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

Hi, everybody. JT Rieck here, EVP of Finance and Investor Relations. Thanks for joining this pre-recorded conversation about Flowers Foods' results for the fourth quarter and the full year 2025. A live Q&A session is scheduled for Friday, February 13th, beginning at 8:30 A.M. Eastern. You can find more information on that live call, plus our earnings release, a transcript of the remarks we recorded, and a slide presentation tied to it, in the investor section of flowersfoods.com. One thing to note before we begin: what you're about to hear might contain forward-looking statements regarding how the company will perform. While we consider those statements reasonable, risks and uncertainties apply to them, and actual results could wind up differing materially. Beyond what these remarks cover, the key factors connected to Flowers Foods' business appear in full within our SEC filings. Speaking today are Ryals McMullian, our Chairman and CEO, and Anthony Scaglione, our CFO. Ryals, over to you.

Appreciate that, J.T., and thanks to all of you for being on the call today. We wrapped up 2025 strongly, delivering results that landed at the top end of what we had guided. The steps we've taken to become more efficient and to proactively reshape our portfolio so it lines up better with what consumers want are producing encouraging outcomes. This momentum reinforces my belief in where we're headed over the longer term. Our top brands keep delivering, even with demand conditions being difficult. For the full year, Flowers held unit share within fresh packaged bread, driven by strong results at Dave's Killer Bread, which picked up 20 basis points, while Nature's Own, Canyon Bakehouse, and Wonder each maintained their share. Traditional loaf stayed tough, as unit sales fell 4% during Q4, making it one of the softer spots in fresh packaged bread. That figure stacks up against a 2% drop for the bread category as a whole and a slight gain in units for the overall food category. As we look forward, we expect continued category headwinds to weigh on results in 2026; to address that, we're taking proactive steps by running a thorough review of our operations, designed to put us in position to reignite top-line growth and expand margins; that review centers on assessing and optimizing our brand portfolio while directing investments toward the areas with the most promise. On top of that, we're looking at supply chain improvements and taking a fresh look at how we allocate capital, so we can fund the growth initiatives that create long-term shareholder value. By investing strategically in key brands and segments and strengthening our supply chain along with advanced commercial capabilities, we have confidence in our capacity to outperform the category and deliver lasting value creation for shareholders. We see 2026 as a year of investment and transition as we work to strengthen our brands through greater marketing and innovation. We'll provide updates on these efforts and the benefits we anticipate as the year unfolds. Although these investments could bring margin pressure in the near term, they're necessary to unlock our business's full potential. Now I'll walk through our fourth quarter performance against our four strategic priorities: developing our team, focusing on our brands, prioritizing margins, and pursuing smart M&A. After that, Anthony will go over our financial results and guidance, and then I'll wrap up with a look at key themes ahead. I'm thrilled to welcome Anthony Scaglione as our new CFO. Anthony delivers a fresh perspective to our company as we tackle today's challenges. Over the course of his career, he has repeatedly shown he can drive change and produce strong results. Since formally joining Flowers in January, he's already had a positive impact throughout the organization thanks to his energy and his vision. I'm confident he'll be a valuable partner to me and the whole management team as we work to reignite sales and expand margins. I'm happy to share that David Roach, previously our Chief Strategic Projects Officer, has been appointed Chief DSD Operations Officer. David will concentrate, in this newly established position, on making our direct store delivery operations execute better and tightening accountability, and since he'll hold complete profit and loss responsibility for Flowers' DSD business, I anticipate that his leadership will hone our attention on DSD sales performance, which should in the end produce better execution, stronger profitability, and steady value for our stakeholders. To back David up in this position, a fresh structure is being put in place for our DSD team, with full P&L responsibility assigned at the regional level. Giving those leaders more visibility, influence, and alignment throughout the value chain should let us enhance execution, boost accountability, and secure solid results that match company goals. These changes excite me, and I'm eager for the better operating results we anticipate from them. Our second strategic priority centers on our brands, which keep delivering solid performance despite a difficult environment. We are using our leading brands to find growth opportunities within a category that is otherwise soft, and that spending is producing favorable outcomes, especially in specialty premium loaf, sandwich buns and rolls, breakfast, and cake. Turning to fourth quarter results, DKB stood out, with unit sales up 3% overall and dollar sales rising at each of its top 10 customers. This brand's dedication to uncompromising taste and texture, plus its distinctive better-for-you attributes, has generated substantial distribution gains in underpenetrated segments such as sandwich buns and rolls and breakfast. Customers are coming to us proactively, seeking additional innovation from this leading brand. Within Specialty Premium Loaf, we picked up 60 basis points of unit share, mostly powered by DKB, which contributed 50 basis points. Canyon and Nature's Own added 10 basis points of unit share apiece, aided by wider distribution. Breakfast likewise proved a strong area, as we captured unit and dollar share during the quarter, rising 40 basis points and 50 basis points, respectively. Wonder and DKB's robust performance lifted these results. Remarkably, DKB has grown dollar share in breakfast every single year starting in 2021; we stay optimistic about our ability to keep gaining share in this segment. In sandwich buns and rolls, solid results from Nature's Own, Wonder, and DKB pushed unit share up 50 basis points. Units climbed 3%, beating the overall category by roughly 600 basis points. Nature's Own was vital to this achievement, thanks to the launch of new keto buns and especially its Perfectly Crafted Brioche Buns, which rank among the fastest growing products in the buns subcategory. Nature's Own Life Keto Buns' success is merely one illustration of how our innovation investments are paying off. By concentrating on better for you items aimed at the category's most promising growth pockets, our recently launched lineup of on-trend innovation is off to a wonderful start. Looking forward, we expect even more thrilling innovations in 2026. Now shifting to our cake business, where targeted steps to counter category weakness have boosted revenues dramatically. Thanks to Wonder's huge name recognition, the cake lineup we introduced in 2025 has given our results a lift. During Q4, category unit sales were down 3%, yet Flowers' cake units rose 5%, with Wonder driving that strength. Just as important, Tastykake has held up well, with cannibalization staying very limited. Margins are our third strategic priority, and there we achieved meaningful gains in Q4. By working hard on efficiency improvements, we cut SD&A as a share of sales by 60 basis points in Q4, which is quite notable. That gain came from efforts across the whole company as we bring our cost structure in line with shifting demand. We'll keep a close watch on expenses as part of our thorough review. As I've said, even though cost-cutting efforts matter, successfully carrying out our portfolio strategy — raising the share of sales coming from higher-margin branded retail items — is essential for margin expansion over the long term. We expect our brand portfolio to support that goal by sharpening our capacity to spot and pursue growth chances and to make sure our products satisfy customer needs at various price points. Smart M&A is our fourth priority. Simple Mills is integrating smoothly, and the brand still connects with today's health-conscious shoppers. Its focus on better-for-you items strengthens how well our portfolio matches current market trends and offers a solid growth platform in categories where significant white space opportunities exist. Q4 sales growth stayed in line with recent results, as Simple Mills grew faster than both the total category and the natural category, all while keeping strong market share positions in key snacking segments such as crackers and cookies. We expect further progress in 2026, powered by what will be the biggest innovation year in Simple Mills history. We're still enthusiastic about the brand's ability to deliver substantial growth for many years ahead. Our capital allocation priority is keeping a strong balance sheet, which gives us flexibility to carry out our strategy. We'll keep investing in our business, focused on generating strong returns for shareholders. As part of our four strategic pillars, we'll sharpen our attention on internal operations, optimizing our portfolio, driving growth, and hunting for efficiencies in the year ahead; now I'll hand things to Anthony to go over the quarter's details, and after that I'll wrap up with our outlook for the current business environment. Anthony?

Ryals, thank you, and good morning to all of you. Being here today as a member of the Flowers team is something I'm excited about. Before we get into the fourth quarter results, I want to spend a few moments explaining what drew me to this company. Flowers possesses a remarkably long history, one that has shifted as market conditions changed. Across a span of over 100 years, this company has built a national platform that, alongside its leading brands, offers a major opportunity to bring a broad and evolving product suite to our customers, which helps drive long-term value. The culture and purpose of the company was another factor in my decision. During my brief tenure at Flowers, I've met with a great many employees, toured numerous bakeries, and even done a ride-along with a partner in our DSD network. That experience made the passion and dedication of our team members to this business abundantly clear. I understand our category is dealing with challenging and somewhat unprecedented times. Even so, I have confidence that the right team, strategy, and structure are in place for us to execute, and I'm eager to leverage those strengths to deliver growth beyond the category over time. As Ryals noted, we are carrying out a comprehensive review of our brands, operations, and financial strategy in order to reignite growth. Central to that effort is making sure we properly fund promising growth initiatives and deploy capital opportunistically to create long-term shareholder value. Evaluating our brands was an early component of our review, and that evaluation, together with our usual process around goodwill and intangibles, resulted in a non-cash write-down of certain assets. Broadly speaking, our evaluation process remains in its early stages, and for you baseball fans, I'd describe us as being at the top of the first inning. We'll provide more detail on our review in the quarters ahead. Now on to our fourth quarter 2025 results: net sales rose 11% versus the prior year period. Price mix was up 70 basis points, helped by price taken late in the fourth quarter to offset input cost inflation. Volume fell 2.2%, driven mostly by pressures in branded traditional loaf, food service, and store brand cake; that weakness was partly offset by gains in branded cake, organics, and keto. The Simple Mills acquisition and the extra week contributed 4.7% and 7.8%, respectively. Gross margin as a percentage of sales, excluding depreciation and amortization, dropped 30 basis points to 48.5% compared with the same quarter last year. Higher outside purchases of product tied to the Simple Mills business model were partly offset by lower labor and ingredient costs related to the addition of Simple Mills and stronger sell-through of finished goods. Selling, distribution, and administrative expenses as a percentage of sales came to 39.9%, which is a 10 basis point decrease versus the prior year period. That decline came from reduced distributor distribution fees, since we shifted to an employee-based model in California and brought Simple Mills into the fold, partly offset by greater workforce-related expenses tied to the California transition, along with the effect of broader wage increases. When you set aside items affecting comparability, adjusted SD&A came in at 39% of net sales, which is a 60 basis point decline. That improvement reflected efficiency efforts and reduced distributor distribution fees as a share of sales stemming from adding Simple Mills, because of how its co-manufacturing is structured. On a GAAP basis, diluted EPS for the quarter showed a loss of $0.32, which is a $0.52 decline versus the prior year period. Notable items include a $136 million non-cash impairment of intangible assets, $9 million of restructuring-related implementation costs, and a $3 million loss tied to inferior ingredients from suppliers, which also hurt sales. Once you exclude the comparability-affected items laid out in the release, adjusted diluted EPS for the quarter was $0.22, matching the prior year period. Let me take a moment on the impairment charge — as I said earlier, during the quarter we kicked off a review of our brand portfolio along with current and future investments. Through that review, we came to recognize that the long-term outlook for certain brands, though they remain in our portfolio and continue to receive support, is below what we had forecasted previously, which produced an impairment; over the near term, we don't anticipate additional impairments given our outlook for the rest of the portfolio. With that said, to pick up on Ryals' earlier point, we'll keep concentrating our efforts on brands offering the biggest opportunity to grow and gain share, while making sure we meet our customers' needs across a range of price points. The Simple Mills acquisition added $57.5 million in net sales, $6.3 million to adjusted EBITDA, and a $0.03 adjusted diluted loss per share, including $0.04 of related financing costs. Moving on to our balance sheet and cash flow. We're dedicated to keeping a strong balance sheet as we keep navigating a difficult macro environment. That financial strength stays a priority, especially with our upcoming bond maturity ahead. At year-end, net debt to trailing 12-month adjusted EBITDA was roughly 3.3 x, up year-over-year because of acquiring Simple Mills. Although leverage is still elevated, we stay focused on prudently managing our capital structure, keeping in mind the long-term needs that support our business and strategies. I'm looking forward to working alongside Ryals and the board on managing this process as we carry on with our broad review across multiple levers. Shifting to cash flow, we brought in cash flow from operating activities of $446 million in 2025, which is $34 million more than the prior year period. Capital expenditures fell $5 million to $127 million, while dividends paid rose $6 million to $209 million. Now, on to our outlook for 2026. We're cautiously optimistic about our initiatives to improve performance, even though we expect the category backdrop to stay challenging, particularly in traditional loaf, where we over-index. Guidance also accounts for one week less, along with cost pressures tied to inputs such as labor. On the top line, our expectation is that total sales will land between a decline of 180 basis points and an increase of 20 basis points. That missing week is projected to drag annual net sales growth by roughly 1.5%. For 2026, we're building in category challenges of about 4% across our portfolio, somewhat above what we'd have anticipated coming out of a tough 2025. To offset that macro environment, we're pursuing multiple growth levers. To start, we anticipate Simple Mills will keep expanding. As Ryals noted, gaining share means we'll keep putting money behind our top brands; those outlays, spanning innovation and marketing, should deliver share improvement and offset part of the broader category pressure. We're weighing our enthusiasm about the exciting launches ahead against the reality of ongoing macro and category difficulties. Turning to costs, we still face inflation in labor, logistics, and inputs. Spending meant to fuel our brands' growth over the longer haul will likewise weigh on margins in the near term. Beyond that, our 2026 plan bakes in a return to normal levels for corporate bonus compensation, which had lifted 2025 results by about $0.08. We'll stay watchful and committed to cost discipline and efficiency efforts. That muscle, I'm happy to report, is one of this company's strengths. Completing the guidance picture: net interest expense is higher because of the bond issuance that took place during the first quarter of 2025, and we assume a full-year tax rate near 26%. That elevated rate stems from fewer excess tax benefits tied to compensation expense on stock award vesting; this discrete item pushes the first quarter tax rate to roughly 30%. For the rest of the year, we look for a tax rate around 25%. On the cadence of results across the year, they'll incorporate a full first quarter of Simple Mills, ongoing gains from savings programs launched in the back half of last year, and the pricing moves we recently put in place. As the year unfolds, we expect commodity inflation to create mounting headwinds, along with the effect of normalized bonus expense. As Ryals said earlier, Simple Mills is still performing strongly, and we anticipate double-digit sales growth fueled by wider distribution, innovation, and favorable velocity trends. Even so, we expect that steeper costs related to tariffs and inputs will keep weighing on margins. Our attention stays fixed on the brand's long-term growth, and we'll keep investing with an eye toward realizing its considerable market potential and expanding consumer appeal. Given all of these assumptions, we project fiscal 2026 net sales of $5.163 billion-$5.267 billion, adjusted EBITDA of $465 million-$495 million, and adjusted diluted EPS of $0.80-$0.90. Within our broader approach to allocating capital and planning overall, I'm collaborating tightly with Ryals and the executive management team to wrap up the capital expenditures we anticipate incurring during this fiscal year, though we intend to handle those investments prudently, just as we have previously. Thanks, and at this point I'll hand things back over to Ryals.

Thanks, Anthony. At this point I want to go over the main trends affecting how we performed, and also lay out the active measures we're taking so we can make the most of current and upcoming opportunities. First I'll cover what's happening with competition, then I'll walk through what we're seeing from consumers. During the fourth quarter, the competitive landscape stayed rational, though it was still tough. We didn't see any meaningful movement when it came to how aggressive promotions were. Actually, the average unit price within bread climbed 1.1%, lifted by private label prices moving higher, even while lower-priced branded items kept taking unit share away from private label as well as from branded products in the mid-price tier. That kind of movement highlights why our efforts to set our products apart within the category matter so much. We keep deploying promotions in a targeted way to drive trial and repeat purchases, concentrating on differentiated, better-for-you items that have fairly low base sales. Because returns on investment tend to be weak at the close of the year, we made a deliberate choice to reduce promotional activity during the fourth quarter. With the improved trade promotion tools we now have, we stay disciplined about how we spend on promotions, watching ROI closely so that growth remains sustainable. Reacting to input costs along with tariffs, we raised prices on the majority of our branded retail items late in the fourth quarter; we're keeping a close watch on category data so we can strike the right balance between market share and profitability, all while delivering value and on-trend attributes to consumers spanning many price points. Shifting to consumer trends, the macroeconomic backdrop keeps shaping how shoppers behave. Things like inflation, elevated consumer debt, a job market that's slowing, and an uncertain economy are weighing on consumer confidence and causing spending to tighten. This softer consumer environment has shown up as lower food and beverage volumes, even though dollar sales growth stays positive thanks to price increases. Because shoppers are hunting for value, a larger share of brand sales has moved into club stores, which is one of the few channels where bread sales are actually rising. Consumers are also directing more of their food and beverage dollars toward the store perimeter, where volumes were up 0.4% over the final four weeks of the year, while center store volumes fell 0.6%; that pattern showed up in bread too, with perimeter breads and rolls continuing to pick up unit share versus offerings in the center store. On top of that, the move away from foods people see as less healthy carried on, with candy, alcohol, and bakery items dropping 3.5%, 3.2%, and 1.5%, respectively, over that same stretch; given more GLP-1 adoption, changes to the food pyramid, and the growing influence of online influencers and health apps, we believe this trend will keep going; to address it, we're deliberately reshaping our portfolio to match consumer trends by putting priority on better-for-you and value-focused products, making sure we satisfy consumer preferences over the long haul. To support this shift, we're moving aggressively to innovate with unique, premium items featuring attributes like protein, sourdough, and keto-friendly options, together with value-oriented offerings such as small loaves. Our goal is to fuel additional expansion by using our leading brands to move into segments that are growing more quickly, such as better-for-you snacking, and by stabilizing and growing the cake business through the strength of the Wonder brand. On top of that, we intend to improve margins by making our supply chain and route to market more efficient, so we can deliver operations and service that lead the industry, which includes matching our bakery network to demand. That review process I mentioned before is an essential piece of this adaptation. We stay dedicated to handling the difficulties of the current market while putting ourselves in position for success down the road. Our efficiency efforts have assisted in preserving margins throughout this tough stretch, and our proactive stance on reshaping our portfolio via innovation and strategic acquisitions is already producing favorable outcomes. Although the economic picture is still unclear, we think that once consumer confidence recovers, we will be strongly positioned to increase market share and improve profitability as time goes on. Our committed team is devoted to carrying out these initiatives with accuracy and enthusiasm, making sure we both address today's obstacles and establish a solid base for lasting growth. We appreciate your ongoing backing as we strive diligently to create long-term value for our shareholders. That brings our prepared remarks to a close.