THOMASVILLE, GA. — While Flowers Foods, Inc. is “not yet where we want to be,” and the road has been bumpy, benefits from strategic actions the company began taking several years ago are “becoming increasingly apparent,” said A. Ryals McMullian, the company’s chairman and chief executive officer.

In prepared remarks delivered May 16 with the company’s first-quarter financial results, McMullian offered an update on the company’s deliberate business shift toward branded business and away from non-branded business that fails to deliver adequate profit margins.

In addition to demonstrating continuing improvement through the first quarter, sales volume company-wide turned positive in the second quarter, McMullian said. While upbeat about the first-quarter results and early indications in the second, McMullian said a number of risks the company faces, including uncertainty about consumer behavior, has prompted the company to leave its full-year earnings and sales guidance unchanged.

Flowers Foods’ net income in the 16 weeks ended April 20 was $73.04 million, equal to 34¢ per share on the common stock, up 3.3% from $70.71 million, or 33¢ per share, in the same period the year before. Net sales were $1.58 billion, up 2.8% from $1.53 billion.

Adjusted earnings during the quarter were down 0.8%. Restructuring charges were higher in the 2023 quarter than 2024. Overall volume in the first quarter this year was down 0.8%, with pricing/mix contributing a positive 3.5% to revenues. Branded volume was up 0.3%.

Responding to the financial results, Flowers’ shares fell 6.6%, trading as low as $23.82 the morning of May 17, after closing at $25.49 the day before.

“In a challenging and dynamic market, we grew branded retail units in tracked channels, outperforming the fresh packaged bread category,” McMullian said. “Our strong brands also drove dollar sales outperformance, increasing 4% compared to category expansion of only 1%.”

He conceded over the past couple years, the benefits of Flowers’ strategy of “emphasizing margins over volume” have not always been readily apparent.

“In the short term, that process resulted in stranded overhead that hampered corporate margins,” McMullian said. “However, beneath the surface, profitability in those businesses improved dramatically, and we are capitalizing on new opportunities to rebuild that lost volume at more-attractive margins.”

Flowers enjoyed some important tailwinds in the first quarter cited by McMullian, including moderating commodity costs. Additionally, the bread category in total has been outperforming within the food sector, with unit sales flat versus a 3% decrease in overall food unit sales.

Additionally, private label has continued to gain market share, but McMullian believes the tide has finally turned.

“Private label actually lost share in the last four weeks of the quarter,” he said.

He noted that higher labor expense and “investments in growth initiatives” were offsets to the improved ingredient cost picture.

Margins were aided by moderating commodity costs, partially offset by investments in growth initiatives and higher labor expense.

Turning to Flowers’ brands, McMullian said the company gained 50 basis points of dollar share in tracked channels, including a 140-point gain in specialty premium, 40 in sandwich buns and rolls and 40 in breakfast bread channels.

“Dave’s Killer Bread continues to post exceptional results despite category weakness in premium products,” he said. “Dave’s gained 30 basis points of dollar share while growing units 10%. Other brands generated similarly impressive results, with Nature’s Own and Wonder each gaining 20 basis points of dollar share. And with the benefit of recent capacity additions, Canyon Bakehouse is making progress in reigniting its growth, increasing dollar share in the gluten-free category by 40 basis points.”

Flowers is in the midst of its nationwide launch of DKB Amped-Up Protein bars, McMullian said, adding that the nationwide launch of DKB Snack Bites will follow soon afterward.

“The original DKB Snack Bars continue to receive strong support from consumers — an encouraging sign as we launch these follow-on products,” he said.

Even as the brand continues to grow, McMullian saw signs of recovery for DKB among one consumer segment that had lagged over the previous year — those with low income.

He noted that in the past, this economic segment accounted for about a fifth of DKB’s consumer base, defining low-income households as those with $30,000 or less in annual income.

“With the inflationary environment, that dropped off a little bit to about 16%, and we recovered almost back to 20% again,” he said.

Still awaiting recovery are sales within parts of Flowers’ flagship Nature’s Own brand, including the Honey Whole Wheat.

Calling the brand a “weak spot,” McMullian said Nature’s Own appears to have been hit hardest by the “private label trade down.”

“I think some of that is starting to come back up out of private label into brands like Wonder,” he said. “And if things continue to improve, I’d expect it to continue to come back to brands like Nature’s Own as well.”

McMullian characterized the competitive environment in baking during the first quarter as “rational and consistent with recent periods.”

Contributing to this “rational “environment may be disincentives in the marketplace for aggressive promotions.

“Although economic pressure is driving many consumers to seek greater value, lifts from promotion remain below pre-pandemic levels,” McMullian said. He theorized that consumers may be less attracted to discounted prices when they remain above pre-inflationary prices.

Flowers’ branded business has been boosted by an expanding innovation pipeline, McMullian said, noting the addition of 11 new products over the past couple of years.

“Building on the success of the Keto Net One loaf, the top-selling Keto packaged bread nationwide, we introduced Keto Soft White Buns,” he said.

With promotions not seen by many consumers as attractive, McMullian offered a different approach Flowers has taken to offer value to consumers.

“Our new Nature’s Own small loaves offer the same great taste, texture, and quality of our traditional loaves, but at a lower price point with less product waste for smaller households,” he said. “We expect our innovation team to continue their work of developing unique products that expand the potential market for our leading brands.”

The company also is investing in technology to help give its branded business lift, McMullian said. Payoff from the investments may require patience.

“To further strengthen our leading brands, we are investing in marketing and digital initiatives,” he said. “Although those investments temper near-term results, they are non-negotiable and crucial in enabling us to meet or exceed our long-term financial targets.”

Amid such investments, McMullian said the company is “redoubling our efforts” to find opportunities for savings and raised the company’s estimates of such savings to $40 million to $50 million this year, up $10 million on both sides of the range.

“Specific actions include select workforce reductions, reduced third-party spend, enhancing the effectiveness of marketing investments, improvements in leased labor and indirect procurement spend, and efficiency in our DSD network, among others,” he said. “In addition to those savings initiatives, we have identified further areas of operational improvement in a couple of bakeries that we expect will result in a meaningful improvement to quarterly earnings going forward, though these initiatives will take time to implement. Had those bakeries been operating at their proper efficiency levels, our quarterly performance would have been even stronger.”

While Flowers has been quiet on the mergers and acquisitions front, McMullian said that may change before long.

“The M&A market is showing signs of improvement, and we remain encouraged by the developing pipeline of potential opportunities,” he said. “Our strong balance sheet positions us well to act when we have financial, commercial and operational conviction.”

Even as the company signaled a positive turn in its fortunes, Flowers left its sales and earnings guidance for the year unchanged.

Sales in fiscal 2024 were projected at $5.09 billion to $5.17 billion, unchanged to up 1.6% from 2023. Adjusted EBITDA was forecast at $524 to $553 million and earnings per share were expected to range between $1.20 and $1.30.

“We are maintaining our 2024 outlook, which incorporates continued volume improvement while acknowledging the ongoing economic uncertainty and its potential impact on consumer behavior and the promotional environment,” McMullian said. “Our full-year results are also expected to benefit from an expansion of our savings initiatives and new business wins.”

Expanding on reasons for continued caution in the company’s guidance was R. Steve Kinsey, chief financial officer and chief administrative officer. He particularly noted the company’s plan to repurchase 350 distribution routes in California following a 2023 agreement to settle distributor-related class action litigation in the state. While the company already has recorded charges to cover the costs of paying plaintiffs and legal costs, Kinsey said the transition may represent an economic headwind during the balance of the year. He said the company has begun the process of repurchasing distribution rights.

“Guidance reflects our expectation for continued volume improvement while acknowledging an uncertain economy and environment, the transition of our California distribution, and implementation of our savings initiatives,” he said. “Other factors expected to impact full-year results include a higher tax rate and increased net interest expense associated with funding payments related to the California legal settlement, the ongoing ERP project, and decreased interest income in fiscal 2025. Once completed, we plan to service the California market with an employment model.”

While the company’s enterprise resource planning rollout started a year ago and continues to progress, Kinsey said Flowers has paused the bakery rollout to “concentrate resources on our California distribution transition.”

“In fiscal 2024, we expect costs for the upgrade of our ERP system to be approximately $25 million to $35 million, including $3 million to $6 million expected to be capitalized,” Kinsey said.

Kinsey estimated Flowers’ coverage of key raw materials at 83% for 2024 and that guidance assumes lower costs than in 2023.

“To minimize volatility and provide adequate visibility into costs, 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,” he said.

Commenting on the consumer environment, McMullian said little change in purchasing behavior was noted, with a “bifurcated market” between premium products doing well with consumers looking for differentiation and “less-expensive products appealing to those looking for greater value.”

McMullian repeatedly emphasized the importance of Flowers’ shift emphasizing its branded products.

“Consistent with our portfolio strategy, the result of that growth is that our branded retail mix increased to 64.4% of sales in the quarter, up 50 basis points from the year earlier period.”

He said branded accounted for 440 basis points more sales in the recent quarter than in the first quarter of 2019.