Flowers Foods Inc (FLO) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Flowers Foods' second-quarter earnings conference call. At this time, all participants have been placed on a listen only mode. The floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Vice President of Communications and Investor Relations, Ms. Marta Turner. Ma'am, you may begin.

Good morning, everyone. Thanks for joining us. Participating in our call today will be Amos McMullian, Flowers Foods' Chairman of the Board and Chief Executive Officer, George Deese, President and Chief Operating Officer, and Jimmy Woodward, Senior Vice President and Chief Financial Officer. George and Jimmy will deliver prepared remarks, then George and Jimmy, along with Amos, will take your questions. At the end of the call, George will make closing comments.

Before we discuss the second quarter, I want to remind you that Flowers Foods will host an Analyst Day in San Antonio on September 25th and we hope you're planning to be there. If you have questions about that event, please give me a call.

Before we turn the call over to George, I also must remind you that our presentation today may contain predictions, estimates or other forward-looking statements. Our use of the words expect, believe or other such expressions will identify those forward-looking statements. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause actual results to differ materially. In addition to some of the matters we will discuss during the call, important factors relating to our business are described in Flowers Foods' filings with the SEC.

Now, I'm very pleased to introduce Flowers Foods' President and Chief Operating Officer, George Deese.

I also want to thank all of you for joining our call this morning. It is an interesting time for Flowers Foods with the sale of Mrs. Smith's now behind us. Our second-quarter results show the strength of our ongoing operations. Jimmy will present our numbers in a few minutes, but I'm happy to report -- even with absorbing transitional costs in spite of higher commodity, energy and labor costs, we achieved outstanding results.

Our Bakery Group, by any measurement, had outstanding results for the quarter and year-to-date. We achieved record units, sales and record cash flow. As you will recall, at the beginning of this quarter, we created Flowers Foods Specialty Group by combining our snack cake operation and our retained frozen bread and roll business from our Mrs. Smith's unit that we divested. I am pleased with the progress that has been made; consolidation is almost complete.

Now, our focus is on gaining sales and improving our margins. I feel, over time, we can and will achieve similar profit margins as our fresh Bakeries Group has been doing for quite some time. I do want to mention that last week, we issued a voluntary recall of some products. We acted out of an abundance of caution following a malfunction of our Montgomery, Alabama bakery. The manufacturing problem was quickly discovered and more importantly, quickly repaired. It involved a mesh wire screen in a flour sifter that supplies the production lines at the bakery. Although we were 90 percent confident that we had all recovered all the product that might have been affected, the recall was issued because we'd never, ever want to take a chance when it comes to consumer safety of any of our products. Our full product line is now back in the market and we have not seen any loss of volume as a result of the voluntary recall. The financial impact of the recall is not expected to be significant.

Before I turn the call over to Jimmy, I want to answer a question we hear very often here at Flowers. That question is, what set Flowers apart from others in our industry? First, our bakeries set us apart. Through we've invested capital dollars in our bakeries, creating efficiency and effective production facilities. Next, we have a full line of (indiscernible) food products that are always delicious and a good value for both the customers and consumers. We continue to add new (indiscernible) to address consumer needs and wants, and we continue to do that day by day. Third, we have strong bread brands, and that brand strength drives solid sales growth. Our Nature's Own and Cobblestone Mill fresh breads are doing very well. We are also seeing good results from our Mrs. Freshley's snack cake brand and our regional white bread brands continue to be the hometown favorite of -- in many of our markets. (indiscernible) our outstanding direct-store delivery system certainly sets us apart. Our independent (indiscernible) is truly a great advantage for our company, providing a highly motivated distributor force that focuses on providing the best possible service, and that drives branded sales growth. Information Technology is another advantage we hold. We have the systems and the support that helps us to create value for our customers and our company. Finally, the strength of our organization sets Flowers apart. Flowers Foods has had a busy ten months. We sold the dessert business, acquired two bakeries, restructured the Company to form the Specialty Food Group and converted hundreds of our customers' locations to pay-by-scan technology. We've accomplished those things and countless others I didn't mention shows the strength and the depth of our organization. I am proud of this team. We have the experience and the dedication to take on challenges and perform remarkably well.

So, in short, what does set Flowers apart is our plants, brands, products, distribution systems, information systems and certainly, our team. What makes all this possible is the continuation of our leadership, the philosophies, the strategies; that's what sets Flowers apart, and we will continue to build on these trends.

Now, I turn the call over to Jimmy Woodward, our Senior Vice President and Chief Financial Officer, to present our second-quarter results.

Thanks, all of you, for joining our call today. We do have outstanding results for the quarter to report and I hope I can clarify any questions you may have. I also add my thanks to the team of employees, operational, administrative, the IT group and all those that have continued to contribute through this quarter and this transition.

Our sales, on a consolidated basis, did increase 6.1 percent. The Batesville (ph), Arkansas fresh bread operation and the Cleveland, Tennessee Bishop making snack operation were the acquisitions that we referenced that yielded a 3.3 percent sales increase. Our branded sales increase of 2.4 percent -- again, primarily in the product lines George mentioned under the Nature's Own and Cobblestone Mill brands -- is a continuation of the trend we've been reporting of that brand's strength. We also increased sales of our private-label fresh bread products and our snack cake sales increased, primarily under the Mrs. Freshley's label in alternate channels of distribution.

The income from continued operations is essentially flat year-over-year. I think, however, this is an outstanding result, given the period of transition we've been through this quarter. Our costs of goods sold are slightly higher. As George mentioned, we had some higher ingredient -- some higher employee related costs. Although we continue to transition the frozen bread and roll business of Mrs. Smith's, our (indiscernible) and admin expense remain flat as a percentage of sales. Depreciation and Amortization was essentially flat year-over-year as well. The interest income you see recorded is net of about $450,000 of loan costs that we reported here rather than in discontinued operations, since the total repayment of all of our bank debt was, in fact, voluntary.

Our effective tax rate for the quarter is 38.5 percent, and we do expect that rate to hold for the year for the continuing operation. As previously stated, this is the financial effective tax rate, and I again want to emphasize, due to federal tax loss carryforwards, we expect no federal cash tax payment until sometime in fiscal 2005. We expect reduced state tax cash payment as we work through utilizing the net operating loss carryforwards in various jurisdictions and entities for state tax purposes.

Looking at the discontinued operations that we reported, as stated in the release, substantially all of the costs associated with the operation of the desert business through the date of closing in the second quarter and the transaction cost itself have now been recorded. I want to run through reconciliation of that. In our 8-K filed in April, we estimated transaction and other costs to be 27.8 million. In the first quarter, we reported 19.3 million, which included approximately 8 million of the transaction cost with the balance being a loss from the dessert operations in the first quarter and interest expense. In the first quarter, we tax affected this at 38.5 percent, which is our ongoing effective tax rate. This would have left an estimated 19.8 million of transaction costs to be recorded, plus the second-quarter loss from operations and interest expense in the second quarter. So as you can see, the second-quarter results reflect the $23.1 million loss from discontinued operations. This is approximately a $4 million operating loss for the business, 15 million in transaction cost and 10 million in interest and capitalized-loan cost that we had written off for a total of $29 million pretax.

We've carefully and conservatively reviewed our tax loss carryforwards at the state and entity level and determined we should reserve for some of those state loss carryforwards, so quarter two's effective tax rate for the $29 million pretax discontinued operation amount is 21.4 percent, not the ongoing 38.5 percent to percent. So, that's how we result in a $23 million net of tax amount that's on the face of the income statement. If you look, therefore, the first and second quarter gives you an effective rate there of 30 percent on those discontinued operations.

The balance sheet -- looking at that again shows our cash and cash equivalents at quarter end of 36.4 million. That amount, as we continue to state, increases virtually every day. We have a strong cash flow business; it's very stable at this point. We have zero bank debt, as we reflect on the balance sheet. We do have our revolving line of credit that is still available, but we have nothing drawn on the revolver and we have absolutely no bank debt. The 6.6 million of other debt on the balance sheet does relate to the purchase of the Batesville (ph), Arkansas facility. The other liabilities of 82.5 million shown on the balance sheet includes our post-retirement benefits, which was primarily the pension contributions to our defined benefit plan we would expect to be making over the next five-year period.

The cash flow statement shows year-to-date capital spending of 24.2 million. Again, we expect capital spending for the year to be in that 40 to $45 million range. It also reflects the $6 million dividend payments of the shareholders year-to-date and as you will recall, the quarterly rate was increased. Last quarter, we paid ten cents per share, so if you were to annualize that, it would be approximately $18 million per year in dividends. Obviously, that is a decision the Board will make appropriately each quarter.

Looking at the guidance for 2003, we are reaffirming our guidance that we had given in the first quarter for sales and net income from continuing operations as a percentage of those sales. We've also included, in this release, the third and fourth quarter of fiscal 2002 Pro Forma data for continuing operations. When you work through your models and you look at last year's reported numbers, you will note differences in the sales and other amounts -- for example, for the Bakeries Group versus last year. That is due to part of the Mrs. Smith's operations being moved to the Bakeries Group, and then Flowers Bakeries moving a plant over to what is now the Specialty Group. So that segment data that you see reflects how the Company is currently structured.

If you use the first and second-quarter releases of this year, along with this third and fourth-quarter Pro Forma data, you will have a view by quarter of the Company as it's currently structured, which would give you fiscal 2002 Pro Forma results from continuing operations -- you would have sales of 1.329 billion, the EBITDA from continuing operations right at 127 million, depreciation and amortization of about 57 million and EBIT of about 70 million, so that's 2002 on a Pro Forma basis. We hope that helps with your modeling process.

So with those comments, Holly, if you will, we would like to open the floor for any questions.

Thank you, sir. The floor is now open for questions. (OPERATOR GIVES CALLER INSTRUCTIONS). Mitch Pinheiro of Janney Montgomery Scott.

Good morning. A couple of things -- first, on the -- in the sales breakdown -- private-label you said was up; snacks was up. Do you have any actual numbers on that?

No, it represents -- I think, in total, that's about a half percent.

What was the growth rate of your private label in general?

That's something we haven't disclosed. George?

No, we haven't.

Was it faster than the brand growth?

No, it was not.

It was slower than the branded growth?

Yes.

How about snacks? Can you characterize that in any way?

We did have a -- both Mrs. Freshley and our BlueBird did increase in sales, but we have not broken that out.

How about on volume? Can you talk about volume a little bit, in terms of branded volume? (indiscernible due to multiple speakers)?

The percentage increase we showed there for branded sales, about half of that was from volume and about half of that would have been pricing and mix. We continue to see through our new product introductions under Nature's Own and Cobblestone Mill; those brands continue to grow in both units and dollars.

How about in the snacks? Was Mrs. Freshley -- BlueBird was up. Was that volume or pricing or both?

It was both.

Out of curiosity, how is the Nature's Own low-carb bread doing? It's still maintaining the same type of sales levels?

We are still real pleased with it.

In terms of you are getting -- you know, you had a nice topline, you know, your EBIT was flat. Is there -- can you quantify, if you could, how much -- what type of -- if there's such a thing as like one-time expenses, or transition cost expenses that might have been embedded in those numbers?

The transition costs we've not broken out specifically. I can tell you that the activities that are going on -- as we absorb the frozen bread and roll operation, we are continuing to run the information systems -- basically a copy of the Mrs. Smith's information system. We're going to continuing run that at least through the end of this fiscal year until we can get the frozen bread and roll business moved over to the Flowers Bakeries, Flowers Foods system, so you are operating two separate systems there. We are continuing to produce certain products and sell those products to the buyer of the Mrs. Smith's dessert business. That activity is actually (indiscernible) on the discontinued operations. Then there's just other transition with respect to the sales force, you know, relocating them to new offices, etc., but we haven't put a specific number on that.

Mitch, the best way to look at it is we had both transaction costs and transition costs. The transaction costs are listed in the discontinued operations; the transition costs had to be absorbed by the ongoing continuing operations.

Right. Were they meaningful costs? I mean -- I mean, had you not had these two separate systems and if you had not still been producing for Schwan and the sales force move and things like that, I mean, EBIT would've been higher? Is that correct?

I think it's fair to say that we had between 1 and $2 million.

Okay, thank you. In term of your guidance, it's pretty wide guidance. You no longer have that Mrs. Smith's unknown back half of the year type of volatility, so you have about roughly 20 cents between the low and the high-end by my calculation. What's the reasoning behind that? You can't get it tighter, or are there any factors in there that sort of worry you from a visibility point of view?

I don't think -- actually, Marta and I talked about this right before the call. There's nothing -- it is still a somewhat wide range just out of an abundance of caution. You know, I think we're getting much closer to having the business transition and very stable where we can tighten the reins, certainly in the third quarter. But you know, we just felt comfortable that just leave the guidance where it is and certainly tighten it up as we go along, but there's nothing -- there's no -- there's nothing out there that worries us.

Finally -- so but related to that, historically, I mean, excluding the fact that you have a 16-week first quarter followed by three 12 weeks, historically, excluding the Mrs. Smith's operations, I mean, the final three quarters should be relatively close in size. Is that correct? I mean, the fourth quarter might be a little lower, but is that a fair statement?

I think, traditionally, the fourth quarter will be -- if you look back historically at Flowers Bakeries in the snack business, the fourth quarter has always been a little slower than the third. Our second quarter now caught up with Memorial and July 4th holidays, so you have to take that into consideration. So, I would sort of sum it up that way. First quarter, naturally at 16 weeks, will be real strong. Second quarter, with the holidays, strong. Now, we're back to school. There's always a few issues there. Then fourth quarter, through the holidays, it seems to slow down somewhat, but we feel very comfortable, as Jimmy said, with the guidance that's in place.

I think if you look at the 2002 numbers now, that will give you an indication of that trend you're looking for by quarter.

Thank you.

Eric Katzman of Deutsche Bank.

Good morning, everybody. A few questions -- I guess -- one, can you comment on the commodity cost outlook, whether it's flour (ph) inputs or natural gas?

Sure. Eric, good news -- we are covered for the rest of this year. We do have a portion of Nature covered. You know, if you look at the (indiscernible) what's going on in the market, the United States is producing, certainly, bumper crops. You would think that things would stabilize. I Know the last couple of weeks, we have seen some increase but with the large crop that is out there, everybody still feels comfortable that we will see -- should see attractive wheat pricing, going forward for this particular season.

On the energy, you know, the prediction was that it would go through the roof, and it still might. The good news for Flowers is we know have that covered through the end of the year at what we consider prices we can live with. That gamble is not out there for us.

Okay. Then I guess the other question I had is kind of following up on Mitch's questions about the second half. I mean, I know that you don't want to make too many specific comments, but I mean, to say you're comfortable -- you could drive a truck through your range at the moment, so -- (LAUGHTER) -- it would seem to me that -- I mean, would you characterize that you're more comfortable towards the higher end of the range, or --? You know, because we are -- you know, you only have four or five months left and as you said, the fourth quarter is relatively, seasonally a smaller quarter, so I think given the fact that your commodity cost outlook is fairly benign, or at least under control, and in the marketplace, your brands and DSD (ph) systems seem to be doing fairly well. I mean, shouldn't we kind of assume that you could go towards the higher end of the range?

I think there, again, we are in the environment that we're trying to be cautious on guidance and not get ahead of ourselves, you know, and leave that judgment up -- as you say, if that's your opinion -- again, we're comfortable with the guidance and we're comfortable that the business continues to perform well. You know, this is a business (indiscernible) that you do have to execute every day and we continue to do that and expect to continue to do that in the second half.

Last question -- on the share repurchase program, it doesn't look like or appear to look like you bought back much. Were you in a quiet period for a good portion of the second quarter? Are you more active in the market today, and kind of what's you're feeling on that?

Again, we have an authorization to repurchase shares from the Board. To date, we have not executed any transactions under that authorization and would continue to expect to monitor that and execute it when deemed appropriate and in the best interest of the Company and shareholders. But there have been no purchases to date.

But is that because lawyers were saying that you couldn't buy anything because you were involved in whatever kind of negotiations or issues, or because you chose not to?

It's both, Eric. We have been blacked out a large part of our (indiscernible) for the last two years, as a matter-of-fact. I would come in early this morning -- it's been painful to me sometimes to see the price of stock be as cheap as it was and us not be able to buy on the Company's behalf. (indiscernible) but part of it is also a capital allocation decision, and that is the part of the Board and managements decision on the best places to spend the cash flow that we now have and the cash flow that we expect to have in the future. There are several variables in that equation and it's not quite certain yet which direction we will go.

Thank you.

Leonard Teitelbaum of Merrill Lynch.

I think Mitch and Eric have asked most of them. Let me just ask the following -- how much has this transition cost you? Have you been able to work it out, Jimmy? I mean, I'm not talking about sleepless nights and that kind of stuff. (LAUGHTER).

There were some of those too.

I'm just talking about cash.

You mean the cash from the discontinued operation?

It's more the transition from what you were to what you are today, and is it over?

The cash (indiscernible) part of the (indiscernible) is probably about 23 million; that's that number. Now, the transaction -- and that's transaction, ect. The transition itself, again, in terms of fees for IT consultants, etc., you know, relocation of some sales force -- all of those activities again would be -- so far, George mentioned we would be in the one million number, no more than two million, but somewhere just over $1 million, I would say, and that would be cash. Those are real costs we've incurred to relocate people, relocate their offices, and just absorb the bread and roll business.

(indiscernible due to multiple speakers).

Were any of those capitalized or where they all expensed?

They've all been expensed. There's not been any aspect of that we've deferred or capitalized in any way.

Okay. That's point number one. Number two, take a look at the goodwill or whatever that is still on the books. That's going to be remaining, correct?

That's correct.

Okay. In your reconciliation, the tax rates makes me more than happy that I sold my accounting practice a long time ago!

(LAUGHTER).

What scares me is I am afraid I understood some of it! I think the important thing here is that this is -- are you using that cash that you saved and that you don't have to defer on your tax basis? What is the use of that cash since it's not going to be a permanent addition?

Again, that cash is just part of the total cash position of the Company. It's not segregated in any way.

Getting back -- I guess -- I think it was Eric's question that says, look, you used to raise -- (technical difficulty) -- every quarter, which made you kind of unique in that area. Are you going to reinvest the cash tax savings? Is that going to be a deliminator of how much stock you buy? Let's just say with the stock repurchase?

Again, I think, as Amos (indiscernible) last quarter, we continue to be in a situation that we have the maximum flexibility and we have cash on the balance sheet and continue to accumulate, you know, very stable, great cash generating business. We've got to continue to assess the opportunities to allocate that cash via the stock repurchase. The dividend, obviously, has been increased -- acquisition opportunities and internal growth opportunities.

The final question is -- is Interstate (ph) still sellling below you in the dozen or so markets that they used to be -- that they were below you last quarter?

You know, that's a fluid thing. All of us continue to -- this is tough business, as you know, and you can change your prices pretty often, particularly when you see competitive activity go on. So you know, we have gotten more competitive in some of those areas that you mentioned, so we are not (indiscernible) there's still some markets that they would be under us.

You're going to hold your price and work your margins off that, or did you say you're going to adjust on a market-to-market basis? I'm just trying to figure out what kind of a growth we can see in terms of revenue and a breakdown between sales and price? That's what I'm ultimately trying to get to here.

Well, the situation is not as good as I'd like for it to be, but it's not as bad as it has been. I don't know if that's a trend but you can hope that it is.

Final comment -- I tried some of that low-carb. I'm love bread but I'm not sure I love it that much. Keep working on it, will you?!

(LAUGHTER).

Thank you.

Tim Ramey (ph) of D.A. Davidson.

Good morning. Just to put one final touch on the transition costs, can we assume those are done now and they won't -- there won't be any additional transition costs in the third quarter?

Well, they are certainly beginning to get lower. As I said, we are continuing to run from an IT perspective, the information system -- basically the (indiscernible) Mrs. Smith's system; we continue to run that and will probably have to do that through the end of this fiscal year to give us time to migrate that business over to the Flowers Foods core system. So there will be some incremental cost there from an IT perspective but other than that, there shouldn't be anything significant.

Okay. We've been hearing an awful lot from other companies about inventory destocking in the trade. Are you seeing any of that? Would you comment on your outlook there and any impacts to your business?

I would comment on it. We have not seen any significant change in that regard.

Most of our business (indiscernible) (indiscernible due to multiple speakers).

It's not inventory driven.

Okay.

Tim, I guess I could follow-up on that too to say, again, as we mentioned in prior calls, as we continue to increase in our scan-base trading or pay-by-scan technology and we roll that out, in effect, you could say that's a destocking, if you will, but it puts us closer to the sale and enhances our cash flow and all of the benefits we get at the route-sales level (indiscernible) (inaudible) much greater than any destocking effect we would see there on that roughly three-day supply of the bread product.

Can you comment on which accounts are now using the scan-based trading or pay-by-scan system?

We are obviously in partnership with virtually all the national retailers, you know, and continue to expand that program. You know, it's one of those programs, again, the national retailers continue to appreciate, and it further strengthens our partnership, if you will, that we have with them and helps us provide, again, better service; it gives our distributor force more time to focus on merchandising branded products. I think we see the result of that through these increased sales.

Following up on that, I think we've said on the last call that we anticipated, probably, as much as 30 percent of our sales at our Fresh Bakery unit would be on scan-based trading. As Jimmy said, we're pleased (indiscernible) the partnership is working out.

Wonderful,

We see great advantages for the retailer and for our distributor and for the Company.

That's terrific. Thank you.

Mario Gavelli (ph) of Gavelli (ph) Asset Management.

Yes. I think you covered (indiscernible) operating details and over-killed on (indiscernible) got on the call. I just want to say thanks, Amos and to everyone else and from my clients who are big shareholders, we're just going to watch -- (technical difficulty).

You're welcome. Thank you kindly.

Thank you.

Noah Echols (ph) of Clovis Capital.

Hi, everybody. Great quarter. I had a modeling question. I don't want to be too harsh here, given that if you put up numbers like Interstate Bakery's you probably would have broken even and if you put up numbers like Sara Lee Bakeries, you would have been down 30 percent on the EBIT line, so I don't want to be too harsh. When I'm doing the modeling for the second half, I'm really having trouble getting to the upper end of the range. I look at the Pro Forma numbers that you laid out for '02 and the second half of the year. If you accelerate the business from a lack of EBIT growth in this quarter to mid to high single digit growth, I'm still coming up with around $1.04, $1.05 for the year, which I would think would be an admirable second half of the year. It seems like I'm not catching any major cost components that are coming out of the cost structure in the second half of the year. It seems like you have a lot of visibility on the ingredients side; you've locked that in. It seems like the employee costs are what they are. So, I'm wondering what's coming out of the cost structure, or what's going to be great on the topline to help you get to that upper end of the range there? Thanks a lot.

I think, Noah, again, it's a function of -- obviously, we have a sales range of 1.4 billion to 1.450 billion. If we get to the upper end of that sales range, depending on our product mix -- and they are again continuing to execute and control costs and minimize this transition -- the cost of this transition. You know, that's the key to it. The other piece is, again, we have -- in the first and second quarter, we had some interest expense and we had a lot of loan cost, as I mentioned. In our interest income line in the second quarter, we had about 450,000 (indiscernible) write off some loan costs. Obviously, that will not occur again, so we will have higher interest income in the third and fourth quarter than what we showed in the first and second quarter. You know, George (indiscernible); it's execution -- (indiscernible due to multiple speakers).

(MULTIPLE SPEAKERS) -- execution. We thrive on that daily execution to make sure that we get this job done well in the marketplace.

Thank you.

David Liebowitz (ph) of (indiscernible).

Let me add my congratulations for an excellent job done. A few brief ones -- one, there was no mention made today about foodservice. Normally, that's one of the things you like to trot out for us. Any words of wisdom there?

Yes, David. If you look at the -- and we look at it consolidated as well as broken out. Our foodservice business was flat to down slightly at our fresh baking unit. On foodservice at our Specialty Group, we were down slightly there as well. So, foodservice was not strong this quarter as this time last year. I don't see a fee change; I think it has to do with -- as I've heard Amos say too many times, your customer has to be successful when you are in foodservice for you to be successful. We did (indiscernible ) see some declines of some customers.

I think, David, we've mentioned the trend of the quick-serve restaurants. We are continuing to work with virtually all of the national chains on alternative bun platforms to help them provide a better product to the consumer and attract customers to their stores. You know, we continue to have a lot of activity in that area, but that quick-serve category I think is, as everybody's saying, continues to look for ways to try to gain units.

Second question, if I may? I'm not sure I heard the answer. There will be no other one-time charges in the second half, other than the Mrs. Smith's frozen that you've retained?

Correct, David. From a one-time charge point of view, there are some continued transition costs again, just absorbing continuing operations in the second half. As far as the one-time charges for continuing operations, there are none there as far as any of those businesses. The discontinued operation -- we believe we have substantially all of that reported through the second quarter. We don't expect any other substantial amounts to show up on that (indiscernible) topline as well. So, other than the limited amount of transition costs in continuing operations -- again, primarily for IT -- there are no other items to deal with.

Lastly, are there any new products you would like to share with us, or anything new that will coming out in the second half that we ought to be looking forward to seeing?

David, we're certainly always looking at trying to be proactive rather than reactive, as exampled with our low-carb product. (indiscernible) specifically that I'd like to talk about because it's not announced to the marketplace, but we think new products, with all the (indiscernible) going on with the consumers, is a very important part of our company. Historically, we've always been on the cutting edge of that, not on the bleeding edge. I guess Nature's Own would be a primary example of that; you know, it started out Nature's Own was only two or three items to start with and now it's a wide array of products that continue to meet the needs of the consumers. they change their feeding habits, so you will continue to see (indiscernible) Nature's Own, Cobblestone Mill and some of our cake lines' new activity.

Nothing in snack foods worthy of mention?

Yes.

Thank you.

Bill Leach of Newburger Berman.

Good morning. Jimmy, in terms of the Pro Forma results for the second half of last year, should we just apply a 38.5 percent tax to that and no interest expense to come out for the EPS?

Yes. On a Pro Forma basis, that would be correct.

I come out with 24 cents for the third quarter and 15 cents for the first quarter. Does that sound right?

Yes.

Okay. The other question -- Amos, could you just talk about the long-term strategy for the Company? You've obviously had a huge uplift in your profitability and your balance sheet and your shareholder value. If you look at the results, they're basically kind of flattish, which is good under the circumstances. Could you talk about what your thoughts are in terms of where we go from here for Flowers?

Well, creating value for our shareholders is the business that we are in, and we have been working on that for the 41 years that I've been here. We've done a good job of that. We (indiscernible) quarter in cash to our shareholders for the keeper (ph) distribution, and then getting the stock price up on the existing company of Flowers Foods.

Going forward, one of the key things you talk about is the balance sheet. You look at our balance sheet, we're in great shape here. We've got money in the bank; we've got cash flow coming in and we've got -- that money is largely unencumbered. It's a question of capital allocation of what we do(indiscernible). We will expand our existing business and we will consider other acquisition opportunities. So, we have the financial wherewithal now and flexibility to be far more creative and innovative and productive in the future than we have in the past.

I look back to where we started 40 years ago and what we've been able to create in terms of three billion or so in value for our shareholders in the aggregate, and I think (indiscernible) starting from where we are today, we ought to do a lot better than that in the future. So, there are acquisition opportunities out there, but we don't have to have acquisitions; we can grow internally, and we can go through acquisitions. We've got opportunity to grow through additional products or geographic expansion or into new channels of distribution. So, I appreciate the fact that all my competitors are listening to this conversation -- (LAUGHTER). I realize those are in broad, general, sweeping terms, but that's as far as I want to go into it at this point.

Our balance sheet is an excellent shape; our income statement is in excellent shape. I told the Board of Directors the last six months have been the best six months in the history of the Company and we've never been in the financial position that we are in today and the amount of cash that we have unencumbered and the cash flows that we have. There are opportunities to strengthen our company and we will do our best to take advantage of them and continue to create value for our shareholders.

Good luck. Thank you.

Joe (indiscernible) of (indiscernible).

Good morning. You guys had mentioned strong cash flow generation. I'm just wondering, is there a 2003 guidance for cash flow?

We hadn't specifically given a cash flow guidance for the year. I think you could look at the first half and then take those earnings projections, again, with no interest expense and no cash tax to be paid. Then capital spending -- there again we've spent -- I think it's 24 year-to-date. Expect that to be in the 40 to 45 range. You would anticipate the ten cents per dividend for the quarterly dividend rate, and that would give you that cash flow for the year.

Right. The D&A projection is up around 55 I think?

That's correct, yes.

Okay, so we wouldn't be completely out of line at 140 or so?

Right.

Thank you.

(OPERATOR GIVES CALLER INSTRUCTIONS). Tim Ramey (ph) of D.A. Davidson.

Good morning again. A lot of your competitors have talked about the impact of extended shelf life creating excess capacity. It appears that perhaps you've been able to use organic growth to fill out that capacity. Would you comment on that issue, please?

Yes, I well, Tim. As we've said several times over the past 18 months, we have been very careful on the whole ESL (ph) concept. We really believe that people still enjoy eating today's bread today even though, you know, some items can carry ESL (ph) and seem to do well. But we've been cautious. As you see, our sales and volume is up, and we don't have any excess capacity at this point.

Thanks.

Thank you. I will turn the call back over to George Deese for his closing remarks.

Well, thank you, Holly. Our second-quarter results are evidence that Flowers Foods is truly an outstanding company. Our sales are strong, cash flow is very good, and as our annual report stated, we are back to our bread and butter business. Because we are growing, we expect that growth to continue. We are looking at adding new production capacity for certain products in both our bakeries had our specialty groups. We are developing new products, growing our brands, strengthening our position in the marketplace. As you can tell, we feel very good about the future of Flowers Foods. We hope you'll join us on September 25th in San Antonio for our Analyst Day, where you'll see our management team, one of our largest bakeries and get a glimpse of how we've performed in the marketplace. Again, thanks for joining our call today, and thank you for your interest in Flowers Foods.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day. (CONFERENCE CALL CONCLUDED)