Flowers Foods Q4 2024 Prepared Remarks Earnings Report

Flowers Foods EPS Results

• Actual EPS: $0.22
• Consensus EPS: $0.21
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.20

Flowers Foods Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $1.13 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Flowers Foods Announcement Details

• Quarter: Q4 2024 Prepared Remarks
• Date: 2/7/2025
• Time: Before Market Opens
• Conference Call Date: Friday, February 7, 2025
• Conference Call Time: 7:00AM ET

Flowers Foods (NYSE:FLO) produces and markets packaged bakery food products in the United States. Its principal products include fresh breads, buns, rolls, snack items, bagels, English muffins, and tortillas, as well as frozen breads and rolls under the Nature's Own, Dave's Killer Bread, Wonder, Canyon Bakehouse, Mrs. Freshley's, and Tastykake brand names. The company distributes its products through a direct-store-delivery distribution and a warehouse delivery system, as well as operates bakeries. Its customers include national and regional restaurants, institutions and foodservice distributors, and retail in-store bakeries; wholesale distributors; mass merchandisers, supermarkets, vending outlets, and convenience stores; quick-serve chains, food wholesalers, institutions, dollar stores, and vending companies; and public health care, military commissaries, and prisons, and other governmental institutions. The company was formerly known as Flowers Industries and changed its name to Flowers Foods, Inc. in 2001. Flowers Foods, Inc. was founded in 1919 and is headquartered in Thomasville, Georgia.

Flowers Foods Q4 2024 Prepared Remarks Earnings Call Transcript

Presentation

[JT Rieck, Investor Relations & Treasurer at Flowers Foods]

Hello, everyone. This is JT Rick, EVP of Finance and Investor Relations. Welcome to the prerecorded discussion of Flowers Foods twenty twenty four Fourth Quarter and Full Year Results. We will host a live Q and A session this morning at 08:30AM Eastern. Further details about the live call along with our earnings release, a transcript of these recorded remarks and a related slide presentation are posted on the Investors section of flowersfoods.com.

[JT Rieck, Investor Relations & Treasurer at Flowers Foods]

Before we get started, keep in mind that the information presented here may include 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. Providing remarks today are Ryals McMullen, Chairman and CEO and Steve Kinsey, our CFO. Ryals, I'll turn it over to you.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Thanks, J. T. It's a pleasure to welcome everyone to the call. Although I'm proud of our team's execution in the fourth quarter and full year of 2024, financial results were mixed. Category weakness drove the lower than expected sales, but that pressure was more than offset by margin expansion, which benefited from efficiency initiatives and moderating input costs.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

I think it's important to point out for context that we grew dollars and units in tracked channels across our branded bread portfolio in 2024. We've documented for several quarters now a consumer shift away from traditional loaf toward more differentiated and premium items. I'm pleased to report that due to our brand investments, gains in organics, keto, buns and rolls and gluten free more than offset softness in those more traditional segments. Furthermore, while our foodservice volumes were down, mostly due to intentional exits and to some extent from weakness in the category, we nevertheless showed respectable dollar growth. And due to our portfolio strategy, our foodservice business turned in substantially improved profits.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

The biggest headwind we face from both a revenue and a volume growth standpoint is significant weakness in the sweet baked goods category. However, we're addressing that headwind straight on with the introduction of Wonder Snack Cakes, for which we've received tremendous retailer enthusiasm given the iconic Wonder brand and our superior quality. Overall, we believe our portfolio is well positioned to capitalize on the seeming secular shifts in the category to more premium and better for you items. So turning to weakness in the bread category, the causes are difficult to isolate, but some attribute it to a variety of factors, including an economic slowdown, GLP ones, and healthier eating trends. As I mentioned, much of the pressure has been focused in sweet baked goods and traditional loaf products like white and wheat bread.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

To overcome retail headwinds, we're investing in our brands to meet the needs of an evolving consumer, finding pockets of growth in a slowing bread category. While the category has softened, Buns and Rolls, breakfasts, and premium products have outperformed. And we're targeting our innovation at those more promising areas. That investment is paying off as each of our major bread brands gain or held unit share and dollar share in the fourth quarter. The away from home category has been similarly challenged, but our prioritization of profitability over volume has improved results.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

We're refilling freed up capacity with higher margin business, and we see significant opportunity to drive future growth. While we work to improve near term results, we're dedicated to enhancing long term shareholder value. This evaluation includes our brand portfolio, the way we go to market, our distribution model and supply chain. I'll provide greater detail on some of these initiatives and how we're taking specific actions to drive improved performance. Ultimately, our goal is to transform Flowers into a faster growing, higher margin business that will compound shareholder value over time.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Part of that process will be enabled through M and A, such as our announced acquisition of Supple Mills. But we must also optimize our existing business, such as with the introduction of Wonder Cake products, which I mentioned earlier. Now I'll provide an overview of our fourth quarter and full year performance in the context of our four strategic priorities. Developing our team, focusing on our brands, prioritizing margins and pursuing smart M and A. Following that, Steve will review the financial results and guidance, and then I'll close with a discussion of key themes moving forward.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Our team, which is our first strategic priority, has been faced with a series of weather events that have impacted them personally and professionally. Last quarter, we discussed the hurricanes that affected much of the Southeast and where ongoing recovery efforts continue today. More recently, fires in California resulted in widespread devastation that touched the lives of many. Thankfully, all of our team is safe and our warehouse locations have been spared. To help those who are not as fortunate, our team is working with disaster relief organizations to support community members in need.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

We're also working closely with customers to help provide consumers the products necessary to feed their families. We have discussed the transition of our business model in California from a partnership with independent distributors to an internal sales team. That process has continued. And despite the fires, we expect to complete the transition on schedule. The California transition is one step we're taking to drive improved long term results.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Another initiative is a targeted investment in our customer team To drive even closer relationships with our customers and align our strategic growth plans to maximize sales, last year, we refined our organizational structure and added top tier external talent. That investment is facilitating strong acceptance of our product innovation, improved and expanded shelf placement, and increased product displays. Over time, we expect these benefits to accelerate the market advantages of our leading brands. And that focus on our brands is our second strategic priority. In contrast to the weaker category results where a pressured consumer drove volumes down 1.8% in the quarter, our leading brands continued to outperform.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

DKB, Wonder and Canyon grew tracked channel volumes 2.9%, zero point five % and a staggering 17.8% respectively in the fourth quarter. And NatureZone, which is concentrated in traditional loaf, the area of the market most impacted by the current environment, outpaced the category, down only 1.6%. NatureZone's more premium, perfectly crafted line of products increased units 8.5%. That performance translated to strong unit share performance with DKB, Wander and Canyon all gaining 10 basis points and NatureZone maintaining share. Particularly noteworthy was DKB's ability to achieve positive unit growth rates in all income cohorts, which confirms the increasing preference for differentiated Better For You products.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

For the year, unit sales among lower income consumers grew the most, though that trend seemed to reverse in the fourth quarter. DKB's strength demonstrates that even pressured consumers are willing to pay for premium products that offer meaningful perceived value. And that strong consumer perception enabled DKB to achieve record levels of household penetration in 2024, eclipsing even the pandemic influence 2020 results. Canyon is also generating exceptional results. Freed from prior capacity limitations, the brand is successfully gaining new distribution and driving growth, helped by fresh marketing and promotion initiatives.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

To continue this momentum and capitalize on Canyon's strong consumer loyalty, we are also exploring the addition of new innovative products to the brand lineup. In the current weak environment, we remain focused on maximizing our current and future growth prospects. Our continued investment in innovation has been a key driver of our strong relative performance. A great example of that is our Nature's Own Keto line of products, which gained four ten basis points of unit share to take the number one spot in the subcategory. We expect to build on that momentum with a robust schedule of on trend innovation that targets evolving consumer demand.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

As consumers shift to healthier eating options, we're bolstering our Nature's Own Keto lineup with the addition of hot dog buns and a multigrain loaf. DKB snack bars and protein bars continue to gain distribution, And consumers are singing their praises with Good Housekeeping awarding us the best protein bars of 2024. While Delicious Living named them their favorite nutrition bar product. In keeping with the healthier eating trend, we're launching our most unique product yet, DKB Snack Bites. These poppable and perfect for snacking bites are packed with killer taste and whole grain nutrition.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Retailers are responding enthusiastically, and we're optimistic that consumers will love them as well. We're also meeting consumer needs regarding affordability. In this challenging economic environment, consumers have been asking for lower priced options and our new small loaves fit that bill perfectly. Coming in at only 12 ounces, small loaves carry a more affordable price point and are perfect for the smaller household or those who want multiple bread flavors or varieties without worrying about throwing any slices away. Our third strategic priority is margins, an area where we continue to make significant progress.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Adjusted EBITDA margins expanded 70 basis points compared to the year ago quarter, benefiting from the successful execution of our portfolio strategy and savings initiatives. To further boost margins, we're focused on optimizing our supply chain to provide Similarly, our Similarly, our procurement team has undertaken several strategic sourcing initiatives to reduce costs. One effort includes reallocating purchases of key commodities to new suppliers at lower cost. Another uses our ERP system to route each spare part order to the supplier with the lowest total cost of ownership. And a third program has significantly reduced lease labor expenses by negotiating lower fees from existing suppliers in addition to adding new lower cost suppliers.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

These examples are just a small portion of our company wide initiatives to increase efficiencies. Our fourth priority is Smart M and A. In January, we announced that we had entered into a definitive agreement to acquire Simple Mills. This acquisition increases our exposure to better for you and attractive snacking segments, diversifies our category exposure, and enhances our growth and margin prospects. This transaction is consistent with our clearly defined M and A strategy of seeking compelling brands that complement our existing portfolio and that skew towards better for you products.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

It also leverages our demonstrated ability to grow acquired brands in the better for you space. Supplement Mills has a loyal customer following and we see significant opportunity to continue the brand's strong track record of growth by further expanding distribution, developing new innovative products and increasing velocities. Slide 11 highlights some of these opportunities. With household penetration well below competitors, Simple Mills has ample growth opportunities by narrowing the gap with legacy players in total distribution points and average items per store. Those opportunities are abundant, even in Simple Mills' most mature categories.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Following the deal closing, our capital allocation priority will be debt pay down, something we've done successfully with past acquisitions like DKB and Canyon. We view our M and A capabilities a key driver of future growth by shifting more of our business towards a growthier, better for you nutritional profile. Quickly returning to a more normalized leverage ratio will enable us to explore further opportunities. As always, we'll remain disciplined in our approach and focused on growing shareholder value with an attractive risk reward balance. Now I'll turn it over to Steve to review the details of the quarter and then I'll close with our outlook for the current business environment.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Steve?

[Steve Kinsey, CFO at Flowers Foods]

Thank you, Ryals, and hello, everyone. I am pleased to present our fourth quarter and full year '20 '20 '4 results. Net sales decreased 1.6% from the prior year period. Price mix improved 0.9% helped by optimization of our non retail business, most notably food service, but was more than offset by volume declines of 2.5% largely in cake and branded traditional loaf bread. Gross margin as a percentage of sales excluding depreciation and amortization increased 90 basis points to 48.8 over the same quarter last year.

[Steve Kinsey, CFO at Flowers Foods]

Comparisons benefited mostly from moderating ingredient cost and optimization of our non retail business. Lower production volumes and higher workforce related cost partially offset the overall improvement. Selling distribution and administrative expenses as a percentage of sales were 40%, a 30 basis point increase over the prior year period. The increase was due to higher workforce related costs, rent expense and bad debt expense. These items were partially offset by lower distributor distribution fees and marketing and insurance expenses.

[Steve Kinsey, CFO at Flowers Foods]

Excluding matters affecting comparability adjusted, SD and A expenses were 39.6 of sales, up 20 basis points compared to the prior period. GAAP diluted EPS for the quarter was $0.2 per share,

[Steve Kinsey, CFO at Flowers Foods]

a $0.03

[Steve Kinsey, CFO at Flowers Foods]

increase over the prior year period. Excluding the items affecting comparability detailed in the release, adjusted diluted EPS in the quarter increased $0.02 over the prior year period to $0.22 Turning now to our balance sheet, liquidity and cash flow. For fiscal twenty twenty four, cash flow from operating activities increased $63,000,000 to four thirteen million dollars Capital expenditures increased $3,000,000 to $132,000,000 and included $6,000,000 for the ongoing ERP upgrade. Dividends paid increased 8,000,000 to $2.00 3,000,000. We believe our financial position remains strong.

[Steve Kinsey, CFO at Flowers Foods]

At quarter end, net debt to trailing twelve month adjusted EBITDA stood at approximately 1.9 times. We held 5,000,000 in cash and cash equivalents and had $564,000,000 of remaining availability under our credit facilities. To enable us to close on the Simple Mills transaction, we entered a binding commitment letter for a three sixty four day, dollars seven ninety five million term loan. We intend to replace this facility with permanent debt financing in the first quarter. Now turning to our outlook for 2025, which incorporates an expectation for near term headwinds from the difficult current economic environment and the potential impact of new tariffs combined with actions we are taking to drive long term performance improvement, including the benefit of a partial year contribution of Simple Mills, weeks spec sales of $5,403,000,000 to $5,487,000,000 adjusted EBITDA of $560 to $591,000,000 and adjusted EPS in the range of $1.11 to $1.24 Excluding Simple Mills, we expect sales of 5,180,000,000 to 5,257,000,000 adjusted EBITDA of $5.26 to $554,000,000 and adjusted EPS in the range of a dollar 18 to a dollar 28.

[Steve Kinsey, CFO at Flowers Foods]

Dollars Relative to the prior year, results are expected to be stronger earlier in the year helped by the carryover of new business wins and savings and pricing initiatives as well as moderating commodity costs. Our outlook for the back half incorporates the lapping of those benefits, increased commodity cost headwinds and continued challenging category trends. The largest swing factor in our guidance is overall category performance. The significant category volatility in recent weeks, which drove lower than expected sales, makes forecasting full year results challenging. We are assuming a range of scenarios that anticipate continued category weakness in bread and cake.

[Steve Kinsey, CFO at Flowers Foods]

Other key factors that could shift results within our guidance range include the promotional environment, potential new business wins, the transition of our California distribution, and implementation of our ERP initiative. Currently, approximately 70% of our key raw materials are covered in 2025. Based on that coverage, our guidance incorporates inflationary pressures compared to the prior year with the benefit in the first quarter, transitioning to a headwind for the remainder of 2025. To minimize volatility and provide adequate visibility into cost, we have maintained our historical hedging strategy in which we attempt to increase the certainty of our key ingredient costs six to twelve months out. As previously disclosed, in fiscal year twenty twenty three, we reached an agreement to settle distributor related class action litigation in California.

[Steve Kinsey, CFO at Flowers Foods]

As Ryals mentioned, we are making progress with the process of repurchasing the distribution rights, which is expected to be completed in April in accordance with the settlement agreement. In the first quarter, we are resuming the Bakery rollout of our ERP system, which we had paused to concentrate resources on our California distribution transition. To minimize the risk of operational disruptions, we are proceeding judiciously and are confident in our ability to execute the transition smoothly. Thank you. And now I'll turn it back to Ryals.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Thank you, Steve. Now I'd like to discuss some of the trends impacting our current performance and the steps we're taking to maximize present and future opportunities. I'll first touch on the consumer trends and then address the competitive environment. Our 2025 financial outlook incorporates continued caution on the consumer and promotional environment, both of which are relatively consistent with the recent past. Consumers remain under financial pressure as inflation continues to rise, albeit at moderating rates.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

In response, consumers have economized in various ways, including what they buy and where they buy it. When those steps have not been sufficient to offset the higher costs, they've used credit cards to make up the difference. Increasing delinquency rates on credit card debt indicate a weakening in consumer health. Demand for private label products has persisted, though unit share gains turned negative over the last few quarters as private label price increases have outstripped those of branded products. The shift to eating at home has continued, driven partly by price increases in away from home channels, which exacerbated the price gap with at home eating.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

And more of those at home purchases have shifted to value channels like mass and club stores. While many low income consumers transitioned to greater at home eating several years ago, more recently we've seen similar behavior among higher income consumers. Despite that shift to at home eating, the center store bread category as measured in tracked channels has been pressured. Consumers have been gravitating more to the store perimeter as they look for restaurant like experiences and what they consider healthier options. The impact of GLP-1s on this shift is unclear.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Research seems to show that consumers who have adopted GLP-1s purchase less food and shift more of their purchases to nutrient dense items located in the store perimeter. However, that effect seems to wane over time. And for consumers taking GLP-1s specifically for weight loss, research shows the initial impact on purchases reverses and ultimately results in consumers spending even more on center store items than prior to adoption. In conjunction with the rise of GLP-1s is greater interest in healthy eating, best exemplified by the Make America Healthy Again movement. With its focus on cleaner food labels, we feel well positioned for that shift.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Going back to its introduction in 1977, Nature's Own stood out for its clean label with no artificial preservatives, colors, or flavors. Nature's Own has maintained that advantage. And more recently, we've added brands like DKB and Canyon, which offer organic and gluten free benefits to meet changing consumer demand. Our announcement to acquire Simple Mills takes this shift one step further, adding a leader in the Better For You space with clean labels and a focus on regenerative agriculture. We are well positioned to capitalize on the trend towards healthier eating and expect a significant portion of our future growth to derive from Better For You products.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Turning now to the competitive environment where trends have remained consistent with recent quarters. The lack of category volume growth has raised fears of increased promotional levels. And while tracked channel data show a step up in promotions, the average category price actually increased slightly in the fourth quarter. As we discussed last quarter, part of the explanation for that trend is a mix shift to premium products. But some is also likely due to a greater percentage of products sold on promotion, though with less promotional intensity.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

It's not clear that increased promotional intensity is the solution to volume pressure in the bread category. In areas of the category where promotional levels increase more meaningfully, volume lift does not seem to have benefited commensurate with the level of investment. Guided by our improved trade promotion capabilities, we've remained prudent in our use of promotional spending, carefully monitoring the return on investment. We've been pleased with the effectiveness of our promotional activity, which remains well below pre pandemic levels. While always striving to maintain the affordability of our brands, we are also focused on providing greater value to consumers by developing unique quality products from brands they know and trust.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

In recent years, our innovation team has successfully launched a number of new products, including the Nature's Own Keto line of products, brioche rolls, small loaves, and our DKB stacking portfolio, among others. And we have an exciting pipeline of additional products that we expect will continue to meet consumers' evolving demands. In closing, while I'm pleased with our team's commitment and execution, none of us at Flowers are satisfied with our financial performance. We acknowledge that our guidance is cautious given the volatile environment that we see continuing into at least the first half of twenty twenty five. The potential for tariffs, commodities volatility, higher promotional activity, and a continued weak consumer demand influence that cautious outlook.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

However, at the same time, we have an overall optimistic longer term outlook given the strength of our brands and their performance in the market, our history of successful innovation, and the addition of Simple Mills to the Flowers portfolio. So, in order to mitigate these negative effects and drive growth and profitability, we have been and will continue to do the following things. Number one, aggressively innovate unique premium products to offset the effects of a declining category. This is a proven strategy evidenced by our market share performance. Two, leverage the power of our top brands to move into other faster growing segments like we have with our DKB snack line.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Three, use M and A to focus on new growing product segments to enhance our growth and margin profile, with Simple Mills being the latest example. Four, stabilize the cake business by leveraging the power of the Wonder brand. And five, optimize our supply chain and path to market to deliver industry leading operations and service. In short, we believe that we are very well positioned to take advantage of our opportunities, particularly as the consumer demand environment ultimately stabilizes. We're confident these initiatives will enable us to enhance shareholder value and grow in line with our long term financial targets.

[Ryals McMullian, Chairman & CEO at Flowers Foods]

Thank you very much for your time. That concludes our prepared remarks.

Participants

Executives

• JT Rieck, Investor Relations & Treasurer
• Ryals McMullian, Chairman & CEO
• Steve Kinsey, CFO