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.

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. Joining me today are Ryals McMullian, Chairman and CEO, and Steve Kinsey, our CFO. Ryals, I'll turn it over to you.

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 is transitioning. The continued challenging economic environment and shifting consumer trends have pressured 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. Now this transition is going to take time to fully implement, 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. 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. I would like to thank the entire Flowers team for their tireless dedication in this process, and to our shareholders for their partnership and support. And so with that, Gigi, we'll take questions.

Our first question comes from Steve Powers from Deutsche Bank.

Ryals, first for you, so on the branded side, you mentioned in the prepared remarks, greater competitive intensity and also cited new lower-priced bread products that are creating challenges in the current environment. 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, maybe the bigger change in trend came on the other side, not unbranded. So maybe also what you're seeing on that? And then if I could, I got a follow-up for Steve.

Sure. So in terms of the competitive environment, as we said, Steve, the promotional environment is elevated, but relatively stable. You've seen us promote a little bit more, particularly around our differentiated products continuing to drive trial awareness, household penetration, etc. And that's 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 is pressuring results somewhat. And I would say that's particularly affecting the traditional loaf area, which we're as you know, particularly exposed to. We are addressing that. We have our own line of small loafs now, and we have more coming to address that value shopper. 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, but you also see good performance on the value end, particularly in mass and club channels. So it's there, we're aware of it and we're proactively addressing it. In terms of the other category, there was, yes. A lot of the private label business, as you know, is bid business. So it's not unusual for it to come and go, and a lot of that on the private label side was driven by lost business that eventually gets replaced by something else. But we're also seeing continued weakness in the away-from-home food service business as well. So that's what's driving that.

Okay. Very clear. Steve, if I could ask you two questions. First, regarding the updated tariff outlook, I'm not sure if the previous tariff costs have just been delayed due to volume dynamics or if there has been a structural update to a lower tariff cost run rate. Secondly, from a capital allocation standpoint, with the reduction in EPS guidance, the gap between your dividend commitments and your current EPS run rate is becoming tighter. How are you thinking about this? I know the Board recently raised the dividend, and you mentioned feeling good about your overall cash and capital position. However, how do you view this situation, especially as you pay down debt and consider how the dividend might impact your M&A aspirations?

Thank you. Regarding the tariffs, we are providing an update as things seem to be becoming more finalized. We are closely monitoring changes in various countries and overall rates, so this isn't really a delay. In fact, we anticipate a significant reduction in tariffs based on current observations. Regarding capital allocation, we aim for a balanced approach. The board reviews this on a quarterly basis and considers performance, cash flow, and liquidity, just as they have in the past. We will keep having those discussions and make decisions as developments unfold.

Okay. Could you remind me if there is a target payout ratio? I assume it's currently higher than ideal. What is the long-term target?

We currently do not have a stated target payout ratio.

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. So I just wanted to remind you of that as well.

Our next question comes from the line of Bill Chappell from Truist Securities.

So I guess back to the competitive question. I guess, 10 years ago, maybe not that long ago, it was supposed to be a duopoly between you and Bimbo. And the thought would be everybody play well in the sandbox on the pricing, but instead, all the players kind of competed for market share, competed for capacity utilization and gave that up for profits. And so gross margin never really improved. And we had a kind of a 6-, 7-year period where it's been pretty benign. Are we going back to this 5, 7, 8 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? Or is it not that bad?

I don't think it's that bad. What we're observing, more than anything else, is a significant transition in the category, driven by rapidly changing consumer trends. This affects various areas, including health and wellness, consumer advocacy, and ultra-processed foods. The dynamics in the food sector, especially baked goods, are changing. For some reason, baked goods are often highlighted in discussions about ultra-processed foods. We are committed to aggressively innovating to navigate this transition. On the retail side, traditional loaf bread, especially light and wheat varieties, is being most impacted. That's why we are focusing on innovation. We've had great success with products like Dave's Killer Bread and Canyon Bakehouse across different segments, including sandwiches, buns, rolls, and breakfast items. Our keto products also performed well, up by 37% this quarter, and that segment is growing. We have exciting innovations lined up for Q3 to tackle the challenges in these categories. Our strategy involves addressing the decline in traditional loaf breads and shifting towards more innovative and differentiated products. We do have plans to address the relative weakness of large brands like Nature's Own, but I won't elaborate on that today for competitive reasons.

I understand. Just to follow up, while I believe you have strategies to enhance profitability, it's important to consider the competitive landscape. What about your rivals? Not just Bimbo, but including numerous smaller regional competitors that often engage in aggressive promotions to boost volume. Are you confident that everyone has the same objectives? Or could competitive pressures intensify from that perspective?

Well, look, I mean, this has always been a competitive category. And our competitors are going to do what they're going to do. 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 in our innovation, and that's what we're going to continue to focus on.

Our question comes from the line of Jim Salera from Stephens.

I wanted to talk about what you mentioned in your prepared remarks regarding Wonder contributing to share gains in cake without causing any cannibalization in Tastykake. Can you provide some insights on whether this is mainly due to the areas where Wonder is being introduced, or is it that in the regions where Tastykake is stronger, both Tasty and Wonder are available in the same retail locations?

Yes, maybe a little bit. I mean Tasty as you know is particularly strong in that Mid-Atlantic region, whereas Wonder naturally is more of a national brand. I'll admit I'm a little bit surprised that there hasn't been more cannibalization, but I'm quite pleased there has not been. But, Wonder, the launch of that line of products has vastly exceeded our expectations. And now even our forecast off of early results, it's running ahead of that. Retailers continue to be excited about it. The consumer has accepted it with enthusiasm, and we're going to continue to add to that. We've got more coming from Wonder too. So we've been extremely pleased with the results there.

Shifting the conversation to Simple Mills, I can see the potential for innovation within your range of offerings. Should we anticipate that Simple Mills will play a significant role in your innovation efforts, or are you primarily focusing on the existing portfolio brands? Additionally, during my recent shopping trip in the Midwest, I noticed Simple Mills prominently featured at a club retailer. This might have been a coincidence, but could you share if there has been increased engagement with club retailers? Do you have a rotation for club products? Any insights would be appreciated.

On the innovation front, I was speaking mainly about the core category. However, Simple Mills will also continue to innovate aggressively. I think I mentioned in the last call that they had been on an every other year innovation rotation. We're working with them to accelerate that, and we have ambitious plans for them next year. As for the club rotation, I'm not entirely sure I understood the question, but if you're saying that you were in a club retailer and didn't see what you're usually accustomed to, that's likely due to rotations.

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

Nothing's changed. They have rotations in club. I will just add, 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 and even that still performed in line with our already high expectations. We expect that to continue. They're doing great.

Our next question comes from the line of Mitchell Pinheiro from Sturdivant & Company.

The transition you are experiencing is significant and will take time. How quickly do you expect your innovative strategies and other plans to address this situation? Transforming a large operation is not a quick process. Nature's Own is a major brand along with your other loaf products, which make up a large portion of your business. Are we looking at a minimum of five years for this transition to be completed, or do you foresee any immediate actions that could accelerate the process?

Yes, it's a valid question. I'm not going to set a timeline today, but I want to emphasize that patience will be necessary. This is not a quick fix; I see it as a generational change in our category, possibly a once-in-a-lifetime transformation that we need to manage. I believe the traditional loaf category will eventually stabilize. Whether that happens next quarter or this time next year is uncertain, but I am confident it will find its balance. We are currently observing many factors, mainly the shift in consumer preferences and behaviors. Part of this is likely related to the final adjustments following the pandemic, which you have inquired about each quarter since the worst of it passed. This is also connected to health and wellness trends and the impact of GLP-1. It will find its footing. Our focus must be to ensure that, as it stabilizes, we are competitive in that environment. I am not suggesting that traditional loaf sales will disappear; tens of millions are still sold daily. However, I anticipate that the market may be smaller than before, and we need to introduce alternatives. Therefore, we are intensely focused on innovation and creating exciting new products that meet consumer demands. It's crucial. Even within the traditional loaf segment, there are opportunities for us to differentiate ourselves further. We currently have the leading brand and SKU in the category, and even a declining sector has its advantages. We will continue to support brands like Nature's Own to maximize their performance despite the shifting landscape. However, this will take time, and it will take some time for the innovative parts of the category to exceed any losses in the traditional loaf sector. Nevertheless, I believe we can further reduce losses even in that challenging traditional loaf space.

And then 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 levers there you can pull to maintain your gross margin despite the volumes being under pressure?

Yes, we have closed a bakery earlier this year and have closed several in the last few years. While that's one option, we have other strategies to improve market efficiencies as well. We have plans in place to tackle these challenges. Additionally, through our portfolio strategy, we are a large player in the food service sector. We have replaced that volume with much higher margin business, which has significantly increased the profitability of our away-from-home operations. I have mentioned this before, but it's important to highlight in light of your question. It's not just about closing bakeries or production lines; we are also optimizing our portfolio to improve margins and address the overhead leakage you pointed out.

I have one last question regarding mergers and acquisitions. M&A is certainly a faster approach to expand into new products and markets. Having just acquired Simple Mills, is there interest in pursuing more M&A opportunities? Considering your current leverage at 3.2 times, will we see more of this in the near future or over time?

I would say that as of today, Mitch, we might see a bit more over time. We are currently focused on paying down debt, but we will always keep an eye on the market. I also want to point out that there are other methods for pursuing M&A besides using cash. It has been and will continue to be one of our major strategic priorities.

Our next question comes from the line of Scott Marks from Jefferies.

First thing I wanted to ask about is, you just touched upon still putting investment dollars behind Nature's Own 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? Without the packaging redesign? Just trying to understand how those investment dollars will be spent.

Yes. It will be a mix, of promotional support, but that's always been the case. That's not new. And like we always say, we view promotions more as a tool to drive trial and awareness than necessarily unit share. And 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 just been impressive. And I think that will continue. And that's a testament to our overall strategies and our brand support and promotional strategies. But yes, it will be a mix of marketing dollar support and promotions. But that's, again, no big change. We've been doing that.

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 just overall mix right now and relative to where you want that to be 3, 5, 7 years out?

Yes. In terms of small loafs, it's pretty small right now, actually, but growing. And I think that could ebb and flow a little bit with the economy, Scott. But from a more demographic perspective, 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, 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.

And then just on maybe what you would consider the more differentiated part of your portfolio? How should we think about current mix versus where you want to get that to?

Well, that's a focus for us. And so over time, you'll 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 bars and our Snack Bites and Simple Mills on top of that. 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. And we also like it because it's premium and the profits are quite robust. That's also been a focus of our M&A efforts as well.

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

Yes. I think other than the small loafs. Obviously, you've seen significant growth in organics. And with a 75% share, we've been the primary beneficiary of that. So we've seen substantial space gains, particularly in mass for DKB, which I think really highlights the bifurcation of the category. When you think about mass as a value shopper's paradise, the fact that they're also focusing on premium tells you a lot about the category. But other than the small loaf piece, not a whole lot more has happened yet from a retailer standpoint. But I do think that, that is coming at some point. I think we'll see some amount of shelf reallocation that reflects these consumer trends as we go forward.

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

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

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