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

Thanks, and good morning everyone. I trust you've all had a chance to look over our earnings release, hear the prepared remarks, and check out 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'd like to point out that during this Q&A session, we might make forward-looking statements regarding the company's performance. While we consider those statements reasonable, they carry risks and uncertainties that could make actual results come in materially different. Beyond what you hear in these remarks, key factors concerning Flowers Foods' business are laid out in full in our SEC filings. We also present non-GAAP financial measures, and disclosure along with reconciliations for those appears in the earnings release and at the end 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. Thanks, J.T., and good morning to everybody. As you heard during our prepared remarks, the results we posted mirrored a lot of the difficult conditions that we talked about last quarter, and they underscored areas where we have to pick up the pace and place more weight on disciplined execution. Although we're seeing some encouraging signals in the business, among them better sequential trends and rising awareness within the Nature's Own franchise, improvement came more slowly than we had expected, and even so, we aren't standing pat. We're speeding up efforts that are already underway so that our value proposition lines up better with where the market is headed. That covers pushing innovation forward, going after new business, and putting investment behind our leading brands. We're enthusiastic about the progress we're making and about what it means for the future of our business. Even though it's taking a while for these efforts to show up in our results, they're setting us on a stronger path ahead and building our confidence in the long-term potential of the business. The large, appealing markets we serve, spanning fresh packaged bread, cake, better-for-you snacking, and food service, present compelling opportunities for growth in the future. Our strengths, rooted in our leading brands, our extensive network, and above all our people, give us a solid foundation for driving long-term shareholder value. With that, Victor, we're ready to take questions.

Hi, everyone. Morning, and thanks for the chance to ask our question. Ryals, I'd like to hear about how you're approaching pricing from here on, since in the prepared remarks you brought up, you know, a more intense promotional backdrop. Clearly, we're able to see some divergence in the share trends, and I'm curious whether part of that relates to the net price you're still realizing. Could you share any thoughts on how we ought to model the pricing lever, you know, for the back half of this year, or I suppose 4Q of this year, but then even more importantly as we head into 2027 while we, you know, sort of refine our models and consider how much of the inflation headwinds we've seen you'll be able to offset?

Yes, absolutely, Jim. Appreciate the question. For sure, price is one thing we're examining. Still, I'd say that's only a portion of the picture. You know, our view is that the larger problem involves some of the shifts occurring in the category when it comes to consumer preferences, price pack architecture, which clearly carries a price component, of course, meaningful differentiation; those are the items winning in the category at present. Where we have gaps right now, though, we're closing them, as you know. In fact, we're doing so as we speak. We just relaunched our Nature's Own Small Loaf, for instance, and we have more of that arriving in 2027. I think, you know, we're taking a close look at price, promotions, promotional effectiveness, you know, using the tools at our disposal to make sure the promotions we do run are as effective as they can be. That said, the promotional environment has been quite intense. Especially this last quarter, we saw fairly intense promotional activity. Price sensitivity among consumers is definitely a factor, but it isn't the only factor.

So if we were to set a few, you know, guardrails around that, I mean, do you figure there's still a chance we'd see, you know, a low single-digit gain from, you know, price mix in 2027, or ought we to view it as more flattish?

Yeah, I think, you know, we aren't in a spot to discuss 2027 at this point. I think every dynamic Ryals brought up is clearly going to be a factor in where we land on a level, and it's going to be a tale of two stories, organic wheat versus traditional wheat. You know, those two are showing different cost inputs, so that is going to play a part in how we view the overall portfolio, both on the traditional loaf as well as on the organic side.

All right. Could I ask just one more thing regarding input costs? This earnings season we've spoken with plenty of people about rising transportation costs, so we were hoping you might help us gauge what you're seeing with your freight contracts. Perhaps you could quantify how we ought to think about that as a percentage of sales, and the size of the increase as we go forward and look toward 2027. Thank you.

Yeah; so perhaps I'll speak briefly about inflation and commodities more broadly, just to provide that context. For fiscal 2026, broadly speaking, our hedging programs benefited us. We saw commodity prices rising, particularly in the back half, year-on-year in Q3 for commodities, ingredients, packaging. On a rate basis they were fairly flat versus a year ago. Markets, while elevated during the quarter relative to 2025, our coverage and inventory gave us protection. And Q4, and that was already in our guide, so nothing new there. We factored this in already; we anticipated greater raw material inflation as coverage started to lapse, and that clearly will be an area we're devoting a lot of time to as we look at 2027, though it might be more of a first half versus second half headwind. Regarding fuel, as we said on the last call, our fuel costs, some of it is hedged, some of it we have contracted transportation costs; so while year-on-year it has gone up, we've been able to manage that either through the contracts or through the rates we've had with our transportation providers.

Hi there, good morning everyone. Really appreciate you taking our questions. The first item I'd like to raise: you mentioned a few of the ongoing pressures in the space and that the pace of improvement at Nature's Own has taken somewhat longer. Some of your innovation hasn't kept pace with category trends, and I realize those pay off more over the longer term. So when you look at the here and now, how are you approaching perhaps curbing some of those pressures inside your own business? I know you mentioned extensive cost controls. I'm just curious whether you could give us a sense of how you intend to tackle that and how we ought to think about those levers.

Yes, absolutely. Some of those levers are already being pulled by us. We estimate a cost takeout of roughly $20 million for this year that directly addresses that issue. There are opportunities to improve procurement. There are also chances for added efficiencies in the bakeries. That's something we're always working on—greater productivity from the bakeries, keeping our stale under control. I mean, Scott, these are the everyday tactical blocking and tackling items the team works on to fight some of the headwinds we face. What matters more, though, is the focus on stabilizing our branded volume. So again, returning to those portfolio gaps we're actively filling, the relaunch of the small loaves, which incidentally also gains from the halo, so to speak, of the Nature's Own advertising campaign; the formulation is the same, clean label, non-GMO. We'll capture that halo effect. Those just relaunched. It's only been a few weeks, yet we're already seeing some very promising returns there that give us confidence we can recapture our fair share of that segment. As for the broader Nature's Own franchise, since the relaunch, we have seen share trends improving sequentially across the Nature's Own franchise. The traditional loaf, which has been the weakest part of the overall segment of the category, continues to lag behind, but even it has shown some sequential improvement; we're not getting results as fast as we'd hoped, but nevertheless, we are seeing those green shoots of improvement that give us confidence this is the right strategy, the right path forward. Our customers are excited about it. They tell us that when we join them for meetings. Of course, when your customers are behind something, that's a really good early sign you're doing the right thing. DKB, Jim asked the question a minute ago about price. I do think there is some price sensitivity with DKB, but it's a lot more than that too. I mean, as recently as Q1, DKB was up in units; this is a very recent phenomenon that has occurred. To be honest, our total share held pretty steady across the past several years right up until quite recently. There's a straight connection, in my view, between that and both the shift in share and the way consumer preferences have moved, and we're working hard to respond to those changes.

Got it. Thanks for all the detail there. And then maybe a second one from me: in the prepared remarks there was a mention of cooperating with bank partners to make sure there's financial flexibility for next year. I was wondering whether you could give us an update on how you're thinking about capital allocation, the dividend included, plus capital expenditures looking ahead. Thanks.

Yeah, no problem. To start, I just want to restate that we're still in compliance with every covenant and that our relationships with our bank group are very strong. With that said, we want to give the company as much flexibility as possible as we keep facing a potentially challenging environment in the year ahead, whether from a commodity standpoint, a category standpoint, or a consumer standpoint. As for 2027, we keep working on it and shaping it up from a planning perspective, and we're building in that flexibility ahead of any potential constraints that might come up. We expect to have an update on that front before year end. On your question about the dividend specifically, obviously the dividend is an important topic and a shareholder consideration, and our board reviews that policy every single quarter. We share with them the relevant items across a number of dimensions, including cash generation, our leverage profile, and capital investment; they take those elements into consideration when forming the basis of their actions, and we expect to announce whatever decision the board makes in our normal cadence following next week's board meeting.

Got it. Appreciate the call. I'll relay that.

Hey, wonderful. Thanks, and good morning to you.

Hello there, Steve.

Hi. So you've highlighted how tough the category backdrop is, but clearly there's a share piece in there as well. Could you give us a bit more of your thinking on how you break that down between the category itself and what Flowers actually controls through improved execution, improved assortment, and so on? I'm just trying to understand better how you view those two drivers and how much control you feel you truly have over where the business goes into 2027, relative to how the category is performing.

Yes. That's a good question, Steve, and I appreciate it. The category as a whole is still soft, so that's where we begin. In the quarter, category units were down nearly, I believe, nearly 3%; and when you break that apart, as we've been saying, the traditional loaf, the 20-ounce traditional loaf, is still the softest piece of the sector. Clearly, we're heavily concentrated in traditional loaf. So stabilizing it, as we've said for a number of quarters now, is our top priority. That's why we have the Nature's Own relaunch, the shift to clean label, the shift to non-GMO; we think these moves are right for the consumer, for our customers, and for our company. We're starting to see some results from that. As I mentioned, DKB is a more recent development when it comes to unit pressure. There are several reasons. Part of it is price sensitivity, but consumption issues are there as well. DKB indexes highest among high-income consumers. They're also the heaviest users of GLP-1s. Seeing some pressure there isn't terribly surprising. DKB is still holding up better among lower-income consumers than among high-income ones. I put a lot of that down to the GLP-1 drugs. We have actions in place to address it, Steve, through innovation and protein items. Closing the gap we have on sourdough has also been an issue for DKB. Our sourdough in DKB is only in California, and it's growing very, very well there. We're highly confident that it will be a very important addition to that part of the portfolio. Coming back to the 20-ounce loaf, getting it stabilized matters a great deal. While we work on that, relaunching the half loaves to capture our fair share of that segment and to help steady overall volumes is also an important piece of the picture. And remember, we're not solely a traditional loaf business; we have a very large billion-dollar food service business, and we serve private label too. Meanwhile, as we work to rebuild the branded business, we're aggressively filling volumes through new wins in food service and private label, along with wins for our branded business, since that helps offset some of the operating deleverage we've been seeing.