Flowers Foods, Inc. Aktie

Good day, and thank you for standing by. Welcome to the Flowers Foods Second Quarter 2026 Results Conference Call. [Operator Instructions] 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. Rieck, Executive Vice President of Finance and Investor Relations. Please go ahead.

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 disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website. Joining me today are Ryals McMullian, Chairman and CEO; and Anthony Scaglione, our CFO.

Ryals, I'll turn it over to you.

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 Instructions]

Our first question comes from the line of Steve Powers with Deutsche Bank.

Ryals, maybe we can pick up a bit where you left off in the 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?

Okay. Thanks, Steve. A few things, and I'll let Anthony chime in here as well in terms of guidance. But I would call out 3 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?

No, I think you covered it. I would say, Steve, if you look at it for the back half, a little skewed. We expect some year-over-year declines in Q3, but then normalization for all the factors that Ryals 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 our marketing investments continue to take hold.

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. So maybe a little bit more color as to where you see -- which side of the business you see more improvement? And then, yes, 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.

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 is going to come in Q3 and some of it will come in Q4. So it's balanced wins across the portfolio.

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's some early indicators that it will 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.

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

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.

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. And so that's where our primary focus is. That 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.

Appreciate the thoughts there. And then maybe there are 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.

Sure. Sure, Scott. Let me take it in 2 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 assume 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 Ryals 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. So I can't look at it in isolation. That being said, overall inflation has gone up in many of our categories from a pricing index perspective is something that we need to definitely address as we look at '27 and the 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.

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

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 could you 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?

Yes. 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 in the network, et cetera. 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 Ryals mentioned, coming together with new products around small loaves, bring 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 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.

My follow-up question is on DKB. In the prepared remarks, you guys touched on marketing pullback there. I would 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.

Yes, 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 -- 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.

[Operator Instructions]

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

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 can you -- how do you manage that?

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's other variables that we are looking towards as we think about the balance of this year in '27 and price pack architecture, one that I mentioned earlier. But price was definitely the contributing factor to answer your question.

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

Yes. So from -- obviously, the restructuring had some cost out in COGS. We've had good productivity as it relates to the in bakery network. But clearly, 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 4 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.

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

Yes, 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.

Okay. And then I guess 2 more questions. One with Dave's Killer Bread. You mentioned that consumer -- shifts in consumer preferences as a reason that helped pressure the unit volume decline. What are you referring to?

Yes. Mitch, it's Ryals. 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. And in DKB, we only have sourdough on the West Coast currently. But as we mentioned earlier in the innovation pipeline, we have [indiscernible] 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 I don't -- 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.

Okay. And then just final question is just 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?

Yes. Well, I think we're always in the mode of continuous improvement. But in terms of the formal initiative of the comprehensive review, yes, 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.

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

Okay. 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.

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

Good day, and thank you for standing by. Welcome to the Flowers Foods First Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, J.T. Rieck, Executive Vice President of Investor Relations. Please go ahead.

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 disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website.

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

Okay. Thanks, J.T. Good morning, everybody. Our team continued to execute against a challenging backdrop and softer top-line trends in the quarter, delivering bottom line results ahead of expectations. We advanced the comprehensive review of our brand portfolio, supply chain and financial strategy, and I'm very encouraged by the progress we're making there.

We sharpened our focus on our core brands, including our nationwide relaunch of Nature's Own, while continuing to strengthen our position in Better For You segments. We also saw positive trends in premium bread and cake categories, helping us offset some of the ongoing softness in the traditional loaf category where we underperformed in the quarter.

In addition, we took initiatives to drive efficiencies across our supply chain while further strengthening our balance sheet and our financial flexibility. Together, these efforts are positioning us to deliver more consistent and sustainable growth and profitability over the long term. Looking ahead, we'll remain focused on executing this strategy and positioning the business to drive value for shareholders. And I want to thank our team for their continued focus and commitment.

And so with that, Marvin, we can open it up for questions.

[Operator Instructions] Our first question comes from the line of Jim Salera of Stephens.

I wanted to start off with your view on inflation, given how much commodities have moved since the start of the Iran conflict. Can you just walk us through your outlook on inflation, how that's changed since the beginning of the year? And any details you can share around your hedging program and maybe internal inflation expectations for the remainder of the year?

Sure. I'll take that. First off, recall, our hedging program really builds the cadence as we progress through the year. So we're virtually fully hedged for the balance of the year on the commodities in the program. So as we look forward, we see pressure primarily in other commodities and the impact that the price of oil has had on our distribution and resin, which has significantly impacted our packaging costs, and that's an area we didn't see as a cost concern when we started the year.

That being said, the teams are looking at ways to mitigate that increase, including packaging configurations, alternatives, along with other productivity measures. So overall, I would say we're assuming a level of increase stays elevated, and that's built into our outlook. But if they should further increase, we'll probably look at other productivity measures to counter that.

Particularly if we think about on the productivity side, are you talking about costs that can come out of SG&A? Is that pulling back on promotional spend or maybe some other efficiencies you can find in the gross margin line? Can you just kind of walk us through how you think the offsets where they would come in the model?

I think it will mostly come out of SG&A. And to the extent that we make progress on some of the packaging, as I mentioned, clearly, that would be productivity as it relates to the cost going into COGS.

Our next question comes from the line of Steve Powers with Deutsche Bank.

Great. Maybe just to follow up on Jim's question. Is there a way to size or dimension the higher diesel and packaging costs that you're now seeing for the balance of '26 versus before? And I guess also, should costs remain high, is there a way to think about how much carryover inflation we're now accruing into '27 versus before?

Yes. So we haven't started our planning process. We're just in the process of kicking it off for '27, so I can't provide further color on that in isolation. Clearly, there's a lot of puts and takes as it relates to what we would address as we look into '27. For '26, as I mentioned, most of our core commodities that could have the highest impact are fully hedged. So we feel pretty good about the outlook as it relates to our position going into the back half.

But as I mentioned, as it relates to oil, it's really a tale of 2 cities. There's the impact of oil on the consumer and that will have from a consumer sentiment, which we are obviously looking at providing value at price points and making sure that we're meeting the consumer demand. On the input side, it's primarily impacting resin, which is not a direct corollary to oil. It's a downstream impact. And then that, as I mentioned earlier, we're looking at ways through productivity to drive some of that headwind out in the back half. And that's all baked into our reaffirmation of guidance.

Okay. Okay. And then, Anthony, while have you, on the dividend reset, you're freeing up around about $100 million of cash, which I think could reduce leverage by about 0.2 turns if fully directed there. Is that the right way to frame it? Or how should we think about the split between deleveraging versus other reinvestment priorities of that incremental cash?

I think you nailed it in terms of the split. I mean, clearly, our first priority is to deleverage and the goal is to be below 3x by the end of fiscal '27. So we're looking at that as the primary lever with the reset of the dividend but continue to invest in the brands similar to what we did with the relaunch of our Nature's Own this quarter.

Yes. Yes. And actually, if I could squeeze one more in. On that relaunch, Ryals, it very much makes sense relative to your strategy, broadly speaking, in terms of the consumer is simple ingredients, non-GMO, big marketing push behind all that. I guess how -- what are your expectations? And what would success look like over the next 2 to 3 quarters, whether in terms of velocity or household penetration? Just how you're thinking about the impact of this relaunch and how it may help the organic growth trajectory at all?

Yes, sure. Good question. Well, first of all, I just want to say we're tremendously excited about this. This was a huge pivot that the team made took a lot of work to get this done, reformulating, taking out another 1/3 of the ingredients, essentially being the cleanest label traditional loaf brand at scale in the country and non-GMO verified. So it's a big deal for us. It took a lot of investment. And of course, as we said, we've got the 360-degree marketing campaign behind it, leveraging John Cena's celebrity. We just actually launched that yesterday. Some of you may have seen it.

In terms of what success looks like, I mean, obviously, the traditional loaf category has been the soft spot for us. We've been talking about this for a number of quarters now. The rest of the business essentially is doing quite well on the premium and the value end. But traditional loaf is approximately 38% of our branded retail. So it's a big segment for us. And getting that part of the category stabilized, Steve, is how I would describe success. So at a minimum, getting our volume stabilized in traditional loaf will do more for the business than any other lever that we can pull.

Now there is a lag. I don't necessarily expect this to have an immediate impact. When you start a marketing campaign like this, you've got to get 6 months, a year down the road before you can then look back and see how effective it was. But I do think between the increased marketing spend, so higher visibility, remembering that Nature's Own has the highest loyalty rate in the category, and it's the #1 brand, and we have the #1 SKU getting consumers' attention and bringing them back to that segment by delivering value in the sense of attributes that resonate with consumers. To me, that's what will drive ultimately our success. But to directly answer your question, success to me is stabilizing volumes in traditional loaf.

And our next question comes from the line of Scott Marks Jefferies.

First thing I wanted to ask about, in the prepared remarks, you noted a number of times about some of the consumer pressures and expectations for kind of headwinds to the top line to persist a bit. So just wondering if you can help us understand within your guidance for the year, what are you embedding in terms of assumptions for volume versus pricing? And how should we be thinking about maybe cadence as we move through the year?

So we don't -- great question. We don't guide to volume, but our guidance assumes easier volume comps as we progress through the year. We do see some back half increased costs related to some of the input costs I mentioned in both in my prepared remarks and on the last call -- I mean, the last question. But we expect to continue to have good overhead and other cost management to help mitigate some of that risk, which is not hedged on the input side. So I would look at it as we don't expect a recovery necessarily from a volume perspective, but we do have easier comps as we progress throughout the year.

Understood. Appreciate that. And then another question would be just on the promotional environment. You made a number of references in the prepared remarks, talked about a little bit more of an intense promotional environment that you believe is unsustainable. And I think you called out some improving trends in certain markets where that has eased a bit. So just wondering if you can dive a little bit deeper into that and help us understand maybe what supports your view that competitors will pull back on promotions? And how long should we be thinking about this irrational environment to persist?

Right. Well, first of all, I would say this. I mean, we've been through periods like this before. I mean this is -- it's not our first rodeo, as they say. We've seen this happen before. It typically has not been sustainable in the past. I think we're all familiar with the affordability issues that the country seems to be going through right now, particularly with the recent spike in gas prices. There was some commentary yesterday from a large retailer on softening consumer sentiment. We saw the Michigan's Consumer Sentiment report come out at a record low. And so it is a concern, and it's something that we're just going to have to navigate our way through.

Having said that, we're taking a long-term view. This company is about building strong brands that deliver significant value to consumers. And when I say value, I don't mean heavily leaning into price. I mean delivering quality, great service, innovation and differentiation to the consumer. That's our play. We'll continue to run it.

Having said that, I know you all have been watching the share and volume dynamics in the syndicated data. I would just remind everyone, we did take pricing late last year, and the pricing gaps have remained a bit wider than we would like in the short term, and that has somewhat affected our volume performance, particularly as you look in the traditional loaf category. However, we did pull back some on promotions and marketing spend in the first quarter because we were saving our dry powder for this big relaunch of Nature's Own.

So our calendar will start to heat up to a more normal level as we move through the remainder of the year. And I would expect some of those share trends to begin to improve. And in fact, where we have seen in a few channels where we have seen the price gap start to narrow to a more normalized level, we're already beginning to see those share improvements.

Our next question comes from the line of Max Gumport of BNP Paribas.

You mentioned you're largely covered for commodities that you hedge for in '26. I'm not sure that would include diesel fuel, I don't think it would include transportation. So can you talk about the rising -- the impact there of those rising costs on your P&L and what's embedded in your outlook for '26 on that front?

So it's fully embedded in our outlook. And as I mentioned, you're correct. The diesel does have an impact primarily for our fleet. But recall from a DSD network, that cost is actually in our partners, not that we don't -- we ignore it, but it's not something that's going to show up necessarily on our P&L. As it relates to the hedging programs, we are looking at potentially hedging that on a go-forward basis is not included in our guide. So everything right now, as it relates to the oil impact, again, it's twofold. It's both on the distribution side as well as on the resin side, fully captured in the guide that we provided.

Okay. And any way to just help provide investors with some context in terms of the magnitude we're talking about in terms of how much incremental costs you are now working to mitigate given everything that's changed since your fourth quarter results when you first gave us 2026 outlook?

I would say, I mean, there's a lot of puts and takes, as I mentioned, we have productivity measures as it relates to the packaging, which is an area that entering the year, we didn't expect cost increases. And as you can imagine, we have inventory that we're burning through at a much lower cost. I would say it's roughly about $0.02 or $0.03 of headwind in the back half of the year associated with, generally speaking, oil and derivatives of oil.

Okay. Got it. And then similar line of thinking, but I just want to finish out this line of thinking should be -- since you gave guidance, the top line environment has gotten much more challenging as you've noted, you just talked about how these key commodity costs are rising. It feels like you're saying you're covered for a lot of it. There's some incremental costs coming in the back half, but that you are reaffirming the outlook. And I'm just trying to get a sense for what's allowing you to. It sounds like it's maybe a little bit more visibility on productivity, but anything else I'm missing there?

Yes. I would -- and I'll pass it to Ryals. I think our confidence in reaffirming is anchored on a couple of things, the Nature's Own relaunch, expansion of half loaf with variety that are going to be coming out in the back half of the year, which is an area that we've seen good growth, continued growth in our snack and Better For You options. The pricing, to Ryals' point, the pricing promotional environment stabilizing.

So there's a lot of things that we have in the back half assumed within our guidance, but we are also looking at the margin pressure as it relates to the commodity increase. We also recognize there's going to be near-term margin pressure. We were very clear at year-end with our marketing investments. So we have captured what we feel are all the relevant inputs as well as the relevant tailwinds as it relates to the balance of the year.

[Operator Instructions] Our next question comes from the line of Mitchell Pinheiro of Sturdivant & Co..

On the cost management side and your supply chain savings, is that the extent of your cost efforts? Or are there also maybe some fixed asset or capacity changes that you're looking at? So anything more substantial to your sort of baking platform?

Yes. Mitch, it's Ryals. I think Anthony covered it well. There's cost opportunities in SG&A. Obviously, there's productivity gains that we expect to deliver this year. And I would just, first of all, like to commend the team for their cost management efforts, frankly, over the last 2 or 3 years, I think they've done a remarkable job of managing our costs in a difficult environment. In terms of the overall supply chain optimization work, not anticipating anything major this year, Mitch, but that is -- as we've discussed in the past, that is in our longer-term plans.

Okay. And then on the CapEx, $115 million to $125 million, what are the -- could you break that down in the buckets of how that's going to be used this year?

Sure. I think I mentioned it on the last call. So the way to think about it is roughly plus or minus around $2 million per bakery on maintenance. So that should be viewed on a consistent basis as we continue to provide productivity measures within our bakery, maintenance measures is around $2 million. The remaining CapEx is going to be dedicated to growth, and we see opportunities around product line extensions where we can drive additional value to the customer as well as productivity measures. So that's the way I would break out the bucket of the guide as it relates to CapEx.

Okay. And then I guess just final question on foodservice. Can you just talk about what's going on in your foodservice business?

Sure. I think just like everything else, Mitch, the consumer is pressured, and so there's certainly some traffic pressure. As you know, we've done a lot of work over the last several years to improve the profitability of our foodservice business, and that continues. So it continues to do well. I would say more recently, it has done a bit better from an overall top line standpoint. So we believe we've got a very solid -- as you know, it's a scale business for us. We think we've got a very solid foodservice/away-from-home business, and we'll continue to work to grow it.

Are you -- so are you seeing any improvement there? Or is it just sort of same pressure and maybe anticipate -- would you anticipate potential improvement sort of coinciding with what you see on the branded retail side?

Yes. I mean, like I said, I think more recently, from a top line standpoint, it has improved a little bit. And again, the profitability work that we've done over the last several years has definitely paid some dividends because profitability is quite a bit better than it was. I think what we'll be watching overall is overall restaurant traffic and where the trends are headed that way, just given the overall inflationary pressures that the consumer is feeling today.

I'm showing no further questions at this time. I'll now turn it back to Ryals McMullian, Chairman and CEO, for closing remarks.

Okay. Great. Thanks, everybody, for taking time today and joining us for questions. And we very much appreciate your interest in our company. And as always, we look forward to talking to you again next quarter. Take care.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Hello, everyone. This is J.T. Rieck, EVP of Finance and Investor Relations. Welcome to the prerecorded discussion of Flowers Foods First Quarter 2026 Results. We will host a live Q&A session Friday, May 22, at 8:30 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. 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 McMullian, Chairman and CEO; and Anthony Scaglione, our CFO. Ryals, I'll turn it over to you.

Thanks, J.T., and thanks to everyone for joining us today. In the first quarter, with disciplined cost management, the team executed well to offset softer top line trends and navigate challenging market dynamics to deliver bottom line results ahead of market expectations. Reported sales growth included an incremental contribution from Simple Mills. On a comparable basis, sales declined 1.2% versus prior year. While near-term conditions remain pressured, we are confident in our ability to navigate the current environment given the strength of our brand portfolio, our expanding presence in Better-For-You categories, our scaled supply chain and DSD network and a balance sheet that we are actively strengthening.

The comprehensive review of our brand portfolio, supply chain and financial strategy announced last quarter continues to gain momentum. This work has sharpened our focus on a clear set of strategic imperatives. These are prioritizing our strongest brands, making targeted investments to reignite growth and realigning capital allocation to strengthen our balance sheet while increasing flexibility to pursue future growth opportunities.

A key proof point of this progress is the relaunch of Nature's Own, now featuring fewer, simpler ingredients. This milestone represents a significant achievement for both our team and our customers. With this relaunch, Nature's Own becomes the largest Non-GMO project verified loaf product in the market, a first at the national scale and reinforces our leadership in the Better-For-You segment. In addition, we've identified and are advancing targeted initiatives to drive efficiencies across our supply chain operations while taking actions to further strengthen our balance sheet. Collectively, these efforts are positioning the business to deliver consistent, sustainable growth and improved profitability over the long term.

Now let me provide details of our performance in our brand categories in the quarter. A key strategic priority is sharpening our focus on our portfolio of leading differentiated brands to unlock growth opportunities in an otherwise soft category. This focus is delivering encouraging results, particularly in premium loaf, buns and rolls, breakfast cake and snacks, which are helping to offset continued softness in the traditional loaf category where we underperformed in both dollars and units. Just some marketing investment, ongoing macroeconomic pressure on consumers, and an intensely promotional pricing environment impacted our market share in the traditional loaf segment in the quarter. Elevated consumer costs combined with heightened promotional activity have driven increased trade-down behavior toward lower-priced offerings and value brands. While the category remains pressured, we don't view the current promotional environment as sustainable over the long term.

In fact, in select markets, we're beginning to see early signs of improvement as pricing gaps have narrowed and our relative competitiveness has strengthened. Importantly, we're acting through several initiatives that we believe will strengthen our competitive position and improve performance over time. First, we are excited about the relaunch of Nature's Own, supported by a broad integrated marketing campaign designed to reinforce the brand's differentiated value proposition and deepen consumer engagement. The relaunch also includes half loaves, aligning more closely with evolving consumer preferences around fewer and simpler ingredients, freshness, portion size and affordability.

In addition, we sharpened price points within our Wonder Bread portfolio to help narrow pricing gaps in key areas of the category. While near-term pressures remain, we believe these actions position us to improve our trajectory over time. So let me provide a little additional context on the Nature's Own relaunch. This marks the first major relaunch of our flagship brand in well over a decade and represents the next step in its long history of innovation since its introduction in 1977. Grounded in extensive consumer insights, the relaunch further strengthens Nature's Own position in the Better-For-You segment with simpler ingredients and Non-GMO project verified products. These enhancements better align the brand with the evolving needs of today's consumers while further differentiating us from the competition.

Supporting the relaunch, this week, we announced a nationwide 360-degree marketing campaign featuring actor and former WWE star, John Cena, as the brand's Breaducator. The campaign highlights the brand's refreshed positioning around simpler ingredients, Non-GMO project verified products and other Better-For-You attributes that increasingly resonate with health-conscious consumers. John's broad appeal and strong favorability make him a highly effective ambassador to communicate these benefits in a compelling and accessible way while naturally reinforcing themes of strength, wellness and healthier living. His long-standing relationship with the Make-A-Wish Foundation also aligns closely with Flowers' values and our own commitments to supporting that organization, further enhancing the authenticity and purpose behind the partnership.

We designed this campaign to engage consumers across the entire path to purchase and clearly communicate the product's key attributes at shelf. The early response from our retail customers and DSD partners is encouraging. We believe these efforts will further reinforce Nature's Own's leadership position in the category. We also continue to strengthen our position in the category with leading brands in the Organic, Gluten-Free and Keto segments.

In Organics, Dave's Killer Bread remains the #1 brand and sustained market share with strong momentum in the breakfast segment driven by our recent DKB Mini Bagels launch. Canyon Bakehouse also maintained its share position in the category and continues to be the #1 choice for consumers looking for great taste and a gluten-free option. Nature's Own Keto remains the leading brand in this growing segment and delivered strong growth this quarter, gaining 180 basis points of unit share and 250 basis points of dollar share. As consumers look to supplement their consumption with keto or protein options, we are strategically positioning to meet those needs with our offerings.

Our comprehensive review affirms our opportunity within snacks. We're building out our Better-For-You snacking platform anchored by Simple Mills and Dave's Killer Bread remains a strategic priority. Simple Mills delivered growth ahead of our expectations in the quarter, supported by broad-based momentum across the portfolio, strong underlying consumer demand and positive initial response to this year's innovation launches. Retail sales increased 9%, driven by strength in the cookies and crackers categories, reinforcing the resilience and appeal of the brand. Cookies grew 43% and crackers grew 3% in the quarter, both outpacing their respective categories and maintaining the #2 position. This performance was driven by a combination of distribution expansion and velocity gains across both food and mass channels. Importantly, our recent innovation launches are performing at or above expectations, providing additional confidence in the sustainability of Simple Mills growth trajectory, which we are forecasting to accelerate in the balance of 2026 as the innovation items gain momentum.

Suffice it to say, we're pleased with the strong momentum at Simple Mills and confident in the brand's long-term growth opportunity. Our Dave's Killer Bread organic snack bars continue to perform well in the nutritional snack bar subcategory, driving increases in both units and dollars versus last year and holding share. Additionally, DKB's amped-up protein bars are resonating with consumers seeking higher protein options and functional benefits. In the breakfast segment, we continue to build momentum in the quarter, delivering 20 basis points of unit share gains and 40 basis points of dollar share gains. This performance extends the strong track record of both Wonder and Dave's Killer Bread and reinforces our confidence in our ability to drive continued share gains over time. In sandwich buns and rolls, Wonder experienced a modest decline in unit share, down approximately 30 basis points versus last year.

However, this was largely offset by strong performance from Nature's Own and Dave's Killer Bread, both of which delivered gains in unit and dollar share during the quarter. Strengthening our connection with both customers and consumers is key to sustaining the relevance of our brands. One way we're doing this is through purpose-driven community-focused partnerships. We are proud to support the U.S. military. And through our Deploy the Joy shopper campaign, we expect to contribute more than $3 million to the USO by the end of this year since launching the partnership in 2018. This demonstrates our strong commitment to the communities we serve while deepening emotional engagement with our brands.

Turning now to our cake business, which is showing improved performance driven by the launch of our Wonder Cake products last year. With incredibly strong brand recognition, Wonder's line of cake products has continued to revitalize performance in the category. In the first quarter, while cake category sales declined 1.4%, Flowers' cake sales grew 6%, driven by Wonder Cake unit share increasing 120 basis points. Additionally, profitability in our cake business improved meaningfully year-to-date, driven by disciplined pricing, mix shifts towards higher-margin branded items and ongoing operational efficiencies in our bakeries. While we remain optimistic in the power of our brands and the innovative products we're bringing to market, the overall demand environment for the traditional loaf segment, which is approximately 38% of our branded portfolio remains soft. Therefore, cost control is a top priority. The team made measurable progress in the first quarter and reduced SG&A as a percentage of sales. This improvement was driven by enterprise-wide cost actions, including effective management of input costs, optimization of marketing expenses and a good overall expense management across corporate departments.

As I have emphasized, in addition to our cost savings efforts, we are continuing to invest in the business and in the successful execution of our portfolio strategy. Increasing the mix of higher-margin branded retail products is a critical driver of long-term growth and margin expansion. Our portfolio review reaffirmed the strength of our brand leadership and reinforced our confidence in our strategy to extend that leadership over time. At the same time, we recognize the continued challenges in the consumer environment and remain disciplined in how we prioritize and deploy investments.

This brings me to capital allocation. As we noted on our previous call, a key component of our comprehensive review was an evaluation of our capital structure, balance sheet and financial flexibility through the lens of our growth agenda and long-term shareholder value creation. To execute our strategy from a position of strength, we're resetting our dividend to an annual rate of $0.50 per share. This action allows us to reduce leverage and interest expense, enhance financial flexibility and create capacity to invest behind our leading brands and capabilities to drive above-category growth. As we increase available capital to reinvest in the business, we will take a disciplined and balanced approach to capital allocation, prioritizing high-return investments while continuing to return capital to shareholders. Importantly, we remain committed to maintaining a sustainable dividend as a core component of our overall shareholder value proposition.

Now, Anthony will cover the details of the quarter, and then I'll close with comments on how we're thinking about our long-term strategy and our outlook for the current business environment. Anthony?

Thank you, Ryals. As Ryals discussed earlier, our comprehensive review of our brand portfolio, operations and financial strategy is sharpening our focus on where and how we compete, how we serve our customers and how we allocate capital to maximize our long-term potential. While it's still early in this process, we are encouraged by the progress we are making. Last quarter, we made a decision to deprioritize 2 regional brands to focus on higher-value opportunities. And our review is ongoing as we continue to actively evaluate and optimize our portfolio to support long-term value creation.

Operationally, we have realigned our DSD reporting structure and are continuing to review additional opportunities to strengthen P&L alignment across the business. At the same time, we are exploring targeted applications of AI tools to enhance decision-making, drive productivity and unlock deeper, more actionable insights into our performance. Another key component of our comprehensive review is ensuring we have the financial flexibility to adequately fund our most promising growth initiatives while allocating capital in a disciplined manner to enhance long-term shareholder value. With that in mind, I'd like to provide additional context around the dividend decision and how it supports our balance sheet objectives and near-term capital priorities.

As Ryals mentioned, we are resetting the dividend to an annualized rate of $0.50 per share. This action is expected to free up meaningful cash flow, which we intend to primarily direct toward debt reduction in the near term as we continue to manage our investment-grade profile. At quarter end, net leverage was 3.2x adjusted EBITDA. Our objective is to reduce leverage to below 3x on a sustainable basis, and we expect the dividend reset to be an important lever in achieving that goal. Importantly, this action goes beyond improving leverage metrics. It creates incremental capacity to invest behind our most promising brands and growth initiatives while enhancing overall financial flexibility. At the same time, it allows us to maintain an attractive current yield for shareholders during this period of strategic transformation.

Our capital allocation framework remains anchored in a few key priorities: Reducing debt, investing in our core brands, modernizing our supply chain and supporting our longer-term portfolio transformation. As we move forward, we will continue to concentrate resources on the brands and categories with the strongest potential to drive growth and share gains while ensuring we effectively meet consumer needs across a range of price points and value tiers.

Now turning to our first quarter 2026 results. Net sales increased 1.1% from the prior year period. Price/mix increased 210 basis points, benefiting from pricing taken at the end of last year. Volume declined 3.3%, largely due to pressures in branded traditional loaf and store-branded cake and loaf. That softness was partially offset by growth in snacking, branded keto and vending. Breaking this down further, branded retail sales rose 3.4%, driven by positive price/mix and the contribution from the Simple Mills acquisition, partially offset by lower volume. Other net sales decreased 3.1% on lower volume in store branded retail sales, partially offset by improved non-retail sales. Gross margin as a percentage of sales, excluding depreciation and amortization, was 49.4%, a 50 basis point decrease to last year. This decrease was driven by reduced operating leverage due to lower volumes and increased outside purchases of products related to Simple Mills, partially offset by lower ingredient costs also associated with Simple Mills.

On a GAAP basis, SG&A expenses as a percentage of sales were 40.9%, a 10 basis point decrease over the prior year period. The slight decrease was due to lower distributor fees as we converted to an employee-based model in California and the addition of Simple Mills, partially offset by higher workforce-related costs from the California transition as well as the impact of overall incentive compensation compared to prior year. Greater legal settlements and restructuring-related implementation costs were also a factor, partially offset by the prior year acquisition costs.

On an adjusted basis, SG&A was 39.3% of net sales, a 20 basis point decrease. The reduction was driven by lower marketing and lower distributor fees as a percentage of sales from the addition of Simple Mills given its warehouse distribution model. The organization has also stayed vigilant on costs, and this remains a key focus area as we navigate the balance of the year. GAAP diluted EPS for the quarter was $0.20, a $0.05 decrease over the prior year period. Excluding the items affecting comparability detailed in our release, adjusted diluted EPS in the quarter was $0.29 compared to $0.35 in the prior year period.

Turning now to our balance sheet and cash flow. As I discussed earlier, we are committed to maintaining a strong balance sheet as we continue to navigate a challenging macro environment. This financial strength remains a priority, and we have taken recent steps to improve our balance sheet, securing a new $400 million delayed draw facility to fund the maturity of our bonds coming due in October of 2026, completely derisking that maturity.

Turning to cash flow. We generated cash flow from operating activities of $108 million in the first quarter, a decrease of $28 million over the prior year period. Capital expenditures were $21 million in the quarter, a decrease of $5 million, and dividends paid were $54 million in the quarter. Having spent time reviewing the maintenance and growth initiatives, we expect total capital expenditures in 2026 in the range of $115 million to $125 million. For the balance of 2026, we are reiterating our guidance. Our team remains focused on disciplined execution, controlling what is within our control and delivering against our strategic and financial objectives while maintaining an appropriate level of caution given the external environment.

From a macro perspective, we continue to closely monitor the impact of inflation on consumer behavior as well as cost-related pressures across the business. This includes potential impacts to import costs from tariffs where we are collaborating with suppliers to mitigate increases. We are also monitoring key input costs such as diesel fuel, edible oils and packaging resin, and we are actively offsetting some of these pressures through productivity and other cost management initiatives. That said, we are pleased by the continued evolution of our product portfolio, which is increasingly positioned to deliver value across a broad range of price points and consumer needs. We remain committed to investing behind our brands to enhance value and relevance, highlighted by the recent relaunch and reformulation of Nature's Own.

Overall, while we are encouraged by the progress we are making against our comprehensive review, we remain cautious on the near-term top line outlook given category trends and ongoing pressure on the consumer. At the same time, we are confident in our ability to remain disciplined on costs and to take the necessary actions to further evolve our operating model, strengthen execution and position the business to deliver improved performance over time.

Thank you, and now I'll turn it back to Ryals.

Thank you, Anthony. I'd like to provide some perspective on our long-term strategic direction and how we are positioning the business to navigate the current environment and drive sustainable value. A key insight from our comprehensive review is the need to further sharpen our focus, strengthening our core brands, enhancing demand generation and supply chain capabilities required to outperform in the market and maintain discipline in how and where we allocate capital. Our commitment to investing behind our strongest brands is already evident in the relaunch of Nature's Own. At the same time, we're working to reshape the breads, buns and rolls category by leaning into faster-growing Better-For-You segments.

We continue to build on our leadership in specialty offerings, including our position as the #1 keto bread brand nationally, while expanding our presence and functional innovation through the national launch of protein breads and buns. These products align with evolving consumer preferences and represent important drivers of future growth. To further strengthen demand generation, we are advancing our revenue growth management capabilities and leveraging the scale and reach of our DSD and IDP networks in close partnership with our customers. At the same time, we remain focused on disciplined cost management and operational efficiency to deliver consistent performance in a challenging environment.

Finally, our disciplined approach to capital allocation and cost management is enhancing financial flexibility and enabling us to invest in the highest return opportunities. To drive productivity, we will continue to evaluate and optimize our cost structure and organizational alignment, considering current category dynamics, particularly in light of the rapidly developing capabilities enabled by AI.

Before I close, I'd like to provide perspective on the current operating environment. While we're pleased with our execution across the P&L this quarter, top line trends remain under pressure, and we are approaching the near term with an appropriate level of caution. That said, we continue to see areas of resilience and growth within our portfolio. Performance remains relatively strong in snacking and other adjacent categories as well as in products with clear points of differentiation. These trends reinforce our strategy to pivot towards faster-growing segments while continuing to support our core business.

From a consumer standpoint, many of the dynamics we highlighted last quarter persist. Inflationary pressures continue to impact household budgets, driving increased price sensitivity and more selective purchasing behavior. We are seeing ongoing trade-offs across price tiers as well as channel shifts towards club and other value-oriented outlets. At the same time, health and wellness trends continue to shape demand. Consumers are gravitating towards products with simpler ingredients and perceived functional benefits while moderating consumption in certain traditional center-store categories. This reinforces our focus on innovation and renovation, including the transformation of Nature's Own with fewer simpler ingredients and our continued expansion into Better-For-You offerings.

In response, we're maintaining a balanced and disciplined approach. We're actively managing pricing and promotional spending with a clear focus on return on investment while optimizing our marketing investments to prioritize the highest impact opportunities. At the same time, we're maintaining tight control over costs, including commodities and overhead to help mitigate top line pressure. Looking ahead, we will continue to make progress on the comprehensive review. While we expect the environment to remain challenging in the near term, we are confident in our ability to navigate these dynamics. Our strategic priorities, combined with disciplined cost management, position us to offset category pressures and drive sustainable, profitable growth over the long term.

Finally, I want to thank our team for their continued focus and execution. Their commitment is critical as we navigate the current environment and build a stronger foundation for future growth. That concludes our prepared remarks.

Good morning, and thank you for standing by. Welcome to the Flowers Foods Fourth Quarter and Full Year 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, Tonya, and good morning, everyone. 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 disclosure and reconciliations are provided in the earnings release and at the end of the slide presentation on our website.

Joining me today are Ryals McMullian, Chairman and CEO; and Anthony Scaglione, our CFO.

Ryals, I'll turn it over to you.

Okay. Thanks, J.T. Good morning, everybody. Welcome to the fourth quarter call.

I'm pleased with the progress that we're making to transform our business. Led by the strong performance of our leading brands and disciplined execution of efficiency initiatives, we produced results at the high end of our 2025 guidance range. Now as we look to 2026, our guidance does reflect ongoing category challenges, 1 fewer week, inflationary pressures, but also additional investments in our leading brands. In response to the headwinds that we are facing, we're conducting a comprehensive review of our operations. including our brand portfolio, supply chain and financial strategy, to strengthen execution and position our business to reignite top line growth and expand margins over time.

I want to thank our dedicated Flowers team for their hard work and resilience during this period of change and our shareholders for their ongoing support. We remain focused on navigating near-term challenges while also laying the foundation for sustainable long-term growth.

And with that, Tonya, we are ready for questions.

[Operator Instructions] And our first question will be coming from the line of Steve Powers of Deutsche Bank.

Great. So Ryals and Anthony, you both spoke to the comprehensive review that you've begun on brands and operations, et cetera. I guess maybe just if you could, I know, Anthony, you talked about it being the first inning of that process, but maybe talk a little bit more about how you've scoped that exercise, what the project plan is, kind of what things are in or out of consideration? Just any more meat on those bones would be happy -- would be helpful. And Anthony, if you -- any estimate of how long the game lasts, that also would be helpful.

Sure, Steve. I'll start and let Anthony fill in. I certainly appreciate the thirst for more details on this. We are in the early innings of the review. But at a high level, we're conducting a complete review of our brand portfolio, the manner and magnitude with which we're supporting that brand portfolio. We're evaluating other areas that are an additional need of investment. I think we're all aware that, by and large, the portfolio is performing very well across cake and our innovative platform and premium. The real issue for us is traditional loaf where we under-index, and that has been underperforming the category. And that has downstream effects in terms of operating deleverage, et cetera.

So one of the key focus areas, Steve, is how do we reinvigorate Nature's Own? Reigniting growth on that brand, generating demand for that brand is going to be a key focus area for us.

In addition, taking a look at supply chain, inclusive of the distribution network, to ensure that we are squeezing as much efficiency out of our operations as possible, is another key area of focus. So as we move through the year, obviously, we will continue to provide you all more and more detail as we go through the year. We're just in the early stretches right now.

Yes. And I would just add, I would characterize the review as a measured approach, working with Ryals and the rest of the management team on the evaluation around the portfolio, where it makes sense to invest. And this really leads to the CapEx conversation as well, where we're going to make those investments. It's a thoughtful and broad review. It's really not intended to be just for this year, but it's a multiyear process. I don't know when we're going to get to the top of the seventh, but we'll -- to Ryals' point, we'll continue to make progress and provide that updates along the way.

Okay. Great. And I guess, as part of that, Anthony, you spoke in the prepared remarks about a review of capital allocation. And some of that will be a review of the capital expenditures that you just spoke to. But maybe if you could speak a little bit more broadly to capital allocation. We've spoken on this call, and in general, about the dividend run rate of Flowers. And obviously, cash flow has exceeded GAAP income, but at the same time, the call for the '26 EPS is obviously below the dividend commitment. So just how you're thinking about capital allocation more broadly inclusive of that dividend?

I appreciate the question. It's a great question. And we understand that the dividend is top of mind for investors, and our focus has always been driving shareholder value. And we want to convey the importance that we place on the evaluation of our capital structure and our capital allocation. And that's obviously a conversation we have with our Board.

I think we need to make progress on the overall strategic evaluation to determine if, what and how much we alter that capital allocation and direction. But I'd also like to say we remain committed, and I think we mentioned this in the prepared remarks as well, to our strong balance sheet, and we recognize the benefit of the investment-grade rating.

Our next question will be coming from Jim Salera of Stephens.

Ryals, I was hoping you could offer us just kind of a high-level thought given your experience in the industry. What do you think the industry, both yourselves and other prominent players, can do to really stabilize this kind of traditional low piece of the category? Often in your remarks, you call out the pockets of growth for DKB and a lot of the specialized offerings that you have, but it seems like the traditional loaf is kind of the thorn in the side and it's been that way for quarter after quarter.

Is there a point where the marginal household is just finally washed out of the category and we can get to a stabilization point? Or do you see the frequency of consumption even for households that stay in the category continue to decline? Just trying to size up what we should be looking for to kind of get a glide path back to some semblance of kind of flat to then hopefully positive in the future.

Yes. Great question, Jim. And as I said, that's the key to everything for us really. Because we do have so much strength in the other parts of the portfolio where we've heavily invested. We've been extremely innovative in those other parts of the portfolio. We've talked a lot about not only the shift to value in this most recent conversation about affordability, but also the shift to premium differentiated. And we've been a key player there. And our efforts have certainly paid off. You can see that in the numbers and in the share data.

You're absolutely right. Traditional loaf is the key for us. It's our largest brand in Nature's Own. It's also the #1 brand. I think the [ soft variety ] will continue -- or traditional loaf, rather, will continue to be an important part of the category. But it's the trends that we see continue, whether that's a shift to premium, whether it's a shift to value, inclusive of small loaves, because I do think a portion of the current value play, if you will, is driven by macroeconomic factors that we see all the time in the bread category.

I think the difference now, whereas traditionally you would have seen a shift to private label, you're seeing a shift to lower-priced branded offerings that are pricing at parity or slightly above private label. And in the same environment, private label is down.

So it's different this time around, but I think that the pure value play is cyclical. I think small loaves, however, offer something different. Not only is it value -- it certainly addresses that area of the market. But it's also demographic shifts, Jim. Smaller households, people getting married later, a desire not to waste product, in addition to, in the current environment, being more of a value offering.

So my point in saying all this is over time, I do think you're going to see the shelf evolve and change overall. And so it's very important for us to be prepared to shift with that. And we believe there are things that we can do with Nature's Own given its high loyalty rate, given its awareness, given that is the #1 brand, to bring additional attributes to consumers that they will value. So I do think that there is a path there. And we're excited about the changes that we have upcoming for that segment of the portfolio.

If we're successful in doing that, Jim, that goes a long way to getting us back at least to a stable state in traditional loaf, which will be very meaningful for the business, if not slight growth and recapture some of that operating deleverage. It's also important though to say, at the same time, as Anthony both noted, our supply chain review is involved in this too. So it's important to do both, to both address the demand for traditional loaf primarily, but also address our fixed cost base and ensure that we are operating as efficiently as possible.

I appreciate all the detail on that. Maybe tying that to 2026, when you just think about the kind of interplay between the ramp in Simple Mills and then the legacy portfolio, can you just give us a sense on the cadence on the top line? I mean, obviously, 4Q has the 53rd week lap. But just should we expect a lot of the Simple Mills to kind of hit at the beginning of the year, is it more of a gradual rollout, just kind of the cadence of the top line growth as we roll through the year?

Yes. So if you think about the guide, the range is down roughly about 180 basis points to slightly up, effectively flat. And from that, we said the category, we expect the category to be down 4% from a headwind, which is anyone's guess at this point. But we felt taking a rational approach and conservative approach looking at that from that lens.

The extra week adds about 150 basis points of pressure. And then the rest is going to be a combination of the Simple Mills [ Wrapped ] and the growth being from share in rate as we plan out the year.

And our next question will be coming from Max Gumport of BNP Paribas.

I wanted to come back to the dividend conversation and just get more clarity on why not cut the dividend today. With your payout ratio going to well above 100% of your guidance for EPS, your leverage being in a difficult place, it looks like your current net debt represents anywhere from 3.5 to 3.75x your outlook for adjusted EBITDA this year, which puts you at risk of tripping your 3.75x covenant. And then clearly, you're in a difficult place right now in determining how to finance the business going forward as you've come to the market with your outlook for '26, but with no CapEx plan for the year. So wouldn't it have been simpler just to cut the dividend now and get back to focusing on operations? Just looking for more clarity there.

I'll take it and then pass it to Ryals. I think the team has stated this before, dividend is a function of our discussion clearly with our Board, our capital structure, overall allocations. And we recognize the need to address that holistically in light of both our strategy and overall capital structure. And our intent is to plan to provide that detail in the upcoming quarters. But I want to reiterate what Ryals just said. We're in the early days of this comprehensive review. I can't necessarily discuss the dividend in detail at this point, but it is something that we are reviewing in light of our capital structure, in light of the bank covenant. What I would say, we're in compliance with all the covenants, and we have a strong relationship with our syndicates and we expect to refinance the upcoming maturity and also make some progress on debt paydown. So it is part of our overall review. And hopefully, that's helpful.

Great. And then as a follow-up, I'm just looking for a bit more clarity on a few factors with regard to what's embedded in your outlook for 2026. Really it's on 4 factors, so I apologize for the long question. But the first is, what are you factoring in with regards to the reduced SNAP budget this year? The second is, what potential impacts are you assuming from the Supreme Court case we have in March? The third would be on that debt refinancing, the $400 million in October that's coming due, are you assuming a refinancing at higher rates occurs in your outlook for '26? And then the fourth would just be, it seems like your guidance is embedding very large market share gains, so you're saying the category is down 4%, but it sounds like organic is closer to just below flat. So just what's behind that large market share gain assumption?

So I'll start with the SNAP, and we recognized reduction in EBT purchases and the pressure on the lower-income households, which is why I think our diverse portfolio of brands and products are structured to appeal at all household demographics. We don't break that out specifically, but we are monitoring that channel, ensuring that we are providing value at those price points as well.

And our next question will be coming from the line of...

I wanted to talk about the other question. So the debt refi, as I mentioned, we're working with our syndicates as well as looking at the most efficient way to refinance. We're highly confident that that refinancing work would occur. Obviously, rates are going to be slightly higher than the rate of the bond that we're taking out, but we feel confident that's going to be part of our process as we look at the overall capital structure going forward.

And then the last 2 questions were the market share gain. Could you repeat that question?

Sure. I'll open the line back up. One moment.

Yes, I'll take that one on the market share gains, Max, if you're still listening. As we've talked about, we anticipate making incremental investments in our brands, also the innovation that we have coming forth across the portfolio, inclusive of Simple Mills having a record year for innovation, introducing 13 new items; the DKB snack brands coming forth with new items and, obviously, further innovation in the core. We also have our increased marketing investment that we're making this year. So all of those would give us confidence that we can continue to gain share in the marketplace.

As for the Supreme Court ruling, there's nothing embedded in guidance. So I don't think we would -- that's more of an operating issue. We wouldn't expect any material financial impact from the decision one way or the other.

And our next question will be coming from Mitchell Pinheiro of Sturdivant & Company.

So as it relates to the supply chain review, is -- I mean, as you look at the traditional loaf market, and obviously, that's getting a little smaller, are we -- should we anticipate perhaps some either bakery consolidation? Or is that part of the review?

Yes, Mitch, that's part of the review, but I would say, yes, that's an ongoing process. I mean you're aware we've closed several bakeries over the last few years, most recently, a bakery in Atlanta, 1 in Louisiana, 1 out in Arizona. So this has been sort of normal course for us as we continually review operations.

I think when we talk about supply chain reinvention in terms of this review, it's a bit more global in terms of how can we better leverage digital, AI, automation, in addition to network optimization. So it's more fully encompassing and looking at the whole picture and inclusive of the distribution network as well, how we get to market, where we place our DCs, et cetera.

Okay. And I saw that you're moving your DSD, the P&L responsibility, to a regional -- back to the regional level. And this obviously is a return, I guess, to the past a little bit. Is that -- where do you see and how do you see that benefiting Flowers going forward?

Yes. So it's not really a return to the past. I mean, maybe, as you said, a little bit. But as we took a look at our operations and how we're operating in our business, I mean, there are regional differences in terms of consumer preferences, things like that. We also felt that there was a need for greater accountability closer to the individual markets. And by moving -- and this is for DSD, which is 85% of the business, doesn't really apply to the balance of the business.

But for DSD, having that higher degree of P&L accountability a bit closer to the market, and in some cases, having more local decisions, we thought was a prudent move to make in the current environment we're operating. I mean, obviously, this is a very challenging time for the company and for the industry. And so making sure we have accountability in the right place, the right people in the right places is of paramount importance.

Okay. And then I guess just last question, is -- and there's also this optimizing your brand portfolio. Does that mean potentially selling brands?

I mean we're looking at everything. I mean I certainly can't comment specifically on any contemplated divestitures, but it really is focused on optimizing the portfolio in a way that sets us up best for success. So that can mean anything from additional investment in brands, to SKU rat, to, yes, potential divestitures. But there's nothing concrete on the table at the moment.

And our next question is a follow-up from Max Gumport of BNP Paribas.

Just a couple of housekeeping ones. So first would be, is there a level of maintenance CapEx you could speak to just as we're thinking through our models and the lowest level of CapEx we could potentially be putting in the model for '26?

Yes. Yes, let me qualify that. So maintenance CapEx for us is just, as you can imagine, the normalized CapEx that we look at across our bakery and real estate network. And that usually runs around $2 million, plus or minus, per bakery per year. And looking at that from a historical, there's always going to be a special project or an initiative that's going to require CapEx, and clearly, we have the rest of the ERP project that we need to complete in 2026 and early part of 2027.

So that hopefully gives you a little bit of a range of, looking at it from the overall picture, there's an amount that we intend to deploy as part of that maintenance. It's really looking at that growth CapEx and really focusing our efforts and being laser-focused on that. And that's what's inhibiting us, at this point, from providing that range. But as I mentioned in my prepared remarks, most likely that outcome is going to be the continued prudent approach that we've had in the past.

Great. And then on the $0.08 impact to EPS from incentive compensation, any color on the cadence in which that line down occurred in '25? I imagine that a large chunk came in 4Q, but partly came in 2Q and 3Q as well. So I mean, more explicit help on cadence you could give us in regard to the $0.08.

Yes. We actually adjust our accrual quarterly, and most of that adjustment occurred in the first 3 quarters of last year, just given the revised estimate. So when you look at the cadence, it's more for 3 quarters versus Q4.

Okay. And then on Simple Mills' sales, it looks like in 4Q, I mean, you ended the year a bit below the full year guidance, which I believe was $221 million to $223 million. You reported closer to $14 million. So it seems like 4Q came in a bit light of expectations, but at the same time, your commentary still sounds pretty good on Simple Mills. So anything one-off that held back Simple Mills' sales in 4Q '25?

Yes, Max, it's Ryals. A couple of things. One, there were some inventory de-loading related to 1 distributor that kind of disrupted the timing of sales during that period. And they -- Simple Mills also had an issue with some coconut sugar that came in. All the affected inventory was in our control, so there was no recall or anything like that. But that contributed to a little bit of a disruption in terms of sales timing in the fourth quarter. But to your point, we still feel great about Simple Mills. We expect them to be top line up double digits next year. Lots of innovation coming. So we're still quite bullish on the business. They're doing fine. .

Great. And last one from me and I'll leave it there. It's just on margins for Simple Mills. It looks like it dipped to 11% EBITDA margin in 4Q versus 16% in the first 3 quarters. I think also that was roughly in line with your plans. So I guess, one, is it really just all about tariffs coming on and then maybe some input costs running a bit higher too? And then could you give us a bit more color on how we should think about cost for '26, particularly given what we're seeing with almonds and inflation there?

Max, you're spot on. It's almond flower and tariffs. And in addition to additional brand investments in the brand, I think you should expect that to continue into '26. But yes, it's primarily the almond flower and tariff impact for Simple Mills. .

And our next question will be coming from the line of Scott Marks of Jefferies.

First one for me. You're talking about kind of heightened reinvestment in the business and some brands for 2026. But it seems like you've also already been on this journey since the summer in terms of small loaves and some protein offerings and Better For You. So just wondering if you can help us understand maybe what's changing and what's going to be different from what you've already been enacting in the portfolio?

Right. Yes, exactly, Scott. Good question. So as I was alluding to earlier, over the last several years, we have ramped up our brand investment, not just in marketing, but also in our innovation efforts around DKB, DKB snacks, obviously, the addition of Simple Mills, but also keto and protein loaves and Perfectly Crafted, just kind of -- I'll go on and list them all. But we believe that we're one of the most innovative producers in the category.

What's different this time, as I said earlier, is when you look at our portfolio, when you look at our market share performance, the clear issue is in traditional loaf, and that primarily means Nature's Own. And so a lot of the additional investment and innovation that we're speaking to today is around reigniting demand for traditional loaf and for Nature's Own.

Understood. And then second one for me is you're talking obviously about some of the category pressures. You also spoke a bit about some heightened competition within the category. So wondering if you can just kind of share maybe how you're thinking about the competition? Have you seen competitors do anything like rationalized some of their own production capabilities? Just wondering how competitors are kind of handling the current environment.

Yes. Nothing major that I will report in terms of bakery consolidation or anything like that. I think the competitive environment in the fourth quarter was pretty normal. No major uptick. In fact, for the category, price per unit was actually up a bit in the quarter. And that -- a lot of that is likely a mix shift to premium products.

Obviously, like the rest of the food industry, everybody is trying to figure this out, the rise of GLP-1s, the fact that it's coming out in a pill, the overall macroeconomic environment, while inflation has certainly come down, prices remain elevated and some consumers are struggling with that. So you see a lot of move to value, not just in terms of product but also in terms of channel, moving more to club stores and mass, et cetera.

So I think we're going to continue to see a consumer -- continue to see a pressured consumer for a bit longer, and we'll see how all that shakes out. In the meantime, what's important to us is that we're delivering products to consumers that have attributes that they want, definitely with a better-for-you bet, but also across the price spectrum. That's how we're looking at it. In terms of promotional levers, obviously, we have that at our disposal. We tend to use that prudently and use it more for driving trial and repurchase rather than driving volume gains.

You have to remember that this is a category with limited expandable consumption. And so we are very disciplined in our use of promotional activity. But where we need to do so, to protect share, we will. But we will use our enhanced TPM capabilities to guide us in that process and make sure that we are achieving the desired return on investment.

Scott, as an example of that, in the fourth quarter, we pulled back strategically on promotions. As I said, there's limited expandable consumption in this category. And typically, when we get aggressive with promotions in the fourth quarter, we don't get a good return on that investment. And so if you look at the share data, you will see that we pulled back pretty substantial in the fourth quarter, and as we move into the new year, get back to a more normalized cadence.

I'm showing no further questions. I would now like to turn the conference back to Ryals McMullian, Chairman and CEO, for closing remarks.

Okay, Tonya, thank you. I just want to thank everybody for taking time today and joining us for questions. We very much appreciate your interest in our company. And as always, we'll look forward to speaking to you again next quarter. Take care.

And this concludes today's program. Thank you for participating. You may now disconnect.

Good morning, and thank you for standing by. Welcome to the Flowers Foods Third 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.

Hello, and 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 disclosure and reconciliations are provided in the earnings release and 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. Welcome to our third quarter call. Our proactive efforts to strategically align our portfolio with consumer demand are yielding positive results. By effectively targeting areas of opportunity with differentiated offerings, we're finding pockets of growth amid ongoing pressures in the bread category. To address these challenges, we're redefining traditional loaf, incorporating value and better-for-you attributes that align with evolving consumer preferences.

While it will take time, we're confident our strong portfolio of brands will successfully enable this transformation. I'd like to take this opportunity to thank our dedicated Flowers team for their hard work and resilience during this period of change.

We are also grateful for the ongoing support of our shareholders as we strive to enhance long-term performance. And finally, I'd like to acknowledge that this will be Steve Kinsey's final earnings call after 18 years as our CFO. His contributions to Flowers have been invaluable, and we're deeply appreciative of his leadership throughout the years. We wish him all the best in his future endeavors. And with that, Daniel, we're ready for questions.

[Operator Instructions]

Our first question comes from Scott Marks with Jefferies.

First thing I wanted to ask about, you made some comments in the prepared remarks about consumer sentiment reaching a low point for the year in Q3, but you also made comments about expecting category demand to normalize as the economy strengthens. So maybe if you can just help us understand how you're thinking about that and maybe what gives you confidence in the recovery of the category and the normalization of demand?

Sure. Thanks, Scott. Of course, it's tough to pinpoint the exact time line, right? But we do think over time, the category will stabilize. This is a very large category. It's a staple in many households in the United States. I think we've just got to get some of this noise out of the way.

People are still very concerned about tariff situation. The job market now with the government shutdown and the disruption that, that has brought, I think it's going to take a little bit of time to work our way through that.

So we do see the weakness continuing at least partway into '26 from where we stand right now, but we do think over time, it will stabilize. I think in the meantime, it's important for us to continue focusing on the consumer, continuing to invest in the consumer, bringing those both value and better-for-you offerings to the consumer, which is clearly where they're going, and that's what we intend to do.

Appreciate that and then the second question for me would be, you talked about some of your newer investments pressuring margins a little bit, just investing to kind of generate consumer trial and ramp volumes. Maybe how should we be thinking about offsets to that within whether it's the supply chain efficiencies or any other offsets that you can call out for us?

Yes. You're spot on there, Scott. I mean we're focused on the long term. And so that means continuing to invest in the consumer. And we will continue to do that. I think you've seen us do that with all the innovation that we brought to market over the last several years.

But the truth of the matter is, I mean, all innovation tends to pressure margins in the short term. They're newer items. But as we build scale and as we make targeted CapEx investments to increase our throughput and efficiency, we expect those margins to improve.

Our next question comes from Steve Powers with Deutsche Bank.

Okay. Congrats again to you, Steve, and thanks for your help over the years. So first question, just maybe to follow up on Scott's initial question, just around the consumer and I guess, your sort of your planning stance into '26.

You talked about some signs of stabilization in the category over the course of 3Q, but then some weakening as the quarter came to an end. So just -- I guess, just thinking about fourth quarter and sizing up '26 scenarios, are you expecting more or less the status quo to prevail? Or are you building in allowances for things to maybe get a little bit worse before they get better?

More towards the status quo with some opportunity for improvement. I mean you're spot on that in Q3, periods 8 and 9, we saw the category begin to stabilize. But comping what, 5 named storms last year and 0 this year was a pretty tough comp in period 10. So you could see the category did fall off in period 10. But since then, it started to migrate back to where it was trending in periods 8 and 9.

Yes. Okay. Perfect. Yes. So more just the comparisons versus the storms of last year. Makes sense.

Yes, that's right.

Okay. And then the other question I wanted to ask is it was just around Simple Mills. It was a point of upside, at least versus our estimates in the quarter. And in the prepared remarks, talked about general strength and performance in line with your own expectations. Maybe just go a little bit deeper and highlight some of the areas where you've seen the most progress since acquisition and where as you integrate and build further, you see the most opportunity?

Yes. The first thing I would call out is just the collaboration effort between our teams. The integration is going exceedingly well. We're finding areas of opportunity in customer engagement, in procurement, among other areas, and across their categories, they still continue to perform very well, and as we noted in the prepared remarks, in line with our expectations.

We're very excited about next year for Simple Mills. Of course, we're not giving guidance today, but they do have quite a bit of new innovation coming for next year that we're all pretty fired up about, and so we're -- overall, Steve, we couldn't be more pleased.

Our next question comes from Jim Salera with Stephens.

Steve, it's been a pleasure working with you. Hopefully, you have a long vacation planned as we get into the beginning of next year, taking advantage of some time off. Ryals, I wanted to maybe ask a little bit more detail around the other segment because branded retail actually came in ahead of what we were modeling and the other piece came a little bit behind.

I would assume that's foodservice, just given some of the headwinds that QSR and the industry has been facing. But can you offer any color there, maybe kind of foodservice and your private label business performance?

Yes. Jim, the foodservice business has been under pressure, not surprisingly, given the economic environment and consumer sentiment. So that's really all that is. I would continue to note, though, that despite that weakness, the work that we've done over the last 2 to 3 years to improve the profitability of that business is still delivering very nicely on the bottom line. So that's good to see.

But we -- look, we would expect that to recover as the economy recovers. It tends to ebb and flow with that. So nothing terribly unusual there. Volumes were a little bit better in that other category, primarily due to vending. So you may note that as well.

Private label is interesting because it has been weak. You can see that in the syndicated data, which may seem kind of strange given where we are economically. But the price gaps between private label and some of the lower-priced branded products have narrowed significantly. And so I would chalk it up to that.

Okay. Is it a fair way to think about just because we have a little bit less visibility on foodservice. Is that kind of run at the same pace of industry traffic? Or is there a way for us to think about kind of incorporating that into our model?

Yes. You can look at traffic, would be a good indicator. And remember, our foodservice business is really broad, right? So it's broad line through the big distributors, but it's also QSR, which has clearly been under pressure. We compete across all those channels. So it's just general weakness across foodservice given the economic environment.

Okay. And then if I could sneak in one more. You guys brought down your expectations for headwinds from tariff, but we've also recently seen some step-up in ag commodity prices. Can you just offer any thoughts around how we should kind of be putting together puts and takes as we think about modeling your '26 gross margins, if there's maybe opportunity for upside there or with kind of all the moving pieces, that should probably be a little bit more conservative from our view.

I mean, Jim, Ryals has made a statement. Obviously, we're not prepared to give guidance for 2026 today. But what I would say, when you look kind of across the whole bucket, we are still expecting inflation. I mean wheat commodities are still very volatile.

There are other things that are going to be up next year. Obviously, we only had tariffs for part of the year this year. So when we give guidance on 2026, my guess is you'll see some inflationary pressure with regard to input costs.

Our next question comes from Max Gumport with BNP Paribas.

Congrats, Steve. First, on the dividend and on cash. So you noted you're reducing your expectations for CapEx this year as you focus on returning to a more normalized leverage ratio. I was hoping you can talk about the balance between pulling this lever, pulling down CapEx versus reconsidering whether the dividend is at an appropriate level.

And I'm really asking because it feels like an acknowledgment or an early admission that this combination of your leverage and the dividend are restraining to some degree, your ability to invest in the business.

Yes. I mean, obviously, every quarter or throughout the year, we consider capital allocation. It's very important to us. I mean we're very focused on delivering shareholder value. I would say from a CapEx perspective, the pullback, while we are focused on our deleveraging, and this is part of the -- would be part of the strategy, a lot of it has to do with project cadence.

We shifted some of the projects into next year. And then we did a reassessment of projects to make sure we're only doing the projects that deliver the best return. So I'd say it's exclusive of any consideration around dividends necessarily. And then on a quarterly basis, our Board considers the dividend. I don't want to get ahead of anything or speculate.

But the reality is the focus is always on delivering the shareholder value, and then based on the facts and circumstances at the time, the Board makes their decision from a dividend policy perspective. So I'd say really no difference in philosophically how we think about capital allocation. But obviously, we're aware of our leverage ratios, we're well aware of the payout ratio and all of that will go into consideration as we think about capital allocation going forward.

Okay. And then coming back to margins. So this quarter, your gross margin was down 190 basis points. EBITDA margin was down 160 basis points, and that looks to be despite the tailwind you've actually had some lower ingredient costs as a percent of sales.

So it feels like negative price mix and lower volumes are really starting to pressure your margins, given the competitive environment and the consumer environment don't seem to be swinging to positive at least in the early part of '26. It's not clear that either of those pressures will be dissipating in the near term. So I'm just curious how you're thinking about the potential need to navigate through several more quarters of margin pressure.

Yes. When you look at the gross margin, I mean, obviously, there is the top line pressure. I mean Ryals talked about the consumer, and you've seen that we've had more promotional activity. So that is causing some of the gross margin pressure.

But the largest item on gross margin actually has to do with Simple Mills and the fact they're 100% co-maned. So obviously, that's a higher cost product. So that is the key -- one of the key items that impacted gross margin overall for the quarter. We'll lap that February of next year.

So if the category were to stabilize or we would see some improvement in overall consumer sentiment, putting aside any inflationary environment, margins should benefit from that. And then on the SG&A side, if you recall, we converted a big part of our labor pool in California from independent distributors to company employees.

So that's a big driver of that. We'll lap that next year as well, and then overall labor costs have been up. So again, from SG&A as a percent of revenue, it does go back to kind of the pressure on the top line, but I'd say there's really no one item that I'd call out as overly impacting the overall EBITDA margin from SD&A except for labor.

[Operator Instructions]

Our next question comes from Mitchell Pinheiro with Sturdivant & Co.

Steve, yes, I wanted to just congratulate you on a heck of a run. And yes, it's certainly great working with you. And I guess you were the third CFO of Flowers I've known. So -- and I guess the longest of those runs. So again, congrats.

So I have a question, Ryals. On one hand, we talked generational shift in your prepared remarks, and then we're also talking consumer weakness, especially at the low end, but they're still eating. They're still there, and bread has consistently evolved towards better for you. I mean it's just been a natural evolution. So nothing's really changed there. So I'm curious if you could try to tie sort of generational shift to the sort of economic weakness in your remarks.

Yes. I think it's more than just the economic weakness. Certainly, that plays a role, Mitch. I mean you've been around a long time, and you've seen when we enter periods of economic uncertainty, there's always trade down from traditional loaf to more value-oriented brands like private label or otherwise.

So I do think that, that does play a role in this, but the shift that we're really talking about is centered around traditional loaf, meaning the traditional 20-ounce soft variety and white breads, and there has definitely been a shift, frankly, that's been underway for several years now, but it has just accelerated over the last 12 to 18 months, where the category is really bifurcated into premium, differentiated, or value, and traditional loaf has really taken it on the chin because of that.

That's very impactful for us, obviously, because we're very concentrated in that category, particularly given we have the #1 brand and #1 SKU in that category, but we are intent on redefining traditional loaf. We think we've got a great opportunity with the strength of our Nature's Own brand to lead the category in the transformation of that particular segment.

We clearly acknowledge the challenges that we're facing in the short term, given that consumer shift, but we have growing optimism in the longer term, and that's primarily due to two things: one, our team, which I think is the best in the industry; and two, our portfolio of #1 brands.

So we will continue to invest in the consumer, continue to innovate. You've seen us do that over the last several years, we're making significant progress, and while at the same time, working to optimize our cost structure. I mean you look in the quarter, Mitch, and you see Canyon up 6% in units, Dave's Killer Bread, up 10% in units.

You've seen us enter into the small loaf category that definitely addresses a consumer need. And in the quarter, we gained 15 points, 15 full points of unit share, and we're already #2 under that Nature's Own banner, and while that category is growing 85%, obviously, off of a small base, but significant growth. So I believe we're doing all the right things for the long pull while we try to mitigate the challenges in the short run.

So listen, I mean, Nature's Own has obviously been a tremendous success story, and it is weighted towards traditional loaf, but you also have Merita and Sunbeam and I don't know, Captain John Derst's bread and all these other breads underneath, where do they stand? I mean, is it -- I know they're important for regional shelf space and things like that, but I'm just curious, they seem to be left in the dust a little bit, and I'm curious if they're -- how strategic they are.

Yes. That's been a change that's been underway for many years now, Mitch, and I would tell you that the regionals have been fairly deemphasized over the last 8 years or so, 8 to 10 years, and the primary reason for that is retailer consolidation.

You can't run a national ad with Sunbeam, which you can with Wonder, and you can with Nature's Own. Now certainly, they do play important roles in particular markets like take Sunbeam in Atlanta or Bunny in Louisiana, they are still very important brands, but they're much smaller than they used to be. They've been supplanted by the likes of Nature's Own and Wonder over time.

So okay. And then just last question on that is, I mean, it certainly would add complexity to -- not that you want to get rid of brands, but it certainly adds sort of unnecessary complexity to have these smaller brands, and so is that not a problem? Is that not an issue? Or do you have sort of a solution for that?

Not so much with the regional brands, but I do agree with you overall regarding complexity, and that's one of the reasons we talk about a little bit of near-term margin pressure from all the innovation we're bringing forth because that does -- the small loafs are growing very, very fast, but it's still relatively small, right?

And you're introducing an additional complexity into a bakery that's accustomed to running really fast runs of Nature's Own Butter bread, for example. But it is what the consumer wants, and we're all about being there for today's and tomorrow's consumer, and over time, as I mentioned, as we make targeted investments in the bakeries to increase the efficiency and throughput of those products, those margins will begin to rise. So it to me, I'm not very concerned about it. It's a short-term issue that I'm willing to undertake because I know I'm delivering for the consumer.

Okay. And just a couple of things. You're down to 44 bakeries. Is that going to be the right number for a while? Or are there opportunities for additional consolidation?

Mitch, we're always evaluating our cost structure, and we know that we have further supply chain optimization to take place, where and when that will occur is too speculative, but it is certainly top of mind that we need to -- particularly in this environment and going forward, we need to be as efficient as we can possibly be. So removing complexity, increasing focus and making sure that we're optimized from a cost structure standpoint is top of mind.

I'm showing no further questions at this time. I would now like to turn it back to Ryals McMullian, Chairman and CEO, for closing remarks.

I want to thank everybody for taking time today and joining us for questions. We very much appreciate your interest in our company, and as always, we look forward to speaking with you again next year, actually. So take care. Thank you.

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

Hello, everyone. This is J.T. Rieck, EVP of Finance and Investor Relations. Welcome to the prerecorded discussion of Flowers Foods 2025 Third Quarter Results. We will host a live Q&A session Friday, November 7, at 8:30 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. 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 McMullian, Chairman and CEO; and Steve Kinsey, our CFO. Ryals, I'll turn it over to you.

Thanks, J.T., and thanks, everybody, for joining our call. I'm pleased to report our third quarter results, which reflect the continued strong relative performance of our leading brands. Our work to proactively transform our portfolio to better align with consumer preferences is showing promise and gives me great confidence in our longer-term path forward. We continue to invest in innovation to further advance that transformation. There's no doubt that macroeconomic uncertainty and shifting consumer demand are creating headwinds for food companies. These headwinds are evident in the bread category, which continues to underperform, with units declining 2.9% in the third quarter compared to a 1.8% decline for the overall food category.

Within bread, traditional loaf, an area to which we are particularly exposed, is under even more pressure with units declining 6.3%. The generational shift I discussed last quarter referred to that pressure on traditional loaf. Although in its current form, this segment may become a smaller portion of the category over time, we are actively working to mitigate that trend by redefining traditional loaf, incorporating more value and Better For You attributes that align with shifting consumer preferences. And our leading brands uniquely position us to capitalize on this opportunity and lead the category through this transition. Nature's Own is the original cleaner label mainstream bread brand, and we solidified our dominant position in Better For You bread products with the acquisitions of DKB and Canyon Bakehouse. More recently, the introduction of keto, protein and sourdough bread highlights our leadership in Better For You products, while Small Loaves target the value opportunity. We intend to continue differentiating our brands to further solidify our competitive position in the category. Despite category headwinds, I remain optimistic about our long-term prospects for several reasons. First, we expect category demand to normalize. As the economy strengthens, lower-end consumers may trade up from value-oriented products to more differentiated branded products like Nature's Own and Wonder. Improved consumer confidence should also boost higher-margin premium products, which are outperforming even in the current environment. Second, the initiatives we are taking to align our portfolio with changing consumer demand are gaining traction and driving improvement in key parts of our business. Notably, despite the overall underperformance in the bread category, sales of our differentiated products, particularly those with Better For You attributes are encouraging. I'll highlight some of those positive results shortly.

To mitigate the current headwinds, we remain focused on innovation to continue transforming our portfolio. This strategic approach allows us to target attractive opportunities within our existing categories, while expanding into new adjacencies that promise exciting growth prospects. We're confident that by concentrating on the factors within our control, we can maximize our near-term performance while supporting more consistent long-term growth.

Now I'll provide an overview of our third quarter performance in the context of our four strategic priorities: developing our team, focusing on our brands, prioritizing margins and pursuing smart M&A. Following that, Steve will review our financial results and guidance, and then I'll close with a discussion of key themes moving forward.

As we reflect on our performance and the challenges we face, I want to take a moment to express my heartfelt gratitude to our employees. Their hard work, dedication and unwavering commitment have been instrumental in driving our results. It is their passion and resilience that enable us to adapt and innovate, positioning us for future success. On that note, I'd also like to recognize and celebrate Steve Kinsey, who will be retiring at the end of this year. Through many years of dedicated service to Flowers, Steve has brought a wealth of knowledge and expertise to our team and truly embodied the core values of our culture: honesty, integrity, respect and passion. As the longest tenured CFO in the food industry, his leadership has been instrumental in guiding our company through various stages of growth and transformation. He has committed his career to Flowers and has been a valued partner and friend to me personally as well as the broader leadership team. I am deeply grateful for the significant impact he has made on our organization and the strong foundation he leaves behind.

As we bid farewell to Steve, in January, we will be welcoming Anthony Scaglione as our new CFO. Anthony joins us with a remarkable track record of success, having led significant transformations at other companies, navigating challenging situations with skill and strategic insight. In his role as CFO, Anthony will help guide our company's financial strategy and oversee critical functions as we navigate through today's complex and competitive landscape. His extensive experience across a broad range of disciplines, coupled with a proven ability to lead high-performing teams with a solutions-oriented approach positions him well to drive our next phase of growth.

Focusing on our brands is our second strategic priority, and they have never been more important to the success of Flowers Foods. Each of our leading brands either gained or held unit share during the quarter. DKB and Canyon grew unit share by 30 and 10 basis points, respectively, while Nature's Own and Wonder maintained share. Despite the challenging environment, DKB and Canyon continued to thrive with overall units increasing an astounding 10% and 6%, respectively, while the bread category declined 3%. We're leveraging our leading brands to find pockets of growth in an otherwise soft category, and that investment is paying off, driving growth even in segments that are declining. Our strong performance in specialty premium loaf, sandwich buns and rolls, breakfast and cake highlight those gains. In the third quarter, we grew specialty premium loaf units 4%, achieving our highest share ever, while the subcategory declined 4%. DKB and Canyon drove that performance, growing 6% and 8% in the subcategory and gaining 180 and 30 basis points of unit share, respectively. While sandwich, buns and rolls category units declined 2%, Flowers grew 7%, gaining 80 basis points of unit share. With a combination of existing differentiated products and innovation, Wonder, Nature's Own and DKB grew by 4%, 12% and 60%, respectively. Particularly strong contributors include Nature's Own Perfectly Crafted Brioche, Nature's Own Keto and DKB Sandwich rolls. DKB also helped produce strong results in the breakfast segment, where Flowers achieved an all-time high in unit share, up 60 basis points to 6.9%. Units increased 6%, while the overall segment declined 4%. Shelf space gains in DKB's premium offerings, particularly bagels, contributed the bulk of that growth. Additionally, consistent with our strategy targeting value opportunities in the bread category, Wonder's recent entry into the breakfast space also contributed to our outstanding performance. After a successful 2024 West Coast launch for Wonder English muffins and bagels, we're in the process of expanding distribution nationally and are excited about the possibilities as we leverage the brand's high awareness. Wonder also continued to drive strong performance in the cake category, where we grew 1% despite category units declining 5%. That performance was led by Wonder, which gained 80 basis points of unit share with Tasty Cake experiencing only minor cannibalization. The ability to increase sales in a declining cake category validates our decision to leverage Wonder's leading consumer awareness. Its success also highlights our ability to find unique ways to maximize our brands and assets to drive growth even in difficult environments.

Turning now to Small Loaves. Demand is increasing rapidly with category units up 85% in the third quarter. Our expanded selection of Nature's Own and Wonder brand Small Loaf offerings drove exponential growth and enabled us to quickly capture the #2 market share position. We gained 15 points of unit share in the quarter and remain very optimistic about the potential for these products. To continue our progress, we recently announced an exciting slate of on-trend innovation with an emphasis on Better For You items that target the strongest pockets of growth in our category. Our newest products build on earlier launches of Nature's Own keto offerings and expanded selection of small loaves, Wonder snack cakes and Canyon sourdough-style bread. Among the new products are a higher protein loaf from our Nature's Own Life Lineup and DKB Supreme Sourdough. We have a robust pipeline of additional innovation and expect to continue to bring fresh, differentiated options that speak directly to today's consumers. We're making steady progress in our Better For You snacking portfolio. DKB organic snack bars are performing well in the nutritional snack bar subcategory, and our amped-up protein bars are perfect for consumers gravitating to products with protein attributes. The national launch of DKB organic snack bites is progressing well. With a mix of 6 sweet and savory flavors, we're expanding distribution across the mass, grocery and convenience channels. Retailer response to the upcoming launch of additional Better For You snacking innovation has been enthusiastic. And early next year, we're introducing 10 new SKUs featuring exciting new flavors of bars and bites, along with the launch of a new DKB breakfast bars platform. Our third strategic priority is margins. Given the difficult industry volume trends, combined with additional pressure from tariffs, it is incumbent upon us to adjust our cost base. We're focused on aligning our supply chain with changing demand. And in recent years, we have closed several bakeries, while converting others to higher-margin organic production. We will continue to make adjustments when necessary to best adapt our supply chain to current and expected future demand. Perhaps more important for long-term margin growth and cost savings initiatives is the successful execution of our portfolio strategy, whereby we work to increase the percentage of sales of higher-margin branded retail products. Our investments in innovation are crucial to that process and for achieving our long-term financial goals. But new products generally offer lower margins than more mature ones. The increased cadence of new product introductions will temporarily pressure our overall margins as we invest to generate consumer trial and ramp production volumes. Over the long term, we expect these investments to expand our category leadership and drive significant shareholder value.

Our fourth priority is smart M&A. The integration of Simple Mills is progressing well. We're pleased with the brand's continued strong results as it continued to outperform many of its competitors in the overall and natural categories in which it competes. Simple Mills generated particular strength in its largest categories, crackers and cookies, where it grew units in tracked channels 14% and 23%, respectively. Overall growth moderated compared to first half results, largely due to traffic declines at select retailers and softness in the bar category performance. However, results remain on track with our original estimates, and we're excited about its potential to drive growth for many years. Our capital allocation priority is to maintain an investment-grade rating, while returning to a more normalized leverage ratio, enabling us to explore further growth investments. As always, we will continue to evaluate our capital allocation strategies to ensure we maximize shareholder value, while balancing risk and reward and an appropriate leverage ratio.

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?

Thank you for your kind words, Ryals. It has truly been an honor to work alongside such an exceptionally talented and passionate team. Together, we have navigated through a period of significant change for the bread category. I take great pride in all that we have accomplished as Flowers has evolved through innovation, transformation and acquisition. I am also deeply grateful for the support of the investment community and the relationships I've built with many of you. As I enter this next chapter, I am filled with confidence in our incredible team's ability to continue executing on our strategic priorities and driving shareholder value.

Turning to our third quarter 2025 results. Net sales increased 3% from the prior year period. Price mix declined 2.3%, impacted by greater cake sales, lower foodservice sales as a percentage of total sales and an increase in contract manufacturing. Our performance was stronger in the early and middle parts of the quarter, but weakened towards the end as expected due to difficult comparisons from hurricanes in the prior year. Volume declined 0.6%, largely due to continued weakness in the fresh packaged bread category and to a lesser extent, increased hurricane-driven demand in the prior year quarter. That softness was partially offset by growth in more premium branded products as well as contract manufacturing and vending. The Simple Mills acquisition added 5.9%. Gross margin as a percentage of sales, excluding depreciation and amortization, decreased 190 basis points to 47.9% over the same quarter last year. Increased outside purchases of product, sales with no associated ingredient costs due to the Simple Mills acquisition and lower sales price mix, along with reduced production volumes drove the decline, partially offset by lower ingredient costs as a percentage of sales.

Selling, distribution and administrative expenses as a percentage of sales were 38.8%, a 10 basis point increase over the prior year period. The increase was due to higher workforce-related costs as we converted to an employee-based model in California. wage inflation, lower sales price mix and the restructuring-related implementation costs, partially offset by lower distributor distribution fees. Excluding matters affecting comparability, adjusted SG&A was 38.3% of net sales, a 30 basis point decrease.

GAAP diluted EPS for the quarter was $0.19 per share, a $0.12 decrease over the prior year period. Excluding the items affecting comparability detailed in the release, adjusted diluted EPS in the quarter decreased $0.10 over the prior year period to $0.23. The Simple Mills acquisition contributed $70.7 million in net sales, $11.1 million to adjusted EBITDA and a $0.01 adjusted diluted loss per share.

Turning now to our balance sheet, liquidity and cash flow. We remain confident in our overall financial position. At quarter end, net debt to trailing 12-month adjusted EBITDA stood at approximately 3.4x, increasing over the year ago period due to the acquisition of Simple Mills. Year-to-date, cash flow from operating activities increased $38 million to $321 million, benefiting from deferred tax benefits from recently passed legislation and improved working capital performance. Capital expenditures decreased $6 million to $80 million, and dividends paid increased $5 million to $157 million. With one quarter remaining in our fiscal year, we are narrowing the range of our 2025 financial outlook to net sales of $5.254 billion to $5.306 billion, adjusted EBITDA of $515 million to $532 million and adjusted EPS of $1.02 to $1.08. This guidance does not incorporate any impact from potential SNAP-benefit disruptions.

As we focus on returning to a more normalized leverage ratio, we are adjusting our expectations for capital expenditures to $120 million to $130 million from our prior estimate of $135 million to $145 million. Our estimate for the portion of CapEx related to our ERP initiative also decreased from $4 million to $6 million to $3 million to $5 million. We are reducing our tariff impact expectations for 2025. Our current estimate of the in-year tariff impact is $11 million to $14 million for our legacy business and $2 million to $4 million for Simple Mills. That compares to prior guidance, which assumed an in-year tariff impact of $15 million to $18 million from our legacy business and $2 million to $4 million for Simple Mills. Approximately 100% of our key raw materials are covered in 2025. Based on that coverage, our guidance incorporates inflationary headwinds for the remainder of the year. 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 6 to 12 months out. In the third quarter, we continued the bakery rollout of our ERP system with successful go-lives of three bakeries. We plan to complete an additional four bakeries in the fourth quarter, bringing our total to 10.

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.

Thank you, Steve. Now I'd like to discuss the key trends shaping our performance and outline the proactive steps we're implementing to maximize present and future opportunities. I'll begin with an update on the competitive environment, followed by an overview of consumer trends.

The competitive environment remained consistent with the second quarter as producers grapple with rising input costs due to tariffs. Traditional loaf has been one of the most pressured parts of the category with units declining 6% compared to a 3% decline for bread overall. Low-priced branded offerings continue to capture unit share from private label and mid-price branded products, highlighting the importance of our initiatives to introduce differentiation into the category. We continue to increase promotional activity in the quarter. To better target areas of category strength, promotions focused on differentiated Better For You products with relatively low base sales. We're committed to driving trial and repeat purchases of our innovative new items that align well with consumer demand. We expect our commitment to these areas will further solidify our leading market positions. Guided by enhanced trade promotion capabilities, we remain prudent in our use of promotional spending, carefully monitoring the return on investment to ensure sustainable growth.

Turning to consumer trends. As inflation has risen, consumer sentiment in the third quarter reached the lowest point this year, exacerbated by greater fears about the economy and the job market. That lack of confidence is pressuring consumer spending with the largest impact on discretionary items. Lower income consumers have cut back the most, though their food and beverage spending remains resilient, continuing to grow overall, though at lower rates while volumes have turned negative. Unsurprisingly, foodservice traffic has remained negative in this environment.

Bread category sales declines stabilized for much of the third quarter before softening in the final weeks due to difficult comparisons in the prior year. Sales were strongest in the mass and club channels. We've observed a continued bifurcation of demand with notable strength in premium value products, both within food and beverage overall and bread specifically. We are strategically adapting our portfolio to align with these consumer trends, focusing on Better For You and value-oriented items to ensure we meet consumer preferences. To accomplish this transition, we've identified five key areas of focus that align with evolving consumer demands and market dynamics: one, aggressively innovating unique premium products alongside value-oriented offerings, an area we are addressing with new products that feature differentiated attributes, including protein, sourdough and keto-friendly as well as small loves; two, leveraging our top brands to move into faster-growing segments like snacking; three, enhancing our growth and margin profile with M&A once we return to a more normalized leverage ratio as we did with Simple Mills; four, stabilizing the cake business by leveraging the power of the Wonder brand, a process that's off to a great start; and five, optimizing our supply chain and path to market to deliver industry-leading operations and service, including aligning our bakery network with demand.

As we look ahead, we remain steadfast in our commitment to navigating the challenges of today's market while positioning ourselves for future success. Our proactive approach to transforming our portfolio through innovation and strategic acquisitions is already yielding positive results. Despite the headwinds facing the bread category, we're focusing on growth opportunities that appeal to today's health-conscious and value-focused consumers. While the economic landscape remains uncertain, we believe that as consumer confidence rebounds, we will be well positioned to grow market share and enhance our profitability. Our dedicated team is committed to executing these initiatives with precision and passion, ensuring that we not only meet the current challenges head on, but also lay a strong foundation for sustainable growth.

Thank you for your continued support as we work diligently to drive long-term value for our shareholders, and that concludes our prepared remarks.

All right. Good morning, everybody. We just found our seats. We'll kick off our first fireside chat of the day. So, good morning, and welcome back to our fireside chat with Flowers Foods. With us today are Chairman and CEO, Ryals McMullian; and CFO and CAO, Steve Kinsey. Welcome to you both. Thanks for being here.

Thanks, Andrew.

So first off, maybe Ryals, we've heard a lot about the last couple of days, right, about the challenges currently facing sort of the consumer. You operate in a bit of a unique category. So I'm interested in hearing your perspective as -- just far as what you're seeing from the consumer sort of at this stage?

Yes. I mean, really, more broadly, nothing really different than what everybody else is seeing. The consumer is still pressured, concerned about inflation, job market, et cetera. So it's really no different for us. Our category is a little bit unique. Yes, in the sense that we -- there's a lot of private label in our category that has, kind of, been in a long-term decline, but typically sees a bit of a pop when there's economic uncertainty, and that's normal. That happens virtually every time we see an environment like this.

Yes. And maybe what do you -- what are some of the headwinds that you're sort of seeing that are impacting the bread category specifically? And more importantly, how are you sort of responding to some of those challenges?

Yes. I mean for us, it's really speaking broadly 2 things, the economic uncertainty that we just talked about, not unusual to see a little trade down going on there. But then the whole health and wellness issue as well. Breads are kind of getting a bad wrap right now. A lot of influencers and celebrities and whatnot kind of giving bread a bad name.

Taylor Swift is helping now, sourdough...

Exactly. Exactly. And the consumer is just really, really fragmented. We were talking yesterday about Instagram, just -- I mean, it has basically become a selling platform. And if you have a feed like mine, there's many different kinds of breads that are rolling through that you can order into your home or sourdoughs that you can bake off at home. So it's hard to -- it's become harder to keep the consumers' attention.

But I think one of the things that's incumbent upon us as an industry and specifically Flowers as a company is to retake that narrative, which I think in many ways, we've sort of ceded to the influence of celebrities. And that's our fault as an industry, obviously. But we're intended on recapturing that because there's a lot of misinformation out there, a ton of misinformation. And we have a portfolio of products that are largely better for you.

And we'll continue down that track, continue improving on that and continue innovating around that, which will also help to mitigate some of the pressures in the category. Diving a little bit deeper into the category. If you look overall, category has been down 2.5%, 3% roughly. But if you drill down a level further and look at the subsegments, traditional loaf, which means the 20 ounce Honey Wheats and other white breads, that part of the category has been down 5% to 6% and we're quite exposed to that. So that's the bad news.

The good news is that we are innovating around that and have lots of growth in the portfolio, whether it's our keto products or everybody is familiar with Dave's and Canyon and all that, which continues to do really, really well. I think the challenge for us is, how do we address that soft variety of white bread category. And that's the part that I said on our second quarter call that I think is a generational shift.

And I could be wrong. I don't think I am, but I don't think it's coming back. I don't think -- I don't mean to say that traditional loaf and white breads are going away. So don't misunderstand me. They're not. There's tons of that sold in the United States, and that will continue. I do think over time, it will become a smaller part of the category. And so again, our job is to figure out how to innovate around that and replace that with more differentiated items that have attributes that consumers are looking for.

Yes. I guess if we -- it's a good lead in. If we zoom out a little bit, what are your longer-term expectations for the category?

Just that, just that. I mean -- and I think organics will continue to be a bright spot. We were told for years that gluten-free was a fad and was going to go away. Well, it never has. It's continued to grow and do well. Again, I think the longer-term challenge is to solve for that soft variety aspect. I think that the bread wall, if you will, is going to change a lot because of that.

It's -- we talked a lot about this yesterday in our one-on-ones. It's a very difficult category to shop for consumers. There's a lot of SKUs on the wall. It's not organized in a very intuitive way. So take small loafs, for example. Demographic changes in the country, smaller household, people having children later, et cetera. Small loafs are a big deal, not just for economic reasons, but just for practical reasons, I just don't want that much bread. I want -- I like bread, but I want less of it.

Well, I mean, try to find that. It's sprinkled -- kind of everywhere, there's not a lot of facings. And so longer term, I can see a bread wall that has a lot less soft variety and white bread on it and a lot more of those differentiated items, but organized in a way that makes it more intuitive for the shopper.

I'm just curious on that. Have there been any retailers where you've been able to sort of maybe test a...

We're doing that right now.

Sort of a different shelf set.

Yes. There is -- there have been a few regionals that are testing it on their own, and then we're proactively testing it with one of our better retailers. So sort of see how things balance out. I mean I think it will take probably a few tries to find the right balance. We're doing it in several different markets, larger and smaller markets, we're trying to capture the differences between the 2. But I think we'll get a lot of learnings out of that, and we can then take to others, yes.

Yes. I know the regionals tend to be a little more proactive sometimes...

Yes, they do -- a little more agile.

Yes. Exactly. Okay good. Related to the competitive environment, I guess what's been the nature of some of the new low-priced competitors? And is this type of activity something you've experienced in the past? And if so, sort of what have you learned from that experience?

Yes. First of all, I'll just say, it's -- this has always been a competitive category. That's not new. Margins are thin in this business. It's always been pretty tough sledding. I mentioned the private label trade down earlier, that's totally normal. And that is not -- among the things I have to worry about, that's not one of them.

The lower price entrant, is a little bit of a change. And certainly, we're addressing that with small loafs and some other things. But that's -- probably the biggest difference is, branded items that are priced at or even sometimes a little bit below private label. That is also new. We're addressing that with value offerings for our shoppers. But that, too, will get better as the economic environment gets better because they're branded, but they're still relatively undifferentiated.

Got it. That's helpful. I know Flowers has also been sort of pairing and adding distribution, both on the branded retail side of the business and otherwise in private label and food service and whatnot. I guess where are we now in that cycle? And how do you think incremental gains and losses in the second half will compare to the first half?

So on the -- our other category, which is kind of -- it's got food services and private label and all that, we -- some of you will recall, we did a lot of up or out, basically meaning we needed to margin up that business or free up capacity to do other things, primarily branded. We're done with that. That as a discrete initiative is over. Now in those categories, you're always picking up and losing. It's bid or contract business.

So -- but that's normal, but the proactive up and out is sort of done. The shelf space gains and the new distribution that we're winning in the Midwest, which is a big white space for us and the Northeast, which is a growing market for us where we have lower share than we do in our core, yes that will continue.

Got it. That's helpful. I know on tariffs, have obviously been a big topic of discussion of late. What sort of exposure does Flowers have to tariffs? And I guess, where are you seeing the most pressure? And has anything changed, I guess, versus your sort of prior forecast that may have resulted in a lower impact than you may have initially anticipated?

Yes. I mean, so we get quite a few ingredients internationally. I mean, obviously, wheat and flour are wholly domestic, but things like vital wheat gluten, palm oil, cocoa, all that comes in international. So it's pretty impactful overall. When we came out in the end of Q1 with guidance, I'd say we were fairly conservative. I mean we went to the upper end of the forecast with regard to what we thought the impact would be.

And obviously, it's pulled back quite a bit. So that impacted our view for the rest of the year. But when you look at the overall kind of tariff bucket, we probably have, I'd say, 12 or 15 countries we deal with. So far, there's been no supply challenge with regard to tariffs, but it will impact our back half cost.

Okay. And then how do you -- so sort of mitigation strategies, I guess, one, could be some incremental pricing that's tough in this environment. I guess do you expect to have to take pricing or at least in some part to help mitigate some of these tariff impacts?

I mean we'll look at everything. We're not going to comment on pricing going forward. But in times like this, you'd look at everything to try to maintain your margins, but you'd also be mindful of elasticities, particularly when you've got a strained consumer, right?

Yes. Earlier this year, the company announced that it had completed the acquisition of Simple Mills, a natural brand offering premium sort of better-for-you crackers, cookies, snack bars and baking mixes. How has the integration been going? And has it been in line with expectations? And how do you expect to drive growth in that business going forward?

Yes. They're doing great. The integration went very, very smoothly. They continue to perform right in line with our expectations. And I say that even though we kind of got the unexpected hit of tariffs, which hit them a little bit too. So despite that, they continue to do well. They lead in all the categories that they play in, in the natural channel and are competing very well even with the larger, more traditional players in the sort of cookie and cracker categories.

But Simple Mills is very clearly on trend. We're really excited about next year for them. They had been kind of on a year on, year off sort of 2-year innovation cycle. 2026 will be their largest innovation year ever. A lot of new introductions coming out. We'll continue to help them gain distribution, that will be a big piece of the growth puzzle for us in addition to continuing to innovate around that brand. So all good there.

Great. On your second quarter earnings call, you lowered underlying '25 guidance, excluding Simple Mills for both the top and the bottom line. I guess what drove the guidance reduction? And what gives you the confidence that the current guidance is now in a good spot for the balance of the year?

I mean when you look at really the first half performance, it was a little more challenged than we were expecting and then really coming into the second quarter, coming out into the third quarter, continuing to see challenges in the category. So a lot of it was top line driven. Obviously, there were some benefit from the tariffs. We did -- I would say we typically have a pretty strong season in Q2 with Memorial Day in July 4.

That wasn't quite as strong as we had forecasted, although I would say it was still good. Obviously, it's a big bun season for us. It just did not come in quite where we had planned. So, yes, just thinking about the consumer, thinking about our cost in the back half, which are -- from a comp perspective, are elevated compared to the first half. We just felt like it would be more prudent to bring guidance down and tighten the range a little bit.

Okay. I want to touch a bit on innovation. Specifically, I guess, what are you most excited about? How is the Wonder Cake introduction performed versus expectations so far? Tasty product.

Yes. Thank you. Thank you. Yes, we're excited about a lot. I mean we -- as many of you know, if you listen to our calls, we've had a very heavy focus on innovation for a number of years now. And I would say most of it is centered around better-for-you snacks like the DKB stuff. Wonder, obviously much more indulgent, not quite on the better-for-you profile. But yes, I mean, we've put a lot of focus on it, put a lot of resources behind it and a lot of investment in it.

And when you think about the better-for-you health attributes, we started down this path long before RFK was in his position. So we've got a good head start. We were already moving the company in that direction. So really excited about the DKB platform, continuing to gain distributions, velocity, et cetera. We've already talked about Simple Mills. That obviously is right on trend there.

And then Wonder, as many of you know, our cake business has struggled for quite a while. And we've got a great regional brand in Tasty that does well in that part of the world, but outside of that, it tends to struggle against Hostess and Debbie and some of the others. So we knew we needed to do something to combat that and decided to try under the iconic Wonder brand. I mean Wonder brand, this brand's got 98% awareness.

So we thought we'd give it a whirl and set pretty high expectations for it, and it's vastly exceeded our expectations. Lots of retailer excitement around it. Some retailers even took it early before the broader launch, and it's continued to gain momentum. So we'll build on that next year with a round of innovation for Wonder as well. But it's been a very nice addition to the portfolio and really helped what had been a struggling category for us.

Good. Good. Can you provide maybe an update on how small loafs are doing?

They're doing very well. As we touched on earlier, demographic shifts in the country and people are just either looking to reduce their consumption of carbs or -- because they don't need as much and don't want to be wasteful by throwing out a half of loaf of bread perhaps. It fits that bill perfectly.

And so we -- I think we started with 3 SKUs and I think we've got 6 now. We'll continue to build on that and build space. We are offering it under the Nature's Own brand, which is the #1 soft variety brand in the country. And we also have a bit more value-priced option in the mini loaf coming out under the Wonder brand.

Great. I guess just to put a finer point on it, just to level set. In past few years, you discussed Dave’'s Killer Bread, Bars and Bites as part of the broader push into sort of the better-for-you snacking arena. Where do we stand today on that brand family within snacking? And what do you see ahead on that growth vector?

We're going to continue to grow. I mean we started with the bars, very competitive category, but Dave's is holding its own there and competing very well from a velocity standpoint. We were still small, but we continued to gain distribution, continued to grow. We followed that with the snack bites. There's kind of 3 sweetener options. There's 3 savory options and more flavors coming next year and different pack sizes. This one here is the larger one, and there's some in the room across the way too, if folks are interested.

But we also have smaller 2-ounce packs too that will be great for convenience stores, which I should mention is a huge white space for us. We're big in mass and grocery and club and dollar stores and all that. Convenience stores, we're very underpenetrated just because we're largely a bread company, not a lot of breads sold in convenience stores with short shelf life, all that sort of thing. But now with Dave's Killer Bread snack portfolio, the bars, the bites and everything to come behind it, plus Simple Mills, plus Wonder Cake, you've got a really nice portfolio to bring to C-stores, and there's 150,000 of them.

How do you access C-stores from a distribution perspective? Is it using your distribution?

Yes, yes.

Okay.

And all the -- I should mention too, all these products, Wonder included are all warehouse delivered. So none of this is on the route trucks that traditionally deliver the bread. It's hard to get -- part of the problem with convenience stores historically for us, the distributors just don't want to stop there. The stop is so small. They would much rather go to their Publix or their Walmart or their Kroger and do their big drop. So warehouse is the way -- I think to give them credit, I mean, Hostess is the one that taught us all that when they converted from DSD to warehouse, a great model for it.

Any other products in the innovation pipeline of note or things that are coming that's...

There are. I can't be specific about it for competitive reasons, but we have quite a few very on-trend offerings coming in just a few weeks' time actually for the fall resets and then some at the very beginning of the year and for the spring resets next year. So it's a very heavy load-in that we've been working on for a while. And again, back to the beginning of our conversation, particularly on the bread side, that will also help to mitigate some of the softness we see in the core of the category.

Right. As we think about input costs outside of tariffs, what sort of impact will they have on the second half? And sort of where are the greatest areas of pressure?

Sure. I mean, as I said, from a comp perspective, the second half is tougher than the first. We are expecting absolute dollar increases in things like palm oil, eggs, cocoa, packaging, ex tariffs. So even though wheat has pulled back some. It's still a little volatile and it's still at a higher base. It has been nice to see a pullback in wheat. But from an overall cost perspective, including tariffs, the back half will be up year-over-year. And that's all planned in our guidance.

Yes. You've been going through the ERP transition. Maybe you can just level set the audience on where we currently stand in that process and what the plan is for the year and whether there have been any disruptions as you've sort of restarted the rollout?

Sure. I mean we've started this in -- well, actually, we started it before 2023. We actually initiated a rollout and we had to pause it to, come back in 2 bakeries. Our goal was to make sure we didn't do anything to jeopardize the business. So we thought it was prudent to start small. We had a couple of missteps, came back and corrected those. Earlier this year, we did test things at one bakery and completed the rollout. Things went pretty well.

So we feel great about that. We're actually starting in the back half now to ramp things back up. We have a handful of bakeries planned in Q3, depending on how that goes, and then we may be able to pick up the pace. So we feel like from an overall cost perspective, we're good. We'll stay within the range that we've forecasted. And then from a timing perspective, right now, we're still shooting for the end of 2026, but it will depend on the success, I think, of the rollout in the back half of this year.

Okay. Great. Can you talk about additional factors to consider around margins in the period ahead? And specifically, I think in the most recent quarter, co-manufacturing costs were up, presumably related to innovation. In your 10-Q, I think you said the higher rate of spend was likely to continue. So how should investors think about that line item as you scale up some of the many initiatives that you're talking about here?

Yes. Specific to that line item, most of that is going to be Simple Mills. All of their products are currently co-manufactured. And then to a lesser degree, the DKB Bar and Bites items were also co-manufactured. So that's -- we do a little bit of co-manufacturing on the bread side, but most of that is going to be these newer acquisition plus our newer innovation items outside of the bread category.

Okay. I think directionally, you've been more inclined to increase spending around advertising and marketing, really to support your differentiated products and innovation. I guess what's your outlook for brand support against the sort of current backdrop? And how are you thinking about that in the years ahead?

Yes. I mean we definitely have, yes, over the last several years, increased our brand support. We think that's really important, particularly as we made that pivot to be more consumer-focused and consumer-led. Obviously, that means needed brand support, particularly when we are moving outside of our core categories. And we have to support this. We have to tell consumers that it's there. Expect that to continue. I think that there's certainly a balance between the advertising support and the promotional support.

Many of you know, we historically don't promote as much as our competition. That's not to say we don't promote. We do, but at a much lower rate. We view trade spend as a tool to drive awareness and household penetration, not as a tool to gain unit share. We use the strength of our brands to gain unit share. And so you can expect that balance to continue much like it has in the past. That's not to say that sometimes you don't have to respond to some competitive activity, but we do so in a way that's thoughtful and generates the best possible ROI.

Okay. I guess post Simple Mills, what are your capital allocation priorities? Are you still in a position to contemplate additional acquisitions at this stage? And with a relatively high payout ratio, what are the plans for the dividend going forward?

Yes. I mean we -- from a capital allocation perspective, we've been pretty consistent in all of my career. I don't really see anything philosophically changing there. Obviously, from a debt perspective, we are more levered than we have been historically, driven by the Simple Mills acquisition. So we're very -- from a priority perspective, we're very focused on deleveraging. Most of our debt is fixed. We have great liquidity in our revolver and our A/R facility.

From a debt tower perspective, 2026, we have a tranche of bonds coming due. If I had -- today, I had to forecast, you would expect us to refinance that with something that's potentially prepayable. That will give us the ability to delever. So we're very focused on that. With regards to the dividend, it's a Board decision, obviously, but payout ratio is elevated.

I would say, from an overall cash flow perspective, still have a nice arbitrage between D&A, CapEx. There are levers we can pull if need be. But the Board has good visibility into historic cash flow. They have, I feel, like good visibility into future cash flow. I mean, even though we are seeing some pressures, this is still a great cash generation business. So they'll just continue to evaluate the dividend on a quarterly basis going forward.

And Ryals, you've got, obviously, and Steve, history in this business and frankly, in the broader sort of packaged food landscape. The way many of these stocks in this space are trading these days, it's almost as if investors are starting to sort of think that, hey, some of the challenges the industry is facing, like this time is different somehow.

And that -- the issues are more structural in nature, even though the industry has been through many challenges over the years and typically does find its way forward. And I'm just curious your thought on that. I mean, are things different this time? Or is it just, hey, the challenges are different each time, but the industry is fairly agile and it will find its way through it?

Yes, I think it's definitely the latter. And I think that's true across though. Every time we encounter one of these -- it was back in the Atkins days. You heard it back then when the world was coming to end...

Carb, low fat -- yes, it keeps...

Exactly. Yes, we were talking about eggs. Eggs used to be deadly apparently. And now, it's completely changed and protein is great and you move on. So it's -- the challenges are definitely different. But as I said at the outset, there are ways around this. And I think the industry will innovate around it. They'll respond to the challenges. Some of them will be temporary in nature. Some of them will be more permanent in nature. I think we've got a good handle on that.

We're first to acknowledge that our category is challenged, but it's been challenged in the past, and we've always found our way around it. I was telling someone yesterday, I would be -- obviously, we're concerned. First of all, most of us are heavy owners of our stock. I mean that's always been true at Flowers. It's still true today. So this is deeply personal to us.

And we're aware of the challenges that we have ahead of us. We're deeply focused on them. I would be a lot more concerned if we were trying to compete with #4 or #5 and #7 brands, but that's not the case. The case is that we have #1 brands across categories. And now with the addition of supplementals, even more so outside the category. So that gives me great confidence that behind the strength of those brands, we'll find ways around us. And so we're -- it's an uncomfortable period right now, but we're also excited about the future.

Yes. No, I appreciate that perspective because I think that broader context is important for folks here without question because particularly those that don't necessarily have a lengthier history in the space, right, and having seen these sorts of things before. And maybe just in our last moments, I guess, anything that you want to sort of talk to the group about on either what you think might be most misunderstood?

You've been in meetings, obviously, during the day yesterday as well. You're getting a lot of the similar incoming questions that we went through today. But are there any themes or topics that you feel like, hey, those are all reasonable and relevant, but that maybe people are missing either the forest for the trees in some way or along those lines?

Yes, it's a great question. I'm glad you asked it because I do think there's something. Some of the folks that know us a little bit better, I don't think fall under this category. But for those of you that might not, I would ask you to look at the category more deeply than just on the surface level because there is growth in this category. I'll even mention some of our sort of indirect competitors here. People are still eating a lot of baked goods.

If you -- if anybody in the room is familiar with Kodiak Cakes, I mean, they're doing $500 million plus of that, okay? That's a baked product. Smucker's does over $1 billion with Uncrustables. That is a baked product. It's really more of how people are shopping for baked goods, where they're shopping for baked goods and how they consume baked goods. And that's what we're working on. I want folks to take away that there is growth in this category.

And I've highlighted some of the areas even with our current category that are growing within bread. I mean Dave's Killer Bread is still doing great. Look at your syndicated data, you can see it very, very clearly. Canyon is still doing very, very well. We were not a first mover in keto. We're #1 in keto. There's that #1 brand again, Nature's Own. So there is growth here.

Having said that, I'm not going to tell you that it's an overnight fix. It's not. It's going to take a little bit of time for this transition to take place. I think the takeaway, though, is that we're well ahead of it, and we're working on it, and we're being proactive about it. So over time, I think as you see the portfolio start to change and shift alongside of some of those pressures that are more economic related as things get better, which they always do, some of those pressures will relieve.

And my goal for the soft variety segment, which is, again, where we're most pressured is just to get that stable. If we can get that even just flat, that will make a tremendous difference in our results, which, at the end of the day, the only thing that matters to our shareholders.

That's great perspective. So I really appreciate that. I think that's a good point to head over to the breakout for those that have some additional questions. And please join me in thanking Ryals and Steve for being here.