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

Hello, everyone. I trust you all 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 the Investor Relations section of our site. Once today's Q&A wraps up, an audio replay of this call will be posted as well. Before we begin, a quick note: during this Q&A session, we might share forward-looking statements regarding how the company is performing. While we consider those statements reasonable, they come with risks and uncertainties that may lead to actual results differing materially; beyond what you hear in these remarks, the key factors tied to Flowers Foods' business are laid out in full in our SEC filings. We also present non-GAAP financial measures, and the disclosure along with reconciliations for those can be found in the earnings release and at the conclusion 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, hello everyone, and good morning. Our second quarter performance, as we mentioned in the prepared remarks, fell short of what we had anticipated. Conditions stayed difficult in the fresh packaged bread category, which mirrored strain on household budgets, evolving consumer preferences and ongoing competitive activity. Given that environment, we are speeding up efforts to bring our resources and value proposition more closely in line with the direction the market is taking. Among these are pushing forward with innovation in smaller formats, sourdough and protein, sharpening how we execute in stores, going after new business and maintaining investment in our leading brands. With the Nature's Own relaunch, recent business wins and innovation efforts gaining traction, we anticipate they will help deliver more stability and better performance; there is still work ahead, yet our confidence in the strategy, the brands and the steps we are taking remains strong. Shannon, let's go ahead and take questions.

Stephen, perhaps we can continue from where you stopped during the introduction. If I consider what your revised guidance suggests for the second half, even at the minimum, it appears to point toward some pickup and certainly some betterment compared with the consumption exit rate we observed as 2Q ended. Could you give us a little more on the components you foresee producing that sequential gain, since it doesn't seem you anticipate the category getting better? It sounds as though you expect your own position relative to the category to strengthen. So which initiatives do you think will matter most? And I suppose, some sense of how soon we ought to see them show up across what's left of the year?

All right. Thank you, Steve. There are a few items, and I'll have Anthony weigh in on guidance too. To answer what you asked, I'd point to 3 main drivers. First, we have some fairly meaningful new business wins arriving in the back half; beyond that, we implemented further cost savings actions that will help the back half. That comes on top of the approximately $200 million we've removed from the business across the past several years; and I'd mention innovation as well, which matters a great deal when you consider where the category is headed, since the pace of change in what consumers prefer honestly moved somewhat ahead of our innovation pipeline. Fortunately, though, we have those items arriving to close those holes in what we offer, whether you mean protein, half loaves, sourdough, and so on, all of which arrives in the back half and then as we go into the spring of next year. Anthony, is there anything you'd like to add?

Nope, I believe you got everything. What I'd add, Steve, is that when you look at the second half, it's somewhat back-weighted; we're anticipating a few year-over-year drops in Q3, though after that things should settle out thanks to all the items Ryals brought up regarding the new business wins, lower elasticities as we lap last year's pricing in Q4, plus a bit of leveling off in Nature's Own as our marketing investments keep gaining traction.

Great. Perhaps you could give us a bit more detail, if possible. It sounds like you anticipate gains in both the branded retail operation and the other segment, where I'd assume those new business wins are located. So maybe a bit more detail on where you see — which part of the business do you see more gains? And then, yes, I would appreciate a bit more detail regarding what you're observing with the Nature's Own relaunch and the reasons for optimism there.

So Steve, from how we're viewing it, it's genuinely divided between our Away-from-Home business and our retail branded business; so I would say we're seeing solid opportunities and realization in both those areas, with the timing of some coming in Q3 and some arriving in Q4. So it's balanced wins across the portfolio.

And Steve, to answer what you asked regarding the Nature's Own relaunch: keep in mind, we kicked that off only 2 months back. My take is that things are progressing nicely; it's somewhat too soon for the real results to show through, yet the response we're receiving from shoppers, from social media, and so on has been quite positive. So we have a few early signals pointing toward this being a campaign that succeeds. Still, I believe we need to give it — like I mentioned during the previous call, we'll need to allow additional time for those results to come through; even so, our confidence in this campaign and in the direction we're taking it is genuinely high.

The first item I'd like to bring up — during your prepared remarks, you mentioned intensifying competition and greater promotional activity. Clearly, earlier this year your team implemented certain price increases, anticipating that rivals might match them, and it appears that hasn't really materialized so far. So I'm curious whether you could provide some perspective on how pricing is behaving within the category and where things stand for you. Also, any consideration of adjusting certain measures you've implemented in order to stay more competitive against peers in traditional?

Absolutely. I'll be first to address that. What matters to keep in mind is that what's happening in this category involves far more than pricing alone. Within particular portions of our portfolio, that could play a role; and as mentioned during our prepared remarks, we're conducting a fairly thorough examination of our approach to pricing and promotions. Even so, pricing isn't the only element. I'd actually emphasize shifts in what consumers prefer. There's definitely been a degree of trading down toward store brands and cheaper options; yet the larger element, regarding how we're performing against the category at least, relates to those holes in our lineup, the insufficient presence in half loaves, sourdough, protein fiber, along with other functional characteristics that shoppers seek. That's therefore where we're concentrating most. None of this means we're disregarding the pricing side of things. We're examining that closely. My preliminary view is that certain areas of the portfolio likely do have that as a contributing factor, though I wouldn't call it the main engine behind our results.

Thanks for that perspective. There may be a few points in the prepared remarks—I believe from Anthony—about 2027 potentially seeing some cost inflation creep up, particularly tied to commodities and fuel. So I'm curious if you could update us on what inflation looks like at present, how you're viewing the exit rate for '26, and then perhaps what you're factoring in right now for '27, plus anything else you can offer about '27 that would help us understand your framework.

Absolutely, Scott. I'll break it into 2 pieces. During Q1 we said that for the rest of this year, the bulk of our commodities are completely hedged; there was a bit of exposure—I mentioned it earlier—in oil and diesel, and indirectly in resin, mostly within our packaging segment; so our existing guidance stayed the same, since we didn't see incremental commodity-related strain. That strain was baked into what we assumed during Q1, and it really hasn't shifted in any meaningful way versus where things stood back in Q1. Turning to '27, our planning process for fiscal '27 is still underway. Because of that, I'm unable to give additional detail on it by itself. To build on what Ryals said, input costs represent merely one among numerous factors we must weigh when it comes to price mix, the architecture, and new innovation. So I can't examine it by itself. That said, on the whole, inflation has risen across many of our categories when viewed through a pricing index lens, and that's something we absolutely must tackle as we consider '27 and the exit velocity you referenced coming out of '26. It's an issue we're actively working to handle moving forward; and as I noted during my prepared remarks, expect more updates later. However, at this stage, that's the extent of what we can share regarding '27.

I'd like to build on what you told Steve and Scott when they asked their questions. Looking back at 2022, I believe that was the most recent period where we saw a fairly meaningful commodity cycle. Assuming my model is right, net price/mix for the whole business rose somewhere in the mid-teens during 2022, and that played a major role in helping to offset it. Please correct me if that's not accurate, but my read is that going forward there may be less room to maneuver on pricing because of certain competitive dynamics. So could you take us through the additional levers available within the business that could help counter the commodity inflation we're currently seeing and that we expect will keep flowing through in 2027?

Yes. I'll begin with that one, Jim. What I'd say is that we clearly need to focus on productivity efforts, which are built into each annual planning cycle, and all year long we're examining opportunities to operate more efficiently across the bakeries in our network and so forth; after Q1, once we noticed softness in the top line, we took steps that will build as a tailwind as we move out of 2026 and into 2027. As we mentioned in the prepared remarks, that tailwind amounts to approximately $20 million as we head into 2027. The second area is price pack architecture. Like Ryals said, by joining forces around new products for small loaves, launching innovation in sourdough, and focusing on the places consumers have moved toward and where they currently are, we're likely underpenetrated from a portfolio standpoint. We have excellent products reaching the market shortly, yet we're probably underpenetrated right now. So considering those elements gives us confidence that price likely won't be the sole lever capable of overcoming the inflation; and as I said before, there's considerably more work ahead on that front as we move through the '27 planning process.