Flowers Foods, Inc.

Good morning, and thank you for standing by. Welcome to the Flowers Foods third 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.

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 Riles McMullen, Chairman and CEO, and Steve Kenzie, our CFO. Riles, I'll turn it over to you.

Okay. Thanks, JT. Good morning, everybody. Welcome to our third quarter 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. And 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. And with that, Daniel, we're ready for questions.

To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Scott Marks with Jeffries. Your line is open.

Hey, good morning. Thanks so much for taking your 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. So 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.

Sure. Thanks, Scott. Of course, it's tough to pinpoint the exact timeline, right? But we do think over time, the category will stabilize. This is a very large category. It's a staple in many households in the United States. I think we've just got to get some of this noise out of the way. People are still very concerned about 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. So we do We do see the weakness continuing at least partway into 26 from where we stand right now, but 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, and that's what we intend to do.

Appreciate that. Thank you. And then 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.

Yeah, you're spot on there, Scott. I mean, we're focused on the long term, and so that means continuing to invest in the consumer. And 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. But 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.

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

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

Okay, great. Thank you. Good morning. And congrats again to you, Steve, and thanks for your help over the years. Thank you. So 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 26, you talked about some signs of stabilization in the category over the course of 3Q, but then some weakening as the quarter came to an end. So just thinking about fourth quarter and sizing up 26 scenarios, are you expecting – you know, 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?

More towards the status quo with some opportunity for improvement. I mean, you're spot on that, you know, in Q3, periods eight and nine, we saw the category begin to stabilize. But, you know, comping, what, five named storms last year and zero this year was a pretty tough comp in period 10. So you could see that The category did fall off on period 10, but since then it's started to migrate back to where it was trending in periods eight and nine.

Yeah, okay, perfect. Yeah, so more just the comparisons versus the storms of last year. It makes sense. Yeah, that's right. Okay, and then the other question I wanted to ask is, you know, there was this around Simple Mills. It was a point of upside, at least versus our estimates in the quarter, and, you know, in the prepared marks talked about general strength and performance in line with your own expectations. Maybe 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.

Yeah, the first thing I would call on is just the collaboration effort between our teams. The integration is going exceedingly well. We're finding areas of opportunity in customer engagement, in procurement, among other areas. And across their categories, they still continue to perform very well. And as we noted in the prepared remarks, in line with our expectations. We're very excited about next year for supplemental. 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. And so overall, Steve, we couldn't be more pleased.

Okay. Very good. I'll pass it on. Thank you.

Thanks. Thank you. Our next question comes from Jim Solera with Stevens. Your line is open.

Hey, Ross. 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 at the beginning of next year to take advantage of some time off. Ross, I wanted to maybe ask for 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. But can you offer any color there, maybe kind of food service and your private label business performance?

Yeah, Jim, the food service business has been under pressure, not surprisingly, given the economic environment and consumer sentiment. So that's really all that is. I would continue to note, though, that despite that weakness, the work that we've done over the last two to three years to improve the profitability of that business is still delivering very nicely on the bottom line. So that's good to see. But we would expect that to recover as the economy recovers. It tends to ebb and flow with that. So nothing terribly unusual there. You know, volumes were a little bit better in that other category primarily due to vending So you may note that as well. Private label is interesting because, you know, it has been weak. You can see that in the syndicated data, which may seem kind of strange given, you know, where we are economically. But, you know, the price gaps between private label and some of the lower price branded products have narrowed significantly. And so I would chalk it up to that.

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, you know, industry traffic, or is there a way for us to think about kind of incorporating that into our model?

Yeah, you can look at traffic would be a good indicator. And, you know, remember our food service business is really broad, right? So it's, you know, it's broad line through, you know, the big distributors, but it's also QSR, which has clearly been under pressure. You know, we compete across all those channels. So it's just, Again, it's just general weakness across food service given the economic environment.

Okay. And then if I could sneak in one more. You guys brought down your expectations for headwinds from tariff, but we've also recently seen some step up in ag commodity prices. Do you offer any thoughts around how we should... can be putting together puts and takes as we think about modeling your 26 gross margins. If there's maybe opportunity for upside there or if with kind of all the moving pieces, that should probably be a little bit more conservative from our view.

I mean, Jim, Ross has made a statement. Obviously, we're not prepared to give guidance for 2026 today. But what I would say, you know, when you look kind of across the whole bucket, you know, we are still expecting an inflation. I mean, we 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. So when we give guidance on 2026, my guess is you'll see some inflationary pressure with regard to input costs.

Okay, awesome. I appreciate the call, guys. I'll hop back in the queue. Thank you. Thank you. Our next question comes from Max Gumport with BNP Paribas. Your line is open.

Hey, thanks for the question and congrats, Steve. First, on the dividend and on cash, so you noted you're reducing your expectations for CapEx this year as you focus on returning to a more normalized leverage ratio. So you can talk about the balance between pulling this lever, pulling down CapEx versus reconsidering whether the dividends at an appropriate level. And I'm really asking because it feels like an acknowledgement or an early admission that this combination of your

leverage in the dividend are restraining to some degree your ability to invest in the business thanks very much yeah i mean obviously every quarter or throughout the year even you know we consider capital allocation is very important to us i mean we're very focused on delivering shareholder value i would say from a capex perspective the pullback while you know while we are focused on our deleveraging and this is part of this you know would be part of the strategy A lot of it has to do with project cadence. We shifted some of the projects to next year, and then we did a reassessment of projects to make sure we're only doing the projects that deliver the best return. So I'd say it's exclusive of any consideration around dividends necessarily. And then on a quarterly basis, our board considers the dividend. I don't want to get ahead of anything or speculate, but the reality is You know, the focus is always on delivering the shareholder value. And then based on the facts and circumstances at the time, you know, the board makes their decision, you know, from a dividend policy perspective. So I'd say, you know, really no difference philosophically how we think about capital allocation. But obviously we're aware of the, you know, our leverage ratios. We're well aware of the payout ratio. And all of that will go into consideration as we think about capital allocation going forward.

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

Yeah, when you look at the gross margin, I mean, obviously there is the top-line pressure. I mean, you know, Riles talked about the consumer. We talked about – and you've seen that we've had more promotional activity. So that is causing some of the gross margin pressure. But the largest item on gross margin actually has to do with Simple Mills and the fact they're 100% co-man. So obviously that's a higher cost product. So that is one of the key items that impacted gross margin overall for the quarter. We'll lap that February of next year. So if the category were to stabilize or we would see some improvement in overall consumer sentiment, you know, putting aside any inflationary environment, you know, margins should benefit from that. And then 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. So, you know, that's a big driver of that. We'll allow that next year as well. And then overall labor costs, you know, have been up. So again, from SD&A as a percent of revenue, you know, it does go back to under the pressure on the top line. But I'd say there's really no one item that I'd call out as overly impacting the overall EBITDA margin from SDNA except for labor.

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

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone. Again, that is star 1-1 to ask a question. Our next question comes from Mitchell Paniero with Sturdivant & Co. Your line is open.

Yeah, hey, good morning. Steve, yeah, wanted to just congratulate you on a heck of a run. And, yeah, it's certainly great working with you. And I guess you were the third CFO of Flowers I've known, and I guess the longest of those runs. So, again, congrats. I'll thank you for this. So I have a question, Riles. On one hand, we talk 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, so nothing's really changed there. So I'm curious if you could try to tie sort of generational shifts to the sort of economic weakness, you know, in your remarks.

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, you know, trade down from traditional loaf to you know, more value-oriented brands like, you know, private label or otherwise. So I do think that that does play a role in this. But, you know, the shift that we're really talking about is centered around traditional loaf, meaning, you know, the traditional 20-ounce soft variety and white breads. And there has definitely been a shift, frankly, that's been underway for several years now, but it's just accelerated over the last 12 to 18 months, where the category is really bifurcated into premium differentiated or value. And 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. But 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, and 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. So 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. And in the quarter, we gained 15 points 15 full points of unit share. And we're already number two under that nature zone banner. And while that category is growing 85%, obviously off of a small base, but significant growth. Um, so I believe we're doing all the right things for the long pole. Um, you know, while we try to mitigate the challenges in the, in the short run.

So, so listen, you know, I mean, nature zones obviously been a, um, a, a tremendous success story. Um, And it is weighted towards traditional loaf, but you also have Merida and Sunbeam and, I don't know, Captain Durst, John Durst's 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.

Yeah, that's been a change that's been underway for many years now, Mitch. I would tell you that the regionals have been fairly de-emphasized over the last eight years or so, eight to ten years. And 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, you know, take Sunbeam in Atlanta or Bunny in Louisiana. You know, they are still very important brands, but they're, you know, they're much smaller than they used to be. They've, you know, they've been supplanted by the likes of NatureZone and Wander over time.

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

not so much with the regional brands, but I do agree with you overall regarding complexity. And that's one of the reasons, you know, we talk about a little bit of near-term margin pressure from all the innovation we're bringing forth because that does, you know, small loads are growing very, very fast, but it's still relatively small, right? And, you know, you're introducing an additional complexity into a bakery that's accustomed to running, you know, really fast runs of nature's own butter bread, for example. But, It is what the consumer wants, and we're all about being there for today's and tomorrow's consumer. And 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. So 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.

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?

Mitch, we're always evaluating our cost structure, and 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. So removing complexity, increasing focus, and making sure that we're optimized from a cost structure standpoint is top of mind.

Okay. Okay, that's all I have. Thank you very much.

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

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

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