Flowers Foods (NYSE:FLO) reported second-quarter financial results on Friday. The transcript from the company's second-quarter earnings call has been provided below.

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Summary

Flowers Foods reported second-quarter results that did not meet expectations due to challenges in the fresh packaged bread category, reflecting consumer preference shifts and competitive pressures.

The company is focusing on strategic initiatives such as innovation in smaller formats, sourdough, and protein products, improving in-store execution, and continuing to invest in leading brands like Nature's Own.

New business wins and cost-saving measures are expected to contribute to improved performance in the second half of 2026, despite a challenging market environment.

Management anticipates some year-over-year decline in Q3, with stabilization expected in Q4 due to reduced elasticities and ongoing investments.

There is an emphasis on addressing gaps in the portfolio such as underpenetration in sourdough and protein-rich products, as well as a review of pricing and promotional strategies.

Inflationary pressures are acknowledged, with most commodities hedged for 2026, but planning for 2027 is still in progress, considering potential cost increases.

The Nature's Own relaunch is being well-received, though it's too early for definitive results, and the marketing strategy for Dave's Killer Bread is temporarily adjusted.

Operational efficiency improvements and network optimization are ongoing to mitigate the impact of volume declines.

Full Transcript

OPERATOR

Good day, and thank you for standing by. Welcome to the Flowers Foods second quarter 2026 results conference call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, J.T. Rick, Executive Vice President of Finance and Investor Relations. Please go ahead.

J.T. Rick, EVP Finance and Investor Relations

Good morning. I hope everyone 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 disclosures and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are Ryles McMullen, Chairman and CEO, and Anthony Scaglione, our CFO. Ryles, I'll turn it over to you.

Ryles McMullen, Chairman and CEO

Okay. Good morning, everybody. As noted in our prepared remarks, our second quarter results did not meet our expectations. The fresh packaged bread category remained challenging, reflecting pressure on household budgets, shifting consumer preferences, and sustained competitive activity. Against this backdrop, we're accelerating initiatives to better align our resources and value proposition with where the market is heading. This includes advancing innovation in smaller formats, sourdough, and protein; improving our in-store execution; pursuing new business; and continuing to invest behind our leading brands. As the Nature's Own relaunch, new business wins, and innovation initiatives build momentum, we expect them to support greater stability and improved performance. We have work to do, but we remain confident in our strategy, our brands, and the actions that we are taking. Shannon, we can go ahead and open up for questions.

OPERATOR

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Steve Powers with Deutsche Bank. Your line is now open.

Steve Powers, Analyst at Deutsche Bank

Great. Everybody, good morning. Thank you. Ryles, maybe we can pick up a bit where you left off in that intro. I mean, if I think about the implied performance in your updated guidance for the back half, even at the low end, it seems to imply some acceleration and some improvement, certainly versus the exit rate of consumption that we saw coming out of 2Q. So maybe a bit more detail on the building blocks that you see to create that sequential improvement, because it doesn't sound like you're expecting the category to improve; it sounds like you're expecting your own standing versus the category to improve. So which of the initiatives are expected to be the most impactful and, I guess, a little bit of how quickly we should expect them to manifest over the remainder of the year?

Ryles McMullen, Chairman and CEO

Okay, yeah, thanks, Steve. A few things, and I'll let Anthony chime in here as well in terms of guidance, but I would call out three primary factors to address the question you asked. One is we do have some pretty significant new business wins that are coming on in the back half. In addition to that, we took additional cost savings measures that will benefit the back half, and that's in addition to the roughly 200 million we've taken out of the business over the last several years.

And I'd also call out innovation, which is a particularly important factor when you think about where the category is going. The speed of the shift in consumer preferences, frankly, got a little bit ahead of our innovation pipeline. But the good news is we have those things coming to fill those gaps in our offerings. Whether you're thinking about protein, half loaves, sourdough, et cetera, all that's coming in the back half, and then as we move into the spring of next year.

Anthony, anything you want to add?

Anthony Scaglione, CFO

No, I think you covered it. I would say, Steve, if you look at it for the back half, it's a little skewed. We expect some year-over-year declines in Q3, but then normalization for all the factors that Ryles mentioned related to the new business wins, reduced elasticities as we're lapping prior-year pricing in Q4, and a bit of stabilization in Nature's Own from marketing investments continuing to take hold.

Steve Powers, Analyst at Deutsche Bank

Great. Maybe a little bit, if you could, a little bit more color. It sounds like you expect improvement both across the branded retail business and the other segment where I would expect those new business wins to exist. Maybe a little bit more color as to where you see which side of the business you see more improvement. And then, yeah, I'd love a little bit more color on what you're seeing with the Nature's Own relaunch and kind of reasons for optimism with that.

Thank you.

Anthony Scaglione, CFO

So, Steve, I think from the way we're looking at it, it's really split between our away-from-home business as well as our retail branded business. So I would say we're seeing good opportunities and realization in both those areas, the timing of which, some of it's going to come in Q3 and some of it will come in Q4. So it's balanced wins across the portfolio.

Ryles McMullen, Chairman and CEO

And, Steve, just to address your question on the Nature's Own relaunch, recall we just started this a couple of months ago. I would say it's going well. It's a little bit too early to see the actual results read through, but we're getting really good feedback from customers, social media, et cetera. So there are some early indicators that it'll be a successful campaign, but I think we've got to give it, as I said on the last call, we're going to have to give it a little bit more time for it to read through.

That said, we do feel really good about the campaign and where we're headed with it.

Steve Powers, Analyst at Deutsche Bank

Understood. Okay, thank you both. Appreciate it. I'll pass it on.

Ryles McMullen, Chairman and CEO

Thanks, Steve.

OPERATOR

Thank you. Our next question comes from the line of Scott Marks with Jefferies. Your line is now open.

Scott Marks, Analyst at Jefferies

Hey, good morning, everyone. Thanks very much for taking our questions. First thing I wanted to ask about: you noted in the prepared remarks rising competition, rising promotional intensity. Obviously, you guys took some pricing earlier in the year with the expectation that you might see competitors follow, and it doesn't sound like that's happened quite yet. So just wondering if you can kind of give us an update on your thoughts around the pricing dynamics in the category and where you are, and any thoughts of changes to some of the actions you've taken to maintain maybe more competitiveness versus peers in traditional loaves.

Ryles McMullen, Chairman and CEO

Sure, I'll take a stab at that. First, I think it's important to remember that the dynamics in the category are about a lot more than price. I think in certain segments of the portfolio that may be a factor, and, as we noted in the prepared remarks, we're taking a pretty intensive review of our pricing and promotional strategy. However, it is more than just price, and I would point more to consumer preference shifts. Certainly there has been some amount of trade down to private label and lower-priced items, but I think the bigger factor, at least in our performance relative to the category, has to do with those gaps in our portfolio — the underpenetration in half loaves, sourdough, protein, fiber, some of these more functional attributes that consumers are looking for. That's where our primary focus is. It is not to say that we're ignoring the price equation. We are taking a hard look at that, and my initial thesis is there probably are some pockets of the portfolio where that's a factor, but I don't think it's the overall driving force of our performance.

Scott Marks, Analyst at Jefferies

Appreciate the thoughts there. And then maybe, you know, there were some comments in the prepared remarks, I think from Anthony, about 2027 seeing some inflationary costs potentially ticking up, notably from commodity and fuel exposure. So just wondering if you can give us an update on where you're seeing inflation right now, how you're thinking about the exit rate in '26, and then maybe what you're assuming at this point for '27, as well as any other color you can share about '27 to help us frame your thinking.

Anthony Scaglione, CFO

Scott, let me take it in two parts. As we mentioned in Q1, most of our commodities for the balance of this year are fully hedged. We had some exposure, which I alluded to, in oil and diesel and indirectly in resin, and that's primarily in our packaging area. So our current guide didn't change because we saw added pressure from a commodity perspective. We assumed that pressure in Q1, and it hasn't really changed materially from where we were back in Q1.

As I pivot to '27, we're still in the middle of our planning process for fiscal '27, so I can't provide further color on that in isolation. To Ryles' point, input costs are just one of many variables that we have to factor as it relates to price mix and the architecture and new innovation at it in isolation. That being said, overall pricing indices have gone up in many of our categories; it's something that we need to definitely address as we look at '27 and exit velocity, as you mentioned, coming out of '26.

It's something we're working to address going forward and, as I mentioned in my prepared remarks, more to come. But at this point, that's all we could say as it relates to '27.

Scott Marks, Analyst at Jefferies

Understood. Appreciate it. I'll pass it on.

OPERATOR

Thank you. Our next question comes from the line of Jim Solera with Stephens. Your line is now open.

Jim Solera, Analyst at Stephens

Hey guys, good morning. Thanks for taking our question. I wanted to follow up on your commentary to Steve and Scott's questions there. If I look back to 2022, that was, I think, the last time we had kind of a significant commodity cycle, and if my model serves me correct, net price/mix across the business was up kind of mid-teens in 2022, which was a big factor in helping to offset that. Correct me if I'm wrong, but it sounds like there's maybe not as much flexibility on a go-forward basis around pricing given some of the competitive dynamics.

So if you could just walk us through what other levers you might have in the business to help offset that commodity inflation that we're seeing and kind of anticipating to continue to roll through in 2027.

Anthony Scaglione, CFO

Yeah, let me start on that, Jim. I would say clearly we have to look at productivity measures, which is part of our every-annual process, and throughout the year we're looking at ways to be more efficient in the bakeries and the network, et cetera. You know, we took action coming out of Q1 when we saw softness on the top line that will accrue from a tailwind perspective as we exit 2026 into 2027, and, as we said on the prepared remarks, that's roughly around the $20 million tailwind we'll have going into 2027.

The other area is going to be the price-pack architecture, as Ryles mentioned, coming together with new products around small loaves, bringing to market innovation in sourdough — areas where the consumer has headed and where the consumer is. We're probably underpenetrated on a portfolio basis. We have great products coming to market in the near term, but we're probably underpenetrated today. So when we look at those factors, it gives us confidence that, yes, price probably is not going to be the only lever to overcome the inflation.

And as I mentioned earlier, a lot more work to do around that as we continue the '27 planning process.

Jim Solera, Analyst at Stephens

My follow-up question is on DKB. In the prepared remarks, you guys touched on marketing pullback there. Just love some more commentary around: is that kind of a temporary reshift where maybe other brands need some more support? Are you guys reworking the marketing plan there? Did it shift kind of within the portfolio maybe towards some of the innovation versus kind of the core fresh bread offering? Any thoughts there would be great.

Ryles McMullen, Chairman and CEO

Yeah, Jim, it's temporary. I mean, it's the way we laid out the cadence of our marketing and promo spend this year. So we focused a lot at the beginning of the year with the — you may recall the Rock Your Reset campaign that we did with DKB — and then also, to your point, also a focus on back to school. And so we should see more normalized levels of promo and marketing spend with DKB for the balance of the year.

Jim Solera, Analyst at Stephens

Great, thanks. I'll pass it on.

OPERATOR

Thank you. As a reminder, to ask a question at this time, please press star 11 on your touch-tone telephone. Our next question comes from the line of Mitchell Pinero with Durga and Company. Your line is now open.

Mitchell Pinero, Analyst at Durga and Company

Hey, good morning. I was looking at your fresh bread volume decline, which was 9.5%, and that's a big number, but I was surprised at how well the gross margin held up despite the unit volume decline in fresh bread. How do you manage that?

Anthony Scaglione, CFO

Hey, Mitch, this is Anthony. I mean, clearly price had a big contributor in the price/mix from a volume decline. So our pricing definitely was a positive contributor as it relates to overall. But as we look forward into the earlier comments, there are other variables that we are looking towards as we think about the balance of this year and '27, and price-pack architecture is one that I mentioned earlier. But price was definitely the contributing factor, to answer your question.

Mitchell Pinero, Analyst at Durga and Company

And sort of negative fixed-asset leverage — you've been able to manage that, or how should we think about that?

Anthony Scaglione, CFO

Yeah. So, obviously, the restructuring had some cost out in COGS. We've had good productivity as it relates to the in-bakery network, but clearly, you know, that's our highest fixed cost, and while we're looking at network optimization, that is more complicated and takes much longer to execute. But we're clearly constantly looking at ways to be more efficient within the four walls of our bakery and our network, and that drove some benefit, but that becomes harder and harder with the volume declines.

So as you can imagine, that's something that we're looking at and continue to look at as ways to optimize going forward.

Mitchell Pinero, Analyst at Durga and Company

Okay. And then, you know, as you look at the third quarter, do you expect volume declines to moderate?

Anthony Scaglione, CFO

Yeah, we don't break that out. As I mentioned, we expect Q3 year on year to be down from an overall sales perspective, so that's going to be price- and volume-based, and then Q4 to have a little bit more stabilization as the new wins get more fully ramped. That's probably the most color I can give you in terms of the near term.

Mitchell Pinero, Analyst at Durga and Company

Okay, and then I guess two more questions. One with Dave's Killer Bread: you mentioned that shifts in consumer preferences were a reason that helped pressure the unit volume decline. What are you referring to?

Ryles McMullen, Chairman and CEO

Yeah, Mitch, it's Ryles. Mostly we think that it's the growth of sourdough. It's pretty remarkable, actually. I mean, that subsegment of the category has already grown to be a $1.3 billion subcategory, so it's been pretty tremendous growth. In DKB, we only have sourdough on the West Coast currently, but as we mentioned earlier, in the innovation pipeline, we have solves for all that. I would say that is certainly one area, and probably at least some amount of price sensitivity relative to Dave's. But, you know, as I said earlier, I don't think it's all price. It's a combination of price for some consumers, but also offering and product attributes that are driving some of that decline.

Mitchell Pinero, Analyst at Durga and Company

Okay, thanks for that. And then this final question is: where do we stand with the comprehensive review? Where are we in that process? Are we close to the end? Is this a continuous-improvement comprehensive review? Can you shed a little light on that?

Ryles McMullen, Chairman and CEO

Yeah, well, I think we're always in the mode of continuous improvement, but in terms of the formal initiative of the comprehensive review, yeah, we're finished with that and beginning to execute on it. So a lot of the things we've talked about today, whether it's innovation or focus or better execution, all of those are folded in and are the result of that comprehensive review.

Mitchell Pinero, Analyst at Durga and Company

Okay. All right, thank you very much.

Ryles McMullen, Chairman and CEO

Thanks, Mitch.

OPERATOR

Thank you. And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Ryles McMullen for closing remarks.

Ryles McMullen, Chairman and CEO

Great. Thank you, Shannon. I just want to thank everybody for taking time today and joining us for questions. We very much appreciate your interest and support of our company, and as always, we look forward to speaking with you again next quarter. Take care.

OPERATOR

This concludes today's conference. Thank you for your participation. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.