Flowers Foods Q1 2025 Prepared Remarks Earnings Call Transcript

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Provided by Quartr
May 15, 2025

Key Takeaways

  • Positive Sentiment: Maintained unit share in the fresh packaged bread category and each leading brand maintained or gained unit and dollar share despite weaker overall category trends.
  • Positive Sentiment: Gained 130 basis points of unit share in the specialty premium loaf category and captured the #1 share in the Keto subcategory for the first time.
  • Positive Sentiment: DKB Snack Bites are off to a strong start—on track to exceed distribution targets and drive incremental category growth—and the Simple Mills acquisition is integrated smoothly, becoming the fastest growing natural cracker brand.
  • Positive Sentiment: Expanded EBITDA margins by 30 basis points to 49.9%, driven by moderating input costs and SG&A cost controls.
  • Negative Sentiment: Lowered full-year guidance for net sales, adjusted EBITDA and EPS, citing continued category weakness and estimated tariff headwinds of $27 million–$30 million for Flowers Foods and $4 million–$6 million for Simple Mills.
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Earnings Conference Call
Flowers Foods Q1 2025 Prepared Remarks
00:00 / 00:00

There are 3 speakers on the call.

Operator

Hello, everyone. This is J. T. Rick, EVP of Finance and Investor Relations. Welcome to the prerecorded discussion of Flowers Foods twenty twenty five First Quarter Results.

Operator

We will host a live Q and A session this morning at 08:30 a. M. 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. Before we get started, keep in mind that the information presented here may include forward looking statements about the company's performance.

Operator

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 plus 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.

Speaker 1

Thanks, JT. It's a pleasure to welcome everyone to the call. Our first quarter performance highlights the importance of our portfolio strategy and the strength of our leading brands. In a difficult environment characterized by increased value seeking behavior from consumers, we maintained unit share in the fresh packaged bread category and each of our leading brands maintained or gained unit and dollar share. Despite our solid relative performance, we are not satisfied with our absolute results, which suffered largely due to weaker than expected category trends.

Speaker 1

Overall food category units declined 1.4%, while the bread and cake category units declined 2.46.4% respectively. In 2024, we successfully mitigated category headwinds with brand investments that drove growth in organics, keto and gluten free. In the first quarter, our retail cake and bread sales weakened further with softness in traditional loaf and cake more than offsetting strength in those other areas. After starting the year with some signs of potential strength, trends deteriorated as the quarter progressed. Weakness in parts of our private label and away from home businesses also pressured results.

Speaker 1

We are responding to these pressures by continuing to invest in our brands, evolving our portfolio to enhance current performance and position Flowers to thrive over the long term. And I believe Flowers is in the best shape in its long history to do just that. We've revamped our team, adding new talent to a deep bench of experienced industry veterans. And we're capitalizing on the strongest brands in the category to target growth opportunities. We're also focused on seeking out new white space for growth.

Speaker 1

Convenience stores, where our penetration rate is low, represent one of the most promising areas of opportunity. Our expanded snacking portfolio with DKB Snacks, Wonder Cake and now Simple Mills better positions us to make inroads in this large and attractive channel. In recognition of the potential opportunity, we're investing in new capabilities, supplementing our team to accelerate our progress. Now, I'll provide an overview of our first quarter 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 our financial results and guidance and then I'll come back and close with a discussion of key themes moving forward.

Speaker 1

Our team, which is our first strategic priority remains our greatest advantage. And that advantage was on full display at Flowers' recent national sales meeting, which I had the pleasure of attending. The event brought together team members from throughout the organization, sales, brands, supply chain and a variety of other functions. In addition to the exciting list of innovative products and new business wins, what struck me most was the deep sense of teamwork and dedication to improving our business and driving long term growth. We've assembled an impressive group of talent with tremendous experience.

Speaker 1

More importantly, our team is committed to each other and the advancement of our common goal of generating sustainable long term growth. We are collaborating to enhance our effectiveness, sharing best practices and pushing each other to improve every day. That collaboration is exemplified in our first quarter market share performance, which benefited from a team effort to drive improved display and promotional execution. The spirit of teamwork and drive for constant improvement bolsters my confidence in our future. A common theme at the sales meeting was keeping the consumer at the core of everything we do.

Speaker 1

One group specifically tasked with that mission is our consumer insights team, which is dedicated to increasing the relevancy of our products to consumers. As preferences evolve and shopping habits shift, companies that prioritize consumers' experiences can build deeper connections with shoppers and seize emerging opportunities in a competitive landscape. This team is aligning our products with consumer trends and engaging consumers with innovative forms and flavors. That work is evident in our innovation pipeline and is a key to driving long term growth. To further enhance our best in class sales growth opportunities, we recently added a Head of Category Management, specifically responsible for driving growth and profitability within assigned product categories.

Speaker 1

Leveraging our deep understanding of consumer behavior, market trends, the competitive landscape and retailer dynamics, this role leads a team of category managers and analysts. Collaborating closely with sales, marketing, supply chain and innovation, these team members are tasked with developing actionable insights and executing category strategies that maximize market share, revenue and profit. Focusing on our brands is our second strategic priority and I've never seen our focus more heightened than now. From our robust innovation pipeline to finding new white space for growth, we're focused on turning insights into action. Two of the most notable recent consumer trends are the shift to better for you products and value seeking.

Speaker 1

And our brands are well positioned to meet that shift from a place of authenticity. Nature's Own is the original cleaner label mainstream brand, established in 1977 with no artificial preservatives, colors or flavors. And we're building on that history by extending into keto and other areas. Some years later, the acquisitions of Dave's Killer Bread and Canyon Bakehouse further solidified our dominant position in better for you bread products. To extend that advantage, our recent acquisition of Simple Mills, a leading natural snacking brand, increases that potential even further.

Speaker 1

Our leadership position is driving strong relative performance as we gained 130 basis points of unit share in the specialty premium loaf category in the first quarter. I'm also pleased to share that we captured the number one share in the Keto subcategory for the first time. To offset weakness in traditional loaf products, we're adapting quickly to further differentiate our other brands and meet consumers' desire for products aligned to their interests in health and wellness. For example, the Nature's Own Keto product line is one of the fastest growing brands in that segment of the category. To further our growth in this area, we recently introduced Keto Hot Dog Buns and a Multi Grain Loaf with a pipeline of additional products following closely behind.

Speaker 1

Similarly, consumer interest in sourdough bread has been particularly strong and we've introduced Nature's Own and Canyon versions of this popular product to meet that demand. As with keto, although we're not the first to market in sourdough, we're confident that our product quality and unique brand attributes will appeal to consumers and fuel additional growth. In other exciting news, our recently launched DKB Snack Bites are off to a great start and we're on track to exceed our store distribution target this year. Encouragingly, a significant portion of buyers are new to the better for you snack category, implying that the bites are growing category sales incrementally. And we're building off that strength with the addition of single serving and new flavor options coming soon.

Speaker 1

Our DKB snack and protein bars continue to grow distribution and velocities. To continue that momentum, we're focused on expanding our lineup with new flavors and increasing our use of displays to drive trial and awareness. Similar to the incrementality of DKB Stack Bites, more than 20% of DKB bar buyers are new to the category. To target consumers looking to maximize the value of their purchases, we're growing our line of small loaves, expanding the two Nature Zone small loaves launched recently last year to nationwide distribution and adding three new varieties to the lineup. Additionally, we recently launched the Wonder Mini Loaf featuring the brand's classic white bread.

Speaker 1

And in our Sweet Baked Goods business, the Wonder line of cake products is already benefiting our performance, contributing to a 10 basis point unit share gain in the cake category despite being introduced later in the quarter. We're on track to exceed our distribution goal for the year and we're optimistic about the product line's potential. Our third strategic priority is margins, an area where we continue to make progress. We expanded EBITDA margins by 30 basis points in the quarter, helped by moderating input costs and the continuing benefit of prior actions to control SG and A expenses. We're implementing our portfolio strategy of driving higher margin branded retail product sales responsibly, enabling us to maintain margins in the short term while offering positive operating leverage potential in the future.

Speaker 1

We've also proactively adjusted our supply chain network and cost structure to adapt our production capacity to the current demand environment. The closure of a bakery in the first quarter is one of several we have rationalized in the last few years. Tariffs have been top of mind for virtually all companies and we're following the news closely. Where possible, we've taken steps to mitigate the potential headwinds. But should tariffs be fully implemented, we expect some additional margin pressure, which Steve will touch on in his remarks.

Speaker 1

Our fourth priority is smart M and A. We closed on our acquisition of Simple Mills in February and we couldn't be more excited about the addition to our team and product portfolio. As a leading natural snack company, Simple Mills is perfectly positioned to appeal to consumers looking for high quality, delicious and better for you snacks. And Simple Mills intends to meet that growing demand, bringing innovation to extend its product portfolio and expanding distribution. That work is translating into strong results.

Speaker 1

For example, in the first quarter, Simple Mills was the fastest growing natural cracker brand and the fourth fastest growing total cracker brand in tracked channels. The integration is progressing well as we find efficient, mutually productive ways to collaborate and connect. Our teams are working closely to leverage each other's strengths and we're already making progress in areas such as procurement and enhanced retailer engagement. Our capital allocation priority is to quickly return to a more normalized leverage ratio, enabling us to explore further opportunities with a growthier, better for you nutritional profile. As always, we'll remain disciplined in our approach and focused on growing shareholder value with an attractive risk reward balance.

Speaker 1

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. Steve?

Speaker 2

Thank you, Ryals, and hello everyone. Turning to our first quarter twenty twenty five results. Net sales decreased 1.4% from the prior year period. Price mix declined 0.3%, primarily impacted by increased promotional activity in branded retail. Volume declined 2.7%, largely due to decreases in traditional loaf bread and cake.

Speaker 2

The Simple Mills acquisition added 1.6%. Gross margin as a percentage of sales, excluding depreciation and amortization, increased 50 basis points to 49.9% over the same quarter last year. Moderating input costs were somewhat offset by lower production volumes, higher workforce related costs and increased outside purchases of product. Selling, distribution and administrative expenses as a percentage of sales were 40.8%, a 110 basis point increase over the prior year period due to higher workforce related costs, including costs related to the conversion to company owned territories in California and $13,800,000 of acquisition related costs. These items were partially offset by lower distributor distribution fees and benefits of cost saving programs implemented subsequent to the first quarter of the prior year.

Speaker 2

Excluding matters affecting comparability, adjusted SD and A was 39.5% of net sales, a 20 basis point increase. GAAP diluted EPS for the quarter was $0.25 per share, a $09 decrease over the prior year period. Excluding the items affecting comparability detailed in the release, adjusted diluted EPS in the quarter decreased $0.3 over the prior year period to $0.35 largely due to higher interest expense and amortization related to the acquisition and the higher quarter over quarter tax rate. As Ralph mentioned, we closed the acquisition of Simple Mills during the quarter. The acquisition contributed $24,300,000 in net sales, dollars 3,600,000.0 to adjusted EBITDA and a $02 adjusted diluted loss per share.

Speaker 2

Turning now to our balance sheet liquidity and cash flow. For the first quarter of fiscal twenty twenty five, cash flow from operating activities increased $30,000,000 to $136,000,000 Capital expenditures decreased $8,000,000 to $26,000,000 and dividends paid increased $1,000,000 to $52,000,000 We remain confident in our overall financial position. Quarter end net debt to trailing twelve month adjusted EBITDA stood at approximately 3.3 times, increasing over the year ago period due to the acquisition of Simple Mills. We held $7,000,000 in cash and cash equivalents and had $585,000,000 of remaining availability under our credit facilities. We are adjusting our 2025 outlook due to greater than expected category weakness and better visibility into the potential impact of tariffs.

Speaker 2

Including the partial year benefits of Simple Mills, we now forecast net sales to be 5,297,000,000.000 to $5,395,000,000 adjusted EBITDA of $534,000,000 to $562,000,000 and adjusted EPS of $1.05 to $1.15 Excluding Simple Mills, we expect sales of 5,079,000,000.000 to 5,170,000,000.00 adjusted EBITDA of $5.00 4,000,000 to $529,000,000 and adjusted EPS in the range of $1.13 to $1.22 It's important to note that the changes to Simple Mills' expected results are related to a reclassification of trade spend from SD and A to net sales and headwinds from potential tariffs. The underlying business is performing in line with our expectations. And as Ryals noted, we remain enthusiastic about the brand's potential. Given our weaker than expected first quarter results, we now expect a more balanced cadence for 2025. Second half results should benefit from new business wins, shelf space gains and additional cost saving initiatives, offset by the lapping of prior year cost savings initiatives, tariff driven expense increases and continued challenging category trends.

Speaker 2

The largest swing factors in our guidance are overall category performance and tariffs. The significant category volatility in the first quarter, which drove lower than expected sales, makes forecasting full year results challenging. Our prior guidance had assumed some category stabilization, which did not materialize in the first quarter. We are assuming a range of scenarios that anticipate continued category weakness. Our prior guidance assumed a tariff headwind of approximately $10,000,000 for the Flowers stand alone business.

Speaker 2

Given the extension of tariffs to additional countries and provided there is no relief, we now estimate in year impact to be $27,000,000 to $30,000,000 which is incorporated in our guidance. The incremental in year impact of tariffs on Simple Mills, for which no prior estimate was included in guidance, is expected to be $4,000,000 to $6,000,000 Approximately 85% of our key raw materials are covered in 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. As of April, we have successfully completed the process of repurchasing the distribution rights and converting our business model in California to a company operated route sales team.

Speaker 2

With our California distribution transition complete, we plan to resume the bakery rollout of our ERP system in the second quarter. To minimize the risk of operational disruptions, we are proceeding prudently and are confident in our ability to execute the transition smoothly. Thank you. And now I'll turn it back to Ryals.

Speaker 1

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 consumer trends and then address the competitive environment. Consumers continue to struggle with headwinds from inflation, labor market tightening and escalating credit card debt. Lower income consumers are particularly pressured as inflation has forced them to spend a greater portion of their income on food with resulting cutbacks in general merchandise and elsewhere.

Speaker 1

Though there seems to be little evidence of direct tariff impact yet, the prospect of the impact on costs appears to be pressuring consumer sentiment. That pressure combined with widening price gaps has driven more consumers to choose at home eating over away from home options and any tangible inflationary impact from tariffs could further this move. Consumers continue shifting food and beverage spend to value, club and mass channels and away from small format channels like convenience, dollar and drugstores. Within the store, consumers are allocating more of their budget to perimeter items like proteins, produce and dairy and away from center store items like bakery, alcohol and snacks. As I mentioned earlier, bread category trends worsened throughout the quarter with particular weakness in traditional loaf.

Speaker 1

Purchases of sandwich fixings, sweet snacking and convenient carbohydrates like frozen meals and salted snacks are declining as bread buyers spend more on basics like meat, beverages and meal prep items. Looking closer at the bread category, it remains bifurcated with relative strength in premium and private label products, while the middle price portion of the category is weak. Center store bread is underperforming Perimeter Bread as consumers that cut back on eating out seek more restaurant like experiences. As I mentioned earlier, we're adapting our portfolio to align with these trends. The better for you authenticity of our leading brands positions us well to capitalize on consumer demand for healthier eating and differentiated experiences.

Speaker 1

Turning now to the competitive environment, we have seen increased consumer sensitivity to price in the bread category, leading to higher promotional frequency and depth. Despite that sensitivity, average price in the fresh packaged bread category rose $03 due to a combination of private label price increases and a mix shift to more premium products. In response to the higher lifts, we have increased our promotional intensity with a focus on areas of category strength like differentiated better for you products. Our aim is to lean into these areas and further solidify our leading market positions. As always, we're guided by our enhanced trade promotion capabilities and remain prudent in our use of promotional spending, carefully monitoring the return on investment.

Speaker 1

While price is always important to consumers, even more crucial is offering differentiated products that meet their evolving expectations, which is why our innovation capability is so important to enabling current and future growth opportunities. We expect the unique products we're bringing to market today in combination with a deep pipeline of upcoming innovations to spur growth well into the future. In closing, last quarter we listed the five steps we're taking to mitigate headwinds and drive profitability, which include: one, aggressively innovate unique premium products to offset the effects of a declining category two, leverage the power of our top brands to move into other faster growing segments. Three, use M and A to focus on new growing product segments to enhance our growth and margin profile. Four, stabilize the cake business by leveraging the power of the Wonder brand.

Speaker 1

And five, optimize our supply chain and path to market to deliver industry leading operations and service. By doing so, we aim to maximize near term performance while developing our brands and capabilities to drive sustainable growth. The economic pressures and evolving consumer demands are challenging, but obstacles that we have overcome in the past. We're confident the initiatives we have in place will enable us to enhance shareholder value and grow in line with our long term financial targets. Thank you very much for your time and that concludes our prepared remarks.

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