Flowers Foods, Inc. ($FLO)

Good day, and thank you for standing by. Welcome to the Flowers Foods First Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I now hand the conference over to your first speaker today, J.T. Rieck, Executive Vice President of Investor Relations. Please go ahead.

Good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, the slide presentation that were all posted earlier on our Investor Relations website. After today's Q&A session, we will also post an audio replay of this call. Please note that in this Q&A session, we may make forward-looking statements about the company's performance. Although we believe these statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to what you hear in these remarks, important factors relating to Flowers Foods business are fully detailed in our SEC filings. We also provide non-GAAP financial measures for which disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are Ryals McMullian, Chairman and CEO; and Anthony Scaglione, our CFO. Ryals, I'll turn it over to you.

Okay. Thanks, J.T. Good morning, everybody. Our team continued to execute against a challenging backdrop and softer top line trends in the quarter. delivering bottom line results ahead of expectations. We advanced the comprehensive review of our brand portfolio, supply chain and financial strategy, and I'm very encouraged by the progress we're making there. We sharpened our focus on our core brands, including our nationwide relaunch of Nature's Own, while continuing to strengthen our position in better-for-use segments. We also saw positive trends in premium bread and cake categories. helping us offset some of the ongoing softness in the traditional loaf category where we underperformed in the quarter. In addition, we took initiatives to drive efficiencies across our supply chain while further strengthening our balance sheet and our financial flexibility. Together, these efforts are positioning us to deliver more consistent and sustainable growth and profitability over the long term. Looking ahead, we'll remain focused on executing the strategy and positioning the business to drive for shareholders. And I want to thank our team for their continued focus and commitment. And so with that, Marvin, we can open it up for questions.

[Operator Instructions] And our first question comes from the line of Jim Salera of Stephens Inc.

It start off with your view on inflation given how much commodities have moved since the start of the Iran conflict. Can you just walk us through your outlook on inflation, how that's changed since the beginning of the year. And any details you can share around your hedging program and maybe internal inflation expectations for the remainder of the year?

Sure. I'll take that. First off, recall, our hedging program really builds the cadence as we progress through the year. So we're virtually fully hedged for the balance of the year on the commodities in the program. So as we look forward, we see pressure primarily in other commodities and the impact that the price of oil has had on our distribution in resin, which has significantly impacted our packaging costs, and that's an area we didn't see as a cost concern when we started the year. That being said, the teams are looking at ways to mitigate that increase, including packaging configurations, alternatives, along with other productivity measures. So overall, I would say we're assuming a level of increase stays elevated and that's built into our outlook. But if they should further increase, we'll probably look at other productivity measures to counter that.

Particularly, if we think about on the productivity side, are you talking about costs that can come out of SG&A. Is that pulling back on personal spend or maybe some other efficiencies you can find in the gross margin line. Can you just kind of walk us through how you think the offsets where they would come in the model.

I think it will mostly come out of SG&A. And to the extent that we make progress on some of the packaging, as I mentioned, clearly that would be productivity as it relates to the cost going into COGS.

We'll move for our next question. Our next question comes from the line of Steve Powers of Deutsche Bank.

Great. Maybe just to follow up on Jim's question. Is there a way to size or dimension the diesel and packaging costs that you're now seeing for the balance of '26 versus before. And I guess also, should costs remain high, is there a way to think about how much carryover inflation we're now accruing into '27 versus before?

Yes. So we haven't started our planning process. We're just in the process of kicking that off for '27, so I can't provide further color on that in isolation. Clearly, there's a lot of puts and takes as it relates to what we would address as we look into '27. For '26, as I mentioned, most of our core commodities that could have the highest impact are fully hedged. So we feel pretty good about the outlook as it relates to our position going into the back half. But as I mentioned, as it relates to oil, it's really a tale of 2 cities. There's the impact of oil on the consumer and that we'll have from a consumer sentiment, which we are obviously looking at providing value at price points and making sure that we're meeting the consumer demand. On the input side, it's primarily impacting resin, which is not a direct corollary to oil. It's a stream impact. And then that, as I mentioned earlier, we're looking at ways through productivity to drive some of that headwind out in the back half. And that's all baked into our reaffirmation of guidance.

Okay. Okay. And then a while I have you on the dividend reset, you're freeing up around about $100 million of cash, which I think could reduce leverage by about 0.2 turns if fully directed there. Is that the right way to frame it? Or how should we think about the split between deleveraging versus other reinvestment priorities of that incremental cash? .

I think you nailed it in terms of the split. I mean, clearly, our first priority is to deleverage and the goal is to be below 3x by the end of fiscal '27. So we're looking at that as the primary lever with the reset of the dividend but continue to invest in the brands similar to what we did with the relaunch of our Nature's Owned this quarter.

Yes. And actually, if I could squeeze 1 more on that relaunch, Ryals, it very much make sense relative to your strategy, broadly speaking, in terms of where the consumers simpler ingredients on big marketing push behind it. I guess how -- what are your expectations? And what would success look like over the next 2 to 3 quarters? Whether in terms of velocity or household penetration, just how you're thinking about the impact of this relaunch and how it may help then the organic growth trajectory at all?

Yes, sure. Good question. Well, first of all, I just want to say we're tremendously excited about this. This was a huge pivot that the team made took a lot of work to get this done, reformulating taking out another 1/3 of the ingredients, essentially being the cleanest label traditional loaf bread at scale in the country and non-GMO verified. So it's a big deal for us. It took a lot of investment. And of course, as we said, we've got the 360-degree marketing campaign behind it, leveraging John Cena's [indiscernible]. We just actually launched that yesterday. Some of you may have seen it. In terms of what success looks like, I mean, obviously, the traditional loaf category has been the soft spot for us. We've been talking about this for a number of quarters now. The rest of the business essentially is doing quite well on the premium and the value end. But traditional loaf is approximately 38% of our branded retail. So it's a big segment for us. And getting that part of the category stabilized, Steve, is how I would describe success. So at a minimum, getting our volumes stabilized and traditional low we'll do more for the business than any other lever that we can pull. Now there is a lag. I don't necessarily expect this to have an immediate impact. When you start a marketing campaign like this. you've got to get 6 months a year down the road before you can then look back and see how effective it was. But I do think between the increased marketing spend, so higher visibility, remembering that Nature's 1 has the highest loyalty rate in the category, and it's the #1 brand, and we have the #1 SKU getting consumers attention and bringing them back to that segment by delivering value in the sets of attributes that resonate with consumers. To me, that's what will drive ultimately our success. But to directly answer your question, success to me is stabilizing volumes in traditional loaf.

And our next question comes from Scott Marks of Jefferies.

First thing I wanted to ask about, in the prepared remarks, you noted a number of times about some of the consumer pressures and expectations for kind of headwinds to the top line to persist a bit. So just wondering if you can help us understand within your guidance for the year, what are you embedding in terms of assumptions for volume versus pricing? And how should we be thinking about maybe cadence as we move through the year.

So we don't -- great question. We don't guide to volume, but our guidance easier volume comps as we progress through the year. We do see some back half increased costs related to some of the input costs I mentioned in both in my prepared remarks and on the last call. I mean, the last questions. but we expect to continue to have good overhead and other cost management to help mitigate some of that rich risk, which is not hedged on the input side. So I would look at it as we don't expect a recovery necessarily from a volume perspective, but we do have easier comps as we progress throughout the year.

Understood. Appreciate that. And then another question would be just on the promotional environment. You've made a number of references in the prepared remarks, talked about a little bit more of an intense promotional environment that you believe is unsustainable. And I think you called out some improving trends in certain markets where that has eased a bit. Just wondering if you can dive a little bit deeper into that and help us understand maybe what supports your view that, that competitors will pull back on promotions and how long should we be thinking about this irrational environment to persist?

Right. Well, first of all, I would say this. I mean we've been through periods like this before. I mean, this is -- it's not our first radio as they say. We've seen this happen before. It typically has not been sustainable in the past. I think we're all familiar with the affordability issues. The country seems to be going through right now particularly with the recent spike in gas prices, some commentary yesterday from a large retailer on softening consumer sentiment. We saw the Michigan's consumer sentiment report come out. at a record low. And so it is a concern, and it's something that we're just going to have to navigate our way through. Having said that, we're taking a long-term view. This company is about building strong brands that deliver significant value to consumers. And when I say value, I don't mean heavily leaning into price, I mean delivering quality great service, innovation and differentiation to the consumer. That's our play. We'll continue to run it. Having said that, I know you all have been watching the share and volume dynamics in the syndicated data. I would just remind everyone, we did take pricing late last year, and the pricing gaps have remained a bit wider than we would like in the short term, and that has somewhat affected our volume performance, particularly as you look in the traditional loaf category. However, we did pull back some on promotions and marketing spend in the first quarter because we were saving our dry powder for this big relaunch of Nature's Own. So our calendar will start to heat up to a more normal level as we move through the remainder of the year. And I would expect some of those share trends to begin to improve. And in fact, where we have seen in a few channels where we have seen the price gap start to narrow to a more normalized level, we're already getting to see those share improvements.

Our next question comes the line of Max Gumport of BNP Paribas.

Appreciate the question. You mentioned you're largely covered for commodities that you hedged for in '26. I'm not sure that would include diesel fuel. I don't think it would include transportation. So could you talk about the rising intact there of those rising costs on your P&L and what's embedded in your outlook for '26 on that front?

So it's fully embedded in our outlook. And as I mentioned, you're correct. The diesel does have an impact primarily for our fleet, but recall from a DSD network, that cost that's actually in our partners, not that we don't -- we ignore it, but it's not something that's going to show up necessarily on our P&L. As it relates to the hedging program, we are looking at potentially hedging that on a forward basis is not included in our guide. So everything right now as it relates to the oil impact, and again, it's twofold. It's both on the distribution side as well as on the resin side, fully captured in the guide that we provided.

Okay. And then any way to just help provide investors with some context in terms of the magnitude we're talking in terms of how much incremental costs you are now working to mitigate, given everything that's changed since your fourth quarter results where you first gave us '26 outlook?

I would say, I mean, there's a lot of puts and takes. And as I mentioned, we have productivity measures as it relates to the packaging, which is an area that entering the year, we didn't expect cost increases. And as you can imagine, we have inventory that burning through at a much lower cost. I would say it's roughly about $0.02 or $0.03 of headwind in the back half of the year associated with generally speaking, oil and derivatives of oil. .

Okay. Got it. And then a similar line of -- but I just want to finish out this time thinking it would be -- since you gave guidance, the top line environment has not much more challenging as you've noted, we just talked about how the tee commodity costs arising. It feels like you're saying you're covered for a lot of it. There's some incremental costs coming in the back half, but that you are reaffirming the outlook. And I'm just trying to get a sense of what's allowing you to, it sounds like it's maybe a little bit more visibility on productivity, but anything else I'm missing there?

Yes. I would -- -- and I'll pass it to Ryals. I think our confidence in rearming is anchored on a couple of things. The Nature's on relaunch, expansion of half los with varieties that will be coming out in the back half of the year, which is an area that we've seen good growth, continued growth in our snack and better-for-you options. The pricing -- the route point of pricing promotional environment stabilizing to, we have a lot of things that we have in the back half assumed within our guidance, but we are also looking at the margin pressure as it relates to the commodity increase. We also recognize there's going to be near-term margin pressure, and we were very clear at year-end with our marketing investments. So we have captured what we feel are all the relevant inputs as well as the relevant tailwinds as it relates to the balance of the year.

[Operator Instructions] Our next question comes from the line of Mitchel Pinheiro of Sturdivant & Co.

On the cost management side and your supply chain savings, is that the extent of your cost efforts or are there also maybe some fixed asset or capacity changes that are you're looking at so anything more substantial sort of to your sort of baking platform?

Yes. Mitch, it's Ryals. I think Anthony covered it well. There's cost opportunities in SG&A. Obviously, there's productivity gains that we expect to deliver this year. And I would just, first of all, like to commit on the team for their cost management efforts, frankly, over the last 2 or 3 years, I think they've done a remarkable job of managing our costs in a difficult environment. In terms of the overall supply chain optimization work, not anticipating anything major this year, Mitch, but that is, as we've discussed in the past, that is in our longer-term plans.

Okay. And then on the CapEx, $115 million to $125 million, what are the you break that down in the buckets of how that's going to be used this year? .

Sure. I think I mentioned it on the last call. So the way to think about it is roughly plus or minus around $2 million per bakery on maintenance. So that should be viewed on a consistent basis as we continue to provide productivity measures within our bakery maintenance measures is around $2 million. The remaining CapEx is going to be dedicated to growth and we see opportunities around top line extensions where we can drive additional value to the customer as well as productivity measures. So that's the way I would break out the bucket of the guide as it relates to CapEx.

Okay. And then I guess, just final question on service. Can you just talk about what's going on in your foodservice business?

Sure. I think just like everything else, Mitch, the consumer is pressured. And so there's certainly some traffic pressure. As you know, we've done a lot of work over the last several years to improve the profitability of our foodservice business, and that continues. So it continues to do well. I would say more recently, it has done a bit better from an overall top line standpoint. So we believe we've got a very solid, as you know, it's a scale business for us. We think we've got a very solid foodservice-way from home business, and we'll continue to work to grow it.

Are you seeing any -- so are you seeing any improvement there? Or is it just sort of same pressure and maybe anticipate -- would you anticipate potential improvement sort of coinciding with what you see on the branded retail side?

Yes. I mean, like I said, I think more recently, from a top line standpoint, it has improved a little bit. And again, the profitability work that we've done over the last several years has definitely paid some dividends because profitability is quite a bit better than it was. I think what we'll be watching overall is overall restaurant traffic and where the trends are headed that way, just given the overall inflationary pressures that the consumer is feeling today.

I'm showing no further questions at this time. I'll now turn it back to Ryals McMullian, Chairman and CEO, for closing remarks.

Great. Thanks, everybody, for taking time today and joining us for questions, and we very much appreciate your interest in our company. And as always, we look forward to talking to you again next quarter. Take care. .

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.