Q3 2025 Flowers Foods Inc Earnings Call

Speaker #1: Good morning and thank you for standing by . Welcome to the Flowers Foods Third Quarter 2020 results conference call . Please be advised that today's event is being recorded .

Speaker #1: I would now like to hand the conference over to your speaker today , JT . Rick , Executive Vice President of Finance and Investor Relations .

Speaker #1: Please go ahead .

Speaker #2: Hello and good morning . Hope everyone had the opportunity to review our earnings release . Listen to our prepared remarks and view the slide presentation that we're all posted earlier on our Investor Relations 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 .

Speaker #2: 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 . And at the end of the slide presentation on our website .

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

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: We are also grateful for the ongoing support of our shareholders as we strive to enhance long term , 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 .

Speaker #3: 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 .

Speaker #3: And with that , Daniel , we're ready for questions .

Speaker #1: To ask a question , please press star one one on your telephone and wait for your name to be announced . To withdraw your question , please press star one .

Speaker #1: Once again, please stand by while we compile the Q&A roster. Our first question comes from Scott Marx with Jefferies. Your line is open.

Speaker #4: Hey . Good morning . Thanks so much for taking our questions . First thing I wanted to ask about you made some comments in the prepared remarks about consumer sentiment reaching a low point for the year in Q3 .

Speaker #4: But you also made comments about expecting category demand to normalize as the economy strengthens . So maybe if you could just help us understand how you're thinking about that and maybe , you know , what gives you confidence in the recovery of the category and the normalization of demand ?

Speaker #4: Thanks .

Speaker #3: Sure . Thanks , Scott . Of course . You know , it's tough to pinpoint the exact timeline , right ? But , you know , we do think over time the category will stabilize .

Speaker #3: 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.

Speaker #3: You know , people are still very concerned about tariff situation . The job market now with the 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 .

Speaker #3: So we do we do see , you know , the weakness continuing at least partway into into 26 from where we stand right now .

Speaker #3: But we do think over time it will 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 and better for you offerings to the consumer , which is clearly where they're going .

Speaker #3: And that's what we intend to do .

Speaker #5: Okay .

Speaker #4: 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 .

Speaker #4: 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 that you can you can call out for us ?

Speaker #4: Thanks .

Speaker #5: Good .

Speaker #3: 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 .

Speaker #3: And and we will continue to do that . I think you've you've seen us do that with all the innovation that we brought to market over the last several years .

Speaker #3: But the truth of the matter is , I mean , you know , it all innovation tends to be tends to pressure margins in the in the short term .

Speaker #3: You know , they're newer items , but as we build scale and as we make targeted CapEx investments to increase our throughput and efficiency , we expect those margins to improve .

Speaker #4: Appreciate it . We'll pass it on . Thank you .

Speaker #1: Thank you . Our next question comes from Steve Powers with Deutsche Bank . Your line is open .

Speaker #6: Okay . Great . Thank you . Good morning . And congrats again to you , Steve . And thanks for your help over the years .

Speaker #6: So first question , just maybe to follow up on Scott's initial question . Just around the consumer . And I your sort of your planning stance into 26 , you talked about some signs of stabilization in the category over the course of three .

Speaker #6: Q but then some weakening as the quarter came to an end . So just , just thinking about fourth quarter and sizing up 26 scenarios .

Speaker #6: 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 ?

Speaker #3: It 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 .

Speaker #3: But, you know, comping what, five named storms last year and zero this year was a pretty tough comp in Period 10.

Speaker #3: So you could see the the category did fall off from period ten . And but since then it started to migrate back to where it was trending in periods eight and nine .

Speaker #6: Yeah okay . Perfect . Yeah . So more more just the comparisons versus the storms of last year . It makes sense .

Speaker #3: Yeah .

Speaker #6: That's right . Okay . And then the other question I wanted to ask is , this around simple Mills . That was a point of upside at least versus our estimates in the quarter .

Speaker #6: And you know , in the prepared remarks talked about general strength and performance in line with your own expectations . Maybe you just go a little bit deeper and highlight some of the areas where you've you've seen the most progress since acquisition and where as you integrate and build further , you see the most , most opportunity .

Speaker #3: Yeah . The first thing I would call out is just the collaboration effort between our teams . The integration is going exceedingly well .

Speaker #3: We're finding areas of opportunity and in customer engagement and procurement , among other areas , and across their categories , they they still continue to perform very well .

Speaker #3: And as we noted in the prepared remarks , in line with our expectations , we're very excited about next year for Supplementals . Of course , we're not giving guidance today , but they they do have quite a bit of new innovation coming for next year that we're all pretty fired up about .

Speaker #3: And so we're overall Steve , we couldn't be more pleased .

Speaker #6: Okay . Very good . I'll I'll pass it on . Thank you .

Speaker #3: Thanks .

Speaker #1: Thank you . Our next question comes from Jim Solera with Stephens . Your line is open .

Speaker #7: Hey . Hey , Steve . Good morning . Thanks for taking the question , Steve . That's been a pleasure working with you .

Speaker #7: Hopefully you have a long vacation planned . We get into the beginning of next year , take advantage of some time off . I wanted to maybe ask a little bit more detail around the other segment , because branded retail actually came in ahead of what we were modeling and , you know , the other piece came a little bit behind .

Speaker #7: 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 ?

Speaker #3: Yeah . Jim , the food service business has been under pressure , you know , not surprisingly , given the economic environment and consumer sentiment .

Speaker #3: So that 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 2 to 3 years to improve the that business is still delivering very nicely on the bottom line .

Speaker #3: So that's good to see . But we you know , look , we would expect that to recover as the economy recovers . It tends to ebb and flow with that .

Speaker #3: So nothing terribly unusual there . You know volumes were a little bit better in that in that other category primarily due to to to vending .

Speaker #3: So you may you may note that as well . Private label is interesting because , you know , it has been weak . profitability of syndicated data , which may seem kind of strange given you know , where we are economically , but you know , the , the price gaps between private label and some of the lower priced branded products have narrowed significantly .

Speaker #3: And so I would chalk it up to that.

Speaker #7: 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 ?

Speaker #3: Yeah , you can you can look at traffic . It would be a good indicator . And , you know , remember our food service business is is really broad .

Speaker #3: Right . So it's you know , it's broad line through , you know , the big distributors . But it's also QSR which is has clearly been under pressure .

Speaker #3: You know we we compete across all those channels . So it's just it's just general weakness across food service given the economic environment .

Speaker #7: Okay . And then if I could sneak in one more you guys brought down your your expectations for headwinds from tariff . But we've also recently seen some step up in ag commodity prices .

Speaker #7: Just offer any thoughts around how we should be putting together puts and takes as we think about modeling ? 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 .

Speaker #8: I mean , Jim Ross just 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 inflation .

Speaker #8: I mean , wheat commodities are still very volatile . You know , there are other things that are going to be up next year .

Speaker #8: Obviously , we only had tariffs for part of the year this year . So you know , when we give guidance on 2026 , my guess is you'll see some inflationary pressure with regard to input costs .

Speaker #7: Okay . Awesome I appreciate the color guys . I'll be back in the queue .

Speaker #5: Thank you .

Speaker #1: Thank you . Our next question comes from Max Gumpert with BNP Paribas . Your line is open .

Speaker #9: Hey , thanks for the question and congrats , Steve . First on the on the dividend and on on cash . So you noted reducing your expectations for CapEx this year as you focus on returning to a more normalized leverage ratio , is something you can talk about .

Speaker #9: The balance between pulling this lever , pulling down CapEx versus reconsidering whether the dividends an appropriate level . And I'm really asking because it feels like an acknowledgement or an early admission that this combination of your leverage and the dividend are restraining to some degree , your ability to invest in the business .

Speaker #9: Thanks very much .

Speaker #8: Yeah . I mean , obviously every quarter or throughout the year , even , you know , we consider capital allocation . It's very important to us .

Speaker #8: 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 .

Speaker #8: You know, we shifted some of the projects into next year. And then we did a reassessment of projects to make sure we're only doing the projects that deliver the best returns.

Speaker #8: So I'd say it's exclusive . Any of any consideration around dividends necessarily . And then on a quarterly basis , our , you know , our board considers the dividend .

Speaker #8: You know , I want to get ahead of anything or speculate . But the reality is , you know , the focus is always on delivering the shareholder value .

Speaker #8: And then based on the facts and circumstances , circumstances at the time , you know , the board makes their decision , you from a dividend policy perspective .

Speaker #8: So so I'd say , you know , really no difference in philosophically how we think about capital allocation . But obviously we're aware of the , you know , our leverage ratios .

Speaker #8: And we're well aware well aware of the the payout ratio . And all of that will go into consideration as we think about capital allocation going forward .

Speaker #9: Okay . And then coming back to margins this quarter , your gross margin was down 190 basis points . EBITDA margin was down 160 basis points .

Speaker #9: And that looks to be despite a tailwind . You actually had from lowering ingredient costs as a percent of sales . So it feels like negative price mix and lower volumes are really starting to pressure your margins .

Speaker #9: Given the competitive environment and the consumer environment don't seem to be swinging to positive , at least in the early part of 26 .

Speaker #9: 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 of margin pressure .

Speaker #8: Yeah , when you look at the gross margin , I mean , I mean , obviously there is the top line pressure . I mean , you know , talked about the consumer .

Speaker #8: We talked we've talked about and you've seen that we've had more promotional activity . So that is causing some of the gross margin pressure .

Speaker #8: But the largest item on gross margin actually has to do with simple meals . And the fact that 100% command . So obviously that's a higher cost product .

Speaker #8: So that is the key . And you know , one of the key items that impacted gross margin overall for the quarter will lap that February of next year .

Speaker #8: 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 .

Speaker #8: And then on the side , if you recall , we we converted a big part of our labor pool . And California from independent distributors to , to company employees .

Speaker #8: So that's a big driver of that . We'll lap that next year as well . And then overall labor costs have been up .

Speaker #8: So so again , you know , from SG&A as a percent of revenue , you know , it does go back to the pressure on the top line .

Speaker #8: But I'd say there's really no one item that I'd call out , as overly impacting the overall EBITDA margin from SG&A , except for labor .

Speaker #9: Okay , great . Thanks very much . I'll pass it on .

Speaker #1: Thank you . As a reminder to ask a question , please press star one one on your telephone . Again , that is star one one to ask a question .

Speaker #1: Our next question comes from Mitchell Pinero with Sturdevant and Co . Your line is open .

Speaker #5: Yeah . Hey good morning Steve . Yeah I wanted to just congratulate you on a heck of a run and yeah , certainly great working with you .

Speaker #5: And I guess you were the third CFO of flowers . I've known so . And I guess the longest of those runs . So again , congrats .

Speaker #8: Thank you .

Speaker #5: So I have a question , you know , on one hand we talked generational shift in your prepared remarks . And then we're also talking consumer weakness , especially at the low end .

Speaker #5: But they're still eating . You know , there's still there's still there . You know , and bread has consistently evolved towards better for you .

Speaker #5: 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 shift to the sort of economic weakness , you know , in your remarks .

Speaker #3: 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 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 .

Speaker #3: So I do think that that does play a role in this . But , you know , the shift that we're really talking about is , is centered around traditional loaf , meaning , you know , the traditional 20 ounce soft and white breads .

Speaker #3: And there is definitely been a shift , frankly , that's been underway for several years now , but has just accelerated over the last 12 to 18 months , where the categories really bifurcated into premium , differentiated or value .

Speaker #3: And traditional loaf is has really taken it on the chin because of that . That's very impactful for us . Obviously , because we're we're very , you know , concentrated in that , in that category , particularly given we have the number one brand and number one skew in that category .

Speaker #3: 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 .

Speaker #3: You know , we we clearly acknowledge . The challenges that we're facing in the short term , you know , given that consumer shift .

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: 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 , you know , Canyon up 6% in units .

Speaker #3: Dave's Killer Bread up 10% in units . You've seen us enter into the small loaf category that definitely addresses a consumer need . In the quarter , we gained 15 points , 15 full points of unit share , and we're already number two under that Nature's banner .

Speaker #3: And while that category is growing 85% , obviously off of a small base , but significant . So I believe we're doing all the right things for the long pull .

Speaker #3: You know , while we try to mitigate the challenges in the in the short growth .

Speaker #5: So , so listen , you know , I mean , nature own has obviously been a , a tremendous success story . And it is weighted towards traditional loaf .

Speaker #5: But you also have Morita and Sunbeam, and I don't know, Captain Durst, John Durst, bread, and all these other breads underneath.

Speaker #5: Where , where do they Own mean , is it I know they're important for regional shelf space and things like that , but I'm just curious .

Speaker #5: They seem to be left in the dust a little bit . And I'm curious if they're how strategic they are .

Speaker #3: Yeah . You know , that's been a change . That's been underway for many years now . Mitch and I would tell you that the , you know , the regionals have been , you know , fairly de-emphasized , you know , over the last , you know , eight years or so , 8 to 10 years .

Speaker #3: And the primary reason for that is , is retailer consolidation . You know , you can't you can't run a national ad with with Sunbeam , but you can with wonder .

Speaker #3: And you can with nature's own . Now certainly they do play important roles in particular markets like you take Sunbeam and Atlanta or Bunny and Louisiana .

Speaker #3: They are still very important brands , but they're , you know , they're much smaller than they used to be . They've they've been supplanted by the likes of Nature's Own and wander over time .

Speaker #5: Does so . Okay . And then just last question on that is , I mean , it certainly would add complexity to the not that you want to get rid of brands , but it certainly adds sort of unnecessary complexity to have these smaller brands and , you know , so , so is that but is that not a problem ?

Speaker #5: Is that not an issue or do you have sort of a solution for that .

Speaker #3: Not not so much with with the regional brands . But I 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 small loaves are growing very , very fast , but it's still relatively small .

Speaker #3: Right . And , you know , you're introducing an complexity into a bakery that's accustomed to running really fast runs of nature's own butter bread , for example .

Speaker #3: But it is 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 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 .

Speaker #3: So it to me , it's I'm not very concerned about it . It's a short term issue that I'm willing to that I'm willing to undertake because I know I'm delivering for the consumer .

Speaker #5: Okay . And just just a couple other things . You're down to 44 bakeries . Is that going to be the right number for a while , or are there opportunities for additional , you know , consolidation ?

Speaker #3: Yeah , Mitch , we're always evaluating our cost structure . You know , and we know that we have further supply , supply chain optimization to to take place , you know , where and when that will occur .

Speaker #3: Is , is too speculative . But , you know , 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 .

Speaker #3: So we're moving complexity , increasing focus and making sure that we're optimized from a cost structure standpoint is top of mind .

Speaker #5: Okay , okay , that's all I have . Thank you very much .

Speaker #3: Thanks much .

Speaker #1: 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 .

Speaker #3: I want to thank everybody for taking time today and joining us for questions . We very much appreciate your interest in our company .

Speaker #3: And as always , we look forward to speaking with you again next year . Actually . So take care . Thank you .