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

I trust everyone has had a chance to go through our earnings release, hear our prepared remarks, and look at the slide presentation, all of which went up earlier today on our Investor Relations website. Once today's Q&A session wraps up, an audio replay of this call will be posted as well. I want to remind you that during this Q&A session, forward-looking statements regarding the company's performance may be made. While we consider such statements reasonable, risks and uncertainties apply to them, and those could lead to actual results differing materially. Beyond what you hear in these remarks, our SEC filings contain a full detailing of important factors related to Flowers Foods, Inc.'s business. We additionally present non-GAAP financial measures, with disclosure and reconciliations available in the earnings release and at the close of the slide presentation on our website. With me today are Ryals McMullian, our Chairman and CEO, and Anthony Scaglione, our CFO. Ryals, over to you. All right. Thank you, JT. Good morning, everyone. Welcome to the fourth quarter call. The progress we are making in transforming our business pleases me. Thanks to strong performance from our leading brands and disciplined execution of efficiency initiatives, our results landed at the high end of our 2025 guidance range; turning to 2026, our guidance does account for ongoing category challenges, one fewer week, inflationary pressures, and also additional investments in our leading brands; in response to the headwinds before us, we are undertaking a comprehensive review of our operations, covering our brand portfolio, supply chain, and financial strategy, in order to strengthen execution and position our business to reignite top line growth and expand margins over time. I want to express my thanks to our dedicated Flowers team for their hard work and resilience throughout this period of change, and to our shareholders for their continued support; we stay focused on navigating near-term challenges while also laying the foundation for sustainable long-term growth. And with that, Tanya, we are ready for questions.

I appreciate you letting me ask. To Ryals and Anthony, both of you mentioned the thorough assessment now underway regarding brands and operations and so forth. I realize Anthony described it as the opening inning of this effort, yet could you expand a bit on how you defined the scope of that work, what the project timeline looks like, and which items fall inside or outside what you're considering? Having additional substance there would really help. Anthony, if you can gauge how long the game runs, that would be useful too.

Of course, Steve. I'll kick things off, then let Anthony add more. And I'll definitely share additional specifics about this. This review remains in its opening innings. At a broad level, though, what we're doing is a full examination of the brands we own, plus how and how much we back those brands. We're also looking at additional places that require further funding. As I think everyone knows, on the whole the portfolio is doing quite well throughout cake along with our innovative platform and premium. What's really problematic for us is traditional loaf, where our position is weak, and which has been trailing the category, and that creates knock-on consequences like operating deleverage and so on. So a main area of emphasis, Steve, involves figuring out how to bring new life to Nature's Own. Restarting expansion for that brand and building demand for it will be a central priority for us. Beyond that, examining the supply chain, including the distribution network, so we extract maximum efficiency from our operations, represents another important focus. So throughout the year, we'll keep giving all of you additional and greater detail as the year unfolds. We're only in the earliest stages at this point. Yeah. And let me also say, I'd describe this review as taking a careful, deliberate approach, collaborating with Ryals and the remaining management team on assessing the portfolio, determining where investment is justified, and this naturally connects to the CapEx discussion too, regarding where those investments will go. It's a considered and wide-ranging review. The intent isn't for it to apply only to this year; rather, it's something spanning multiple years. I can't say when we'll reach the top of the seventh, but we'll keep making headway and share those updates as we proceed.

All right, that's helpful. And Anthony, I suppose part of this ties to what you covered earlier in your prepared comments regarding the capital allocation overview, and a portion of that will involve your assessment of the capex you just discussed. But perhaps you could address capital allocation from a somewhat wider angle; on this call we've talked generally about the dividend run rate at Flowers, and clearly cash flow has come in above GAAP income, yet at the same time, the 2026 EPS guidance is plainly under the dividend commitment. So how are you viewing capital allocation in a broader sense, including that dividend? Thanks.

Thanks for asking that. That's a really good question. We realize the dividend is foremost in investors' minds, and creating shareholder value has always been our emphasis. We want to communicate how much importance we assign to reviewing our capital structure along with how we allocate capital, and that is clearly something we discuss with our Board. My sense is we must make headway on the broader strategic review to establish whether, what, and how much we change that capital allocation and direction; however, I'd also add that we stay dedicated — and I believe we said this in the prepared remarks too — to keeping our balance sheet strong, and we see the advantages that come with an investment grade rating.

Sounds good, thank you. I’ll relay that. Appreciate it.

Thank you, Steve.

Jim, thanks — and good morning to both of you. Thanks for the question. Ryals, given how long you've been in this business, I'd love to hear your big-picture take. What can the industry — your company and the other major players — actually do to bring some stability back to that traditional loaf section of the category? In your prepared comments, you frequently highlight where DKB is growing and the many specialized products you offer. Yet the traditional loaf seems to be the persistent problem, and that's been true every single quarter. Is there some threshold where the marginal household finally exits the category entirely and we reach a point of stabilization? Or do you believe consumption frequency will keep falling even among households that remain in the category? Can you help us estimate what signals we should watch for that would suggest a path back toward roughly flat, and then hopefully positive, performance down the road?

Yes — terrific question, Jim. As I've mentioned, this really is the crux of everything for us, since we hold so much strength in the portfolio's other segments where we've invested heavily and innovated aggressively. We've discussed at length not just the move toward value in this latest conversation around affordability, but also the move toward premium and differentiated products — we've been a major participant there, and those efforts have clearly delivered. You can see it in the financials and in the share numbers. You're completely correct. For us, the traditional loaf is critical. Within Nature's Own, it's our biggest brand. It's also the top brand overall. My view is that soft variety — or rather, traditional loaf — will remain a significant component of the category. However, should the patterns we're observing persist — whether that's a move toward premium, or a move toward value that includes small loaves, since I believe part of today's value dynamic stems from macroeconomic forces we consistently observe in bread — then things could change. What's notable is that in the past you'd typically see consumers switch to private label, but now they're switching to lower-priced branded products priced at parity with or marginally above private label, and private label itself is declining under the same conditions. So this time is unusual. Still, I view the pure value play as cyclical. Small loaves, though, bring something else to the table. It's not just about value — though it certainly serves that market segment — it's also about demographic change, Jim. Households are smaller now, folks are tying the knot at older ages, nobody wants to throw food away, and on top of that, in today's climate, it comes across more as a value play. What I'm driving at with all of that is that I really believe, as time passes, you'll watch that shelf transform and shift as a whole. That makes it extremely important that we stand ready to move along with it. And we're confident there are moves available to us with Nature's Own — because of how loyal its shoppers are, because of how well known it is, because it holds the number one spot — to deliver extra benefits to consumers that they'll appreciate. So I genuinely believe a route exists there, and we're eager about the updates we have lined up for that piece of the portfolio. Should we pull that off, Jim, it carries us a long way toward at minimum reaching a steady position in traditional loaf, which would matter a great deal to the business — or perhaps even modest growth — and recovering part of that operating deleverage. It's equally important to mention, though, that simultaneously, as both Anthony and I pointed out, our supply chain review plays into this as well. So doing both matters: tackling demand for traditional loaf above all, while also tackling our fixed cost base and making certain we run things as efficiently as we can.

Thanks. I really value that level of detail. To connect that with 2026, let's consider how the Simple Mills ramp-up interacts with the existing portfolio. Could you provide some insight into how the top line will unfold? Clearly, Q4 includes the lap from the 53rd week, but should we anticipate that a significant portion of Simple Mills lands early in the year? Or is it a more gradual introduction — essentially, what's the top-line growth cadence as we move through the year?

Sure. Looking at the guidance, the range spans from roughly 180 basis points down to slightly positive, which is effectively flat; beyond that, regarding the category, our expectation is a 4% decline stemming from a headwind that nobody can really predict right now. Still, we preferred a rational and conservative stance, examining it through that perspective. That additional week contributes roughly 150 basis points of pressure. The remainder will come from a mix of the Simple Mills ramp and growth derived from share and rate as we map out the year. All right. Appreciate it, Jim.

Hi, thanks for asking. I'd like to revisit the dividend topic and understand better why it wasn't reduced today, given that your payout ratio is projected to exceed 100% of your EPS guidance and your leverage situation is challenging. Your present net debt appears to be roughly 3.5 to 3.75 times this year's EBITDA forecast, which could breach your 3.75 times covenant. Additionally, you're clearly facing a tough spot in figuring out how to fund the business moving ahead, since you've provided your 2026 outlook but haven't included any CapEx plans for that year. Wouldn't it have been easier to just eliminate the dividend right now and return our attention to running the business? I'm just hoping for a bit more clarity on that point.

Absolutely. Thanks. I'll handle that and then hand things over to Ryals. As the team has mentioned previously, I believe, the dividend is something we determine through conversations with our Board, based on our capital structure and how we allocate capital overall. We understand that this needs to be tackled comprehensively, taking into account both our strategy and our overall capital structure, and we intend to share those specifics in the quarters ahead. But let me echo what Ryals just told you. This comprehensive review is still in its very early stages. When it comes to the dividend, I'm limited in what I can say right now. Still, that's one item we're looking at as we weigh our capital structure and the bank covenant. What I can tell you is that every covenant is being met, our ties with the syndicates remain solid, and our expectation is to refinance the maturity coming up while also chipping away at the debt. So it fits within the broader review we're doing, and I hope that answers things.

Thanks. For my follow-up, I'm hoping to get somewhat more clarity on several things baked into your 2026 outlook. There are actually 4 items here, so forgive me for the lengthy question. First, what have you assumed about SNAP budgets being lower this year? Second, what effects do you expect from the Supreme Court case scheduled for March? Third, regarding that debt refinancing — the $400 million maturing in October — does your 2026 outlook presume a refinancing will happen at elevated rates? And fourth, your guidance appears to embed extremely sizable market share gains. You're describing the category as down 4%, yet organic sounds like it's only slightly under flat. So what accounts for that assumption of such a big market share gain? Sorry again for the long question, and many thanks.

Let me begin with SNAP. We acknowledge that EBT purchases have declined and that lower income households are under pressure, which is exactly why I believe our diversified lineup of brands and products is built to appeal across all household demographics; we don't disclose that separately, but we're keeping a close watch on that channel and making sure we deliver value at those price points.

The Supreme Court.

I wanted to address the other item. Regarding the debt refi, like I said, we're collaborating with our syndicates and also examining the most efficient path to refinance. We have strong confidence that such refinancing activity would take place. Clearly, rates will be a bit above the coupon on the bond we're retiring; yet we're confident that will form part of our approach as we consider the broader capital structure moving forward. Then the final couple of questions concerned the market share gain. Could you say that question again? Yeah. I'll handle it regardless regarding the market share gains. Max, if you're still on the line, as we've discussed, we expect to make incremental investments in our brands. Plus, innovation we have coming across the portfolio including Simple Mills having a record year for innovation, launching 13 new items. The DKB snack brands coming with new items; and then clearly additional innovation in the core. We also have our boosted marketing investment that we're making this year. So all of those would give us confidence that we can keep gaining share in the marketplace. As for the Supreme Court ruling, nothing is baked into guidance. So I don't think we would — that's more of an operating matter. We wouldn't anticipate any material financial impact from a decision either way.

Hey, good morning.

Good morning.

Hey. Regarding the supply chain review — when you examine the traditional loaf category, and clearly it's shrinking somewhat, should we expect possibly some bakery consolidation, or does that fall within the scope of this review?

Yeah. That does fall within the scope, though I'd describe it as something we do continually. As you know, we've shut down a number of bakeries in recent years — most recently one in Atlanta, one in Louisiana, and one out in Arizona. So for us this has been fairly routine as we keep evaluating operations. When we discuss supply chain reinvention in the context of this review, I'd say it's somewhat broader — how can we more effectively take advantage of digital, AI, automation, plus network optimization. So it's a more comprehensive effort, looking at the entire picture and including the distribution network too — how we reach the market, where we site our DCs, and so on.

All right. And, you know, I noticed that you're shifting your DSD, you know, the P&L responsibility over to a regional — back down to the regional level. And this, you know, clearly represents, I suppose, somewhat of a return to how things used to be. Is that — where do you see, and in what way do you see this helping Flowers down the road?

Yeah. So it's not just going back to how things were before. I mean, perhaps as you put it, somewhat. But when we examined our operations and the way we run our business, there are regional variations when it comes to consumer preferences, that sort of thing; we also believed there was a need for stronger accountability nearer to the individual markets. And by moving — and this applies to DSD, which accounts for 85% of the business, and doesn't really apply to the rest of the business — but for DSD, you know, having that greater degree of P&L accountability somewhat nearer to the market, and in certain cases having more decisions made locally, we believed was a wise step to take given the current environment in which we're operating. Clearly, this is a very difficult time for the company and for the industry, and so ensuring we have accountability in the right place, the right people in the right place, is absolutely critical.