Flowers Foods, Inc.

Good morning and thank you for standing by. Welcome to the Flowers Foods First Quarter 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. Rick, Executive Vice President of Finance and Investor Relations. Please go ahead.

Thank you and good morning. I hope everyone had the opportunity to review our earnings release, listen to our prepared remarks, 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 Riles McMullen, Chairman and CEO, and Steve Kinsey, our CFO. Riles, I'll turn it over to you. Okay,

thanks, J.T. Good morning, everybody. While none of us here are satisfied with our absolute performance in the quarter, we did hold unit share in a category that faced greater than expected declines. Those results in an uncertain economic environment do highlight the importance of our portfolio strategy and the strength of our brands. To mitigate this category weakness, we're continuing to invest in on-trend innovation and targeting significant opportunities in faster-going categories and adjacencies. By aligning our portfolio with evolving consumer taste and targeting new white space for growth, we aim to maximize near-term performance while developing our brands and capabilities to drive sustainable growth over the long term. I remain confident that the initiatives we have in place now will enable us to enhance shareholder value and grow in line with our long-term financial targets. Michelle, with that, we're ready to take questions.

Thank you. If you'd like to ask a question, please press star 11. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again. Our first question comes from Jim Solera with Stevens. Your line is open.

Good morning. Thanks for taking our question. I wanted to start off and maybe just ask on the core package bread category. You know, I can appreciate some of the shareholds that you guys highlighted and strength of do something better for you, Dave Schiller and Keto, obviously. But if we think about what it takes to drive, whether your brands in particular or the category, back to kind of even just a stabilization point, what should we be looking for to see unit share kind of stabilize and ideally get back to positive? Is that something that we think can happen this year or are we looking more towards 26 already at this point?

Yeah, Jim, thanks for the question. So, there's a lot going on. Things remain quite dynamic and fluid, from consumer health to economic uncertainty, the whole situation with tariffs, et cetera. And it makes it very, very difficult to forecast when you're in an environment like that. I was asked a similar question, I think back in February, when I thought things might improve. And at that time I said probably no sooner than the second half. But frankly, given the trends that we saw in the first quarter where things actually weakened further than we had anticipated, my mind's already moving to 26. So, I don't know that we see a tremendous amount of improvement this year. Now, certainly for our business specifically with the new business wins that we're getting, they're just now coming online. Significant space gains that we've won in the spring resets that are just now coming online. You know, we think we have things there to mitigate some of those headwinds. But I think the biggest positive influence on our results going forward are going to be better consumer health. If you look at what's going on in the category, there's definitely a premiumization versus a value play going on here. What's getting squeezed is the middle. And the middle, unfortunately, is where we have the most exposure. So, that traditional loaf and white bread, those traditional loaf and white bread segments of the category. We believe that the key to reinvigorating that part of the business is further differentiation. And we have plans in that regard that we're putting in place. That's a huge segment for us. We need to address it and further differentiate ourselves from the competition. Our philosophy is, you know, when we're in economic situations like this, you know, the way out of it is not to try to promote your way out of it. We believe in using promotion primarily to drive trial, particularly as we bring out new innovative products and brands, and not necessarily to drive volumes because that can devalue our business and the category. So, we're focused on, you know, smart promotion, certainly, but heavily focused on brand investment and innovation. When we get that improved consumer health, the way we position ourselves with our brands, I think we're going to be in a great position to benefit when consumer health returns, and it eventually will. So, long answer, Jim, but that's how we're thinking about it.

I appreciate all the detail. And maybe a follow-up question drilling down a little bit on the Wondercake Innovation. I believe in the prepared remarks, you said, you know, that's pacing ahead of your expectations on the distribution front and actually contributed to the unit share gain. In the retailers that are adding that lineup onto shelves, do you find that it's incremental to your other offerings, or is that kind of a swap for your legacy cake business, and the Wonder just performs better, so net-net, it gains unit share, and just any details you could offer, that would be helpful.

Yeah, it's a little early to call. You know, right now, it's sort of more than all set. The other part of the cake business, but again, it just launched. One retailer went a little bit early, but it's only been in that retailer for a few weeks. So, I think we need a little more time to see how that all shakes out. So, hopefully, by next quarter, I think we'll have probably a bit of a clearer picture on what that trade-off looks like. Sounds great. I appreciate that. I'll be back in a few.

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

Hey, thanks for the question. It sounds like there's been a change in your stance on promotions a bit, particularly in the preparatory marks, where it sounds like you're seeing higher lifts more recently, and that's led to you maybe to lean in on promotions a bit heavier than you would have previously anticipated, I think particularly for Dave's Killer Bread and some of your other differentiated offerings. Can you talk a bit about what you're seeing from the consumer and how that's getting you to maybe lean into promotions a bit more, and then what that could mean for price mix, particularly in branded retail this year? Thanks very much.

So, most of that increase in promotional activity was around our more differentiated offerings like Dave's Killer Bread, and a lot of that came towards the end of the quarter and period four. You know, as I just responded to Jim, you know, we've never been the most highly promoted player in the fresh package bread category. We like to use it selectively, and we primarily use it to drive trial. You know, certainly there are sometimes opportunities to get some volume lift from promotions, but when you look at this category and understand that, you know, 93% of the sales are base sales, there's not a lot of, you know, there's not a lot of opportunity for incrementality from a volume standpoint on top of that. And so, you know, promoting at very high levels from our perspective, our philosophy has always been, you know, that's just going to get you, you know, lower volumes and lower sales over time and devalue your brand. So, you know, we talk a lot about our trade promotion system capabilities that have enhanced our understanding of how promotions work and their effectiveness so that we can be, you know, a lot more granular in how we think about our promotional strategy to ensure that we're getting a good return

on

that investment.

Got it. Thank you. And then going back to Jim's question on the bread category, I realize a lot of what we're seeing is due to the consumer health leading to value seeking behavior, which is weighing on the category, which, as you said, should improve at some point. But you're also attributing the weakness to this broader shift to healthier eating and imagine GLP-1 rise in penetration is a factor as well. So curious on that piece, how do you see the bread category getting out of its current slump with those headwinds likely to be more structural in nature? Thanks very much.

Yeah, yes, that's part of what I was alluding to in answer to Jim's question. I can't say too much about it right now, but we have plans to directly address that. You know, we're already doing a lot of things from a health and wellness standpoint when you think about our offerings under DKB, Canyon Bakehouse, obviously, our keto offerings. And now, you know, with the Semple Mills acquisition coming on, those are outstanding choices for people who are interested in health and wellness. The largest part of the category, soft variety and white breads, are less oriented that way. And, you know, we see ourselves as an innovation leader in the category. We intend to continue to be an innovation leader in the category and address those consumer needs as we go forward.

Great,

thanks very much.

Thank you. Our next question comes from Mitchell Pinero with Sturtevant and Company. Your line is open.

Yeah, good morning. So, you know, when I'm just looking at your EBITDA margin guidance, it's down about 30 or 40 basis points from the prior. Where's that? How do you think that's going to be distributed between that gross margin and SDNA?

I mean, when you look at kind of what's impacting that, obviously, you know, we said category trends are a big, you know, a big consideration when we pull together our guidance change. So, obviously, that's going to impact the gross margin line. Tariffs obviously impact the input costs. So that's primarily gross margin. We're doing some things from a cost saving perspective, you know, primarily in SDNA to try to offset some of the and mitigate some of the impact of, you know, of the top line challenge as well as the tariffs. So I'd say that, you know, the majority of that we would expect to see flow through the gross margin line versus the SDNA.

Gotcha. And then, so, you know, as you look, you know, your long term targets, you know, between 12 and 14 percent EBITDA margin and, you know, we're going to be in the, you know, low tens. Like, you know, Riles, how's your confidence in getting there? And, you know, any changes to how you're going to get there? You know, IE fixed cost leverage, more branded, et cetera. Any any change in your view of your long term EBITDA margin?

No, Mitch, there's no there's no change in the longer term outlook, you know, but we have to acknowledge that, you know, the environment that we find ourselves in is a bit of a setback, right? So, you know, it may take us a little longer as we all together, you know, as a country work our way out of this out of this current situation. But, you know, the the building blocks of that strategy and our and our path to get there remain remain the same.

OK, and then and I guess just back, you know, again, not to harp on healthy eating or those trends, but, you know, as as as you look, you know, at the bifurcated consumer, you know, bread, you know, and sandwiches and the portability, convenience aspect of of fresh bread, you know, is always leaned. You know, it's always been sort of a, you know, a benefit and growth to the to the, to the lower income cohorts. And I think why wouldn't you be seeing that now? Is there really a healthy eating switch? Is that, you know, in the lower even in the lower income to know what traditionally I guess would be higher, higher cost items? So I'm just curious, any more color that you could add there?

Yeah, I certainly think I mean, we're focused on the lower income consumer. I certainly think there is some of that, but I also think that given the environment, I mean, we have seen an overall pullback in consumption, you know, across across income groups. And so I think that's playing a role as well. OK,

all right. That's all I have. Thank you.

Thanks, Mitch.

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

OK, great. Thank you. Hey, Riles, so it sounds like an overall initiatives like DKB snacking and simple mills overall are trending more in line with your expectations, despite everything we've been talking about in terms of where the consumer is and in value seeking behavior. And I'm setting aside the accounting change, obviously, on simple mills. First off, is that is that is that the correct read? And then secondly, if it is, you know, is there how do you assess the risk that that maybe those initiatives as well kind of fall victim to some of these some of these macro pressures as the year progresses? And is that is that sort of encapsulated in in the new guidance range?

Yeah, thanks for the question, Steve. Well, first of all, let's remember that both simple mills and our new snacking business are just that they're very new. And so you're still picking up a lot of a lot of distribution gains, ACV gains, velocities, picking up that kind of thing. They're helping to drive growth. Having said that, both are performing very, very well. But we've also incorporated, you know, some of the caution around the consumer and to the outlooks for both of those businesses. And all of that is reflected in the numbers you've already seen.

OK, very good. Thank you for that. And then, Steve, you know, you you you quantify the incremental tariff impact, I guess, you know, beyond obviously kind of layering in the the impacts on simple mills. Can you just give a little bit more color as to where that incrementality is coming from? That would help. That'd be helpful. Thank you.

Sure. Yeah. I mean, obviously, when we gave guidance back in February, the focus was on Canada and Mexico. There really wasn't much focus beyond that from a tariff perspective. And then things changed and obviously Canada and Mexico are exempt. And we moved to to other countries, kind of in the supply chain. So that's really where the big impact is coming in. If you set aside you set aside China, I mean, you know, we there's a variety of ingredients that come from outside the US, even though we're wholly domestic. And, you know, those are pretty impactful overall, you know, within our products. A lot of us, you know, sugar, wheat, gluten, pommel, cocoa. So, you know, those are coming from countries with a decent tariff percentage. So those are really the impacts that are driving the change from back in February. What I would say when you look at the guidance and forecast, you know, we're taking a fairly conservative view in that tariffs began, you know, at the end of April for 10 percent until for 90 days, roughly August 1st, setting China aside. And then, you know, they go to 100 percent of the forecasted rate. And that's how we that's how we built, you know, the tariff impact into our model. If there's any change to that, you know, there will be some benefit. But, you know, not knowing what's going to happen until we get closer to that date. We just thought it was more prudent to just go ahead and lay out what we thought the worst case scenario could be.

Yeah, that's helpful. And just, you know, on on do you have much exposure to imports or inputs from from China specifically, or you just use that as an example?

No, we do. We do get some things from China. There are some ingredients that are specific actually to China. We, you know, obviously we're working on other sources, but right now they primarily come from China. And I would say when I look at the overall impact, they're probably in the top four or five countries. Yeah. OK. OK, that's good color. Thank you so much.

Appreciate it. Thank you.

Thank you. Our next question comes from Scott Marks with Jeffries. Your line is open.

Hey, good morning. Thanks for taking more questions. Wanted to ask quickly about the kind of the private label and away from home business. I think you mentioned some some weakness in both of those segments in the preparatory marks. So just wondering if you can kind of share some color on what you're seeing there and how that's impacting the business.

Sure, I'll start with away from home. It's sort of a continuation of the story from the last couple of quarters. You know, there has been continued weakness in overall food service sales. And we're, you know, we're experiencing that just like everyone else. So that's just an overall theme for the food service business. I will continue to point out, though, that with the restructuring that we've done in our food service business, our profitability continues to improve and margins were up yet again in the first quarter. So that's the good news on that front. And we continue to work to refill some of the exited business that we've talked about the last couple of years that we're now past with with higher margin food service business. So we we've been very pleased with the progress on that front for for private label, private label has from a market share standpoint has, you know, marginally reversed its downward trends over the last couple of quarters. I think it was up ten basis points or so in the last quarter. Units, total units and private label are still down, just not as much as the category was down. Thus, the pickup in unit share. And for us, remember that a lot of our private label business is bid business and it comes in and out from time to time. And a lot of our a lot of our decline was was that lost business and a little bit of price mix. However, as I mentioned earlier, a lot of the new business that we're that we are pulling on is good private label business at good margins. That'll help that'll help refill that volume as we move through the year.

Understood. And then I think also during the prepared remarks, if I'm not mistaken, I saw a call out that that your team closed one of your bakeries. Was that related to the food service business or was that on the branded side?

That's well, I mean, a lot of our bakeries do both, but it was a it was a fresh bread, bun and roll plant, an old one. And we've been undergoing the supply chain optimization work for a number of years now. So that's just part of that part of that program.

Got it. And then just last one for me, I know you called out some some more push into smaller loaves. I'm wondering if you can kind of share some some color on how those have been performing thus far relative to what you're seeing on the more traditional size products.

Yeah, so I mean, this is all about addressing consumer needs, right? I mean, both from a value standpoint, but also acknowledging that, you know, households are smaller. A lot of single individuals and households, family starting later, that kind of thing. And having that smaller loaf that you can consume without, you know, half of it going stale is something that consumers want. So we've had two skews out for a while. We just added three new skews, which is going to be great for us, obviously, you know, improving our shelf presence and visibility and your early returns are good. Also, we have a wonder mini half loaf as well that directly addresses both the smaller household and that value oriented consumer.

Got it. We'll pass it on. Thanks so much.

Thank you. I'm showing no further questions at this time. I like to turn the call back over to Ralph McMullen, Chairman and CEO for any closing remarks.

Okay, Michelle, thanks. Thanks, everybody, for joining us for questions. As always, we appreciate your interest in our company and we look forward to speaking with you again next quarter. Take care.

This does include the program. You may now disconnect. Everyone have a great day.