Flowers Foods Inc (FLO) 2004 Q1 法說會逐字稿

Good morning and welcome to the Flowers Foods first quarter 2004 earnings conference call. At this time, all parties have been placed on a listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to introduce your host, Ms. Marta Turner, Vice President of Communications and Investor Relations. Maam, the floor is yours.

Thank you, Marisha. Good morning, everyone. Participating in our call today, we'll have George Deese, Flowers Foods President and Chief Executive Officer and Jimmy Woodward, our Senior Vice President and Chief Financial Officer. George and Jimmy have a few comments on our first quarter results and then we'll open the call for your questions.

But first, I 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 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'll discuss during the call, important factors relating to our business are described in Flowers Foods filing with the SEC. Now, I'm pleased to introduce Flowers Foods's President and Chief Executive Officer, George Deese. George.

Thank you, Marta. Good morning. Thank you all for joining our call and for your continued interest Flowers Foods. As you have seen in our news release, our first quarter was outstanding. In the face of the declining market and an onslaught of negative news about carbs, our sales and earnings increased by 5.4 and 25.6% respectively. That proves that our strategies are working. Looking at our IRI and pannel data for the twelve weeks ended April 18th, the packaged bread as a category was down 3.9% and volume decreased 2.9% for the total U.S. In the South market, the category was down 5.3% and volume declined 4.8%. We're very pleased to report that in the same time frame, Flowers increased dollar sales increased dollar sales by 3.2% and volume increased by 4.1%. Flowers brands also gained one half share point in both dollars and volume.

I would like to congratulate Flowers Bakeries group for another outstanding quarter, in addition I would like to congratulate our specialty group, their performance is on plan, and as expected we're seeing improvements in the frozen bread and roll business. I will talk more about new products and new markets in a few minutes but, first, I know you want to hear more about the financials from Jimmy. Jimmy?

Thank you, George. Let's take a look at the financial statements in the press release. We'll go through the income statement first. Our consolidated Q1 sales of reported sales of 457.8 million represent a 5.4% increase over the same quarter last year. The company's most recent acquisitions were over one year ago, therefore, this sales growth represents growth in the base business. The growth is due to a volume increase, driven primarily by increased sales of Nature's Own bread products. We continue to further penetrate the existing markets and expand our geographic coverage of DSD routes successfully.

Food service sales increased in both the bakeries fresh distribution, and specialties frozen distribution on higher volume and some price increases in the frozen channel. Our snack cake sales at retail increased on higher volume, primarily in the mass merchant channel. The bakeries fresh bread sales under store brands and specialty snack cake sales to the vending channel in contract production for our other companies, all of those remained essentially flat year-over-year. So we had a favorable -- continue to have favorable mix shifts in our sales. The gross margin of 229.8 million is up 4% over last year, on this increased sales base. As a percentage of sales the gross margin of 50.2% is slightly below the 50.8 we reported last year.

The bakeries fresh bread margin was essentially unchanged from the prior year, while the specialty margin slipped about a percent, due to higher ingredient and labor cost. Our selling, marketing and administrative expenses of $186.4 million were 40.7% of sales, down from some 42.3% of sales last year. Flowers bakery expenses were lower than last year due to holding costs stable on the higher sales volume. Specialty expenses were down as we shifted various functions to the shared administrative services. We provide and then we reduced various staffing levels at the segment, at the specialty segment. Again, that relates to the fact that we sold the frozen dessert business and we were trying to right size specialtys for the frozen bread and roll that we retained and the snack cakes. The unallocated corporate expense did increase some 1.6 million over last year due in part to higher advisory services cost for various matters, including costs related to the ongoing assessment of our internal controls in preparation for our compliance this year, with section 404, as essentially all companies of our size would have to comply. Depreciation and amortization expense of 16.9 million is a slight decrease from last year. Certain assets have become fully depreciated.

The source of interest income remains primarily the distributor notes, with the balance coming from the cash we have invested. Interest income is reflected net of interest expense that we incur and the increase over last year is due to the fact we had the significant debt reduction last year, when we sold the frozen dessert assets.

The effective tax rate for the quarter has changed to 37%. The effective rate on our wholly owned base business remained at an historical level of 38.5%. However, you will note that we are, for the first time, reporting a minority interest in a variable interest entity, or VIE, in accordance with FIN 46. This is fully disclosed in our Form 10-K, and then will be more fully disclosed in the Form 10-Q that we will file next Thursday. As required by FIN 46, we've consolidated the VIE, although it is very small and could be considered immaterial.

It is an S corporation and has no corporate tax; therefore, the consolidation of its numbers with ours yields this lower effective tax rate that I just mentioned. We are not making federal cash tax payments due to the tax loss carry-forwards, and except for alternative minimum tax, if any, we expect this to be the case, excuse me, until 2005. Based on the 2003 tax provision, again, as a reminder our operating loss carry forward into 2004 was approximately $85 million. The amount you see reported on the face of the income statement, as the minority interest in the VIE or variable interest entity represents all of the income of the VIE, as Flowers has zero equity interest in this entity. The effect of the consolidation on the income statement is simply to gross it up by some very immaterial numbers, and then all of its net income is eliminated. And then we also consolidate its balance sheet and cash flow activity. And, again, consolidation is a requirement under FIN 46 for these type of entities now starting in this quarter.

Of the $3.5 million reported as discontinued operations, is for estimated expenditures that will be incurred to complete the matters related in the frozen dessert business that was sold approximately one year ago. And, again, all of the known and the expected costs associated with the matters related to the frozen dessert business that we sold have been reported.

On a per share fully diluted basis, income from continuing operations was 38 cents per share, and then discontinued operations was an 8 cent loss for a net income of 30 cents. The diluted weighted average shares outstanding did decrease slightly since last year, because during the quarter the company purchased approximately 305,000 shares of common stock. The balance sheet reflects cash of $29.4 million and we continue to report zero bank debt. Our unsecured $150 million credit agreement is still in place, and has not been drawn upon.

The cash flow statement for the quarter, again, shows the strength of the business that we generated $9.9 million of cash from operating activities. The pension plan contributions that we had previously announced are being made each calendar quarter. Therefore, you will note that the first fiscal quarter shows contributions of $8.5 million, which is one half of the total we expect for the year. And that's the part of that change in assets and liabilities. We used 15.4 million for capital expenditures and I would mention this includes the purchase of the production facility, the land, building and equipment in McDonough, Georgia that was announced earlier this year. And our operational expectations are that this facility would be opened later this year, or early next year. But that's in the capital, in the purchase of property, plant and equipment number, not shown as an acquisition. The company paid a $4.4 million dividend and used $7.8 million to purchase approximately 305,000 shares of common stock.

Again, we have the completion of this strong quarter at this point in the fiscal year, we remain with our guidance that we have previously given. This is a 52-week fiscal year, versus last year's 53-weeks, and this was a 16-week quarter. We will reiterate our previous guidance for sales and net income. Sales would be 1.45 to 1.5 billion, and net income is expected to be 3.75 to 4% of sales. With a quarterly pattern, essentially, much like last year's fiscal 2003, as far as the progression through the year. George, I think that covers the financial statements. So I will turn it back to you.

Thank you, Jimmy. Our performance is a reflection of our outstanding efforts of our team. Their execution in the market place and our long-term strategies that continue to give us competitive advantages. For decades we have invested in our bakeries, worked to build our brand, and extend our product offering. We've been innovative with our distribution systems and with our information systems. Today more than ever before, the competitive advantages we've created with those strategies are clearly seen in our performance.

During the first quarter the sales of our brand and products did increase by 4.9%. Looking at our product categories our local regional white breads outperformed the category. Our Nature's Own brand continues to grow. Units and dollars grew by double digits. In the premium specialty category we are pleased to report that the Cobblestone Mill performed well, with increases being driven by our premium loaf breads.

Turning to food service, it is important to realize that we offer our customers the bakery items they need, either fresh or frozen. That is a competitive advantage. We continue to develop the right products for each customer, drawing on our extensive product mix. For instance, we've added bread and rolls with lower carb count in recent months. It looks as if that will be an important part of a mix but not a huge volume item for food service. Our frozen bread and rolls are doing well, living up to our high expectations. We're growing that part of our business and improving margins as expected.

Turning to the cake category. Sales of our Blue Bird and Mrs. Freshley increased during the quarter driven by growth in the mass and convenience store channels. We are encouraged by the continued growth of our Hispanic products. Our distribution is expanding each week. We expect combined sales of Mi Casa and [Tesarito] products to annualize in the 5 to $7 million range this year. As is usual in the case of a new brand, it takes time. We are excited about our opportunities to serve this important and fast-growing market. New products played an important role in our growth during the first quarter, and we continue to develop new items for today's consumer.

In fact, just this week, we rolled out six new Nature's Own products, including the double fiber breads and hot dog and hamburger buns with fewer carbs under our health line banner. Those new products are aimed at the needs of our health conscious consumers and our well-established Nature's Own brand suits these items very well. In the new markets we created over the past ten months or so sales are annualized by a 1% increase for our bakeries group. That's on plan and again, reflects good performance on the part of our team, as well as good market response to our products and brands.

Within the last few weeks, we entered Oklahoma City, and in going forward we'll continue to push the boundary as far as the DSD routes. As we've said before, we plan to extend our territory by 100 to 150 miles in the states that border our current territory. Since we announced that plan we have entered new markets in northern Virginia and the Washington, D.C. area, Lexington Kentucky and southern Missouri and most recently, Oklahoma City. I know you would like to know more about where we're going next, but for competitive reasons we cannot give you specifics on which markets we will enter next, but during the year we'll keep you informed about our new market activity.

Our new Denton, Texas bakery should begin production of buns and rolls within the next few weeks serving the Dallas-Fort Worth market, as well as our new markets in Oklahoma. We expect to add other production lines to that bakery, as our business grows. In March, we announced the acquisition of a new bakery in McDonough, Georgia. We expect to begin production there early next year. McDonough is a part of the solution to our move out of the Swan building now owned by Schwans. The bakery also plans to offer new products for food service customers.

Looking at commodities, main one being Flower, I would like to report that we're covered for the remainder of the year and well covered into the first quarter of next year that will allow to us maintain our margins. We expect to continue generating strong cash flow. Over the long term, we expect half of our cash to be used for dividends and capital investments. The remaining half will be used for acquisitions of either Flower stock or new businesses that fit our plans for growth. As you heard from Jimmy before, our use of cash in the first quarter fits with that plan. We paid dividends, invested in our bakeries, acquired the McDonough bakery and repurchased our stock. As we allocate cash, we're always mindful of the importance of investing, for the cash that will generate the best results for our shareholders.

Finally, I would like to congratulate and commend the North American Millers Association, the American Bakers Association, and our allied partners for the formation of the Foundation for the Advancement of Grain-Based Foods. The foundation will work to promote a better understanding of the nutritional value and health benefits of grain-based foods. Of course, we are a part of this effort. To wrap up, Flowers Foods is in excellent shape. We have sufficient bakeries, outstanding distribution systems, great products, strong brands, extraordinary customer service and an exceptional team. We expect to continue to outpace the industry as the year unfolds. Now Marisha will open the call to questions.

Thank you. The floor is now open for questions. If you have a question, please press star one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. We do ask you while you pose your question that you pick up your handset to provide the best sound quality. Please hold as we poll for questions. Thank you. Our first question is coming from Eric Katzman of Deutsche Bank.

Hi. Congratulations, everybody.

Morning Eric

Good morning, Eric.

A few questions. I guess first one, Jimmy you mentioned on the cash flow statement that around, what was it, 8 or $9 million was from the pension contribution, but that still leaves the negative working capital hit of about 27, $28 million. Can you kind of explain that in more detail?

Yeah, the -- again, the pension was 8.5. We did have an expenditure of about 4.5 related to some lease obligations that remain from the dessert business. Our accounts receivable went up about $10 million. I think that our day sales outstanding is still very good based on pay by scan at the Bakeries business. Day sales outstanding at Specialty is about 30 days, which is good. That's not a pay by scan and as we have grown those sales in this quarter, our receivables ticked up about 10 million there, while payables went down about 12 million, and a good piece of that we obviously had a bonus payments related to last fiscal year that were made during the quarter. Inventory, you know, only up about 2 million. So I think if you take those components, that will explain that change.

Okay. But for the full year, you are not expecting working capital to be a huge cash --

No, absolutely not. We -- we expect it to, there again, be a fairly stable situation, and be very cash flow positive for the year.

Okay. And then the other question I had was, I guess George, maybe you could just comment on kind of whether you're seeing any kind of plateauing of the low carb trends in the current territories or maybe, you know, to the extent have you have vision on it, across the U.S. because, you know, Krispy Kreme, Weight Watchers have blamed the low carb phenomenon on their weakness, you're obviously offsetting that but I'm kind of, more importantly, are you seeing kind of a diminishing of the trend away from carbs?

Eric, that's an excellent question. You know, truthfully, most of my career there's always been something out there that was affecting the business. This particular one happens to be on carbs, but to Flower's credit, you know, looking back 20-25 years ago as we begin to see people moving away from white bread that's why Nature's Own was introduced in 1978, I believe was the year because we did see that trend. As we begin to see more emphasis putting on the low reduced carb, people eating less carbs last three or four years, seeing it peak last year, that's why we did develop the wheat and fiber product. And it was remarkable last year what happened. That is still growing somewhat. There's a lot more competition, as you well know in the market place but we're confident enough that we did introduce under that same health line banner, wheat and fiber hot dog/hamburger buns and a roll just this past Monday because I don't think it peaked out -- it might have peaked out but there's a lot of interest out there.

All we're trying to do is making sure that we have the right products for the consumers as they go forward. You know, you recall, of course the South Beach diet started in Miami. The Sugar Buster diet started in Louisiana and we have been keenly aware of those trends and we have introduced the Nature's Own sugar-free, I guess three years ago and certainly have continued to ride that tide. And our emphasis is whatever the consumer trends are, to be on the cutting edge of that. Certainly -- hopefully not on the bleeding edge, but staying in tune with our consumer research and talking to consumers to really see what's happening and trying to take advantage of it.

Then last question -- thank you. The last question, Jimmy, you kind of mentioned that the quarterly flow this year should remain kind of the same, but in the fourth quarter, I think your comping versus an extra week, so it's not really, you know, an even flow. I mean, shouldn't we expect the fourth quarter to probably be a -- a tougher one?

Yeah, I guess. Absent the extra week in the fourth quarter, the next three quarters there, again, are 12-week quarters. So that is a correct statement, that the fourth quarter of last year, you know, I gave information on -- on the effect of that extra week in the quarter last year. So if you take that out, then we would expect basically the pattern to be the same.

Okay. Thank you.

Thanks, Eric.

Thank you.

Thank you. Our next question is coming from Bill Leach of Neuberger Berman.

Good morning.

Morning Bill.

Morning Bill.

Congratulations also.

Thank you.

I have a couple questions. First, on the specialty segment the 11% sales gain is that all organic or did you have any acquisitions in there?

There are no acquisitions. Bishop Baking Company was the last acquisition for the specialty group in January of -- I think the very first day of January last year.

That's all organic.

So it's still growth of those products, and our other products and brands in the specialty.

Do you think that rate of growth can continue for the year?

Well, we -- I'm cautious to say that we -- the bread and roll -- in my opening comments I did say that the Specialty bread and roll group is really doing a wonderful job in growing. Mrs. Freshley continues to perform. I think that was up some 9% for the quarter. So hopefully we'll continue to see the same results going forward.

In terms of margins that business has really come a long way over the last two years. It was hardly making any money two years ago and now it's doing like a 6% margin. Is this a sort of normalized margin for the division?

I think it very well could be. I think there's a lot of focus with the management team improving those two businesses, and since we're not in the pie business they're staying true to focus on that part of the business and they are doing it and having good results. So I think we will see normal margins along these lines and hopefully improve.

Alright. Jimmy let me ask you a few P&L questions.

Okay.

I came expecting your corporate expense charge to go down because it seems so high and it keeps going up, is there some point its going to start to go down? I mean its equivalent to over 30% of your pre tax earnings right now.

Yeah, again, these are direct corporate costs and unallocated expenses. You know, during the quarter we have had, you know, various third-party service providers for various matters. We are incurring additional cost. We have an internal audit function that we historically always had but as many -- as most companies are, we are incurring significant incremental costs in our internal control assessment, to be prepared for the -- for the 404 compliance this year. You know, I expect, again, the number to be somewhere in that 25 to $30 million range for the year. And we're doing, you know, all that we can to monitor and control the cost.

So it should be down then for the balance of the year?

Yeah, I don't think it will be $10 million per quarter for the next three quarters, no.

So it should swing to be a positive variable on your P&L?

Yes.

And another question here, your interest expense in the fourth -- or interest income was 1 million in the fourth quarter and now it's 2.7, how did you have such variability in just one quarter's time?

I think it's just the 16 weeks.

That's like a 20% change.

Versus 13 weeks

You almost tripled your interest income.

Well again we continue to have cash invested and we're doing a little better job at managing and getting a little better rate on our overnight cash investments as we stabilize the cash and understand better, rather than just having it in an overnight account we're doing, you know, 30-days, very short term maturity type things to try to get a little better yield on the cash invested.

So what would you guess your interest income will be for the year, roughly?

I think it's still, you know -- we haven't given, I don't think specific guidance on the interest income. I think the net income guidance still factors in that interest income, but I would expect that the trend to continue, much as you see here.

And lastly, for the tax rate on the minority interest, is that what we expect for the year, 37%, and minority interest charge of about a million per quarter.

That's correct, yes.

Okay, great. Thank you very much.

Thank you.

Thank you.

Thank you. Our next question is coming from Leonard Teitelbaum from Merrill Lynch.

Good morning.

Hey Lenny.

Morning Lenny.

Good quarter.

Thank you.

I want to fill up a little bit on Bill Leach's question which related first to the VIE.

Okay.

Are you -- where had that been classified earlier, prior to the APB.

Okay. I would point you to the Form 10-K, note three, Lenny, and --

I'm not at that page yet.

Yes.

If it's in there, I will get it.

In summary, the VIE had not been consolidated previously.

Right.

Okay. This is the first quarter that we have been required to consolidate the VIE.

All right. I will dig it out. Thanks. So, but I think you answered Bill by saying its going to -- you estimate that to be a million a quarter?

Yes. That would be my best estimate. Probably a little lower than that, because there again this was a 16-week quarter.

All right. Let me get just a couple of definitional questions, if you could, because clearly, your food service business in the bakery is doing better than a couple of your competitors, at least one in particular. What is your definition of food service? Is it going to be just the buns and rolls or got the the par baked product. What is in that for you.

Lenny, restaurant institutions and fast foods of course would be in that, along with distribution companies that do serve as we serve. Product line, though, could be anything from white bread to wheat bread to buns, rolls, even some super premium wide loaf bread could go through that process.

Okay. Because it's customer driven. The frozen deli bakery part is not in that business, correct?

No, we're not.

Okay. Moving on Blue Bird and Freshley's is obviously doing a lot better than its competitors. Is it because the region is doing better? Are you gaining share there that you would rather not talk about?

No, we had looked at panel data that strong on it. [inaudible] is important to us. We have focused on it more. I think we're getting wider distribution. I say that's probably the main reason. A little more focus, as I mentioned earlier. Our people don't have the time and effort to put behind --

So are you taking share from interstate or not?

Lenny, I don't see that much of that. It's possible but I don't -- we don't subscribe to that particular data program to get and see what's going on in the market place, like we do bread and rolls.

Just two other questions. You mentioned that you're hedged out in wheat into Q1of next year, what about some of your other products?

You know, I basically say on all of our coverage we are basically covered through the year without too many exceptions and that's in our plan and we feel comfortable with the guidance that Jimmy has given you on that. And trying to look out into the next year as best we can on some of those other items other than flour.

Okay. And if I go through the projections, I'm assuming, Jimmy, your guidance for '04 of 4% on sales base is -- has incorporated the consolidation of the VIE. Is that correct?

Yes.

All right. Okay. I don't want to go any further. I got the answer I wanted. Thank you very much and again, congratulations.

Thank you, Lenny.

Thank you. Our next question is coming from Tim Ramey of D.A. Davidson.

Congratulations, guys.

Thanks. Good morning.

Good morning, Tim.

Good morning. I wondered if you would flesh out the program of entering new markets. You seem to have done that really without much of an impact to -- negative impact to the P&L and that's a difficult thing to do, I know. You mentioned several markets that you entered. Can you just discuss more broadly what competitive response you have seen, the level of sales you are getting, the level of route penetration and so on?

Well, I did mention that these new markets generate about 1% sales increase for the Flowers and Bakeries group. I would not like to get into specifics by market, as far as how many routes and that type of thing. But I would say I think it's about the strength of our people and about the strength of our brands, particular Nature's Own and Cobblestone Mill. I think in these adjoining territories that we are going into, the adjoining consumers have heard about these brands and I think they wanted these brands and that yields the retailers in those marketplaces reason to have us and to have access to the market. So that's the key to any new market, is having access. You can go but if you don't have access, you know, your bread can sit on the truck so to speak.

Mm-hmm.

So our customer base has been very cooperative in letting us serve the market, and likely the consumers are accepting the brands because they heard of them before.

And are you sort of using scan-based as your entry to these new markets? I assume that some of the retailers that have embraced that program --

Yes we do. If we have it in Texas we move it into Okahoma for the same customers.

Great.

Yes, we do.

And just a quick question for Jimmy. Does the guidance reflect a 30 cent number for this quarter or a 38 cent number for this quarter? Are we going on GAAP or pro forma?

The -- the guidance is, there, again for operating income. So it would be before the discontinued operations.

Okay. So the 38 cent would drive the guidance?

That's correct.

Thanks very much.

Mm-hmm. Thank you, Tim.

Thank you. Our next question come is coming from Mitch Pinheiro of Janney Montgomery.

Hey, good morning.

Hey Mitch.

Hi, Mitch.

Couple things. One, just getting back to the geographic expansion, how many routes have you added in the quarter?

Mitch, I would rather not get into those specifics.

Okay.

I can go back and say the newest entry was Oklahoma City.

And you said that that added 1% to Flowers Bakery sales in the quarter?

That's correct, over last year. And not just Oklahoma City.

No, all new markets.

All new markets.

And your guidance or, I think maybe in the release said something about you expected to add 1% for the year. Wouldn't -- wouldn't we expect that to maybe accelerate a little bit? Or --

Well, I think we will continue to grow in those markets, but I wouldn't want to overpromise and I would rather be cautious because not only are we growing these markets but we also have to have our earnings the way they need to be.

Okay.

So we are trying to take care of our shareholders, at the same time we are trying to grow the market. So there is a fine balance. I'm not overspent in any markets, but at the same time I'm trying to grow on a consistent basis.

Okay. In terms of specialty, how -- you mentioned that food service, the frozen bread and rolls were up. I forget the amount. I don't have that right in front of me. Is -- how are you growing that business? Is it -- are you getting new restaurant chains? Is it -- are you in with the right distributors? What is driving that?

I think both of those. I think we are -- we serve basically all of the distributors nationwide on frozen bread and roll side of the business. And we can only be as successful as our operators are. So I have to say that there is some new customers probably in that base. I think food service is beginning to bounce back. We're seeing that trend over the past few months.

The Specialty margins, I think Bill asked about, you know, the level of the operating margin in that business. Why shouldn't that business have a margin that would be equal to or better than the Bakery?

Are you talking on the frozen bread rolls?

Well, your entire Specialty business, including snack cake.

I think over time it will, Mitch.

Okay.

I really do.

Is that, over time, is that like a three to five year or is there a quicker ramp or a slower ramp than that.

I think it can be a two to three year ramp. I don't think it's five years out.

Okay.

Because we are seeing tremendous improvement as our numbers have shown.

In terms of new products and specialty, we've seen, at least, I guess the initial reaction to Entemann's low carb products have been, I guess luke warm at best. Are there any plans -- do you have any plans for for any of those types of low carb introductions in Specialty in the snack cake area?

No we do not. We are working hard to eliminate the transfatty acids. We think that's the number one priority and we are focused on that and developing our [Tesaritos] and Mi Casa brand on the cake side.

Do you have a low transfatty acid product out now?

No. It's in development. It's not in the market.

Okay. When you -- getting back to the fresh bread category, was your private label business down?

Yes, it was.

Do you care to tell us by how much or was it -- what did private label, as a category -- as a category, how did that do?

You know as a category -- you said white bread didn't you?

Well, I just meant all of your private label.

Private label in general, I think we've seen the same thing occur on the private label as we have seen on the brand. White bread is certainly been down more than the wheat products under private labels. I think white bread is suffering nationwide, and private label is also being affected.

You know, I -- some part of your, I guess with some of your newer products, there aren't private label offerings to compete against some of your Nature's Own products. Do you anticipate or would you expect sort of premium private label? Is -- would there be such a thing in your category?

We do not have what it would be known as a premium private label in our portfolio.

Is -- I mean --

I really don't anticipate one in particular. I think volume, as the retailer set is -- even though white bread is down its still a huge part of the business. And I see private label probably sticking with white bread and buns and ex-salt variety breads and not try to jump into the superpremium part.

Okay. Is private label -- how is pricing? We didn't get any pricing in the quarter. As a matter of fact looks like pricing was down a little bit.

Yes, flat to down slightly.

Is private label pricing flat to down as well?

I think it's -- it's up slightly, I think. I think it's ticking up.

Okay. I mean, I wonder, does that have any impact on private label volumes?

No. I don't think it picked up that much. There's still a huge gap between branded and private label, but, you know if you look at the IRI, you do see that private label did tick up two or three cents, I think.

Okay. Last thing. I missed the -- your cap ex spending in the quarter, Jimmy.

Okay, Mitch. It was, including the acquisition of the McDonough facility, which is reported as cap ex, is 15.4 million.

And your expectations for the full year?

Is still in the same realm, the 45 range.

Okay. How about looking into, I mean, next year, is that the run rate we should be modeling?

Mitch we think so. As Jimmy mentioned, I think in prior calls, just maintaining our present plants and keeping them up to date, you can count on a million, a million two or three per plant. In a huge special project, we'll probably be on top of the 40, to 45 that we're talking about.

All right. Thank you.

Thanks, Mitch.

Thank you. As a reminder if you wish to ask a question, please press star one on your touch-tone phones. Our next question is coming from David [Leowitz] of [Burnham].

Good morning. And congratulations to a great quarter.

Thank you, David.

A few questions if I may. First, fuel costs both for your route vehicles as well as your production of product. How much is that hurting you right now?

David, we don't specifically disclose the incremental costs in the fuel. Again, we have the gas for the ovens and then that's obviously all of our cost, and then with the transportation companies we deal with and with our independent distributors, you know, obviously there's costs incurred in the fleet, but we don't disclose specifically details on the incremental cost increases there.

Okay. The next question, what is your current status of selling off routes to the sales folks?

That's always ongoing. Obviously as we go into new markets we want to develop those markets before we sell them off. And once a market is material, well then we do sell them to people who want to be an independent distributor. Always you have ongoing -- because of turnover or somebody retiring, there's always x number of routes, even in existing markets, it's always ongoing. All this company is independent distributors basically except those new markets, and any turn over or retired people who are in the mature markets.

And right now, how many routes are still available for sale?

We don't -- we don't, again, disclose specifically a number. If you look on the balance sheet, there's a number for assets held for sale.

Right.

And I know that level of detail was not in the press release but it's in the 10-K and will be in the Q. Year-end assets held for sale were some $14 million. Which would primarily represent where we sold the territory to an independent distributor, and then for whatever -- a variety of reasons, that distributor -- we then made a transaction to repurchase their territory, and now it is held for resale to another distributor.

Okay. Turning to the Hispanic market and the [Tesarito] and Mi Casa brands, you said you expect it to do 5 to 7 million this year?

Yes.

What percentage of your total market territory is the product sold in right now?

We are rolling it out gradually throughout the territory. And in fact, any territory you want to go to, you can find some of it. But obviously, it's -- it is Hispanic product and that's the markets we are putting the most focus on, is where there is a lot of population in the trends or in that direction that we are putting the most effort.

And you never disclosed where your break even point is on this line. Could you share that with us?

I'd like -- No. David, thanks for that question, but I would rather not get into the specifics of that.

Okay. And also is there any growth rate you believe this is capable of growing at? Granted it's such a very low base, but are we looking at potentially $100 million worth of sales or can you give us some assistance in that regard?

David, we see the consumer trends, we all know that this part of the population is growing. And just like Nature's Own, it started out as a very small brand in 1978, and you see what it is today. So is the Hispanic product today. And I couldn't predict 25 years ago what our total sales would be on Nature's Own. There's just no way I could fathom what it would be. So I couldn't say it's a 50 or $100 million brand. I think over time, we'll see steady growth in this segment. We have excellent product. We like the brands. And just a matter of having access to the market. And I think we'll gradually do that.

Well, I'm batting 1,000 so far with getting answers so why don't we try the last question, which would be given how upbeat and the strong outlook you have given us, what could possibly go wrong? What are you concerned about over the next 12 months?

David, what -- the things we don't know, probably. That's not an answer to your question but there are always things that happen that you're not aware of. I'm not aware of anything today that causes alarm. You know, if there was a tremendous shift away from bread, that would be a tough thing for us. We don't anticipate that, but it could happen. Taste is important, we mentioned that earlier. With obesity that's why we're trying to correct the transfatty part of that and we continue to try to come out with new products that we think do meet the consumer's needs.

Okay. Thank you very much.

Thank you, Dave.

Thank you. Our next question is comes from [Nomi Gez] of [Perry] Capital.

Hi, guys.

Hello Nomi.

Just a couple of questions. First of all, clearly the route drivers have absorb here the higher fuel costs and you are fortunate that you don't have to, because they are independent, but if they're suffering, it must have some impact on you. How are you helping them? Or how is the -- clearly their economics have been impacted here in a major way.

Nomi that's a great question. I would like to answer that because its a very positive response. The good news is we develop these new branded items, like help line and we see the product mix shift more and more to upscale products.

Mm-hmm.

Our margin is better and so is the distributors, which gives them more income so they can afford to buy the gasoline.

Mm-hmm.

Yes there is impact to them, but that's why we're so excited to be driving our branded business and that's the way that our incentive program works with our distributors.

But just the fact that sales are actually up nicely, giving them a little cushion here to offset it.

That is correct.

Okay. But you don't -- you don't usually have any financial help that you give them or any financial cushion or sharing of unusual expense?

No. No Nomi, there again it's all contractual arrangement with determined discount rates off the selling price of the product. So as we have, as George mentioned a mix shift to higher priced products as we have price increases as we have -- they have the incentive to sell more, you know, higher volume, higher price products, so that their discount off of that price gives them more gross income with which to work.

Mm-hmm.

And, again, it also gives them an incentive to use their vehicles as efficiently and as -- you know, as far as the distribution cost, they have the incentive to try to minimize that cost.

Mm-hmm. Now that leads me to the next question. You say that on average, your prices were slight to down. And that's a little surprising in an environment where the material costs are up and many of the food producers are pushing through with some higher prices, whether they are hedged or not hedged. Can you address that?

I will. There's not any, quote, price decreases in the market, number one. There might have been higher promotions which does affects the net/net price, as we all know. But as costs go up, we will be having to take price increases as we go forward. We know costs are going up in the health care and our commodity costs even though we're hedged they are a little higher price so we are looking at taking some prices.

But when we look at your sales increase for the quarter which was excellent, how much of it was volume and how much was maybe price or mix because you maybe -- as you say you are focusing on mix rather than price. Can you break it down for us?

Nomi, again, I would say it's -- it's virtually all volume and mix related. When you look at the consolidated total.

Right.

And where it came from, it's -- it -- that we're selling incremental volume with the various new products we have introduced that we believe are bringing consumers to the category, purchasing our product. We're driving the sales with higher volumes of product.

Yeah. I understand all that. All I'm saying of the 5.4% increase, how much of that was volume and how much was mix?

It was primarily volume.

Primarily volume.

Yeah.

So the mix added a little bit of the margin

The mix did help some, yes, but primarily volume.

Lastly, last question. Are you seeing any changes among your competitors? I mean, clearly I have to believe that weak competitors are helping your expansion here. Are they continuing to be flipping the switch or are you seeing any changes there?

Nomi, I missed part of your question. I think the question was are we seeing any difference in our competitors in the expansion market? Was that the question?

Well, in general in existing and new markets, it it seems like your competitors are playing dead while you are expanding aggressively. And we know that some of them are having problems. Are you seeing them waking up in any way?

Well, rest assured , I don't think they are dead Nomi. It is tough out there every day. And we have tough competitors in every one of our markets and we are just trying to do all we can do to stay afloat and yield the consumers the products that we think they want and I think the portfolio of our products is also what is driving this business.

Mm-hmm.

And innovative in those areas, and our competitors also come out with new products.

Mm-hmm.

The same as we do. Some like us are successful and some are not so successful. But rest assured, it is highly competitive, daily.

But when you gain share, which you are clearly gaining because the market is not growing, is it t mostly from your larger competitors or is it more squeezing the smaller guys that are still there? Or it's hard to say?

It's hard to say.

Mm-hmm.

There are still a lot of competitors out there competing.

Hmm. Thank you very much.

Thank you. Our next question is a follow-up coming from Tim Ramey of D.A. Davidson.

Yeah, just wanted to kind of get your thoughts on the decline in private label we're hearing Interstate say some of the same things. There's this change in the in the way that a couple of the big accounts have bought private label de-linking it from branded shelf space. Isn't this quite possibly a really good trend for the industry over time? That it's positive for mix and, you know, perhaps accentuates the value added brands in your portfolio.

I think it's very positive for the baking industry. I think any time we can see people trading up, I think the retailer would applaud that as well. I think they would rather sell a $2 product than an 89 cent product. That's what drives the cash register. So Tim, I think you are absolutely right. I think there are changes going on and I think that's a positive change for the industry.

So there's a little short-term pain because of lost volume but we ought to think of this as a structural positive?

Absolutely.

Thank you.

Mm-hmm.

Thank you. Our next question is a following coming up from Eric Katzman of Deutsche Bank.

Hi. Most of my questions were answered, but did depreciation and amortization in the step-down, should we materially change what, I guess the last guidance you gave on D & A which was about 55 million?

Yes, I think that's still a pretty close estimate for the year, Eric, the 55.

Okay. And then just as kind of a follow-up to Nomi's question and some of the others, I'm still not exactly sure the top line components, because you said sales are up 5.4, but at one point I think you said pricing was a negative. So did pricing offset mix, like, pretty much one for one, so -- and then the bulk of it was volume?

I think could you safely say that.

Okay. All right. Thank you.

Thank you.

Thank you. I will turn the call back to Mr. George Deese for his closing comments.

Well, thank you for joining us today. In closing I would like to say that I think Flowers Foods performance is driven by great execution by our people and also a great product portfolio that is continuing to develop. We're driving to become one of the better consumer packaged foods companies in the country. Again, thank you for your interest in our company and look forward to discussing our business with you on the next call. Thank you.

Thank you. This does conclude this morning's teleconference. You may disconnect your lines and enjoy your day.