Flowers Foods, Inc.

Good morning and thank you for standing by. Welcome to the Flowers Foods fourth quarter and full year 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, Tonya, and good morning, everyone. 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 Anthony Scaglione, our CFO. Riles, I'll turn it over to you. Okay. Thanks, JT. Good morning, everybody. Welcome to the fourth quarter call. I'm pleased with the progress that we're making to transform our business. Led by the strong performance of our leading brands and disciplined execution of efficiency initiatives, we produce results at the high end of our 2025 guidance range. Now, as we look to 2026, our guidance does reflect ongoing category challenges, one fee a week, inflationary pressures, but also additional investments in our leading brands. In response to the headwinds that we are facing, we're conducting a comprehensive review of our operations. including our brand portfolio, supply chain, and financial strategy, to strengthen execution and position our business to reignite top-line growth and expand margins over time. I want to thank our dedicated Flowers team for their hard work and resilience during this period of change, and our shareholders for their ongoing support. We remain focused on navigating near-term challenges while also laying the foundation for sustainable long-term growth. And with that, Tanya, we are ready for questions.

Certainly. As a reminder, 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 our Q&A roster. And our first question will be coming from the line of Steve Powers of Deutsche Bank. Your line is open.

Great. Good morning, everybody. Thanks for taking my questions. Great. So, Riles and Anthony, you both spoke to the comprehensive review that you've begun, you know, on brands, on operations, et cetera. I guess maybe just if you could, I know Anthony talked about it being the first inning of that process, but maybe talk a little bit more about how you scoped that exercise, what the project plan is, kind of what things are in or out of consideration, just any more details. meat on those bones would be helpful. And Anthony, if you have any estimate of how long the game lasts, that also would be helpful.

Sure, Steve. I'll start and let Anthony fill in. And I certainly appreciate the thirst for more details on this. We are, you know, in the early innings of the review. But at a high level, you know, we're conducting a complete review of our brand portfolio, the manner and magnitude with which we're supporting that brand portfolio, We're evaluating other areas that are in additional need of investment. I think we're all aware that, you know, by and large, the portfolio is performing very well, you know, across Cake and our innovative platform and premium. The real issue for us is traditional loaf, where we under-index, and that has been, you know, underperforming the category. And, you know, that has downstream effects in terms of operating deleverage, et cetera. So, you know, one of the key focus areas, Steve, is how do we reinvigorate NatureZone? Reigniting growth in that brand, generating demand for that brand is going to be a key focus area for us. In addition, taking a look at supply chain, inclusive of the distribution network, to ensure that we are squeezing as much efficiency out of our operations as possible is another key area of focus. So as we move through the year, obviously we will continue to provide you all more and more detail. As we go through the year, we're just in the early stretches right now.

Yeah, and I would just add, I would characterize the review as a measured approach, working with Rouse and the rest of the management team on the evaluation around the portfolio, where it makes sense to invest. And this really leads to the CapEx conversation as well, where we're going to make those investments. It's a thoughtful and broad review. It's really not intended to be just for this year, but it's a multi-year conversation. I don't know when we're going to get to the top of the seventh, but to Roz's point, we'll continue to make progress and provide that update along the way.

Okay, great. And I guess, you know, as part of that, Anthony, you spoke in the prepared remarks a review of of capital allocation and some of that will be your review of the of the capital expenditures that you just spoke to but uh maybe you could if you could speak a little bit more broadly to capital allocation um we've spoken on this call in general about about you know the the dividend run rate of of flowers and um obviously cash flow has exceeded um you know gap income but at the same time you know the the call for um for 26 EPS is obviously below the dividend commitment. So just how you're thinking about cap allocation more broadly inclusive of that dividend. Thank you.

I appreciate the question. It's a great question. And we understand that the dividend is top of mind for investors. And our focus has always been driving shareholder value. And we want to convey the importance that we place on the evaluation of our capital structure and our capital allocation. And that's obviously a conversation we have with our board. I think we need to make progress on the overall strategic evaluation to determine if, what, and how much we alter that capital allocation and direction. But I'd also like to say we remain committed, and I think we mentioned this in the prepared remarks as well, to our strong balance sheet, and we recognize the benefits of the investment rating.

Very good. Thanks. I'll pass it on. Thank you. Thanks, Steve.

And our next question will be coming from Jim Solera of Stevens. Your line is open.

Hey, Rouse. Anthony, good morning. Thanks for taking our question. Hey, Jim. Rouse, I was hoping you could offer us just kind of a high-level thought, given your experience in the industry. What do you think the industry, both yourselves and other prominent players, can do to really stabilize you know this kind of traditional loaf piece of the category you know often in your remarks you can call out the pockets of growth for DKB and a lot of the specialized um you know offerings that you have but it seems like the the traditional loaf is kind of the thorn in the side and it's been that way for you know quarter after quarter is is there a a point where you know, the marginal household is just finally washed out of the category and we can get to a stabilization point? Or do you see the frequency of consumption even for households that stay in the category continue to decline? You're trying to size up, you know, what we should be looking for to kind of get a glide path back to, you know, some semblance of kind of flat to then hopefully positive in the future.

Yeah, great question, Jim. And as I said, that's the key. to everything for us really, because we do have so much strength in the other parts of the portfolio where we've heavily invested, we've been extremely innovative in those other parts of the portfolio. We've talked a lot about not only the shift to value in this most recent conversation about affordability, but also the shift to premium differentiated. And we've been a key player there and our efforts have certainly paid off. You can see that in the numbers and in the share data. You're absolutely right. Traditional loaf is the key for us. It's our largest brand in Nature's Own. It's also the number one brand. I think that soft variety will continue, or traditional loaf rather, will continue to be an important part of the category. But if the trends that we see continue, whether that's a shift to premium, whether it's a shift to value, inclusive of small loaves, because I do think a portion of the current value play, if you will, is driven by macroeconomic factors that we see all the time in the bread category. I think the difference now, whereas traditionally you would have seen a shift to private label, you're seeing a shift to lower price branded offerings that are priced at parity or slightly above private label. And in the same environment, private label is down. So it's different this time around, but I think that the pure value play is cyclical. I think small lows, however, offer something different. Not only is it value, it certainly addresses that area of the market, but it's also demographic shifts, Jim. Smaller households, people getting married later, a desire not to waste product, in addition to in the current environment, it being more of a value offering. So my point in saying all this is over time, I do think you're going to see the shelf evolve and change overall. And so it's very important for us to be prepared to shift with that. And we believe there are things that we can do with Nature's Own, given its high loyalty rate, given its awareness, given that it's the number one brand, to bring additional attributes to consumers that they will value. So I do think that there is a path there. And we're excited about the changes that we have upcoming for that segment of the portfolio. If we're successful in doing that, Jim, that goes a long way to, you know, getting us back at least to a stable state in traditional loaf, which will be very meaningful for the business, if not slight growth and recapture some of that operating deleverage. It's also important, though, to say at the same time, as Anthony and I both noted, you know, our supply chain review is involved in this, too. So it's important to do both. to both address the demand for traditional loaf primarily, but also address our fixed cost base and ensure that we are operating as efficiently as possible.

Thank you. I appreciate all the detail on that. Maybe tying that to 2026, we just think about the kind of interplay between the RAMP and Simple Mills and then the legacy portfolio. Can you just give us a sense on the cadence on the top line? Obviously, 4Q has the 53rd week lap, but just should we expect a lot of the simple mills to kind of hit at the beginning of the year? Is it more of a gradual rollout, just kind of the cadence of the top line growth as we roll through the year?

Yeah, so if you think about the guide, the range is down roughly about 180 basis points. to slightly up effectively flat and from that we said the category we expect the category to be down four percent from a headwind which is anyone's guess at this point but we felt taking a rational approach and conservative approach looking at that from that lens the extra week adds about 150 basis points of pressure and then the rest is going to be a combination of the simple mills wrap and and the growth being from share and rate as we plan out the year

Okay, great. Thank you. I love that. Thank you. Thanks, Jim.

And our next question will be coming from Max Gumford of BNP Paribas. Your line is open.

Hey, thanks for the question. I wanted to come back to the dividend conversation and just get more clarity on why not cut the dividend today. Would your payout ratio go into well above 100% of your guidance for EPS, your leverage being in a difficult place. It looks like your current net debt represents anywhere from 3.5 to 3.75 times your outlook for adjusted EBITDA this year, which puts you at risk of tripping your 3.75 times covenant. And then clearly you're in a difficult place right now in determining how to finance the business going forward as you've come to the market with your outlook for 26%. but with no capex plans for the year. So wouldn't it have been simpler just to cut the dividend now and get back to focusing on operations? Just looking for more clarity there. Thanks very much.

Thank you. I'll take it and then pass it to Rouse. I think the team has stated this before. Dividend is a function of our discussion clearly with our board, our capital structure, overall allocations, and we recognize the need to address that holistically in light of both our strategy and overall capital structure, and our intent is to plan to provide that detail in the upcoming quarters. But I want to reiterate what Riles just said. We're in the early days of this comprehensive review. I can't necessarily discuss the dividend in detail at this point, but it is something that we are reviewing in light of our capital structure in light of the bank covenant what I would say you know we're in compliance with all the covenants and we have a strong relationship with our syndicates and we expect to refinance the upcoming maturity and also make some progress on debt pay down so it is part of our overall review and hopefully that's helpful great and then as a follow-up I'm just looking for a bit more clarity on a few factors with regards to what's embedded in your outlook for

for 2026, so really it's on four factors, so I apologize for the long question. But the first is, what are you factoring in with regards to the reduced SNAP budgets this year? The second is, what potential impacts are you assuming from the Supreme Court case we have in March? The third would be on that debt refinancing, the $400 million in October that's coming due. Are you assuming a refinancing at higher rates occurs in your outlook for 2026? And then the fourth would just be, it seems like your guidance is embedding very large market share gains. So you're saying the category is down 4%, but it sounds like organic is closer to just below flat. So just what's behind that large market share gain assumption? Apologies for the long question, but thanks very much.

So I'll start with the SNAP. And we recognize the reduction in EBT purchases and the pressure on the lower income households, which is why I think our diverse portfolio brands and products are structured to appeal at all household demographics. We don't break that out specifically, but we are monitoring that channel, ensuring that we are providing value at those price points as well.

The Supreme Court.

Thank you. And our next question will be coming from the line of

I wanted to talk about the other question. So the debt refi, as I mentioned, we're working with our syndicates as well as looking at the most efficient way to refinance. We're highly confident that that refinancing work would occur. Obviously, rates are going to be slightly higher than the rate of the bond that we're taking out, but we feel confident that's going to be part of our process as we look at the overall capital structure going forward. And then the last two questions were the market share gain. Could you repeat that question?

Sure. I'll open the line back up one moment.

Yeah, I'll take that one anyway on the market share gains, Max, if you're still listening.

You know, as we've talked about, you know, we anticipate making, you know, incremental investments in our brands. Also the innovation that we have coming forth across the portfolio, inclusive of Supple Mills having a record year for innovation, introducing 13 new items, the DKB snack brands coming forth with new items, and then obviously further innovation in the core. We also have our increased marketing investment that we're making this year. So all of those would give us confidence that we can continue to gain share in the marketplace As for the Supreme Court ruling, there's nothing embedded in guidance, so I don't think we would, that's more of an operating issue.

We wouldn't expect any material financial impact from a decision one way or the other.

And our next question will be coming from Mitchell Panhero of Sturdivant & Company. Your line is open.

Hey, good morning.

Good morning.

So as it relates to the supply chain review, as you look at the traditional load market, and obviously that's getting a little smaller, should we anticipate perhaps some either bakery consolidation, or is that part of the review?

Yeah, Mitch, that's part of the review, but I would say that's an ongoing process. I mean, you're aware we've closed several bakeries over the last few years, most recently a bakery in Atlanta, one in Louisiana, one out in Arizona. So this has been sort of normal course for us as we continually review operations. I think when we talk about supply chain reinvention in terms of this review, it's a bit more global in terms of how can we better leverage digital AI, automation, in addition to network optimization. So it's more fully encompassing and looking at the whole picture and inclusive of the distribution network as well. You know, how we get to market, where we place our DCs, et cetera.

Okay. And, you know, I saw that you're moving your DSD, you know, the P&L responsibility to a regional platform. back to the regional level, and this obviously is a return, I guess, to the past a little bit. Where do you see and how do you see that benefiting flowers going forward?

Yeah, so it's not really a return to the past. I mean, maybe, as you said, a little bit. But as we took a look at our operations and how we're operating our business, I mean, there are regional differences in terms of consumer preferences, Um, you know, things like that. We, we also, you know, felt that there was a need for greater accountability closer to the individual markets. And, you know, if I'm moving and this is for DSD, you know, which is 85% of the business doesn't really apply to the balance of the business. Um, but for DSD, you know, having that higher degree of P and L accountability a bit closer to the market. And, you know, in some cases having more, uh, local decisions. we thought was a prudent move to make in the current environment we're operating. I mean, obviously, you know, this is a very challenging time for the company and for the industry. And so making sure we have accountability in the right place, the right people in the right places of paramount importance.

Okay. And then I guess this last question is, and there's also this optimizing your brand portfolio. Does that mean potentially selling brands?

I mean, we're looking at everything. I mean, I certainly can't comment specifically on any, you know, contemplated divestitures, but it really is focused on, you know, optimizing the portfolio in a way that sets us up best for success. So, you know, that can mean anything from, you know, additional investment in brands to Ski Rat to, yes, potential divestitures, but there's nothing, you know, concrete on the table at the moment.

Okay. All right. Thank you.

Thanks, Mitch. Thank you.

And as a reminder, if you would like to ask a question, please press star 11 on your phone. And our next question is a follow-up from Max Gumford of BNP Paribus. Your line is open.

Hey, thanks. Just a couple of housekeeping ones. So first would be, is there a level of maintenance capex you could speak to, just as we're thinking through our models and The lowest level of capex we could potentially be putting in the model for 26?

Yeah, let me qualify that. So maintenance capex for us is just, as you can imagine, the normalized capex that we look at across our bakery and real estate network. And that usually runs around $2 million plus or minus per bakery per year. and looking at that from a historical, there's always going to be a special project or an initiative that's going to require CAPEX, and clearly we have the rest of the ERP project that we need to complete in 2026 and early part of 2027. So that hopefully gives you a little bit of a range of looking at it from the overall picture. There's an amount that we intend to deploy as part of that maintenance. It's really looking at that growth CAPEX and really focusing our efforts and being laser focused on that. And that's what's inhibiting us at this point from providing that range. But as I mentioned in my prepared remarks, most likely that outcome is going to be the continued prudent approach that we've had in the past.

Great. And then on the $0.08 impact to EPS from incentive compensation, any color on the cadence in which that line down occurred in 25. I imagine a large chunk came in 4Q, but it partly came in 2Q and 3Q as well. So any more explicit help on cadence you could give us with regard to made sense?

Yeah, we actually adjust our accrual quarterly, and most of that adjustment occurred in the first three quarters of last year, just given the revised estimate. So when you look at the cadence, it's more first three quarters versus Q4.

Okay. And then on Simple Mills sales, it looks like in 4Q, I mean, you ended the year a bit below the full year guidance, which I believe was 221 to 223. You reported closer to 14. So it seems like 4Q came in a bit light of expectations. But at the same time, your commentary still sounds pretty good on Simple Mills. So anything went off that held back Simple Mills sales in 4Q25?

Yeah, Max, it's Riles. A couple of things. One, there was some inventory deloading related to one distributor that kind of disrupted the timing of sales during that period. And Simple Mills also had an issue with some coconut sugar that came in. All the affected inventory was in our control, so there was no recall or anything like that. But that contributed to a little bit of a disruption. in terms of sales timing in the fourth quarter. But to your point, we still feel great about Simple Mills. We expect them to be top lineup, double digits next year, lots of innovation coming. So we're still quite bullish on the business. They're doing fine.

Great. And last one, and I'll leave it there. It's just on margins for Simple Mills. So it looks like it dipped to 11% EBITDA margin in 4Q versus 16% in the first three quarters. I think also that was roughly in line with your plan. So I guess one, is it really just all about tariffs coming on and then maybe some input costs running a bit higher too? And then could you give a bit more color on how we should think about input costs for 2016, particularly given what we're seeing with almonds and inflation there? Thanks very much.

Yeah, Max, you're spot on. It's almond flour and tariffs. And, you know, in addition to, you know, additional brand investments in the brand, I think you should expect that to continue in the 26th. But yeah, it's primarily the almond flour and tariff impulse with Simple Mills.

Okay, thanks very much. Appreciate all the questions.

I'll pass it on. Okay, thanks. Thank you.

And our next question will be coming from the line of Scott Marks of Jefferies. Your line is open, Scott.

Hey, good morning, all. Thanks for taking our questions. First one for me, you know, you're talking about kind of heightened reinvestment in the business and some brands for 2026. But it seems like you've also already been on this journey since the summer in terms of small loaves and some protein offerings and better for you. So just wondering if you can help us understand maybe what's changing and what's going to be different from what you've already been enacting in the portfolio. Yeah.

Right, yeah, exactly, Scott. Good question. So, you know, as I was alluding to earlier, you know, over the last several years, we have, you know, ramped up our brand investment, not just in marketing, but also in our innovation efforts, you know, around DKB, DKB Snacks, obviously the addition of Simple Mills, but also Keto and Protein Loaves and Perfectly Crafted, just kind of, you know, I'll go on and list them all. But, you know, we believe that we're, you know, one of the most innovative brands producers in the category. What's different this time, as I said earlier, is when you look at our portfolio, when you look at our market share performance, the clear issue is in traditional loaf, and that primarily means nature zone. And so a lot of the additional investment and innovation that we're speaking to today is around reigniting demand for traditional loaf and for nature zone.

Understood. Thanks for the clarity on that.

And then second one for me is, you know, you're talking obviously about some of the category pressures. You also spoke a bit about some heightened competition within the category. So wondering if you can just kind of share maybe, you know, how you're thinking about the competition. Have you seen competitors do anything like rationalize some of their own production capabilities? Just wondering, you know, how competitors are kind of handling the current environment.

Yeah, nothing major that I would report in terms of, you know, bakery consolidation or anything like that. I think, you know, the competitive environment in the fourth quarter was, you know, pretty normal, no major uptick. In fact, for the category, price per unit was actually up a bit in the quarter. And, you know, a lot of that is likely a mixed shift to premium products. You know, obviously, like the rest of the food industry, Everybody's trying to figure this out. The rise of GLP-1s, the fact that it's coming out in a pill, the overall macroeconomic environment, while inflation has certainly come down, prices remain elevated, and some consumers are struggling with that. So you see a lot of move to value, not just in terms of product, but also in terms of channel, moving more to club stores and masks. etc. So, you know, I think we're going to continue to see a consumer, continue to see a pressured consumer for a bit longer. And we'll see how that shakes out. In the meantime, you know, what's important to us is that we're delivering products to consumers that have attributes that they want, definitely with a better for you bet, but also across the price spectrum. That's how we're looking at it. You know, in terms of promotional levers, obviously we have that at our disposal. We tend to use that prudently and use it more for driving trial and repurchase rather than driving volume gains. You have to remember that this is a category with limited expandable consumption. And so we are very disciplined in our use of promotional activity. But where we need to do so to protect share, you know, we will. but we will use our enhanced TPM capabilities to guide us in that process and make sure that we are achieving the desired return on investment. Scott, as an example of that, in the fourth quarter, we pulled back strategically on promotions. As I said, there's limited expandable consumption in this category, and typically when we you know, get aggressive with promotions in the fourth quarter, we don't get a good return on that investment. And so if you look at the share data, you will see that we pulled back pretty substantially in the fourth quarter. And as we move into the new year, get back to a more normalized cadence.

Appreciate the color. We'll leave it there.

Thanks, Scott.

I'm sharing no further questions. I would now like to turn the conference back to Riles McMullen, Chairman and CEO, for closing remarks.

Okay, Tanya, thank you. I just 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'll look forward to speaking to you again next quarter. Take care.

And this concludes today's program. Thank you for participating. You may now disconnect.