Q2 2025 Flowers Foods Inc Earnings Call - Q&A

Speaker #1: Good day, and thank you for standing by. Welcome to the Flowers Foods second quarter 2025 results conference call. Please be advised that today's event is being recorded.

Gigi: Good day, and thank you for standing by. Welcome to the Flowers Foods' second 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. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead.

Speaker #1: 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.

Speaker #1: Please go ahead.

Speaker #2: Thank you, and good morning, everyone. I hope you all had the opportunity to review our earnings release, listen to our prepared remarks, and view the slide presentation that we posted earlier on our Investor Relations website.

J.T. Rieck: Thank you, and good morning, everyone. I hope you all 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 at the end of the slide presentation on our website.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: We also provide non-GAAP financial measures, for which disclosure and reconciliations are provided in the earnings release at the end of the slide presentation on our website.

Speaker #2: Joining me today are Riles McMullan, Chairman and CEO, and Steve Kinsey, our CFO. Riles, I'll turn it over to you.

J.T. Rieck: Joining me today are Ryals McMullian, Chairman and CEO, and Steve Kinsey, our CFO. Ryals, I will turn it over to you.

Speaker #3: Okay, thanks, J.T. Good morning, everybody, and welcome to the second quarter call. Before we move to questions, I would like to address one thing right out of the gate.

Ryals McMullian: Okay, thanks, J.T. Good morning, everybody, and welcome to the second quarter call. Before we move to questions, I would like to address one thing right out of the gate. We are in the midst of a transition. The category is transitioning, and by extension, Flowers Foods is transitioning. The continued challenging economic environment and shifting consumer trends have pressured our end markets and hampered our recent results. However, we are aggressively responding to that pressure, transitioning our portfolio to better align with current consumer demand. This transition is going to take time to fully implement, and patience will be necessary. We expect further benefits as we execute our portfolio strategy and continue to develop our deep pipeline of innovation. Our strategies are sound, and the early progress we've made in repositioning our portfolio gives me great confidence that we're on the right path to drive consistent long-term growth.

Speaker #3: We are in the midst of a transition. The category is transitioning, and by extension, Flowers is transitioning. The continued challenging economic environment and shifting consumer trends have pressured our end markets and hampered our recent results.

Speaker #3: However, we are aggressively responding to that pressure, transitioning our portfolio to better align with current consumer demand. Now, this transition is going to take time to fully implement.

Speaker #3: And patience will be necessary. But we expect further benefits as we execute our portfolio strategy and continue to develop our deep pipeline of innovation.

Speaker #3: Our strategies are sound, and the early progress we've made in repositioning our portfolio gives me great confidence that we're on the right path to drive consistent long-term growth.

Speaker #3: I would like to thank the entire Flowers team for their tireless dedication during this process. And to our shareholders, thank you for your partnership and support.

Ryals McMullian: I would like to thank the entire Flowers Foods team for their tireless dedication in this process, and our shareholders for their partnership and support. With that, Gigi, we'll take questions.

Speaker #3: And so, with that, J.T., we'll take questions.

Speaker #1: As a reminder 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.

Gigi: As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Steve Powers from Deutsche Bank.

Speaker #1: Our first question comes from the line of Steve Powers from Deutsche Bank.

Speaker #4: Hey, great. And good morning, everybody. Riles, first for you. So on the branded side, you mentioned in the prepared remarks greater competitive intensity. You also cited new lower-priced bread products as creating challenges in the current environment.

Steve Kinsey: Hey, great, and good morning, everybody. Ryals, first for you. On the branded side, you mentioned in the prepared remarks greater competitive intensity and also cited new lower-priced bread products as creating challenges in the current environment. Maybe just a little bit more detail there as to what you are seeing and what is incremental versus last quarter. Then also, versus us, and I think versus like sequential trends, maybe the bigger change in trend came on the other side, non-unbranded. So maybe also what you are seeing on that. Then if I could, I got a follow up for Steve.

Speaker #4: Maybe just a little bit more detail there as to what you're seeing and what's incremental versus last quarter. And then, also, versus us, and I think versus, like, sequential trends. You know, maybe the bigger change in trend came on the other side, you know, not on branded.

Speaker #4: So, maybe also what you're seeing on that. And then, if I could, I got a follow-up for Steve.

Speaker #3: Okay, sure. So in terms of the competitive environment, you know, as we said, Steve, you know, the promotional environment is elevated. But relatively stable, you know, you've seen us promote a little bit more, particularly around, you know, our differentiated products, continuing to drive trial awareness, household penetration, et cetera.

Ryals McMullian: Okay, sure. In terms of the competitive environment, as we said, Steve, the promotional environment is elevated, but relatively stable. You have seen us promote a little bit more, particularly around our differentiated products, continuing to drive trial awareness, household penetration, et cetera. That is definitely paying some dividends, as you could see with DKB's performance in the quarter. Yes, there have been some lower-priced entrants into the markets that are pressuring results somewhat. I would say that is particularly affecting the traditional loaf area, which we are, as you know, particularly exposed to. We are addressing that. We have our own line of small loaves now, and we have more coming to address that value shopper. I think, Steve, it is a continuation of the trend that we have seen in the sense that the market remains bifurcated.

Speaker #3: And that's definitely paying some dividends, as you can see with BKB's performance in the quarter. Yes, there have been some lower-priced entrants into the markets.

Speaker #3: That is pressuring results somewhat. And I would say that's particularly affecting the traditional loaf area, you know, which we're, as you know, particularly exposed to.

Speaker #3: We are addressing that. You know, we have our own line of small loaves now, and we have more coming to address that value shopper.

Speaker #3: But I think, Steve, it's a continuation of the trend that we've seen in the sense that the market remains bifurcated. Certainly, on the premium differentiated side of things, you see good performance.

Ryals McMullian: Certainly on the premium differentiated side of things, you see good performance, but you also see good performance on the value end, particularly in mass and club channels. It is there, we are aware of it, and we are proactively addressing it. In terms of the other category, there was a lot of the private label businesses is bid business. It is not unusual for it to come and go. A lot of that on the private label side was driven by lost business that eventually gets replaced by something else. We are also seeing continued weakness in the away-from-home food service business as well. That is what is driving that.

Speaker #3: But you also see good performance on the value end, particularly in mass and club channels. So, you know, it's there. We're aware of it.

Speaker #3: And, you know, we're proactively addressing it. In terms of the other category, you know, there was a lot of the private label businesses, you know, as bid business.

Speaker #3: So it's not unusual for it to come and go. A lot of that on the private label side was driven by, you know, lost business that eventually gets, you know, replaced by something else.

Speaker #3: But we're also seeing, you know, continued weakness in the away-from-home food service business as well. So that's what's driving that.

Speaker #2: Okay. Okay, very clear.

Steve Kinsey: Okay, okay, very clear. Steve, if I could, on the, I guess, two questions for you. One is just on the updated tariff outlook. I was not clear from your remarks if your previous tariff costs have just been delayed because of the volume dynamics, or if you have updated kind of structurally to a lower tariff cost run rate, number one. Then number two, from a, I guess, from a capital allocation standpoint, with this reduction in EPS guidance, the gap between your dividend commitments and your current EPS run rate is increasingly narrow. So just how you are thinking about that. I know the board just raised the dividend. You say you feel kind of good about overall cash and capital positioning, but just how you are thinking about that and as you pay down debt, just the relative constraint that the dividend may place on M&A aspirations.

Speaker #3: Steve, if I could, I have two questions for you. One is just on the updated tariff outlook. I wasn't clear from your remarks if previous tariff costs have just been delayed because of, you know, just because of volume dynamics.

Speaker #3: Or if you've you've updated kind of structurally to a lower tariff cost run rate, number one. And then number two, from a, I guess, from a capital allocation standpoint, you know, with this reduction in EPS guidance, you know, the gap between your dividend commitments and your current EPS run rate is increasingly narrow.

Speaker #3: So just how you're thinking about that. I know the board just raised the dividend, and you say you feel you're kind of good about overall cash and capital positioning.

Speaker #3: But just how you're thinking about that, and as you pay down debt, just the relative constraint that the dividend may place on M&A aspirations.

Speaker #3: Thank you.

Steve Kinsey: Thank you.

Speaker #2: Yeah, thank you. Sure. With regard to the tariffs, actually, it's just structurally, it's an update. You know, with things becoming, I guess, maybe more final, for lack of a better term, we just continue to follow the various countries and the changes from an overall rate.

Bill Chappell: Yeah, thank you, Chip. With regard to the tariffs, actually, it is just structurally it has been updated. You know, with things becoming, I guess, maybe more final, for lack of a better term. You know, we just continue to follow the various countries and the changes from an overall rate. So it is not really a delay. It is actually, you know, we expect tariffs to pull back quite a bit based on what we are seeing currently. You know, overall, with regard to kind of the capital allocation structure, I mean, you know, we have always taken, tried to take a balanced approach. You are right. I mean, the board evaluates this quarter to quarter. You know, they will take into consideration performance, cash flow, liquidity. This will be no different. You know, we will continue to continue to have those conversations.

Speaker #2: And so it's not really a delay. It's actually, you know, we expect tariffs to, you know, pull back, you know, quite a bit based on the based on what we're seeing currently.

Speaker #2: You know, overall, with regard to kind of the capital allocation structure, I mean, you know, we've always taken, you know, tried to take a balanced approach.

Speaker #2: And you're right. I mean, the board evaluates this, you know, quarter to quarter. And, you know, they'll take into consideration performance, cash flow, and liquidity.

Speaker #2: And, you know, this will be no different, you know, they'll continue to continue to have those conversations. And, you know, we'll continue to, you know, make decisions as things, you know, progress.

Bill Chappell: You know, we will continue to make decisions as things progress.

Speaker #3: Okay. Remind me, is there a target payout ratio? I mean, I'm assuming you're running now quite higher than ideal. Like, what's there, is there a stated long-term target?

Steve Kinsey: Okay. Remind me, is there a target payout ratio? I mean, I am assuming you are running now quite, quite higher than ideal. What is the stated long-term target?

Speaker #2: No, we currently do not have a stated targeted payout ratio.

Bill Chappell: No, we currently do not have a stated targeted payout ratio.

Speaker #3: Okay.

Steve Kinsey: Okay. Yeah, okay.

Speaker #2: Yeah, thank you.

Speaker #3: Yeah, okay. You can go ahead, Riles. I didn't mean to cut you off. I think I got stuck on that one.

Bill Chappell: Yeah, just, okay.

Steve Kinsey: You can go. Sorry, Ryals McMullian. I didn't mean to cut you off. I just thought you'd be fine.

Speaker #2: Just, yeah, in terms of the payout ratio, one thing that we like to remind people is that if you look at that on a cash basis, it's quite different than it is on a GAAP basis, just due to, you know, DNA being significantly above our CapEx.

Ryals McMullian: Just in terms of the payout ratio, one thing that we like to remind people is that, if you look at that on a cash basis, it is quite different than it is on a GAAP basis just due to D&A being significantly above our CapEx. Just wanted to remind you of that as well.

Speaker #2: So, just wanted to remind you of that as well. Yeah, understood.

Bill Chappell: Yeah, understood. Thank you so much.

Speaker #3: Thank you so much.

Speaker #2: Sure.

Steve Kinsey: Sure.

Speaker #1: Thank you. One moment for our next question. Our next question comes from the line of Bill Chappelle from Truist Securities.

Gigi: Thank you. One moment for our next question. Our next question comes from the line of Bill Chappell from Truist Securities.

Speaker #4: Thanks. Good morning.

J.T. Rieck: Thanks. Good morning.

Speaker #2: Morning, Bill.

Steve Kinsey: Morning, Bill.

Speaker #4: So, I guess, back to the competitive question, you know, I guess 10 years ago, maybe not that long ago, it was supposed to be a duopoly between you and Bimbo.

J.T. Rieck: So, back to the competitive question, 10 years ago, maybe not that long ago, it was supposed to be a duopoly between you and Bimbo, and the thought would be, hey, everybody would play well in the sandbox on the pricing. But instead, all the players competed for market share, competed for capacity utilization, and gave that up for profits. Gross margin never really improved. We had a six, seven-year period where it has been pretty benign. Are we going back to the five, six, seven, eight years ago where it is buy one, get one free, and more competitive and figuring out more ways where it is kind of a race to the bottom on profitability, or is it not that bad?

Speaker #4: And, you know, the thought would be, hey, everybody play well in the sandbox. And on the pricing, but, you know, instead, all the players kind of competed for market share, competed for capacity utilization.

Speaker #4: And gave that up for profits. And so, gross margin never really improved. We had a kind of a six- to seven-year period where it's been pretty benign.

Speaker #4: Are we going back to the, you know, five, six, seven, eight years ago where it's buy one, get one free and more competitive, and figuring out more ways where it's kind of a race to the bottom on profitability?

Speaker #4: Or is it not that bad?

Speaker #2: Yeah, I don't think it's I don't think it's that bad. I think that, you know, what you're seeing more than anything else, Bill, as I said at the opening, is, you know, a pretty significant transition in the category, primarily driven by, significantly shifting consumer trends.

Ryals McMullian: Yeah, I don't think it's that bad. I think that, you know, what you're seeing more than anything else, Bill Chappell, as I said at the opening, is a pretty significant transition in the category, primarily driven by significantly shifting consumer trends. We can spread that over a lot of different things, right? We can spread it over health and wellness, MAHA movement, GLP-1s, whatever it is, ultra-processed foods, all that sort of stuff. It is really changing the dynamics in food and particularly in baked foods. For whatever reason, they tend to get called out quite a bit when the ultra-processed argument comes up. I think we're seeing a lot of that now. We are committed to aggressively innovating to work our way through this transition. Most of, you know, we can have a conversation about food service, but that's more macroeconomic driven.

Speaker #2: And we can, you know, we can spread that over a lot of different things, right? We can spread it over health and wellness, MOHA movement, GLP-1s, you know, whatever it is.

Speaker #2: You know, ultra-processed foods, all that sort of stuff. It is really changing the dynamics in food, and particularly in baked foods. You know, for whatever reason, they tend to get called out quite a bit when the ultra-processed argument comes up.

Speaker #2: And I think we're seeing a lot of that now. We are committed to aggressively innovating to work our way through this transition.

Speaker #2: You know, most of, you know, we can have a conversation about food service, but that's more, you know, macroeconomic driven. But, you know, on the retail side of things, you know, what is being most affected is traditional loaf.

Ryals McMullian: On the retail side of things, what is being most affected is traditional loaf. Those less differentiated white and wheat breads are what are being affected the most. That is why we are innovating so aggressively to work our way through that. We've seen tremendous success with things like Dave's Killer Bread, Canyon Bakehouse, across different sub-segments of the category too, not just breads, but sandwich, buns, and rolls, breakfast, etc. We're winning in those areas. Keto is another example that I would give you. Our keto products were up, I think, 37% in the quarter. That segment of the category continues to grow. We have a wonderful slate of innovation coming out in Q3 to further address the softness in these categories.

Speaker #2: You know, those less differentiated, light, and wheat breads are what are being affected the most. That is why we are innovating so aggressively to work our way through that.

Speaker #2: We've seen tremendous success with things like Dave's Killer Bread, Canyon Bakehouse, you know, across different subsegments of the category too, not just breads, but sandwich buns and rolls, breakfast, etc.

Speaker #2: And we're winning in those areas. Keto is another example that I would give you. You know, our Keto products were up, I think, 37% in the quarter.

Speaker #2: And that, you know, that segment of the category continues to grow. We have a wonderful slate of innovation coming out in Q3 to further address the softness in these categories.

Speaker #2: That's really the solve for us, Bill. It's just working our way through this, you know, de-emphasis by the consumer, if you will, on traditional loaf as it stands today.

Ryals McMullian: That's really the solve for us, Bill Chappell, is just working our way through this de-emphasis by the consumer, if you will, on traditional loaf as it stands today and towards more innovative and differentiated products in addition to value offerings. Having said that, with regard to traditional loaf, we do have plans to address that even more directly. I'm not going to get into it today for competitive reasons, but we do have plans to address the relative weakness of large brands like Nature's Own.

Speaker #2: And towards more innovative and differentiated products, in addition to value offerings. Now, having said that, with regard to traditional loaf, we do have plans to address that even more directly.

Speaker #2: I'm not going to get into it today for competitive reasons, but we do have plans to address the relative weakness of large brands like NatureSun.

Speaker #3: Got it. We'll just follow up. I mean, I don't doubt you have plans to improve profitability, but you obviously don't work in a vacuum.

J.T. Rieck: Got it. Well, just to follow up, I mean, I do not doubt you have plans to improve profitability, but you obviously do not work in a vacuum. So how about your competitors? I mean, not just Bimbo, but think about the dozens of smaller regional competitors who are usually the bad guy when it comes to promotions and driving to try to drive volume. I mean, are you comfortable that everyone is working on the same goal, or could it get worse from that standpoint in terms of competitive pressures?

Speaker #3: So, how about your competitors? I mean, not just Bimbo, but think about the dozens of smaller regional competitors who are usually the bad guys when it comes to promotions and driving to try to drive volume.

Speaker #3: I mean, are you comfortable that everyone is working on the same goal? Or could it get worse from that standpoint in terms of competitive pressures?

Speaker #2: Well, look, I mean, this has always been a competitive category. And, you know, our competitors are going to do what they're going to do.

Ryals McMullian: Look, I mean, this has always been a competitive category. Our competitors are going to do what they are going to do. That is not within my control. What is within my control is what Flowers Foods is going to do. Our strength is in our brands. Our strength is in our innovation. That is what we are going to continue to focus on.

Speaker #2: That's not within my control. What is within my control is what Flowers is going to do. And our strength is in our brands. Our strength is in our innovation.

Speaker #2: And that's what we're going to continue to focus on.

Speaker #3: Okay, thanks so much.

J.T. Rieck: Okay. Thanks so much.

Speaker #1: Thank you. One moment for our next question. Our next question comes from the line of Jim Solera from Stevens.

Gigi: Thank you. One moment for our next question. Our next question comes from the line of Jim Salera from Stephens.

Speaker #2: Or I'll say, Steve, good morning. Thanks for taking the question. I'll say, I wanted to touch on something you'd mentioned in the prepared remarks about, you know, Wonder obviously helping to contribute to share gain in cake and that that didn't see any cannibalization in Tastykake.

Steve Kinsey: Ryals, hey, Steve, good morning. Thanks for taking the question. Ryals, I wanted to touch on something you mentioned in the premier remarks about Wonder obviously helping to contribute to share gain in cake, and that did not see any cannibalization on Tastykake. Are you able to just give us some commentary around, is that just due to the geographies where Wonder is rolling out? Or do you have retailers where, in the regions that Tastykake is a little bit more formidable, that you have Tastykake and Wonder in the same set?

Speaker #2: Are you able to just give us some commentary around, is that just due to the geographies where wonder is rolling out? Or do you have retailers where, you know, in the regions that tasty cake is a little bit more formidable, that you have tasty and wonder in the same set?

Speaker #2: Yeah, maybe a little bit. I mean, you know, Tasty is particularly strong in that, you know, Mid-Atlantic region. Whereas Wonder, you know, naturally is more of a national brand.

Ryals McMullian: Yeah, maybe a little bit. I mean, you know, Tasty, as you know, is particularly strong in that Mid-Atlantic region, whereas Wonder, you know, naturally is more of a national brand. You know, I will admit I am a little bit surprised that there has not been more cannibalization, but I am quite pleased that there has not been. But you know, Wonder, the launch of that line of products has vastly exceeded our expectations. And now even our forecast, you know, off of early results, it is, you know, running ahead of that. You know, retailers continue to be excited about it. The consumer has accepted it with enthusiasm. And we are going to continue to add to that. You know, we have got more innovation coming from Wonder too. So we have been extremely pleased with the results there.

Speaker #2: You know, I'll admit, I'm a little bit surprised that there hasn't been more cannibalization. But I'm quite pleased that there has not been. But, you know, the launch of that line of products has vastly exceeded our expectations.

Speaker #2: And now even our forecasts, you know, off of early results, it's running ahead of that. You know, retailers continue to be excited about it.

Speaker #2: The consumer has accepted it with enthusiasm, and we're going to continue to add to that. You know, we've got more innovation coming from one or two.

Speaker #2: So we've been extremely pleased with the results there.

Speaker #3: Okay. And then shifting gears a little bit on just talking on simple mills. As you talk about innovation and I can appreciate, you know, this kind of a broad range of stuff you guys can lean into.

Steve Kinsey: Okay. Shifting gears a little bit, let's talk on Simple Mills. As you talk about innovation, and I can appreciate this kind of a broad range of stuff that you guys can lean into, should we expect to see Simple Mills as an outsized contributor on the innovation side, or are you really speaking to the legacy portfolio brands? As maybe a part two to that, I am in the Midwest, and I saw Simple Mills pretty prominently as a club retailer the last time I was shopping there. That could have just been something that was there that I missed. Any comments, is that something you guys are seeing more engagement with, Club, or do you guys have a rotation in Club? Any comment there would be great.

Speaker #3: Should we expect to see Simple Mills as, you know, kind of an outsized contributor on the innovation side? Or are you really speaking to the legacy portfolio brands?

Speaker #3: And then, as maybe a part two to that, I'm in the Midwest. I saw Simple Mills pretty prominently at a club retailer the last time I was shopping there.

Speaker #3: That could have just been something that was there that I missed. But maybe any comments? Is that something you guys are seeing more engagement with, club?

Speaker #3: Or do you guys have a rotation in the club at any club? That would be great.

Speaker #2: Okay. On the innovation front, you know, as I was responding to Bill's question, I was speaking more in terms of the core category, Jim.

Ryals McMullian: Okay. On the innovation front, as I was responding to Bill Chappell's question, I was speaking more in terms of the core category, Jim Salera. However, Simple Mills will also continue to aggressively innovate. I think I mentioned on maybe the last call that they had been on an every other year innovation rotation. We are working with them to speed that up, and we have aggressive plans for them for next year. In terms of the club rotation, I am not quite sure I understood the question, but if you were saying that you were in a club retailer and did not see what you are used to seeing, that is probably due to rotations.

Speaker #2: However, supplementals will also continue to aggressively innovate. I think I mentioned on maybe the last call that they had kind of been on an every-other-year innovation rotation.

Speaker #2: You know, we're working with them to speed that up, and we have aggressive plans for them for next year. In terms of the club rotation, I'm not quite sure I understood the question.

Speaker #2: But if you were saying that you were in a club retailer and didn't see what you're used to seeing, that's probably due to rotations.

Speaker #3: Yeah, they could more than—oh, I’m sorry, go ahead.

Steve Kinsey: Yeah, I think it is more of a. Oh, I am sorry. Go ahead.

Speaker #2: No, no, go ahead, Jim.

Ryals McMullian: No, no, go ahead, Jim.

Speaker #3: I had seen Simple Mills more prominently than I had traditionally seen it. And so, I wasn't sure if you guys were on a rotation that hadn't been the case before.

Steve Kinsey: I had seen Simple Mills more prominently than I had traditionally seen it. I was not sure if you guys were on a rotation that had not been the case before.

Speaker #2: No, nothing's changed. They have rotations in the club. I'll just add, you know, they continue to grow their distribution points and had another nice quarter of that in Q2.

Ryals McMullian: has changed. They have rotations in Club. I will just add, you know, they continue to grow their distribution points and had another nice quarter of that in Q2. So that business continues to perform very, very well, even though in the second quarter, they were somewhat affected by that cyber attack at UNFI. Even with that, still performed in line with our already high expectations. We expect that to continue. They are doing great.

Speaker #2: So that business continues to perform very, very well. Even though in the second quarter, they were somewhat affected by that cyber attack at UNFI.

Speaker #2: And even with that, they still performed in line with our already high expectations. We expect that to continue. They're doing great.

Speaker #3: Great. I'll pass along. Thanks, guys.

Steve Kinsey: Great. I will pass it on. Thanks, guys.

Speaker #1: Thank you. One moment for our next question. Our next question comes from the line of Mitchell Pineiro from Sturdevant & Company.

Gigi: Thank you. One moment for our next question. Our next question comes from the line of Mitchell Pinheiro from Sturdivant & Company.

Speaker #4: Yeah, hey, good morning.

Steve Kinsey: Yeah, hey, good morning.

Speaker #2: Hi, Mitchell.

Ryals McMullian: Hi, Mitchell.

Speaker #4: Hey, so you know when you talk about, like, the transition, you're in the midst of a transition. And it's going to take time. I mean, it's going to take—how fast do you see your innovation and some of your other plans that you have to address this?

Steve Kinsey: Hey, so you know when you talk about the transition, you are in the midst of a transition, and it is going to take time. I mean, it is going to take, you know, how fast do you see your innovation and some of your other plans that you have to address this? I mean, this is a long time to turn around an aircraft carrier. You know, Nature's Own is a huge brand, and your other loaf products. I mean, it is the bulk of your business. So the transition, I mean, is this going to be, you know, a five-year minimum time period to sort of get this turned around? Or, you know, are there, I do not want to say quicker fixes, but are there more near-term things that you see that can speed up this transition?

Speaker #4: I mean, this is a long time to turn around an aircraft carrier. You know, NatureZone's a huge brand. And your other loaf products – I mean, that's the bulk of your business.

Speaker #4: So the transition, I mean, is this going to be, you know, right, a five-year minimum time period to sort of get this turned around?

Speaker #4: Or, you know, are there, I don't say quicker fixes, but are there more near-term things that you see that can speed up this transition?

Speaker #2: Yeah, fair question. I'm not going to put a time on it today. But, you know, I did note that some patience is going to be required.

Ryals McMullian: Yeah, fair question. I am not going to put a time on it today. But, you know, I did note that some patience is going to be required. It is not an overnight fix. You know, this is, you know, I view this as a generational shift in our category. You know, perhaps a once-in-a-lifetime shift, you know, that needs to be addressed. I do, Mitch, I do think that the category, and I am speaking mostly about traditional loaf, I do think that the category will stabilize eventually. Now, I do not know if that is next quarter or this time next year, you know, it is hard to say. But I do think that it will stabilize. I think that we are seeing a lot of things, primarily, you know, the shift in consumer tastes and behaviors.

Speaker #2: It's not an overnight fix. You know, this is a, you know, I've used this as a generational shift. In our category. You know, perhaps a once-in-a-lifetime shift, you know, that needs to be addressed.

Speaker #2: I do think that the category and I'm speaking mostly about traditional loaf. I do think that the category will stabilize eventually. Now, if that I don't know if that's next quarter or this time next year.

Speaker #2: You know, it's hard to say, but I do think that it will stabilize. I think that we're seeing a lot of things, primarily, you know, the shift in consumer taste and behaviors.

Speaker #2: I think part of this is kind of the final throws of the pandemic reversion that, you know, you all were asking us about every quarter.

Ryals McMullian: I think part of this is kind of the final throes of the pandemic reversion that, you know, you all were asking us about every quarter, you know, when the worst of the pandemic was over. You know, when was that going to happen? I think that is part of it too, you know, in addition to the health and wellness and GOP1 issue. So I do think it is going to find its footing. What is important for us is to make sure that, you know, as it begins to stabilize, that we are winning in that environment. You know, I am not saying that traditional loaf is going to go away. There are still tens of millions of loaves with traditional loaf sold, you know, every day.

Speaker #2: You know, when the worst of the pandemic was over, you know, when was that going to happen? I think that's part of it too.

Speaker #2: You know, in addition to the health and wellness and GLP-1 issue, I do think it's going to find its footing. What's important for us is to make sure that as it begins to stabilize, we're winning in that environment.

Speaker #2: You know, I'm not saying that traditional loaf is going to go away. There are still tens of millions of loaves of traditional loaf sold, you know, every day.

Speaker #2: But I do think, you know, it's going to be smaller perhaps than it has been in the past. And that needs to be replaced by something.

Ryals McMullian: But I do think, you know, it is going to be smaller perhaps than it, you know, that it has been in the past. And that needs to be replaced by something, hence the hyper-focus on innovation and bringing, you know, new exciting products to consumers that have the attributes that they want. That is going to be important. But even in the traditional loaf area, I do think that there are opportunities for us to further separate ourselves. We do have the number one brand. We still have the number one SKU. There is a lot of things to like about being number one in a category, you know, even though it is declining. But, you know, we will continue to invest behind brands like Nature's Own to ensure that it performs as well as it can, given the environment. But yeah, that is going to take some time.

Speaker #2: Hence, the hyper-focus on innovation and bringing, you know, new, exciting products to consumers that have the attributes that they want. That's going to be important.

Speaker #2: But even in the traditional loaf area, I do think that there are opportunities for us to further separate ourselves. We do have the number one brand.

Speaker #2: We still have the number one SKU. There are a lot of things to like about being number one in a category, even though it's declining.

Speaker #2: But you know, we will continue to invest behind brands like NatureSun to ensure that it performs as well as it can, given the environment.

Speaker #2: But yeah, that is going to take some time. And, you know, it's going to take some time for the, you know, the innovative segments of the category to more than offset, you know, any declines in traditional loaf.

Ryals McMullian: And, you know, it is going to take some time for the, you know, the innovative segments of the category to more than offset, you know, any declines in traditional loaf. But again, I do think that we have the ability to further mitigate, you know, any further losses, even in that soft traditional loaf category.

Speaker #2: But again, I do think that we have the ability to further mitigate, you know, any further losses, even in that soft traditional loaf category.

Speaker #4: And then, how are you looking at your gross margin as it relates to the lower volume and the sort of negative fixed cost leverage?

Steve Kinsey: How are you looking at your gross margin as it relates to the lower volume and the sort of the negative fixed cost leverage? Do you have leverage there that you can pull to maintain your gross margin despite the volumes being under pressure?

Speaker #4: Do you have levers there? You can pull to maintain your gross margin despite the volumes being under pressure?

Ryals McMullian: Yeah, we do. We do. And you know, we closed a bakery earlier this year, Mitch. You know, we have closed several in the last few years. That is not the only lever we have to pull, but it is certainly one of them. You know, there are past-market efficiencies as well that we can extract. And you know, we have plans in place to address all of that. You know, the other thing I would note is that, you know, via our portfolio strategy, the food service business that, you know, we are a very scaled food service player. You know, we have refilled that volume with much higher margin business. And thus, the profitability of that away-from-home business is up significantly. I have mentioned that a few times, but I think it bears repeating today in the context of what you just asked.

Speaker #2: Yeah, we do. We do. And, you know, we closed a bakery earlier this year, Mitch. You know, we've closed several in the last few years.

Speaker #2: That's not the only labor we have to pull, but it's certainly one of them. You know, there are path-to-market efficiencies as well that we can extract.

Speaker #2: And, you know, we have plans in place to address all of that. You know, the other thing I would note is that, you know, via our portfolio strategy, the food service business that, you know, we're a very scaled food service player.

Speaker #2: You know, we have refilled that volume with much higher-margin business, and thus, the profitability of that away-from-home business is up significantly.

Speaker #2: I've mentioned that a few times, but I think it bears repeating. Today, in the context of what you just asked, it's not just about closing bakeries or lines, or whatever.

Ryals McMullian: So it is not just closing bakeries or lines or whatever. You know, there is also optimization of the portfolio, if you will, to margin up to better business to help address that overhead leakage that you referenced.

Speaker #2: You know, there's also, you know, optimization of the portfolio, if you will, to, you know, margin up to better business to help address that overhead leakage that you referenced.

Speaker #4: I guess just one last question. This is on M&A. Obviously, M&A is a quick way, a quicker way to help transition to other products and other adjacencies.

Steve Kinsey: Last question, this is on M&A. Obviously, M&A is a quicker way to help transition to other products, other adjacencies. Having just acquired Simple Mills, is there an appetite for further M&A? Right now with the way you are 3.2 levered, or is this something that we will see over time?

Speaker #4: And I guess, you know, having just acquired Simple Mills, I mean, is there an appetite for further M&A? I mean, right now with the way you're, you know, the 3.2 levered, or is this something that we'll see over time?

Speaker #2: I would say, you know, as of today, Mitch, probably a little bit more over time. I mean, obviously, we're focused on debt paydown right now.

Ryals McMullian: I would say, as of today, Mitch, probably a little bit more over time. Obviously, we are focused on debt paydown right now. As always, we continue to monitor the market. I would also offer up that there are other ways to do M&A other than cash. It has been and will always be one of our big strategic priorities.

Speaker #2: But as always, we continue to monitor the market. You know, I guess I would also offer up that there are other ways to do M&A other than cash.

Speaker #2: So it's always, it has been and will always be one of our big strategic priorities.

Speaker #4: All right. Well, thank you for the answers.

Steve Kinsey: All right. Well, thank you for the answers.

Speaker #2: Thanks, Mitch.

Ryals McMullian: Thanks, Mitch.

Speaker #1: Thank you. One moment for our next question. Our next question comes from the line of Scott Marks from Jefferies.

Gigi: Thank you. One moment for our next question. Our next question comes from the line of Scott Marks from Jefferies.

Speaker #5: Hey, good morning, guys. Thanks for taking our questions. The first thing I wanted to ask about is, you just touched upon still putting investment dollars behind Nature Zone.

Scott Marks: Hey, good morning, guys. Thanks for taking our questions. First thing I wanted to ask about is, you just touched upon, you know, still putting investment dollars behind Nature's Own, you know, and some of the more mainstream loaf parts of the portfolio. But in the prepared remarks, you talked about more of the, let's say, promotional activity being in kind of the differentiated parts of the portfolio to drive trial and repeat purchase. So maybe as we think about the investments in the more mainstream, traditional loaf part of the category, how should we be thinking about those investments? Will that be behind marketing? Will that be promotional? Will that be packaging redesign? Just trying to understand how those investment dollars will be spent?

Speaker #5: You know, and some of the more mainstream loaf parts of the portfolio. But in the prepared remarks, you talked about more of the, let's say, promotional activity being in kind of the differentiated parts of the portfolio to drive trial and repeat purchase.

Speaker #5: So maybe as we think about the investments in the more mainstream traditional loaf part of the category, how should we be thinking about those investments?

Speaker #5: Will that be behind marketing? Will that be promotional? Will that be packaging redesigns? Just trying to understand how those investment dollars will be spent.

Speaker #2: Yeah, it'll be a mix of, you know, promotional support, but that's always been the case. That's not new. You know, and like we always say, we view promotions more as a tool to drive trial and awareness.

Ryals McMullian: Yeah, it will be a mix of promotional support, but that has always been the case. That is not new. As we always say, we view promotions more as a tool to drive trial and awareness than necessarily unit share. I think if you look back at our market share performance, even through this tough transition period, our market share performance, particularly on a relative basis, has been impressive. I think that will continue. I think that is a testament to our overall strategies and our brand support and promotional strategies. But yeah, it will be a mix of marketing, dollar support, and promotions. That is no big change there. We have been doing that.

Speaker #2: Then necessarily, unit share. And I think, you know, if you look back at our market share performance, even through this tough transition period, our market share performance, particularly on a relative basis, has been impressive.

Speaker #2: And you know, I think that will continue. I think that's a testament to our overall strategies and our brand support and promotional strategies.

Speaker #2: But, yeah, it'll be a mix of marketing dollar support and promotions. But that's, again, no big change there. We've been doing that.

Speaker #5: Got it. And then as we think about these differentiated, better-for-you offerings that you're talking about, maybe some of the small loaf products that you mentioned, just what part of the portfolio is that in terms of overall mix right now and relative to where you want that to be?

Scott Marks: Got it. As we think about these differentiated better-for-you offerings that you are talking about, maybe some of the small loaf products that you mentioned, what part of the portfolio is that in terms of overall mix right now and relative to where you want that to be three, five, seven years out?

Speaker #5: You know, three, five, seven years out?

Speaker #2: Yeah, in terms of small loaves, you know, it's pretty, it's pretty small right now, actually. But it's growing. You know, and I think that could ebb and flow a little bit with the economy, Scott.

Ryals McMullian: Yeah, in terms of small loafs, it's pretty small right now, actually, but growing. You know, I think that could ebb and flow a little bit with the economy, Scott. From a more demographic perspective, you know, we see a lot more smaller households now. So from that standpoint, I think it will continue to be a pretty big part of our portfolio and the category. In fact, you know, some retailers are even resetting shelves with small loaf segments within the shelf. So I think that's an indication of how important it is to the retailer as well.

Speaker #2: But from a more demographic perspective, you know, we see a lot more smaller households now. So from that standpoint, I think it will continue to be a pretty big part of our portfolio and the category.

Speaker #2: In fact, you know, some retailers are even resetting shelves with small loaf segments within the shelf. So I think that's an indication of how important it is to the retailer as well.

Speaker #5: And then just on maybe what you would consider the more differentiated part of your portfolio, you know, how should we think about the current mix versus where you want to get that to?

Scott Marks: How should we think about current mix versus where you want to get that to, on what you would consider the more differentiated part of your portfolio?

Speaker #2: Well, that's a focus for us. And so over time, you know, you'll see that continue to grow and be a bigger and bigger part of our portfolio.

Ryals McMullian: That is a focus for us. Over time, you will see that continue to grow and be a bigger and bigger part of our portfolio, not only within the bread category, but within adjacent segments, with our DKB Protein Bars and our DKB Snack Bites and Simple Mills on top of that. It is pretty obvious you are seeing us really lean into that area. We like it because we think it is the right thing to do for the consumer. We also like it because it is premium and the profits are quite robust. That has also been a focus of our M&A efforts as well.

Speaker #2: Not only within the bread category, but within adjacent segments, you know, with our DKB bars and our snack bites and Simple Mills on top of that.

Speaker #2: You can, you know, it's pretty obvious you're seeing us really lean into that area. We like it because we think it's the right thing to do for the consumer.

Speaker #2: And we also like it because it's premium, and the profits are quite robust. You know, that's also been a focus of our M&A efforts as well.

Speaker #5: Got it. And then maybe if I could just squeeze one more in. You mentioned retailers resetting some shelves, focusing on smaller loaves. Maybe what other changes have you seen from retailers recently to address some of the pressures and competitive intensity that you've spoken to?

Scott Marks: Got it. Then maybe if I could just squeeze one more in, you mentioned, you know, retailers resetting some shelves, focusing on smaller loaves. Maybe what other changes have you seen from retailers recently to address, you know, some of the pressures and competitive intensity that you've spoken to?

Speaker #2: Yeah, I think, you know, other than the small loaves, you know, you've obviously seen significant growth in organics. And we, you know, with a 75 share, we've been the primary beneficiary of that.

Ryals McMullian: Yeah, I think, you know, other than the small loaves, you know, you have obviously seen significant growth in organics. We, you know, with a 75% share, we have been the primary beneficiary of that. So we have seen, you know, substantial space gains, particularly in mass for Dave's Killer Bread, which I think, you know, really highlights the bifurcation of the category. When you think about, you know, mass as a, you know, a value shopper's paradise, the fact that they are also focusing on premium tells you a lot about the category. But, you know, other than the small loaf piece, not a whole lot more has happened yet from a retailer standpoint. I do think that is coming at some point. I think we will see, you know, some amount of shelf reallocation that reflects these consumer trends as we go forward.

Speaker #2: So we've seen, you know, substantial space gains, particularly in mass for DKB, which I think, you know, really highlights the bifurcation of the category.

Speaker #2: Because, you know, when you think about, you know, mass as a, you know, a value shopper's paradise, the fact that they're also focusing on premium tells you a lot about the category.

Speaker #2: But, you know, other than the small loaf, piece—not a whole lot more has happened yet from a retailer standpoint. But I do think, I do think that that is coming.

Speaker #2: At some point, I think we’ll see, you know, some amount of shelf reallocation that reflects these consumer trends as we go forward.

Speaker #5: Understood. We'll pass it on. Thanks so much.

Scott Marks: Understood. I will pass it on. Thanks so much.

Speaker #1: Thank you. At this time, I would like to turn the conference back over to Riles McMullan for closing remarks.

Gigi: Thank you. At this time, I would now like to turn the conference back over to Ryals McMullian for closing remarks.

Speaker #2: Okay, thank you, J.T. I want to thank everybody for taking time today and joining us for questions. We appreciate your interest in our company.

Steve Kinsey: Okay. Thank you, Gigi. I want to thank everybody for taking time today and joining us for questions. We appreciate your interest in our company. As always, we look forward to talking with you again next quarter. Take care.

Speaker #2: And, as always, we look forward to talking with you again next quarter. Take care.

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