Flowers Foods - Earnings Call - Q3 2025 (Q&A)

Transcript

Speaker 0

Morning, and thank you for standing by. Welcome to the Flowers Foods Q3 2025 results conference call. Please be advised that today's event is being recorded. I would now like to hand the conference over to your opening speaker today, J.T. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead.

Speaker 1

Hello, and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared marks, and view 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 Steve Kinsey, our CFO. Ryals, I'll turn it over to you.

Speaker 5

Okay, thanks, J.T. Good morning, everybody. Welcome to our Q3 call. Our proactive efforts to strategically align our portfolio with consumer demand are yielding positive results. By effectively targeting areas of opportunity with differentiated offerings, we're finding pockets of growth amid ongoing pressures in the bread category. To address these challenges, we're redefining traditional loaf, incorporating value and better-for-you attributes that align with evolving consumer preferences. While it will take time, we're confident our strong portfolio of brands will successfully enable this transformation. I'd like to take this opportunity to thank our dedicated Flowers team for their hard work and resilience during this period of change. We are also grateful for the ongoing support of our shareholders as we strive to enhance long-term performance. Finally, I'd like to acknowledge that this will be Steve Kinsey's final earnings call after 18 years as our CFO.

His contributions to Flowers have been invaluable, and we're deeply appreciative of his leadership throughout the years. We wish him all the best in his future endeavors. Daniel, we're ready for questions.

Speaker 0

To ask a question, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. Please stand by while we compile the Q&A roster. Our first question comes from Scott Marks with Jefferies. Your line is open.

Speaker 7

Hey, good morning. Thanks so much for taking our questions. First thing I wanted to ask about, you made some comments in the prepared remarks about consumer sentiment reaching a low point for the year in Q3, but you also made comments about expecting category demand to normalize as the economy strengthens. Maybe if you can just help us understand how you're thinking about that and maybe what gives you confidence in the recovery of the category and the normalization of demand. Thanks.

Speaker 5

Sure. Thanks, Scott. Of course, it's tough to pinpoint the exact timeline, right? We do think over time the category will stabilize. This is a very large category. It's a staple in many households in the U.S. I think we've just got to get some of this noise out of the way. People are still very concerned about the tariff situation. The job market now, with the government shutdown and the disruption that that has brought, I think it's going to take a little bit of time to work our way through that. We do see the weakness continuing at least partway into 2026 from where we stand right now. We do think over time it will stabilize.

I think in the meantime, it's important for us to continue focusing on the consumer, continuing to invest in the consumer, bringing those both value and better-for-you offerings to the consumer, which is clearly where they're going. That's what we intend to do.

Speaker 1

Appreciate that. Thank you. The second question for me would be, you talked about some of your newer investments pressuring margins a little bit, just investing to kind of generate consumer trial and ramp volumes. Maybe how should we be thinking about offsets to that within whether it's the supply chain efficiencies or any other offsets that you can call out for us? Thanks.

Speaker 5

Yeah, you're spot on there, Scott. I mean, we're focused on the long term, and that means continuing to invest in the consumer. We will continue to do that. I think you've seen us do that with all the innovation that we brought to market over the last several years. The truth of the matter is, I mean, all innovation tends to pressure margins in the short term. They're newer items, but as we build scale and as we make targeted CapEx investments to increase our throughput and efficiency, we expect those margins to improve.

Speaker 1

Appreciate it. We'll pass it on. Thank you.

Speaker 0

Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is open.

Speaker 6

Okay, great. Thank you. Good morning. And congrats again to you, Steve, and thanks for your help over the years. First question, just maybe to follow up on Scott's initial question, just around the consumer and I guess sort of your planning stance into 2026. You talked about some signs of stabilization in the category over the course of three Q, but then some weakening as the quarter came to an end. Just thinking about Q4 and sizing up 2026 scenarios, are you expecting more or less the status quo to prevail, or are you building in allowances for things to maybe get a little bit worse before they get better?

Speaker 5

More towards the status quo with some opportunity for improvement. I mean, you're spot on that in Q3, periods eight and nine, we saw the category begin to stabilize. Comping what, five named storms last year and zero this year was a pretty tough comp in period ten. You could see the category did fall off in period ten, but since then, it started to migrate back to where it was trending in periods eight and nine.

Speaker 6

Yeah. Okay, perfect. Yeah, so more just the comparisons versus the storms of last year. Makes sense.

Speaker 5

Yeah, that's right.

Speaker 6

Okay. The other question I wanted to ask is, it was just around Simple Mills. It was a point of upside, at least versus our estimates in the quarter. In the prepared marks, talked about general strength and performance in line with your own expectations. Maybe you just go a little bit deeper and highlight some of the areas where you've seen the most progress since acquisition, and where as you integrate and build further, you see the most opportunity.

Speaker 5

Yeah, the first thing I would call out is just the collaboration effort between our teams. The integration is going exceedingly well. We're finding areas of opportunity in customer engagement and procurement among other areas. Across their categories, they still continue to perform very well. As we noted in the prepared remarks, in line with our expectations, we're very excited about next year for Simple Mills. Of course, we're not giving guidance today, but they do have quite a bit of new innovation coming for next year that we're all pretty fired up about. Overall, Steve, we couldn't be more pleased.

Speaker 6

Okay, very good. I'll pass it on. Thank you.

Speaker 5

Thanks.

Speaker 0

Thank you. Our next question comes from Jim Salera with Stephens. Your line is open.

Speaker 4

Hey, Ryals. Hey, Steve. Good morning. Thanks for taking our question. Steve, it's been a pleasure working with you. Hopefully, you have a long vacation planned as we get into the beginning of next year, take advantage of some time off. Ryals, I wanted to maybe ask a little bit more detail around the other segment because branded retail actually came in ahead of what we were modeling, and the other piece came a little bit behind. I would assume that's food service, just given some of the headwinds that QSR and the industry has been facing. Can you offer any color there, maybe kind of food service and your private label business performance?

Speaker 5

Yeah, Jim, the food service business has been under pressure, not surprisingly, given the economic environment and consumer sentiment. That is really all that is. I would continue to note, though, that despite that weakness, the work that we have done over the last two to three years to improve the profitability of that business is still delivering very nicely on the bottom line. That is good to see. We would expect that to recover as the economy recovers. It tends to ebb and flow with that. Nothing terribly unusual there. Volumes were a little bit better in that other category, primarily due to vending. You may note that as well. Private label is interesting because it has been weak. You can see that in the syndicated data, which may seem kind of strange given where we are economically.

The price gaps between private label and some of the lower-priced branded products have narrowed significantly. I would chalk it up to that.

Speaker 4

Okay. Is a fair way to think about, just because we have a little bit less visibility on food service, is that kind of run at the same pace of industry traffic, or is there a way for us to think about kind of incorporating that into our model?

Speaker 5

Yeah, you can look at traffic would be a good indicator. Remember, our food service business is really broad, right? It is broad lined through the big distributors, but it is also QSR, which has clearly been under pressure. We compete across all those channels. It is just general weakness across food service, given the economic environment.

Speaker 4

Okay. If I could sneak in one more, you guys brought down your expectations for headwinds from tariff, but we have also recently seen some step-up in ag commodity prices. Just offer any thoughts around how we should be putting together puts and takes as we think about modeling 2026 gross margins, if there is maybe opportunity for upside there, or with kind of all the moving pieces, that should probably be a little bit more conservative from our view.

Speaker 2

I mean, Jim has made a statement. Obviously, we're not prepared to give guidance for 2026 today. What I would say, when you look kind of across the whole bucket, we are still expecting inflation. I mean, wheat commodities are still very volatile. There are other things that are going to be up next year. Obviously, we only had tariffs for part of the year this year. When we give guidance on 2026, my guess is you'll see some inflationary pressure with regard to input costs.

Speaker 4

Okay. Awesome. I appreciate the call, guys. I'll back in the queue.

Speaker 2

Thank you.

Speaker 0

Thank you. Our next question comes from Max Gumport with BNP Paribas. Your line is open.

Speaker 3

Hey, thanks for the question and congrats, Steve. First, on the dividend and on cash, you noted you're reducing your expectations for CapEx this year as you focus on returning to a more normalized leverage ratio. I was hoping you can talk about the balance between pulling this lever, pulling down CapEx versus reconsidering whether the dividends are at an appropriate level. I'm really asking because it feels like an acknowledgment or an early admission that this combination of your leverage and the dividend are restraining to some degree your ability to invest in the business. Thanks very much.

Speaker 2

Yeah, I mean, obviously, every quarter or throughout the year, we consider capital allocation. It's very important to us. I mean, we're very focused on delivering shareholder value. I would say from a CapEx perspective, the pullback, while we are focused on our deleveraging, and this is part of this, would be part of the strategy, a lot of it has to do with project cadence. We shifted some of the projects into next year, and then we did a reassessment of projects to make sure we're only doing the projects that deliver the best return. I'd say it's exclusive of any consideration around dividends necessarily. On a quarterly basis, our board considers the dividend. I don't want to get ahead of anything or speculate, but the reality is the focus is always on delivering the shareholder value.

Based on the facts and circumstances at the time, the board makes their decision from a dividend policy perspective. I'd say really no difference in philosophically how we think about capital allocation. Obviously, we're aware of our leverage ratios, and we're well aware of the payout ratio, and all of that will go into consideration as we think about capital allocation going forward.

Speaker 3

Okay. Then coming back to margins, this quarter, your gross margin was down 190 basis points. EBITDA margin was down 160 basis points. That looks to be despite a tailwind you've actually had from lower ingredient costs as a percent of sales. It feels like negative price mix and lower volumes are really starting to pressure your margins. Given the competitive environment and the consumer environment do not seem to be swinging to positive, at least in the early part of 2026, it is not clear that either of those pressures will be dissipating in the near term. I am just curious how you are thinking about the potential need to navigate through several more quarters of margin pressure.

Speaker 2

Yeah, when you look at the gross margin, I mean, obviously, there is the top line pressure. I mean, Ryals talked about the consumer. We talked about, and you've seen that we've had more promotional activity. That is causing some of the gross margin pressure. The largest item on gross margin actually has to do with Simple Mills and the fact they're 100% co-man. Obviously, that's a higher-cost product. That is the key and one of the key items that impacted gross margin overall for the quarter. We'll lap that February of next year. If the category were to stabilize or we would see some improvement in overall consumer sentiment, putting aside any inflationary environment, margins should benefit from that.

On the SD&A side, if you recall, we converted a big part of our labor pool in California from independent distributors to company employees. That is a big driver of that. We will lap that next year as well. Overall labor costs have been up. From SD&A as a percent of revenue, it does go back to kind of the pressure on the top line. I would say there is really no one item that I would call out as overly impacting the overall EBITDA margin from SD&A, except for labor.

Speaker 3

Okay, great. Thanks very much. I'll pass it on.

Speaker 0

Thank you. As a reminder to ask a question, please press star 11 on your telephone. Again, that is star 11 to ask a question. Our next question comes from Mitchell Pinheiro with Sturdivant & Company. Your line is open.

Speaker 8

Yeah, hey, good morning. Steve, yeah, wanted to just congratulate you on a heck of a run. Yeah, it's certainly great working with you. I guess you were the third CFO of Flowers I've known, and I guess the longest of those runs. Again, congrats.

Speaker 2

Thank you, Mitch.

Speaker 8

I have a question, Ryals. On one hand, we talked generational shift in your prepared remarks, and then we're also talking consumer weakness, especially at the low end, but they're still eating. They're still there. And bread has consistently evolved towards better for you. I mean, it's just been a natural evolution. Nothing's really changed there. I'm curious if you could try to tie sort of generational shift to the sort of economic weakness in your remarks.

Speaker 5

Yeah, I think it's more than just the economic weakness. Certainly, that plays a role, Mitch. I mean, you've been around a long time, and you've seen when we enter periods of economic uncertainty, there's always trade down from traditional loaf to more value-oriented brands like private label or otherwise. I do think that that does play a role in this. The shift that we're really talking about is centered around traditional loaf, meaning the traditional 20-ounce soft variety and white breads. There has definitely been a shift, frankly, that's been underway for several years now, but it's just accelerated over the last 12-18 months where the category is really bifurcated into premium differentiated or value. Traditional loaf has really taken it on the chin because of that.

That's very impactful for us, obviously, because we're very concentrated in that category, particularly given we have the number one brand and number one SKU in that category. We are intent on redefining traditional loaf. We think we've got a great opportunity with the strength of our Nature's Own brand to lead the category in the transformation of that particular segment. We clearly acknowledge the challenges that we're facing in the short term, given that consumer shift, but we have growing optimism in the longer term. That's primarily due to two things. One, our team, which I think is the best in the industry, and two, our portfolio of number one brands. We will continue to invest in the consumer, continue to innovate. You've seen us do that over the last several years.

We're making significant progress, and while at the same time working to optimize our cost structure. I mean, you look in the quarter, Mitch, and you see Canyon up 6% in units, Dave's Killer Bread up 10% in units. You've seen us enter into the small loaf category that definitely addresses a consumer need. In the quarter, we gained 15 percentage points, 15 full points of unit share, and we're already number two under that Nature's Own banner. While that category is growing 85%, obviously off of a small base, but significant growth. I believe we're doing all the right things for the long pull while we try to mitigate the challenges in the short run.

Speaker 4

Listen, I mean, Nature's Own has obviously been a tremendous success story. It is weighted towards traditional loaf, but you also have Merita and Sunbeam and, I don't know, Captain John Derst Bread and all these other breads underneath. Where do they stand? I mean, I know they're important for regional shelf space and things like that, but I'm just curious. They seem to be left in the dust a little bit, and I'm curious how strategic they are.

Speaker 5

Yeah, that's been a change that's been underway for many years now, Mitch. I mean, I would tell you that the regionals have been fairly de-emphasized over the last eight years or so, eight to ten years. The primary reason for that is retailer consolidation. You can't run a national ad with Sunbeam, but you can with Wonder, and you can with Nature's Own. Now, certainly, they do play important roles in particular markets, like take Sunbeam in Atlanta or Bunny in Louisiana. They are still very important brands, but they're much smaller than they used to be. They've been supplanted by the likes of Nature's Own and Wonder over time.

Speaker 4

Okay. And then just last question on that is, I mean, it certainly would add complexity to the, not that you want to get rid of brands, but it certainly adds sort of unnecessary complexity to have these smaller brands. Is that not a problem? Is that not an issue? Or do you have sort of a solution for that?

Speaker 5

Not so much with the regional brands, but I do agree with you overall regarding complexity. That is one of the reasons we talk about a little bit of near-term margin pressure from all the innovation we're bringing forth because small loaves are growing very, very fast, but it's still relatively small, right? You're introducing an additional complexity into a bakery that's accustomed to running really fast runs of Nature's Own butter bread, for example. It is what the consumer wants, and we're all about being there for today's and tomorrow's consumer. Over time, as I mentioned, as we make targeted investments in the bakeries to increase the efficiency and throughput of those products, those margins will begin to rise. To me, I'm not very concerned about it.

It's a short-term issue that I'm willing to undertake because I know I'm delivering for the consumer.

Speaker 4

Okay. And just a couple of things. You're down to 44 bakeries. Is that going to be the right number for a while, or are there opportunities for additional consolidation?

Speaker 5

Yeah, Mitch, we're always evaluating our cost structure. We know that we have further supply chain optimization to take place. Where and when that will occur is too speculative, but it is certainly top of mind that we need to, particularly in this environment and going forward, we need to be as efficient as we can possibly be. Removing complexity, increasing focus, and making sure that we're optimized from a cost structure standpoint is top of mind.

Speaker 4

Okay. Okay. That's all I have. Thank you very much.

Speaker 5

Thanks, Mitch.

Speaker 0

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

Speaker 5

I want to thank everybody for taking time today and joining us for questions. We very much appreciate your interest in our company. As always, we look forward to speaking with you again next year, actually. Take care. Thank you.

Speaker 0

This concludes today's conference call. Thank you for participating. You may now disconnect.