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

Hi, everyone. J.T. Rieck here, EVP of Finance and Investor Relations. Thanks for joining us to go over Flowers Foods' 2025 third quarter results. 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, risks and uncertainties surround them that might make actual results come out materially different. Beyond what you hear in these comments, our SEC filings lay out in full the important factors tied to Flowers Foods' business. Speaking today are Ryals McMullian, Chairman and CEO, and Steve Kinsey, our CFO. Ryals, over to you.

Thanks, J.T., and thank you all for being on the call. I'm happy to share our third quarter results, and they show the sustained strong relative performance of our leading brands. Our effort to proactively reshape the portfolio so it lines up better with what consumers want is showing promise and gives me a lot of confidence in our longer-term path forward; we keep investing in innovation to push that transformation further. Without question, macroeconomic uncertainty and shifting consumer demand are creating headwinds for food companies. You can see those headwinds in the bread category, which keeps underperforming, with units down 2.9% in the third quarter versus a 1.8% decline for the overall food category. Within bread, the traditional loaf segment—where our exposure is especially significant—is under even greater strain, with unit sales falling 6.3%. The generational shift I mentioned last quarter related to that strain on traditional loaf. Although in its present form this segment may shrink as a share of the category over time, we are working hard to counter that trend by redefining traditional loaf, introducing additional value and Better For You attributes that match evolving consumer preferences. Moreover, our leading brands give us a distinctive position to seize this opportunity and guide the category through this transition. Nature's Own started the cleaner-label trend among mainstream bread brands, and by acquiring DKB and Canyon Bakehouse we strengthened our leading position in Better For You bread. More recently we've shown leadership in that space by launching keto, protein and sourdough bread, and Small Loaves go after the value opportunity. Our plan is to keep setting our brands apart so our competitive standing in the category becomes even stronger. Even with the category facing headwinds, I'm still optimistic about the long term for a few reasons. First, we think category demand will return to normal. As the economy improves, consumers at the lower end may move up from value products to more differentiated branded items such as Nature's Own and Wonder. Stronger consumer sentiment ought to give a lift as well to premium items that carry richer margins, and those items are already beating the market even under today's conditions. Second, the steps we're rolling out to bring our portfolio in line with shifting shopper demand are picking up momentum and producing gains in several key areas of the business. In particular, even though the bread segment as a whole has lagged, we're seeing encouraging volume for our differentiated offerings, above all those carrying Better For You attributes. I'll walk through a few of those favorable results in a moment. To cushion the present headwinds, we're keeping our attention on innovation so we can keep reshaping the portfolio. That strategy lets us pursue appealing openings in the categories we already serve, while moving into adjacent spaces that hold the promise of compelling growth. We believe that by zeroing in on what we can control, we can get the most out of near-term results while fostering steadier growth over the long run. Next, I'll walk through how we did in the third quarter against our four strategic priorities: developing our team, focusing on our brands, prioritizing margins and pursuing smart M&A. Steve will then cover the financial results and guidance, and afterward I'll close with the key themes ahead. Reflecting on our performance and the challenges we face, I want to stop and offer my heartfelt thanks to our employees. Their hard work, dedication and unwavering commitment have been essential to delivering our results. Their dedication and ability to bounce back are what enabled us to adjust and innovate, positioning us well for future success. Along those lines, I want to recognize and honor Steve Kinsey, who will retire at the close of this year. Through years of committed work at Flowers, Steve has brought deep knowledge and expertise to our organization and truly embodied the fundamental principles of our culture: honesty, integrity, respect and passion. As the food industry's longest-serving CFO, his guidance has been essential in navigating our company across multiple phases of growth and transformation. Throughout his whole career, he has given himself to Flowers, and he has been a cherished colleague and friend both to me personally and to the wider leadership group. My gratitude runs deep for the considerable difference he has made to our company and for the solid groundwork he leaves in place. While we bid Steve goodbye, in January we will bring Anthony Scaglione aboard as the new CFO. Anthony joins us with an outstanding history of achievement, having directed major transformations at other firms and steered through difficult circumstances with expertise and strategic judgment. As CFO, Anthony will assist in steering our company's financial strategy and will supervise essential functions while we work through the intricate and fiercely competitive conditions of today. His wide-ranging experience in many disciplines, plus a demonstrated knack for guiding strong teams with a solutions-first mindset, makes him well suited to steer our coming growth phase. Our second strategic priority is putting emphasis on our brands, and for Flowers Foods' success they matter more now than ever. During the quarter, every one of our top brands either increased or preserved its unit share. DKB and Canyon each raised unit share, by 30 and 10 basis points respectively, and Nature's Own and Wonder held their share. Even with the tough conditions out there, DKB and Canyon kept growing — total units rose an amazing 10% and 6% respectively — while the bread category fell 3%. We're using our top brands to locate pockets of growth within a category that's otherwise soft, and the money we've put behind that is paying off, producing growth even in segments that are shrinking. Our gains stand out in specialty premium loaf, sandwich buns and rolls, breakfast and cake. During the third quarter, specialty premium loaf units for us were up 4%, giving us our biggest share ever, even as that subcategory dropped 4%. DKB and Canyon powered that result, posting 6% and 8% growth in the subcategory and picking up 180 and 30 basis points of unit share, respectively. Within the sandwich, buns and rolls segment, category units were down 2%, yet Flowers advanced 7% and picked up 80 basis points of unit share. Combining innovation with our already differentiated products, Wonder, Nature's Own and DKB each delivered growth — 4%, 12% and 60%, respectively. The standout performers were Nature's Own Perfectly Crafted Brioche, Nature's Own Keto and DKB Sandwich rolls. DKB also produced strong results at breakfast, a segment in which Flowers hit an all-time high for unit share, climbing 60 basis points to 6.9%. Units rose 6% while the overall segment dropped 4%. Most of that growth came from added shelf space for DKB's premium offerings, especially bagels. Beyond that, our approach of pursuing value opportunities within bread paid off, and Wonder's move into breakfast contributed to our strong results as well. After launching Wonder English muffins and bagels successfully on the West Coast in 2024, we're taking that distribution nationwide, and given how well known the brand is, we're excited about what's possible. Wonder continued to perform well in cake too, growing 1% even as category units fell 5%. Wonder drove that outcome, gaining 80 basis points of unit share, while Tasty Cake experienced only slight cannibalization. The fact that we can grow sales in a shrinking cake category confirms that leaning on Wonder's leading consumer awareness was the right call.

That achievement additionally demonstrates how we can discover distinctive approaches to get the most from our brands and assets, fueling growth even when conditions are tough. Moving on to Small Loaves: demand is climbing fast, with category units rising 85% during the third quarter. Our broader lineup of Nature's Own and Wonder brand Small Loaf products produced exponential growth and let us seize the #2 market share position quickly; unit share rose 15 points in the quarter, and we stay highly optimistic about what these items can achieve. To keep that momentum going, we recently unveiled an exciting set of on-trend innovations, with a focus on Better For You items aimed at the category's strongest growth pockets. The latest products extend prior launches including Nature's Own keto items, an expanded small loaves selection, Wonder snack cakes and Canyon sourdough-style bread. The new lineup features a higher protein loaf from our Nature's Own Life Lineup alongside DKB Supreme Sourdough. We hold a strong pipeline of further innovation and anticipate continuing to deliver fresh, differentiated choices that resonate directly with today's consumers. Within our Better For You snacking portfolio, progress is steady. DKB organic snack bars are doing well in the nutritional snack bar subcategory, while our amped-up protein bars suit consumers drawn to products carrying protein attributes. The national rollout of DKB organic snack bites is moving along nicely. Offering a mix of 6 sweet and savory flavors, we are broadening distribution through the mass, grocery and convenience channels. Retailers have responded with enthusiasm to the coming launch of further Better For You snacking innovation. And early next year, we will introduce 10 new SKUs with exciting new flavors of bars and bites, plus the debut of a new DKB breakfast bars platform. Margins are our third strategic priority. With industry volume trends difficult and tariffs adding further pressure, adjusting our cost base is incumbent upon us. Our focus is on aligning the supply chain with shifting demand. In recent years we have shut several bakeries while converting others to higher-margin organic production; we will keep making adjustments where necessary so our supply chain best fits current and expected future demand. Perhaps more important for long-term margin growth and cost savings initiatives is successful execution of our portfolio strategy, through which we strive to raise the share of sales coming from higher-margin branded retail products. Our innovation investments are crucial to that effort and to hitting our long-term financial goals. Yet new products generally carry lower margins than more mature ones. The rising cadence of new product introductions will temporarily pressure our overall margins as we invest to generate consumer trial and ramp production volumes. Over the long term, we expect these investments to expand our category leadership and drive significant shareholder value. Smart M&A is our fourth priority. Integration of Simple Mills is progressing well. We feel good about how the brand keeps delivering solid results, since it went on beating a lot of rivals across both the total market and the natural segments where it plays. Simple Mills showed notable momentum in its biggest areas — crackers and cookies — lifting unit volume in tracked channels by 14% and 23%, respectively. Growth on the whole cooled off relative to what we saw in the first half, driven mainly by lower foot traffic at certain retailers and weaker performance in the bar category; even so, things are tracking in line with the estimates we laid out originally, and we're enthusiastic about what it can do to fuel growth over many years. Keeping an investment-grade rating is our top capital allocation priority, alongside moving back toward a more normalized leverage ratio, which would let us pursue additional growth investments. As we always do, we'll keep assessing our capital allocation approaches so that shareholder value is maximized, while we balance risk against reward and keep leverage at an appropriate level. I'll now hand things to Steve to walk through the quarter's details, and after that I'll wrap up with our outlook on the current business environment. Steve?

I appreciate the warm words, Ryals. Working with such a remarkably skilled and dedicated group has genuinely been a privilege. As a team, we've steered through a stretch of considerable upheaval in the bread segment. I feel a great deal of pride in everything we've achieved while Flowers has grown through innovation, transformation and acquisition. I'm also very thankful for the backing of the investment community and for the ties I've formed with so many of you. Looking ahead to this next chapter, I have full confidence in our outstanding team's capacity to keep delivering on our strategic priorities and creating shareholder value. Now to our third quarter 2025 results. Net sales rose 3% versus the same period a year earlier. Price mix fell 2.3%, driven by higher cake sales, foodservice sales making up a smaller share of total sales, and growth in contract manufacturing. Results were stronger in the early and middle portions of the quarter but softened toward the end, as anticipated, because of tough comparisons against hurricanes in the prior year. Volume was down 0.6%, mainly reflecting ongoing weakness in the fresh packaged bread category and, to a lesser degree, elevated hurricane-driven demand in the year-ago quarter. That softness was partly offset by gains in more premium branded products, along with contract manufacturing and vending. The Simple Mills acquisition contributed 5.9%. Gross margin as a percentage of sales, excluding depreciation and amortization, fell 190 basis points to 47.9% versus the same quarter last year. Higher outside purchases of product, sales carrying no associated ingredient costs stemming from the Simple Mills acquisition, lower sales price mix, and reduced production volumes drove the decline, partly offset by lower ingredient costs as a percentage of sales. Selling, distribution and administrative expenses were 38.8% of sales, up 10 basis points from the prior year period. That increase stemmed from higher workforce-related costs as we shifted to an employee-based model in California, wage inflation, lower sales price mix and restructuring-related implementation costs, partly offset by lower distributor distribution fees. Excluding matters affecting comparability, adjusted SG&A came to 38.3% of net sales, a 30 basis point decrease. GAAP diluted EPS for the quarter was $0.19 per share, down $0.12 from the prior year period. Excluding the items affecting comparability detailed in the release, adjusted diluted EPS for the quarter fell $0.10 versus the prior year period to $0.23. The Simple Mills acquisition added $70.7 million in net sales, $11.1 million to adjusted EBITDA and a $0.01 adjusted diluted loss per share. Moving now to our balance sheet, liquidity and cash flow, we remain confident in our overall financial position. At quarter end, net debt to trailing 12-month adjusted EBITDA was roughly 3.4x, higher than a year ago because of the Simple Mills acquisition. Year-to-date, cash flow from operating activities rose $38 million to $321 million, helped by deferred tax benefits from recently passed legislation and better working capital performance. Capital spending went down by $6 million, landing at $80 million, while dividend payments rose by $5 million, reaching $157 million. Since just one quarter is left in the fiscal year, we're tightening the range for our 2025 financial outlook: net sales between $5.254 billion and $5.306 billion, adjusted EBITDA between $515 million and $532 million, and adjusted EPS between $1.02 and $1.08. That guidance doesn't include any effect from possible SNAP-benefit disruptions. Because our focus is on getting back to a more normalized leverage ratio, we're revising our capital expenditure expectations to $120 million to $130 million, down from the earlier estimate of $135 million to $145 million. Our estimate for the CapEx portion tied to our ERP initiative also came down, from $4 million to $6 million to $3 million to $5 million. We're lowering what we expect tariffs to cost us in 2025. Our present estimate of the in-year tariff impact is $11 million to $14 million for our legacy business and $2 million to $4 million for Simple Mills. That's versus prior guidance, which had assumed an in-year tariff impact of $15 million to $18 million from our legacy business and $2 million to $4 million for Simple Mills. Roughly 100% of our key raw materials are covered in 2025. Given that coverage, inflationary headwinds for the rest of the year are baked into our guidance. To keep volatility low and give ourselves adequate visibility into cost, we've kept our historical hedging strategy, under which we try to raise the certainty of our key ingredient costs 6 to 12 months out. During the third quarter, we carried on with the bakery rollout of our ERP system, with three bakeries going live successfully. We expect to finish another four bakeries in the fourth quarter, which would bring our total to 10. To keep the risk of operational disruptions to a minimum, we're moving ahead prudently and feel confident in our ability to carry out the transition smoothly. Thank you. And now I'll hand it back to Ryals.

Thank you, Steve. I'd now like to talk through the major trends affecting how we're performing and lay out the active measures we're taking to make the most of opportunities both now and later. I'll start with where things stand competitively, then move to an overview of consumer trends. The competitive picture was much the same as in the second quarter, with manufacturers facing higher input costs stemming from tariffs. Traditional loaf has been among the hardest-hit areas of the category, with units down 6% versus a 3% drop for bread as a whole. Lower-priced branded products keep taking unit share away from private label and mid-price branded goods, which underscores how important our efforts are to bring differentiation into the category. We kept ramping up promotional activity during the quarter. To aim more precisely at the category's stronger areas, promotions concentrated on differentiated Better For You items that carry relatively low base sales. We're dedicated to generating trial and repeat purchases for our new innovative products that fit well with what consumers want. We believe our dedication in these areas will further strengthen our leading market positions. Supported by improved trade promotion capabilities, we stay disciplined about promotional spending, watching ROI closely to secure sustainable growth. Now on to consumer trends. With inflation climbing, consumer sentiment during the third quarter hit its lowest level this year, made worse by heightened worries regarding the economy and the job market. That missing confidence is weighing on consumer spending, hitting discretionary items hardest. Lower income consumers have pulled back the most, even though their spending on food and beverage is holding up, still growing overall but at slower rates, while volumes have gone negative. Not surprisingly, foodservice traffic has stayed negative in this climate. Bread category sales declines leveled off through much of the third quarter before weakening in the closing weeks because of tough prior-year comparisons. Sales were strongest in mass and club channels. We've seen demand keep bifurcating, with notable strength in premium value products, both across food and beverage broadly and in bread specifically. We're adapting our portfolio strategically to match these consumer trends, concentrating on Better For You and value-oriented items so we meet consumer preferences. To carry out this transition, we've pinpointed five key focus areas that fit evolving consumer demands and market dynamics: one, aggressively innovating unique premium products alongside value-oriented offerings, something we're tackling with new products featuring differentiated attributes, including protein, sourdough and keto-friendly as well as small loves; two, using our top brands to enter faster-growing segments such as snacking; three, improving our growth and margin profile through M&A once leverage returns to a more normalized ratio, as we did with Simple Mills; four, stabilizing the cake business by harnessing the strength of the Wonder brand, a process that's off to a great start; and five, optimizing our supply chain and route to market to deliver industry-leading operations and service, including aligning our bakery network with demand. Looking forward, we stay firmly dedicated to steering through the difficulties of the current market while putting ourselves in position for success down the road. Our proactive strategy of reshaping the portfolio via innovation and strategic acquisitions is already producing encouraging outcomes. Even with the headwinds confronting the bread category, we are concentrating on growth opportunities that resonate with today's health-conscious and value-focused consumers. Although the economic picture is still uncertain, we believe that once consumer confidence recovers, we will be well placed to expand market share and improve our profitability. Our committed team is dedicated to carrying out these initiatives with precision and passion, making sure we not only confront the present challenges directly, but also establish a solid foundation for sustainable growth. Our proactive work to strategically align the portfolio with consumer demand is producing encouraging outcomes. By effectively targeting areas of opportunity with differentiated offerings, we are discovering pockets of growth amid continuing pressures in the bread category. To tackle these challenges, we are redefining the traditional loaf, adding value and better-for-you attributes that match evolving consumer preferences. Though it will take time, we are confident our strong portfolio of brands will successfully enable this transformation. I want to use this opportunity to thank our dedicated Flowers team for their hard work and resilience throughout this period of change; we are also grateful for shareholders' continued support as we strive to enhance long-term performance; and finally, I want to acknowledge that this will be Steve Kinsey's final earnings call following 18 years as our CFO. His contributions to Flowers have been invaluable, and we are deeply appreciative of his leadership over the years. We wish him all the best in his future endeavors. And with that, Daniel, we're ready for questions.

The first thing I wanted to ask about: in your prepared remarks you said something about consumer sentiment hitting its lowest point of the year in Q3, but you also said you expect category demand to normalize as the economy strengthens. So maybe you can help us understand how you're thinking about that, and maybe what gives you confidence that the category will recover and demand will normalize?

Sure. Thanks, Scott. Of course, it's tough to pinpoint the exact time line, right? But we do think over time, the category will stabilize. This is a very large category. It's a staple in many households in the United States. Let me clear up a few distracting factors first. There's still a lot of worry out there regarding tariffs. With the government shutdown and the upheaval it caused, the employment picture will likely need some time before things settle down. From our current vantage point, that softness looks like it will persist at least into part of '26, though we expect conditions to steady eventually. In the interim, I believe we should keep our attention squarely on consumers, keep putting money behind them, and deliver both value options and better-for-you products—since that is plainly the direction they are heading, and that is exactly what we plan to do.

Thanks for that. My second question is this: you mentioned that some of your newer investments are putting a bit of pressure on margins — just spending to drive consumer trial and build volumes. How should we think about what offsets that, whether through supply chain efficiencies or anything else you could point to for us?

Yes. You've got it exactly right there, Scott. What I'd say is we're taking the long view. That means we keep investing in the consumer, and we'll keep doing so. I think you've watched us do exactly that through all the innovation we've launched over the past several years. But the honest truth is that all innovation tends to squeeze margins near term. These are newer items. Still, as we build scale and make targeted CapEx investments aimed at raising our throughput and efficiency, we expect those margins to get better.

All right. Steve, congratulations once more, and thank you for everything you've done to help us over the years. So for my first question, perhaps building on what Scott asked at the outset, on the consumer and, I suppose, how you're framing your plan as you look toward '26. You mentioned there were some indications of stabilization within the category during 3Q, yet things softened somewhat as the quarter wound down. So just — I suppose, when you think about the fourth quarter and work through the '26 scenarios, do you anticipate that more or less the status quo holds? Or are you factoring in room for things possibly deteriorating somewhat before they improve?

Closer to the status quo, with a bit of room for things to get better. You're exactly right that during Q3, in periods 8 and 9, we started to see the category steady. But lapping what, 5 named storms last year against 0 this year made for quite a difficult comparison in period 10. So as you could see, the category did decline in period 10. Since then, though, it has begun drifting back toward the trajectory it was on in periods 8 and 9.

Yeah. All right. Great. Yeah, so really just the comparisons against last year's storms. That makes sense.

Yeah, exactly.

Alright. My second question concerns Simple Mills, which came in as a source of upside relative to what we had modeled for the quarter. During the prepared remarks, you mentioned broad-based strength and results matching your own projections. Could you expand a bit and point to the places where progress has been greatest since the deal closed, and where you expect the biggest opportunity as you continue integrating and building?

Sure. What I'd highlight first is how well our teams have worked together. Integration is going extremely smoothly. We're identifying chances in customer engagement, procurement, and other areas, and across their categories they keep delivering strongly, and as we said in the prepared remarks, consistent with what we expected. We're really enthusiastic about next year for Simple Mills. Naturally, we aren't providing guidance today, but they have a fair amount of new innovation lined up for next year that has all of us excited, so overall, Steve, we're extremely pleased.

Steve, it has been great to work with you. I hope you have an extended break planned as we head into the start of next year and can enjoy some downtime. Ryals, I wanted to dig a bit deeper on the other segment, because branded retail actually beat what we had modeled, while the other piece landed slightly below. My guess is that is foodservice, simply because of the headwinds QSR and the industry have been dealing with. Could you give us some color there, perhaps on foodservice and how your private label business performed?

Sure. Jim, the foodservice business has been pressured, which is not a surprise given the economy and how consumers are feeling. That is really the whole story. I would keep pointing out, though, that even with that softness, the efforts we have made over the past 2 to 3 years to boost profitability in that business are still paying off very well on the bottom line; so that is encouraging. But we — look, we would expect it to bounce back as the economy bounces back. It tends to rise and fall along with that. So there is nothing too out of the ordinary there. Volumes were somewhat stronger in that other category, mainly because of vending; so that is worth noting too. Private label is interesting, since it has been soft. You can see that in the syndicated data, which might look odd given where we are economically. But the price gaps between private label and some of the lower-priced branded products have shrunk considerably. So I would attribute it to that.

All right. Would it be reasonable to view it this way: since we have slightly reduced visibility into foodservice, should that roughly track the pace of industry traffic? Or can we think about factoring that into our model somehow?