakfast, and specialty premium loaf; and our brands are beating the competition, with DKB, Wonder and Canyon each picking up unit share during the quarter. Our solid relative market share and the loyalty consumers show our brands have gotten us additional shelf space and improved placement from retailers. A notable trend we saw was strength in segments with differentiation, especially better-for-you health attributes. Although units in the bread category fell 3%, DKB and Canyon both posted unit sales growth in tracked channels, rising 4% and 12%, respectively. Conversely, private label—the segment where we offer the least differentiation—experienced a 4% decline in unit sales. Shoppers are gravitating toward differentiated items and are prepared to spend more for products with value-added attributes. Our recent introductions, such as Nature's Own keto items along with DKB protein bars and snack bites, kept up their impressive momentum. At the same time, buyers want lower price points and smaller pack sizes, and our broadened selection of small loaves meets that need well. In sweet baked goods, the spring debut of Wonder cake products gave our business a lift, and those products substantially beat the category. We picked up 70 basis points of unit share—more than any other vendor—with Wonder's strong results leading the way. Notably, Wonder's gains did not take sales away from Tastykake, whose unit share came in flat. The response from both shoppers and stores was strong, and we see plenty of room for this business to grow, which has us excited. As we bring on more distribution and use promotions to encourage additional trial, the national rollout will keep going through the back half of the year. To sustain our momentum, during Q3 we're introducing a robust set of on-trend, innovative offerings, with a focus on better-for-you and value-oriented items aimed at the areas of our category showing the strongest growth. We keep leaning into those trends by putting more into innovation so our product portfolio stands further apart. Margins are our third strategic priority. With industry volumes trending difficult and tariffs adding more pressure, paying attention to margins matters even more. Costs always get our sharpest attention, and this year we're working through extra savings initiatives to counter top line pressure. Those initiatives—covering labor and other efficiencies—are moving forward, and we anticipate they will add to our results in the second half. Savings on cost are needed, yet they aren't enough on their own for margin growth over the long term. More important still is executing our portfolio strategy, which is designed to increase the portion of sales generated by our higher-margin Branded Retail offerings; in parallel with that change, we continue striving to improve margins within our Other sales category, so that both new and existing business can reach our margin goals. Our fourth priority is smart M&A. Integrating Simple Mills is proceeding well, as I noted earlier, and we are identifying efficient and mutually beneficial approaches to working together and connecting. The brand's ongoing strong results, even amid this difficult environment, demonstrate how closely it fits with current consumer trends and bolster our confidence in its long-term potential. One thing worth highlighting is that in Q2, the brand outperformed both the overall category and the natural category in each channel segment it competes in that we track. The crackers business was particularly impressive: Simple Mills grew faster than any other natural cracker brand and came in as the third fastest-growing brand in crackers overall. Thanks to that momentum, Simple Mills maintained its number one share position in natural cookies and crackers. Since the deal closed, performance has been in line with the high bar we set, and we're very excited about what this brand can do. On capital allocation, our top priority is returning to a more normalized leverage ratio, which would free us up to go after additional opportunities. We'll keep exercising discipline as usual, focusing on creating shareholder value through a appealing mix of risk and return. Now I'll pass it over to Steve, who will take you through the quarter's specifics, after which I'll wrap up with how we see the present business climate. Steve?

Thanks, Ryals, and good morning, everyone. I'll move on to the results for our second quarter of 2025. Net sales were up 1.5% versus the same period a year earlier. Price/mix fell 1.2%, driven mainly by our retail business, partly offset by better price/mix in foodservice as we executed portfolio optimization strategies. Volume was down 2.4%, chiefly from lower traditional loaf bread, partly offset by gains in branded cake, branded organic and branded keto volumes. The Simple Mills acquisition contributed 5.1%. Gross margin as a percentage of sales, excluding depreciation and amortization, fell 110 basis points to 48.8% compared with the same quarter last year. That drop was primarily due to increased external purchases of co-manufactured product related to the Simple Mills acquisition, as well as reduced production volumes. Selling, distribution and administrative expenses represented 38.1% of sales, a decline of 40 basis points versus the same period last year, driven by lower distributor distribution fees and partly offset by increased workforce-related costs and higher fleet expense resulting from the transition to company-owned territories in California. When excluding items affecting comparability, adjusted SD&A stood at 37.7% of net sales, a decrease of 50 basis points. GAAP diluted EPS came to $0.28 per share for the quarter, a drop of $0.04 compared with the prior year period. After excluding the comparability-affected items detailed in the release, adjusted diluted EPS for the quarter declined $0.06 relative to the prior year period, landing at $0.30. Simple Mills added $61.4 million of net sales, $10.9 million of adjusted EBITDA, and a $0.01 adjusted diluted loss per share. Turning to the balance sheet, liquidity, and cash flow: we feel good about our financial position overall. Net debt to trailing 12-month adjusted EBITDA stood at roughly 3.2x at quarter end—above the prior-year period, reflecting the Simple Mills deal. Cash and cash equivalents totaled $11 million, and we had $627 million left available under our credit facilities. Operating cash flow for the year to date climbed $98 million, reaching $267 million, aided by deferred tax benefits tied to recently enacted legislation and stronger working capital results. Capital spending dropped by $5 million, reaching $56 million, while dividend payments increased by $3 million, totaling $105 million. Our 2025 financial guidance is being revised, primarily due to weakness in the traditional loaf category and heightened competitive intensity, both of which we anticipate will continue through the remainder of the year. When factoring in the partial-year contributions from Simple Mills, our updated projections are net sales between $5.239 billion and $5.308 billion, adjusted EBITDA ranging from $512 million to $538 million, and adjusted EPS of $1 to $1.10. Without Simple Mills included, we anticipate sales in the range of $5.021 billion to $5.083 billion, adjusted EBITDA between $482 million and $505 million, and adjusted EPS of $1.08 to $1.17 per share. We continue to anticipate that the second half will bring gains from added shelf space and further cost-reduction programs. Those positives should be partly offset by the fact that prior-year savings will no longer be incremental, by growing pressure from commodity costs, by higher expenses tied to tariffs, and by category trends that remain difficult. The two largest variables that could move our guidance are how the category performs overall and tariffs. Earlier, we had assumed a tariff impact during the year of $27 million to $30 million for our legacy business and $4 million to $6 million for Simple Mills. Our current estimate for the in-year tariff effect is $15 million to $18 million for the legacy business and $2 million to $4 million for Simple Mills. For 2025, we have coverage on roughly 92% of our key raw materials. So with that coverage set, our outlook accounts for inflationary pressures through the remainder of the year. To hold volatility down and provide sufficient visibility on cost, we've retained our longstanding hedging approach, through which we aim to lock in greater certainty on the expense of our key ingredients six to twelve months ahead. In the second quarter, we resumed the bakery deployment of our ERP system and completed a third bakery successfully. We plan to extend that deployment to further bakeries during the third quarter. To lower the risk of operational disruption, we're proceeding carefully and are confident the transition can be executed smoothly. Thank you. I'll now turn it back to Ryals.

Thanks, Steve. I want to talk about a few trends shaping how we're performing right now, plus the actions we're taking so we can make the most of opportunities today and going forward. I'll start with consumer trends, then move on to the competitive landscape. The consumer picture looks much the same as it did last quarter, as ongoing inflationary pressure weighs on confidence and how people spend. Dollar sales in food and beverage have held fairly steady, but volume softened partway through the quarter and on into July. Foodservice traffic kept falling, though it improved from one period to the next, and retail volume growth stayed positive even as trends weakened. Shoppers keep moving their retail food and beverage dollars toward value, club and mass channels, while smaller formats such as convenience, dollar and drugstores trail behind. Inside the store, people are putting more of their budgets toward perimeter items such as proteins, produce and dairy, and less toward center store items such as bakery, alcohol and candy. Bread category trends held fairly steady across the quarter, marked by falling dollar sales and volume, with traditional loaf showing particular softness. That softness came mainly from fewer units sold per buyer, driven by fewer product trips. In line with the food and beverage trends we're seeing, research indicates that health or dietary needs rank among the biggest influences on consumer behavior in the bread category. That mindset has led to stronger results for products seen as having healthier attributes. Not surprisingly, higher-income consumers are raising their food and beverage spending, in both retail and foodservice channels, far more than lower- and middle-income consumers are. That higher spend reflects a mix of higher prices and more units. For lower- and middle-income consumers, price increases matter much more, and lower-income consumers are actually buying fewer units. Looking specifically at bread, volumes have been falling across all income brackets lately, yet upper income consumers have reduced bread purchases the most, even with their overall food and beverage spend rising, while lower income consumer units have fallen the least, perhaps because a loaf of bread offers strong value. As I said earlier, we're reshaping our portfolio to match current trends, including better-for-you and value-oriented items aimed at the strongest growth pockets in our category. Unlike consumer behavior, the competitive environment has grown more intense. Promotional activity is fairly stable, but new lower-priced bread products have weighed on results; that pressure has hit the traditional loaf segment especially hard, where our sales in tracked channels fell 7.9% in the second quarter versus 5.5% in the first quarter. We're actively working to turn these results around. Average fresh packaged bread prices climbed $0.03 in the quarter, led by private label, which rose $0.09. Branded pricing changes were mixed. Our promotional activity, up slightly from the year ago period, stays focused on areas of category strength, such as differentiated better-for-you products like DKB. With innovation mattering so much in today’s environment, our attention is on generating trial and repeat purchases for new products that line up closely with what consumers want. We intend to press further in those areas so that our leading market positions become even stronger. As we always do, we rely on our improved trade promotion capabilities, stay disciplined about promotional spending, and watch return on investment closely. To close, our focus is on carrying out the five actions we are taking to reduce headwinds and improve profitability: one, innovating aggressively in unique premium products as well as value-oriented offerings to counter the impact of a category that is declining; two, using the strength of our top brands to enter other segments that are growing faster; three, pursuing M&A to concentrate on new and growing product segments that can strengthen our growth and margin profile; four, stabilizing the cake business by drawing on the strength of the Wonder brand; and five, optimizing our supply chain and route to market so we can deliver industry-leading operations and service. Even with the near-term headwinds, we are enthusiastic about how much progress we have made in moving these initiatives forward, and we have further plans that ought to produce additional benefits. We believe this approach will help us maximize near-term performance while building our brands and capabilities to generate sustainable growth. Let me be clear that we are not pleased with the results we have now, and we are taking every reasonable action to create long-term shareholder value. Before questions, I want to tackle one point immediately. A transition is under way. The category is changing, and as a result, Flowers is changing too. The economic environment has remained difficult, and consumer trends have shifted, which has weighed on end markets and held back our recent results. Even so, we are responding forcefully to that pressure by transitioning our portfolio so it aligns better with what consumers currently demand. Fully implementing this transition will require time, and patience will be needed; however, we anticipate additional benefits as we carry out our portfolio strategy and keep building our deep innovation pipeline. Our strategies are sound, and the early progress we have made in repositioning our portfolio gives me strong confidence that we are on the right track to produce consistent long-term growth. I want to thank the whole Flowers team for their tireless dedication throughout this process, and our shareholders for their partnership and support. With that, Gigi, let’s take questions.

Ryals, starting with you — on the branded side, you noted in your prepared remarks that competition has gotten more intense, and you also pointed to new bread items at lower prices as creating difficulties right now. Could you give us a bit more detail on what you're seeing there, and what's new versus what was already happening last quarter? And then also compared with us — and I think compared with sequential trends too — maybe the bigger shift in trend came on the other side, not the unbranded side; so perhaps you could also say what you're seeing there? And then, if I may, I have a follow-up for Steve.

Sure. So as far as the competitive environment goes, as we mentioned, Steve, the level of promotional activity is high, though fairly steady. You've seen us do somewhat more promotion, especially around our differentiated products, to keep driving trial awareness, household penetration, and so on. And that is clearly giving us some return, as you could see from how DKB performed in the quarter. Yes, some entrants with lower prices have come into the markets, and that is putting some pressure on results. And I'd say it's hitting the traditional loaf area in particular, where, as you know, we have notable exposure. We're dealing with that. We now have our own line of small loafs, and more are on the way to serve that value shopper; but I think, Steve, this continues the trend we've been seeing, in that the market is still bifurcated. To be sure, on the premium differentiated side you see solid performance, yet you also see solid performance at the value end. Especially in the mass and club channels. So it's there, we're aware of it, and we're addressing it proactively. As for the other category, yes — much of the private label business, as you know, is bid business. So it's not unusual for it to come and go, and a lot of that on the private label side came from lost business that in time gets replaced by something else; but we're also seeing ongoing weakness in the away-from-home food service business too. So that's what's behind that.

All right, that's clear. Steve, if I may, on the — I suppose, two questions for you. First, just regarding the revised tariff outlook. From what you said, I couldn't tell whether earlier tariff costs have simply been pushed out due to volume dynamics? Or whether you've revised things structurally toward a lower tariff cost run rate? That's number one. And then second, I suppose, from a capital allocation perspective, given this cut to EPS guidance. The distance between your dividend commitments and your present EPS run rate keeps getting smaller. So how are you thinking about that? I know the Board recently increased the dividend. You mentioned feeling fairly good about the overall cash and capital position; but how are you thinking about that? And as you repay debt, just the relative constraint the dividend might put on M&A ambitions?

Thanks, sure. Regarding the tariffs, really, it's simply a structural update, with matters becoming, I suppose, perhaps more settled, for want of a better phrase. So we just keep tracking the various countries and the shifts in the overall rate, and so it isn't really a delay. In fact — we anticipate tariffs will come down considerably given what we're seeing at present. Overall, as for the capital allocation structure. I mean, we've always taken — sought to take a balanced approach. And you're right, the board reviews this quarter-to-quarter and they'll factor in performance, cash flow, liquidity, and this will be no different. We'll keep having those conversations and we'll keep making decisions as things develop.

All right. Just to refresh my memory, do you have a target payout ratio? I mean, I assume that right now you're running quite a bit above the ideal level. What is it — is there a long-term target that's been stated?

At this time, we don't have a targeted payout ratio that's been stated.

Regarding the payout ratio, something we often point out is that viewing it on a cash basis gives you a notably different picture from the GAAP basis, simply because D&A runs well above our CapEx. So that's another point I wanted to flag for you.

So I suppose this goes back to the competition question. I guess, 10 years ago — maybe not even that long ago — the expectation was a duopoly involving you and Bimbo. And the thinking was that everyone would play nicely in the sandbox when it came to pricing, but what happened instead is that all the players competed for market share, competed for capacity utilization, and sacrificed profits for that. And so gross margin never really improved. And we had a period of roughly 6, 7 years that was pretty benign. Are we going back to five, seven, eight years ago — buy one, get one free, more competition, finding new ways to turn profitability into a race to the bottom? Or is it not that bad?

Yeah, I don't think it's that bad. What you're seeing, Bill, more than anything else — as I mentioned at the opening — is a pretty significant transition in the category, mainly driven by consumer trends that are shifting considerably, and we can spread that across a lot of different things, right? We can spread it across health and wellness, MAHB movement, GLP-1s, whatever it is — ultra processed foods, all that sort of stuff. The way food works is genuinely shifting, and baked goods especially. Baked foods seem to draw a lot of criticism whenever the ultra-processed discussion surfaces, and that's clearly happening a great deal right now. We're determined to innovate hard so we can navigate this transition. Much of it—we could talk about food service, though that's driven more by macroeconomics. On the retail side, however, the biggest hit is landing on traditional loaf. The light and wheat breads with less differentiation are suffering most, which is exactly why we're pushing innovation so hard to get through it. We've had great results with items such as Dave's Killer Bread and Canyon Bakehouse in various parts of the category as well — not only breads, but also sandwich, buns and roles, breakfast, and so on. And we're coming out ahead in those segments. Keto is another instance I'd point to. Our keto offerings rose, I believe, 37% during the quarter. That portion of the category keeps expanding. We have a strong lineup of innovation launching in Q3 to further tackle the softness in these categories. For us, Bill, the real answer is simply getting through this shift where consumers are pulling back from the traditional loaf as it exists now and moving toward products that are more innovative and differentiated, along with value options. That said, when it comes to the traditional loaf, we do have plans to tackle it even more directly. I won't go into detail today for competitive reasons, but we do have plans in place to deal with the comparative softness of large brands such as Nature's Own.

Understood. And just as a follow-up, I mean, I'm not questioning that you've got plans in place to boost profitability, but clearly you're not operating in a vacuum. So what about your competitors? I mean, not only Bimbo, but when you think about the dozens of smaller regional players who are typically the ones causing trouble on promotions and pushing — trying to push volume? Do you feel confident that everybody is pursuing the same objective? Or could things get worse on that front when it comes to competitive pressure?

Well, look, I mean, this category has always been competitive. And whatever our competitors are going to do, they're going to do. That's outside my control. What I can control is what Flowers is going to do; and our strength lies in our brands, our strength lies in our innovation, and that's what we'll keep focusing on.

I'd like to follow up on a point you raised in the prepared remarks regarding Wonder, which evidently is helping drive share gains in cake, and that you saw no cannibalization of Tastykake. Could you offer some commentary on that — is it simply a function of the geographies where Wonder is being rolled out? Or are there retailers in regions where Tastykake is somewhat more formidable where you have both Tasty and Wonder on the same set?

Yes, perhaps a little bit. Tasty, as you're aware, is especially strong in the Mid-Atlantic region, while Wonder is naturally more of a national brand. I'll confess I'm somewhat surprised that cannibalization hasn't been greater, though I'm quite pleased it hasn't been. But the launch of that Wonder product line has greatly surpassed our expectations. And at this point, even our forecast based on early results is being exceeded. Retailers remain excited about it. Consumers have embraced it enthusiastically, and we'll keep building on that. We have more coming from Wonder as well. So the results there have left us extremely pleased.

Then let me pivot slightly to Simple Mills. When you discuss innovation, and I understand the breadth of things you can pursue there — should we be thinking of Simple Mills as a disproportionately large contributor on the innovation front? Or are you mainly referring to the legacy portfolio brands? And then, as a sort of second part to that: I'm in the Midwest, and I saw Simple Mills quite prominently at a club retailer the last time I shopped there. That may simply have been something I'd overlooked before, but do you have any comments — is that something you're seeing more engagement with at Club? Or do you have a rotation in Club? Any color would be great.

Okay, regarding innovation, as I said in response to Bill's question, I was referring more to the core category, Jim. That said, Simple Mills will keep innovating aggressively as well. I believe I mentioned on perhaps the prior call that they had been on an innovation rotation of every other year. We're collaborating with them to accelerate that, and we have aggressive plans in place for them for next year. As for the club rotation, I'm not entirely sure I grasped the question, but if you — if you're saying you were at a club retailer and didn't see what you're accustomed to seeing, that's likely because of rotations.