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

Hi, everybody. I'm J.T. Rieck, Executive Vice President of Finance and Investor Relations. Thanks for joining this pre-recorded review of what Flowers Foods achieved in the second quarter of 2026. On Friday, August 21st, at 8:30 A.M. Eastern, we'll hold a live question-and-answer session. You can find more information on that live call, plus our earnings release, a transcript of the remarks we've recorded, and a slide presentation connected to it, in the investors area 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 may differ materially; beyond what these remarks cover, our SEC filings lay out in full the significant factors tied to Flowers Foods' business. Speaking on today's call are Ryals McMullian, our Chairman and Chief Executive Officer, and Anthony Scaglione, who serves as our Chief Financial Officer. Ryals, the floor is yours.

Appreciate that, J.T., and I want to thank all of you for being with us today. The results we posted for the second quarter show that the fresh packaged bread category keeps facing difficulties, since sustained strain on family finances, changing ways shoppers buy, and ongoing competitive activity made the operating climate tougher than we had projected. We figured a lot of these headwinds would stick around, but they came faster and hit harder while the quarter was underway, which led to weaker demand through a large part of our portfolio and outcomes below what we had planned. A handful of clear trouble spots accounted for most of that pressure. Families remain squeezed, which has produced more sensitivity to price and more trading down. Meanwhile, buying behavior moved among formats, pack sizes, and product features where our scale is still being built. On top of that came steady promotional intensity and fierce rivalry in pricing and assortment. All of that weighed on volume and helped push sales down 4%. Given this situation, we are speeding up efforts that were already in motion to make the business stronger. What we learned during the quarter, and through our thorough review, has clarified where we need to focus and is helping us act more quickly to boost competitiveness, sharpen execution, push innovation forward, and put our resources behind the opportunities with the greatest value. Acknowledging that the economic picture remains unstable, we are turning those learnings into targeted steps meant to steady and lift our performance. Just as important, we can already point to real commercial momentum coming from these efforts. Among the recent gains are new business wins, moves into new markets, and important wins in away-from-home and cake categories, which should add meaningfully to sales once those opportunities reach full ramp. To grow our leadership in the category, we are picking up the pace on innovation, such as more half-loaf options and additional sourdough varieties that fit better with what consumers want. We are improving how we execute in stores by using technology and assessing AI applications to make promotions more effective, and we are making selective adjustments to our price pack architecture to sharpen competitiveness and back profitable growth. We are also still putting money behind our leading brands, among them the Nature's Own relaunch, which is only in its early days yet is getting favorable reactions from customers and consumers. Let me now move to our brand portfolio and what we are doing across key categories. Our strategic emphasis stays on making our leading brands stronger and funding innovation that serves consumers' changing needs. Though pressure touched much of the portfolio this quarter, we found bright spots in certain parts of premium and specialty loaf, buns and rolls, breakfast, cake, and better-for-you snacking. Those areas offset a portion of the ongoing softness in loaf, where we came up short in both dollars and units. Inside traditional loaf, category trends stayed under pressure as tight household budgets and more intense competition drove more trade-down behavior and dragged on demand overall. Simultaneously, shoppers kept gravitating toward smaller loaves and more differentiated products, areas where our scale is still being built. Those dynamics, plus weaker consumption, hurt how we performed at the category level for both Nature's Own and Wonder during the quarter. Still, one thing stood out: Nature's Own Perfectly Crafted, with sales up more than 8%, picking up share in both dollars and units. That shows what innovation can do, with sourdough and Italian herb helping widen the franchise and generate incremental growth. Given that environment, we're pursuing targeted moves to shore up where we stand. Bringing back Nature's Own is a crucial piece of that effort. As we noted three months ago, this marks the first big introduction for our flagship brand in more than 10 years. Though we recognize it will take time to grow consumer awareness and push gains through the business, we think the relaunch puts us in a stronger spot going forward. Customer reaction so far has been quite favorable, and we're heartened by how people are responding to the brand's better-for-you positioning, fewer and simpler ingredients, and non-GMO project verified offering at national scale. The relaunch remains at an early point, and as sales build momentum, our attention is on raising awareness, locking in displays, sharpening shelf communication, and backing the brand along the entire path to purchase. The marketing campaign, featuring our spokesperson John Cena, is starting to drive stronger consumer engagement and positive social media feedback. We're likewise heartened by Nature's Own ingredient and health perception credentials, such as favorable scores from third-party nutrition and product rating platforms like the Yuka app. Even though the relaunch is still at an early point, we anticipate it will help deliver greater stability and better performance as awareness grows and execution picks up steam; given its scale, trust, and differentiated positioning, Nature's Own offers a solid platform for recapturing share and extending our category leadership. We also see a meaningful opportunity in smaller pack sizes, such as small and half loaves, areas where we're positioned to build meaningful scale. Consumer preferences keep moving toward portion control, affordability, and reduced waste, pointing to a clear chance to improve execution here. Ramping up our presence in small and half loaves will be a vital component of our plan to lift performance and better match the portfolio to where consumer demand is heading. Turning to sandwich buns and rolls, our Nature's Own brand did very well. Nature's Own picked up 30 basis points of dollar share and 20 basis points of unit share in the quarter. The fact that dollar share rose faster than unit share shows ongoing consumer acceptance of the brand's premium positioning and pricing within the segment. Nature's Own Perfectly Crafted led the way and kept building momentum, lifting dollar sales and gaining 20 basis points of unit share in the quarter, which helped offset some of the pressure on our overall performance in the category. Over the July 4th holiday period, we held unit share and grew dollar share during this important seasonal window. This confirms what we already believed: whenever the proper merchandising, display activity, and customer execution are behind them, our top brands keep connecting with shoppers. Within organics, Dave's Killer Bread faced strain on unit share as well as dollar share for the quarter. Consumption fell after we reduced planned marketing investments, and additional pressure came from changing consumer preferences, tougher competition, and price sensitivity among buyers. DKB is still the leader in the organic segment, and we see substantial room to grow, backed by its distinctive brand equity, organic positioning, and loyal consumer base. To seize that chance, we are sharpening our messaging so awareness of DKB's better-for-you attributes grows, while backing the brand with innovation, wider distribution, and advertising. Canyon Bakehouse, the top gluten-free brand, picked up both unit and dollar share, showing how important the brand is inside our wider better-for-you portfolio. With Nature's Own Keto, dollar share increased, showing strength in the category as shoppers keep seeking products that serve particular dietary and functional needs. Even with wider category pressures, our leadership in organic, gluten-free, and other differentiated offerings stays highly relevant and gives us a solid platform for meeting shifting consumer needs. In breakfast, though overall share came in slightly lower, we saw encouraging momentum in select areas.

Wonder picked up 20 basis points of share in both units and dollars. Wider distribution played a part in pushing growth in units and dollars to almost 100% compared with the year before. That momentum, though, was partly canceled out by weaker results at DKB. All the same, breakfast still looks to us like an appealing chance to grow over the long haul, backed by ongoing distribution wins, focused innovation, and better execution. How our brands stack up in this segment also highlights why it pays to have a portfolio spread across various price points, which hands us several routes to take part as shopper tastes and buying habits shift. Within cake, we largely maintained our share of the category, helped by yet another robust quarter for our Wonder-branded items. Wonder Cake stood out clearly, picking up 60 basis points of unit share and lifting dollar share as well, which speaks to the brand's strong connection with consumers and the significant part our cake business can play inside the wider portfolio. The momentum Wonder keeps showing hands us a solid base to build on in this category. Now to better-for-you snacking, where our platform — anchored by Simple Mills and Dave's Killer Bread — keeps giving us reasons for optimism, with distinctive products sitting in a good spot to serve what consumers want. Simple Mills posted solid growth this quarter, helped by momentum spread broadly across the portfolio, robust underlying consumer demand, and a promising first reaction to the innovation launches we rolled out this year. Retail sales climbed 13%, powered by strength in cookies and crackers, which underscores how resilient and appealing the brand is. Cookies rose 39% while crackers rose 8% during the quarter, with both beating their respective categories. A mix of wider distribution, e-commerce results, and strong velocities on core lines in the food and mass channels drove this performance. Our recent innovation launches have beaten distribution targets and turned in encouraging early results, which strengthens our belief that Simple Mills' growth will speed up across the rest of 2026. It goes without saying that we're happy with how strongly Simple Mills has performed and stay confident about the brand's chance to grow over the long term. DKB bars and mini bites kept drawing strong consumer interest this quarter. We're working on making products more available and lifting service levels so we can better satisfy demand and back growth across the rest of the year. Now for our outlook: because of how the first half went and the state of the category, we're revising our full-year guidance to capture a more cautious view for the remainder of the year. At the same time, our thorough review is sharpening our picture of market dynamics, portfolio opportunities, and the moves needed to lift performance. We're making focused moves to boost competitiveness, tighten execution, cut cost, and line up resources more closely with the opportunities capable of delivering the most long-term value. In keeping with those priorities, we're carrying out further cost actions meant to raise efficiency, shrink our cost base, and align our operating structure more closely with customer needs and today's market realities. Though these steps are tough, we anticipate they will produce a nimbler company and improve Flowers' standing for profitable expansion as time goes on. Having said that, I'll now pass things to Anthony Scaglione, our CFO, who will share further specifics and walk through our financial results.

Thank you, Ryals, and good morning to all of you. I'll take a few minutes to walk through what we delivered in the second quarter, the steps we're taking to navigate the conditions in front of us, and how we're viewing the remainder of 2026. As Ryals described, our Q2 performance came against a difficult category landscape, with shoppers still under pressure, demand that was softer, and shifting preferences that held back both volume and mix. During the quarter, we kept a tight grip on costs, safeguarded our financial flexibility, and moved forward on efforts stemming from our comprehensive review that we expect will improve results across the rest of 2026 and afterward; net sales for the quarter fell 4% versus the same period a year ago. Volume declined 5.8%, which mirrors the tough conditions in the fresh packaged bread category along with ongoing softness in traditional loaf and select premium loaf categories, and those factors more than offset favorable price mix. Looking more closely, branded retail sales were down 3.8%, as lower volume was partly offset by positive price mix. Other net sales fell 4.4% because of reduced volume and store-branded retail sales. Gross margin, excluding depreciation and amortization, came in at 48.4% of sales, a drop of 40 basis points from a year earlier. That decrease stemmed from reduced operating leverage tied to lower volumes and greater outside purchases, net of lower ingredient costs tied to Simple Mills; on an adjusted basis, SD&A rose 140 basis points as a percentage of sales, largely because lower sales were paired with higher relative marketing, labor, and logistics costs. Those pressures were partly offset by reduced distributor discounts and our ongoing cost discipline. Although the top-line softness produced P&L deleverage, we're staying intentional about spending, putting cost initiatives first while still investing behind our leading brands. Adjusted EBITDA fell 19% to $111 million, which equals 9.3% of net sales. GAAP diluted EPS for the quarter was $0.19, down $0.09 from the prior year period. Excluding the items affecting comparability detailed in the release, adjusted diluted EPS for the quarter was $0.21, versus $0.30 in the prior year period. Our first-half results were plainly short of what we expected, and we're pursuing targeted actions to help steady performance in the back half of the year, which I'll get to in a moment. On the balance sheet and cash flow side, we stayed focused on preserving flexibility and keeping a disciplined approach to leverage. We keep strengthening our balance sheet and have repaid roughly $70 million of debt year-to-date. Our financial strength remains a priority, and as a reminder, we have secured a new $400 million delayed draw facility to fund the maturity of our bonds coming due in October of 2026, completely de-risking that maturity. We will keep prioritizing investments that support attractive returns, fund the dividend, and strengthen the balance sheet over time. Turning to cash flow, we generated $242 million in cash flow from operating activities year-to-date, while investing $44 million in capital expenditures and returning $81 million to shareholders through dividends. Now moving to full-year guidance. When we look at how the first half of the year played out relative to what's happening across the category right now, we're updating our full year 2026 guidance to match those conditions. Net sales should now land somewhere between $5.07 billion and $5.142 billion, adjusted EBITDA between $453 million and $481 million, and adjusted diluted EPS between $0.75 and $0.85 per share. This revised view is based on what we know as of today and bakes in the present macroeconomic environment, with market and competitive dynamics expected to stay broadly steady for the rest of the year; it also factors in what we're getting from recent wins with new business customers, plus the momentum we're building and the shift we're seeing in the recent trend following Nature's Own's relaunch. On top of that, it captures the steps we're taking to lift performance, such as cost controls, savings from reorganization, focused brand investment, new product launches, and the execution around all of that. Before handing things back to Ryals, I'd like to bring you up to speed on our comprehensive review and the initiatives we're rolling out in the second half. That review is helping us sharpen where we focus, execute better, and get our cost structure and resources more closely matched to the opportunities offering the strongest long-term returns. It's also surfacing concrete steps to simplify how we run things, sharpen our competitive edge, and create a more efficient operating model; we're making solid progress. Earlier this year, we realigned our DSD network along with the territory it covers, and we're actively chasing growth opportunities spanning retail and away-from-home channels, such as food service and QSR customers, where we believe there's room to grow over time. As part of this review, we're taking selected actions that further realign the organization and enhance our cost structure. This extends the cost efficiency efforts we've been working on for the past several years, a period in which the company has taken more than $200 million of costs out of the business. What we're focused on now is becoming more agile, cutting down complexity, and getting our structure in line with customer needs and the growth opportunities where we have the right to win. According to current estimates, we're looking at roughly $9 million in savings for the remainder of this year and roughly $20 million in annualized run rate savings once fully implemented, including certain reinvestments. To get there, we anticipate one-time costs of roughly $6 million. Looking ahead to 2027, we see certain headwinds growing from where they stand today, specifically commodity ingredient exposure and fuel. We're staying vigilant about taking actions that help offset some of that risk, such as broadening our hedging programs and refining our price pack architecture so it better matches consumer preferences. This effort will produce a more stable cost input from a planning perspective, along with chances to offer our best-selling brands in the smaller loaf size and make sure our snack packs are sized right for consumer demand. Taken together, these moves are meant to help us steer through the current environment, execute better, and boost profitability for the rest of 2026 and on into 2027. These efforts additionally back the wider goals Ryals mentioned — reinforcing our top-performing brands, sharpening what we do on store shelves, speeding up new product development, and directing money and people toward opportunities offering the best long-term payback; to wrap up, even though the marketplace is still tough, we are pursuing the correct actions and proceeding with rigor and concentration. My confidence in the enduring vitality of our company, our plan, our brands, and our people has not wavered; so with that, I will hand things back to Ryals for some final words.

Thank you, Anthony. In wrapping up, although the results we posted for the second quarter came in under what we had anticipated, we possess a solid grasp of the market forces at play on the business, along with the steps needed to drive better performance. Shoppers are still feeling squeezed, and the way they buy keeps changing. Through our thorough assessment, we have gained a sharper view of the areas where our portfolio shows the most strength, the areas requiring improvement, and the areas where we can pick up the pace to serve customers better; we are building on efforts that are already in motion, pushing them forward with discipline and focus so that execution gets stronger throughout our business. Given our talented team and a well-defined strategy, our confidence remains intact that we can deliver improved performance as time goes on. That brings our prepared remarks to a close.