Flowers Foods Inc (FLO) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Flowers Foods first quarter 2005 earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be opened for your questions following the presentation.

It is now my pleasure to introduce Marta Turner, Senior Vice President of Corporate Relations. Ma'am, the floor is yours.

Thank you, Jackie, and good morning, everyone, welcome to the call. Participating in the call today will be George Deese, Flowers Foods' President and Chief Executive Officer; and Jimmy Woodward, our Senior Vice President and Chief Financial Officer. As Jackie mentioned, George and Jimmy will discuss our first quarter results and then we'll take your questions.

First I must remind you that our presentation today may contain predictions, estimates, or forward-looking statements. Our use of the words "expect," "believe," and similar expressions will identify those statements. While we believe them to be reasonable, these forward-looking 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 related to our business are described in Flowers Foods' filings with the SEC.

Now it is my pleasure to introduce Flowers Foods' President and Chief Executive Officer, George Deese.

Thank you, Marta, and good morning to all. Thank you for joining our call today and for your interest in Flowers Foods. The results we reported this morning for the first quarter of 2005 reflects the competitive advantages we have developed over the long-term. Jimmy will be discussing in a few moments the numbers in more detail. I would like to make a few comments first, though.

The Flowers Foods strategy is to provide quality products through multiple distribution channels. This is reflected in our sales growth in both retail and food service channels. Product innovation in food service channel, in partnership with our customers, contributed significantly to our results this quarter. You will note that our net sales were up 10.5%. Earnings from continuing operations were up 16%.

Looking closely at our sales increase, retail sales were up some 6.75%. The growth was driven by our leading bread brands: Nature's Own, Cobblestone Mill, and our regional white bread brands. In addition, our Mrs. Freshley's cake brand performed well.

Food service sales were up 23.3%, reflecting not only last year's Texas acquisition, but the strength of food service throughout our business. We continue to make gains with our Mrs. Freshley's cake brand, as we become less dependant on contract manufacturing.

We expanded our sales territory by successfully entering the Louisville, Kentucky market and now we serve all of the markets in South Carolina.

Our market share continues to grow in both retail and food service, and we are well positioned to take advantage of the changes going on in the marketplace. In the quarter we bought in 2.7 million shares, bringing our total share repurchase to almost 5 million since the inception of the share repurchase plan in 2002.

All in all, it was a good quarter and we see 2005 unfolding as a good year. We have increased our sales guidance for the year by $50 million, to 1.65 billion to 1.675 billion.

Now Jimmy will give you more insight into the numbers. Jimmy?

Okay. Thank you, George, and again, I echo the appreciation for you joining our call today.

We'll review first our consolidated statement of income, the Q1 sales of 506 million represent a 10.5 increase over the same quarter last year. As a reminder, the consolidation of the variable interest entity is now reflected in both years and therefore had very little impact on any of these comparisons.

Price increases contributed 4.3% and a favorable mix shift in volume contributed 6.2% of the sales increase. Our core business accounts for an increase of 2%. The expansion of the direct store/door delivery territory and new products account for 2%, and the Texas acquisition made in September 2004 accounts for 2.2%. As George has referenced, our food service sales in the specialty group had a particularly good quarter, based on the success of one of our customers' new product introductions during the quarter.

The gross margin, which is approximately 50%, was stable when compared to a year ago and that's a great achievement. The increase in sales offset higher energy packaging and labor cost and the cost of our start-up activity for the Denton bread line, which is in Denton, Texas. We experienced higher flour cost, due primarily to higher basis levels, which we discussed on the last call. However, we were able to offset some of this with lower cost on other ingredients, such as eggs. We've previously commented on our flour coverage through hedges and we primarily used those contracts to hedge our flour cost.

Our selling, marketing, and administrative expense of 203.1 million were 0.5% lower as a percentage of sales from the prior year. The higher sales offset higher labor cost and the cost associated with the expansion of our DSD territory that George mentioned in South Carolina.

The depreciation and amortization expense of 17.7 million is just slightly higher than the prior year and for the year we would estimate this expense will be approximately $58 million.

The source of our interest income continues to be primarily the distributor of notice and interest income is reflected net of interest expense we incurred, because we did draw on our line of credit late in the quarter to repurchase shares. For the year we estimate that the net interest income will approximate $7 million.

The consolidated effective tax rate for the quarter you'll note was higher than the 38% we expect for the balance of the year. During the quarter we paid an amount to settle a state tax audit and that expense was recorded in the quarter and we are still -- in the cash, as far as cash taxes, we expect that we'll make an estimated federal tax payment either at the end of Q2 or Q3, and we're still working on strategies, obviously, to defer those cash tax payments to the extent possible.

The minority interest is the variable interest entity and represents all of the income of that entity. We still have no equity interest in the variable interest entity.

On a per share, fully diluted basis, income from continuing operations was $0.46 per share. Diluted shares outstanding decreased since the same quarter a year ago, due to the stock repurchases. We've noted in the press release our expected average shares outstanding for quarters 2, 3 and 4 and for the year based on the stock repurchases through the end of the first quarter.

The segment data, you may note, reflects the fact that we are allocating additional commodity costs to the two operating groups and therefore, the unallocated corporate expense for this quarter shows a significant decrease. Most of the allocation relates to flour that is used by the Bakery group, so the results that they show reflect the absorption of this cost in maintaining profits at a level slightly above last year.

The balance sheet reflects 30.4 million of cash at the end of the quarter and we do show bank debt for the first time in a while of $59 million, which was our draw to purchase the block of shares. Since quarter end we have paid down the line, down to 45 million, and we expect our operating cash flow will permit us to repay all of the amount owed during this year.

The cash flow statement for the quarter shows 6.9 million in cash provided by operating activities and in the quarter we used 80.2 million for capital expenditures. We paid 5.3 million in dividends and, as George mentioned, we used $78.2 million to repurchase shares during the quarter. We also paid some 13.4 million to settle stock appreciation rights that vested during the quarter.

Also as George mentioned, we're raising our guidance today for fiscal 2005, again sticking to annual guidance. We expect the sales to be 1.65 to 1.675 billion and net income is still estimated to be 3.75 to 4% of sales.

In summary, this was a great quarter and our guidance increase reflects our view that we will continue to perform and execute in the market.

So with that, I'll turn it back to George.

Thanks, Jimmy. Let me comment more fully on why we are raising our sales guidance for the year. As changes in the competitive landscape and marketplace continue, Flowers Foods is positioned to take advantage of the opportunities as they present themselves.

We are experiencing better than expected growth across many of our sales channels. Our retail sales continues to grow, showing the strength of our brands and the great execution of our people. With half of the consumer food dollars spent on food service, our strategy to position our Company with efficient, cost-effective, quality-driven bakeries allows us to view this business as attractive. That strategy is paying good dividends.

The expansion of our sales territory continues to go well and we will continue in that direction. We are pleased that our brands and products are finding consumer and customer acceptance in the new markets. Our team's execution in these new markets has been outstanding. In addition, we continue to grow in our core markets as well. As changes in the competitive landscape and marketplace continue, Flowers Foods is positioned to take advantage of these opportunities.

So, to recap, we are raising our sales guidance because we see opportunities in both retail and food service business. Our branded products continue to perform well, our core territories and our expansion territories are growing, and because change is in the competitive landscape, continue to offer growth opportunities for our Company.

As I mentioned earlier, we continue to make progress on our goal of becoming less dependent on contract manufacturing business. In our presentation at CAGNY, we told you that we plan to lose about $15 million of sales in snack cakes this year, beginning in the second quarter. That is still our plan.

In other news, our newest bakery in Denton, Texas is starting up its bread line next week. This additional bread capacity will enhance our ability to serve the Texas and Southwest markets. The Denton bakery already has one of the most efficient bun and roll lines in the country and I am confident the bread line will be among the most productive bread lines as well.

With our sales growth continuing, we are adding capacity by recommissioning bun lines in Crossville, Tennessee and our Miami, Florida facilities.

Our estimated capital spending budget for the year continues in the 45 to $50 million range. Our innovation and technology continues as we roll out our third generation of hand-held computers. We expect to complete that in the first quarter of 2006. We are continuing to generate good cash flow, allowing us to buy shares, pay dividends, make capital expenditures, and consider strategic acquisitions.

Flowers Foods has efficient bakeries, great products, strong brands, exceptional customer service, and a knowledgeable and committed team. We believe our 2005 performance will continue to outpace that of others in our industry. We look forward to the remainder of the year.

So with those comments and Jimmy's comments we will -- Jackie, we will now open the floor for questions.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS] Your first question is from Tim Ramey of D.A. Davidson.

Congratulations. What a quarter.

Good morning, Tim. Thank you.

Good morning. Just, one of the things I was impressed by was the lack of margin pressure from the roll-out into the new territories. I would have thought that you might have had some incremental costs there that wouldn't be recoverable in the short term. Can you talk a little bit about how that new territory roll-out is occurring and why it seems to be at reasonable margins, if that's the case?

Tim, I'll be happy to try to take that one. Of course, the new routes in Texas, I think you know that acquisition did go up very smoothly. The customers came on very well. We were able to produce the product through existing plants at a good rate, which held our costs in line.

Then on the selling side, because of the good job that was done, we did not absorb a lot of extra cost. I think we did absorb some in that first quarter of the acquisition, but then going specifically to the new territories, I think it's a reflection upon the good acceptance of our customers and consumers for our brands and products in the market. So, we wrapped up, quite honestly, faster than anticipated. If you look at the sales, and it was slow starting, extremely slow, starting out, your costs do get out of line as a percent of sales. But we're going into it somewhat cautiously but really optimistic and our folks are doing a great job in those new markets. I'm proud of them.

And just one more for Jimmy. I assume that the reversal of the accrual on the SARs occurred at about 1.8 million. Where did you put that? Was that in SG&A? Or was it in --

Yes, it would have primarily been in SG&A. It covers a significant group of employees, some of which are in production and may of which are in sales functions, so I would say most of it was in SG&A.

And am I right that it was about 1.8 million or something like that?

Well, I think it was closer to a million, if you look at the swing from last quarter -- first quarter of last year to the first quarter this year.

Okay. Thank you.

Yes. Thank you.

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

Good morning.

Good morning, Bill.

Just a few questions, Jimmy. What is your guidance for the tax rate for the full year now?

Bill, we think it will -- over the full year, will average out to be right around 38%. Again, that takes into account the state tax audit that we absorbed in the first quarter and then also accounts for the benefit of the manufacturing credit under the new tax law that -- we are estimating what that will be. So I would expect it to be around 38% for the next three quarters and then for the year, it will be something around that.

Let's see, you were at 39.6 this quarter, right?

Yes.

And 38 the next couple of quarters and you'd be above 38 for the year --

Yes. There again, in the next three quarters it may be slightly below 38. Our best estimate for the year is around 38%.

Okay. And in terms of the stock appreciation rights, is that all finished now? We're not going to have any more charges or credits from that?

No, we granted -- stock appreciation rights were granted in 2001 with a four-year vesting, and that's what occurred in the first quarter of 2005. And then stock appreciation rights were also granted two years later, in 2003, and they will vest in 2007. So there are still some stock appreciation rights outstanding. I believe that the strike price on those are around $20. I'd have to look in the 10K to make sure. I think it's $21, roughly, and so we are still making the adjustments necessary to account for those rights that remain outstanding.

And I wasn't clear on your answer to Tim. Was the gain $1 million this year? Or was the swing, year-to-year, $1 million? What was the absolute gain in the quarter this year?

It was $1 million in the quarter this year.

$1 million, pre-tax?

Yes. Right.

And was that in the corporate line? In the segment reporting?

Some of it is. It's again, because it covers a fairly broad base of employees, it's in between all three segments.

And lastly, you mentioned you changed some of your costs from the corporate to the bakery line. How much was that and how did the Bakery business do on an apples-to-apples basis and what do you think the corporate charge will be for the full year?

Again, Tim, what we've historically done -- I'm sorry, Bill -- was provide a fixed flour price to the division and w're still -- and absorbed the difference in that price and actual at corporate, so in effect we knew higher flour prices were coming and we raised the prices to the Bakery group.

Bill, I might follow too, then turn it back over to Jimmy on following up on the same question. Jimmy and I and the senior management team really thought about it. The basis -- remember last year, especially the last half, we had trouble with the basis, and we was afraid if we did not put it back to the divisions we would not it in the cost of product. So it was a philosophical change that we made to put that cost back so we could get it in the cost of product so it would reflect in our pricing. And I think the number was probably right at 2.1 million, 2 million. It was first quarter.

2.1 million?

Yes.

Okay. And then, is there guidance for the corporate charge for the full year now?

I think, Bill, it was -- it still will be around -- it's included in the -- if the percentage of sales guidance reflects the corporate amount would be included in that and I think the corporate will still be probably around 25 for the year, is what I would expect.

25 for the year.

Right.

Okay. Thanks a lot.

Thank you.

Thank you. Your next question is from Eric Katzman of Deutsche Bank.

Good morning, everybody.

Good morning, Eric.

A few questions still left here. I guess you took -- I think you said earlier on the last quarter that you were taking pricing, due to some of the higher costs earlier in the first quarter, it appears that those did go through well, can you just talk, George, maybe a little bit about the industry in pricing? Are you getting better realization than some of the competitors that are pretty well known to be struggling?

Eric, I -- let me talk about Flowers. I can't speak to competition, bit I can speak to -- if you noticed in our press release, we did say that we felt like year over year we were in excess of 4% price increases, and that was pretty well true throughout all of our channels, and things change from -- on the retail side, from week to week, month to month, quarter to quarter on different situations in the local markets, but so far so good, that we were able to have those increases and maintain our volume, which is a good thing.

So, I cannot speak to what our competitors are doing because I'm not that close to them. I see our IRIs just like you probably do, and some have and some have not.

Okay. Next question is, you didn't mention the Hispanic initiative. I think that in the past you've been somewhat cautious about it, relative to your initial expectations. Maybe you could kind of give an update.

Thank you for that question. I wish I'd put it in my comments. We are still convinced the whole issue of growth in the Hispanic segment, both tortillas and occasion sweet goods, is appropriate. It is a growing business. We do want to participate. Our tortilla business is growing.

Our Tesorito's brand continues to grow, that is our direct from cake plant to customers avenue, is continuing to grow. So I'm still optimistic on the cake side, but we're not giving it up. I think it's too big a market not to keep trying to grow that market.

Is that business generating a -- are you funding it to the point where it's break even or at a loss? Or is it earning what you had hoped it would?

I'd say. at best, we're break even. At best.

All right. And then, Jimmy, so I can understand this right, if I do the math, as I'm sure everybody else is doing, the buck, on the 1.675 billion in sales, 4% net margin, if we take the high end, and you said 42.5 million shares outstanding, you're talking like a buck 60 in earnings. Am I misinterpreting that?

No. That is the very high end of the range.

All right. And there's no other items there, so that's a fair characterization of what you're talking about, granted, on the high end?

Correct.

Okay. All right. Thank you.

Thank you.

Thank you. Your next question is from Mitch Pinheiro of Janney Montgomery Scott.

Good morning. There's a couple questions here. When I look at the Flowers Specialty, the 2.5% sales growth, lower than trend, you mentioned that you haven't taken -- the 15 million of contract packaging that you decided not to move forward with. Is that -- so, can I say there was $4 million of sales in the quarter or so, that were purposely shed?

Mitch, I think what was said was, all food service is up 23%. Let me come back and answer specifically. I think what you've got -- trying to hit at, we did transfer out -- not transfer out, but departed from part of that co-packing business -- Jimmy, I'm trying to recall the number from the first number. Most of it, quite honestly, I think what we're talking about would occur second, third, and fourth quarter --

Mitch, probably in the first quarter it was probably around a million dollars, and again, most of it really starts in earnest in the second quarter, to get to that $15 million annual amount that George mentioned. And again, we've taken that into account in determining our higher sales guidance. We still expect fully for that business to depart in the second quarter and our group is working very hard to find alternative customers for our capacity.

But you know, what's interesting is, for years I've sort of been asking, can the Flowers Specialty business attain margins that your bakery business has, and you've always been affirmative. And in this quarter, in fact, your margins in that business were much better than the Flowers Bakery margins. So, is there any conclusion that you could help me draw from that? Is this the right level of margin or is this one quarter not an anomaly, but a little ahead of schedule?

Let me do it this way. As you know, DSD is going through our Flowers Bakery group and doing a wonderful job from DSD perspective. You have X amount of customers in the marketplace who had rather receive their product direct and outside of the DSD territory, so the Specialty division, that's what they focus on is those customers who want a different avenue of distribution. And that is successful and we've always been high on the bread and roll part of that on the food service side.

We are only successful with that, though, if our customers are successful or if we get new business, which is the case -- recognizing the first quarter in the opening comments, one of our customers -- it was a new customer -- we had a significant increase due to a product that they are selling in their restaurants.

On the cake side, you know, we've been in the cake business for a long time and I know on occasions we've had questions about that, but we are committed to our cake business. The Freshley brand did grow between 10 and 11% last quarter, and as Jimmy commented, we are finding other avenues to put these products in. We're pleased with the cake and the --

Do you think the margins, though, in that business, are they -- if I look out to the full year, should we expect margins in the Specialty division to mirror the margins in the bakeries? How do you --

Mitch, I would say that I feel pretty comfortable with that. I think as we indicated, contract manufacturing from a margin standpoint has not been that attractive, it does cover some overhead, but we are looking at Mrs. Freshley as the growth vehicle which will carry the margins.

And then on the bread and roll side we are efficient, we are effective in our bakeries, and it goes to a different distribution channel which we are pleased with and we feel comfortable with -- we're looking at the numbers and think we have a good chance of being equal to or better than.

In terms of capacity across the entire system, first with Speciality, where do you stand on that and what, if any, plans for expanding capacity in Specialties?

The good thing about Speciality, as we're looking at -- especially on the bread, frozen bread and roll side of the business, even though they have some assigned plants, bakeries, to that group, in real truth, they have another 30 to draw from because they can draw from the fresh bakeries as well as, quote, the frozen bakeries.

A case in point, Denton, Texas will really benefit -- the Speciality group, where I commented that bakery will be on the market next week. We will have some capacity that can be shifted as needed to the Specialty group, and that also has been true on the bun side, as we look at our supply chain, so that we can take advantage of it. Cake side, with Speciality, capacity is up and down but we're always looking to see what is needed to grow the marketplace.

And then on the bread side on capacity, Denton, you talked about a little bit. I'd love to know, is that one bread line? Is that what you're adding?

Well, you'll remember, we added the bun line, started it up last June. And the bread, we're going to market next week. By the way, I'm looking at a loaf of bread here on the conference table that was produced yesterday and it's a wonderful looking product. I know a lot of times we have tremendous start-up problems in the industry, but our people are doing a wonderful job in the Denton start-up.

But that is a huge bread line and we'll give up needed capacity, not only in the Texas and the Southwest part of the -- foods market, but they will be able to supply products to the Specialty group. So that is added capacity. I mentioned the two bun lines that we're recommissioning, one in Crossville, Tennessee and one in Miami, which will help us on the capacity side. [Inaudible] under way, because we said two years ago that we thought every 18 months we would be putting in new capacity and/or acquisitions, whichever one fits that mode, but we do know that we'll have to be adding capacity in addition to what I've already mentioned.

Just a last question. In terms of bread pricing, bread pricing historically in the South has been below the rest of the country and it seems that it's accelerated nicely over the last year or two. What do you think is driving that? Is that just demographics or is it perhaps easing of competitive pressure in the South? How would you characterize and what do you think pricing will do the rest of the year?

Well, competition is still tough, but let me answer this way. I think demographics are driving that. You see the numbers like I do, private label is flat to down slightly, branded products continue to increase. When you look at the total mix and the demographics of that, the consumer that's buying the higher priced products does drive the overall cost per pound basis, so that's a great thing.

As you know, capacity has been and continues to come out of the marketplace in the South and that probably does contribute somewhat to it. But I'd still point back to the demographics, the consumption of upscale products more so than the cheaper type product mix.

And pricing for the year, do you see 3 to 4% holding?

Yes, do I.

All right. Thank you.

Your next question is from Heather Jones of BB&T.

Hi, great quarter.

Hi, Heather.

How are you all doing?

Fine, and you?

Good. I wanted to follow up on the snack cake. I think I did my math right, but -- Two questions. Just to make sure, Mrs. Freshley's, that goes into the Specialty category, that's direct to the customer.

That is correct.

Okay. And you said that was up 12 to 13% -- or 10 to 11%?

That's correct.

And then the co-packing elimination didn't effect this quarter that much. Why was sales growth only 2.5%? And you may have mentioned this earlier and I just missed it, so I apologize if that's the case.

Our total, when you look at our two brands, that's the way I like to I focus on it. Mrs. Freshley, like I say, is up 10-12% basis. Bluebird is up slightly, so our branded product overall had a significant increase.

Right.

Then you start looking at cofactors and/or private label and we did give up some business in that first quarter.

Okay. Because -- well then, my next question was you had a big jump in margin and so I was wondering if it was -- you all purposely walking away from some private label or co-packing type volume.

Heather, I commented on that earlier, the co-pack contract manufacturing has been at a much lower margin than we can achieve through our Mrs. Freshley program, and that's why we made the announcement, I think a couple quarters ago, that we would be moving out of the manufacturing of contract business, trying to move [inaudible] because of the margin.

So should we expect this kind of margin jump for Q2 through Q4? And I'm talking about in Specialty.

I think, Heather, we're giving guidance for the year for the Company as a whole. There are a lot of variables that go into that and so we would be more comfortable rather than trying to give you specific guidance on a segment, to just reiterate that we are comfortable with the consolidated guidance, the various segments, there will be pluses and minuses and we'd rather look at it on that consolidated basis.

Okay. Now as far as the basis, did you say it was about 2.1 million in the quarter? Is that the increase from last year or is that the total amount?

Let me clarify that. Again, what we're communicating is that our flour cost, if you look at the various components of that cost basis, which a lot of that relates to transportation, as we said in the fourth quarter going into 2005, was significantly higher than the prior year. So the 2 million -- slightly over $2 million number is not specifically basis, but what that represents is, again, we try to help give our divisions a fixed flour price and then we had absorbed whatever the actual cost was over that price at corporate on the unallocated expense line.

If you look this year versus last year, we decided to allocate more of that cost to the division, as George mentioned, make sure that our operating executives got that cost into the product cost and make sure we took pricing actions to cover it, and so we allocated some $2 million more to the divisions, primarily to the Bakeries group, because it related to flour, not just basis, but the total flour cost.

So is it fair to view the 2 million as basically swing versus expectations when you were setting up the budget and allocated fixed flour price?

Well, no, we went ahead and -- there again, the numbers reflect the allocation of the 2 million, but we knew the cost increases were coming as we started 2005 and we went ahead in our planning process and pushed that cost down. It was just going to be higher cost than last year and we felt it was -- as George said, we made a -- felt like we made a good decision by giving visibility of that cost to the division and making sure that we took appropriate pricing actions to cover that cost.

Okay. And you say that you've hedged your flour, but if I remember correctly, you're not able to hedge the basis part of it?

That's correct. And our hedges for the year are still in place and some into next year. Again, our overall guidance, we continue to try to look at our hedge cost and look at what is not covered, whether it's basis, whether it's increase to volume as we continue to grow sales, because you're never exactly 100% accurate on the forecast usage, and we're comfortable we can cover those costs and meet our goals.

Okay. The new bread line in Denton, how much did that cost in the quarter?

When you say cost, do you mean capital expenditure or do you mean the cost of the start-up?

The cost of the start-up. Sorry. The part that flowed through the P&L.

I don't have a specific number, Heather. Again, it was -- you have internal direct labor -- I just don't have a specific number to tell you.

Okay. And then finally, on the pricing you took, was that pretty much even across -- the 4% or so, was that pretty much even across all your brands or was it greater on some, less on some?

No, I wouldn't say that. I think you have to look at each individual product and make the determination on what you think's a fair value for the marketplace and the consumer. So, no. It would not be 4%, every product, every market.

Okay. Thank you.

Thanks, Heather.

Thank you. Your next question is from Margo Murtaugh of Snyder Capital.

Thank you. How are you?

Good morning, Margo.

Good morning. I wonder what percentage of your sales is food service and can you talk about -- give some more color on what's driving that business and how fast it's growing. And also, how much is contract manufacturing now and -- with you converting. Most of that?

As we look at that number, let me maybe go to the second part of that question first. We've been looking at trends for a long time and can see that the marketplace is going from 75% in-home consumption, 25% outside, to 60/40. Today it's roughly 50/50. The consumer food dollar is consumed away from home or product, food, made somewhere and brought home to consume. Quite frankly we didn't feel like we had any choice but to really get on the band wagon to get on that trend. And so, if you look at our distribution channels, if you look at those products and, in fact that's why our capital expenditures over the past ten years and five years has been what they are so that we could have the right cost advantages in our bakery so that we could compete in that arena.

We're also, with our sales team and with our research and development center, really spend a lot of time and effort with our major customers and customers who are not ours. Future customers, we trust. And really trying to help them come up with the product they're looking for, which would drive sales through their units. And with the teams we have, we've been successful in doing that. It's gratifying to see this business grow with products that weren't here a short time ago because it is innovation. Jimmy, I don't know if you --

Margo, I was looking specifically on food service sales. Keep in mind, we have food service sales through the DSD fresh product, off the route, off the distributors. And then we also have -- that would be in Flowers Bakery. And that's I would estimate around 38% of their sales for the quarter. And then in the Specialty group, the bread and roll, which is distributed frozen, is primarily food service and that -- the number that I have here is food service and other sales, which would include some contract production in vending. The only number I have right here available is roughly 74% of their business on the Speciality side.

And 38% of Bakeries?

That's correct. And again, that would be nonfrozen, it would be fresh product, primarily buns to quick serve restaurants and other food service type customers versus in Speciality, it would go through broad line distributors as well as direct to customers.

Okay. And is that -- how fast is that business growing? More or less than the --

I would say in both, they were up double digits in the quarter. Again, the Texas acquisition, which was in the Bakery group and was DSD, there was a significant amount of that with food service, so that contributed to the year over year growth numbers there, and then on the speciality side you had double digit growth and a significant part of that was the success of our relationship with a customer and a new product introduction that they had and we continue to enjoy their success in partnering with them.

And the contract manufacturing side: how much -- what kind of sales do you have?

Well, with -- the way -- what we referred to as contract manufacturing in the Specialty side was on the snack cake business. Again, we're looking at that with about $15 million that we would forfeit, most of which is in the second quarter and beyond. We still do some co-packing or contract manufacturing. And then if you look on the Bakery side, there it's not contract manufacturing, we call it store brand or private label products, and that's down probably to around 10% of our sales in the Bakeries group now. That trend has continued to be favorable.

And Jimmy, I'll add, it's not because we lost customers, it's because we've grown the brand.

Our growth has really been in the branded category of that DSD side.

Okay. Thanks a lot.

Thank you. Your next question is from David Liebowitz of Burnham.

Good morning, David.

Thank you and good morning. Let me add my congratulations to everybody else's. I'm not certain if you didn't address this or I missed it, but did you discuss at all how many markets you would hope to open over the next 12 to 18 months, via internal expansion rather than acquisition?

David, we do not announce that. We let you know after the fact because we don't want to signal to all our competitors on --

I'm not asking you which markets, I'm just asking whether or not you could give us some idea of how many markets you might choose to enter over the next 18 to 24 months.

I'm trying to think how I can answer that and get you happy, without -- I can say that we have two markets, pretty good-sized markets that we're viewing, that over the next two quarters we'll be able to talk about that we think will add will add quite a few new consumers to our mix.

Okay. And also, was there any discussion today about the situation with Winn-Dixie?

No.

Is there anything you can update us on, then?

Well, I'll tell you. Winn-Dixie has been a valuable customer of ours for a long time and continues to be a valuable customer. I think all of us know they've had some issues. But we continue to sell bread in those stores and hopefully, for their sake, they will continue to stay in -- do a good job in the marketplace. I think it's public knowledge, they've made it aware they have pulled out of some markets and selling some stores.

My point from a concerned standpoint, a risk standpoint, from your thought pattern, I can remember they were -- the way we got to the Dallas/Ft. Worth market was with the Winn-Dixie acquisition of their bakeries back in the late 1980s. They're not there today. They did sell those stores to independents and different people in the marketplace, but our business has never been better in Dallas/Ft. Worth.

So, as they might leave somewhere in Virginia or other markets, someone else does pick up the grocery business and the bread business and we're in all those stores, so we don't view that as a risk. But I reiterate, Winn-Dixie has been a good, valuable customer for us.

Okay. And the last question, if I may. When is the direct -- just meaning, you mentioned in the press release that the dividend policy would be set by the directors, there would be a press release after the directors' meeting. Is that today? Or is that --

Our shareholders meeting board meeting is next Friday.

Okay. They will both be at the same time, in other words. It will not be a prior directors' meeting.

That is correct.

Thank you very much and congratulations on a great quarter.

Thank you. Your next question is from Alton Stump of Longbow Research.

Hi, guys.

Good morning.

One quick question on the topic, the last one just asked, on geographic expansion, could you give me any sort of clue as to what type of sales number I should be using? It looks like that business contributed a bit stronger results this last quarter than it did in 2004. Do you think that's going to remain the case over the rest of the year, or was this last quarter kind of one-time in nature?

I think -- I did mention we moved into Kentucky, particularly the metropolitan area of Louisville. We served about a third of the state of South Carolina, now we are throughout the state of South Carolina. And I think we'll see the same trend continue throughout the year.

I guess our goal, Alton, we stated our goal was to have these new territories grow sales by 1%. The number we're giving here for new territories, new products, is 2%. A lot of that was from the new territories. It has proved to be -- we've gotten good customer acceptance, good consumer acceptance, great execution by our team, and so it has been better than the 1%. We would still -- over time our expectations are these new markets would be somewhere in that 1 to 2% range, as far as a continuing sales increase.

Okay. Is it safe to say then that in '05 at least we'll probably end up at the higher end of that range?

I think -- again, as far as '05, we've accounted for that in our consolidated guidance and rather than trying to tell you specifically which parts will help us achieve that guidance, we'd rather just reiterate that the overall consolidated sales guidance and tell you that we've accounted for the new territories in that number.

Okay. Thanks. Good job.

Thanks, Alton.

Thank you. Your next question is from Joseph Perone of Forest Hill Capital.

Good morning. Congratulations on a good quarter. I was just curious, I want to make sure I got my number right. Earlier you guys said Cap Ex guidance for '05 is 45 to 50 million.

That's correct.

And as an investor, and you guys may have gone over this in prior calls and I may have missed it, but as an investor, given the changes in the competitive landscape and you obvious ability to capitalize on those, as you expand into new markets, what's the reasoning behind buying back $78 million worth of stock versus only spending $45 million in Cap Ex for the year?

Well, that's a great question and I'll let Jimmy follow up also. We try to weigh and measure where do we think we can get the best return, what's the best advantage of use of this cash, because we are generating good cash flow. And we've said acquisitions of our own stock, our strategic acquisitions, we are always interested in.

On the capital side, 45 to 50 million we felt like is giving our people the tools they need to get the job accomplished. And if we thought another 25 or 30 they would need to get the job done, we would certainly look at it and give them the tools they need. So we don't think we're slighting capital at all. Because historically -- I mentioned earlier in my conversation, with David I believe, or Margo, that over time we have invested a lot of money in our facilities. We are ahead of the curve in the industry on investments.

If you looked at it today and had to start over, it would take a ton of money to catch up. But because we've been prudent, doing it every year, we're not starved for capital. That's one good thing we've been able to do as a company.

So I hope I've answered that and I'll let Jimmy come back and talk about the share repurchase. We thought -- when it came about we were very happy to do it and I think it's evidence of stock price today or yesterday that says it's a good buyback. And without hurting growth or without hurting -- starving for capital.

Yes. Joseph, I would just reiterate what George has said. Our capital spending level now reflects many, many years of investment in our facilities to have them at the capacity and the speeds they are currently enjoying. What we're trying to do is have a balanced approach of our management of cash. This is a great cash flow business. As we stated, we believe even with the share repurchase that we'll have sufficient capital to fund the dividends, to fund our capital spending, and to pay the debt back off before the end of the year.

What we don't want to do, operationally, is begin to throw money at projects that may not have the returns that warrant the investment. We're trying to have a disciplined approach and a balanced approach to the utilization of the cash and make those decisions as the opportunities arise.

Okay. Great. Thank you.

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

Good morning again. I wasn't sure anybody mentioned scan based trading in the call. Do you have a new number for us in terms of what the percentage of total sales, pay-by-scan, would be?

I'm pretty sure I'm right on this, Tim. We're in excess, on Flowers' Bakery side -- of course there's going to be scan-base trading elsewhere -- is roughly 400 million out of the 1.2 billion in sales.

Yes, it's still annualizing, Tim. We got most of the chains, I believe are implemented. I'm trying to remember the store count. It's something like 4,500 stores on pay-by-scan now. Maybe closer to 5,000 stores. And I think -- the last I looked at it the number was annualizing around the $400 million level.

So we shouldn't expect much deeper or much more adoption from here on out. The major chains are already there.

The majors are. We still hope to convert the ones who are left. Because we're -- we think it's a good thing for the retailer and great for our distributor and just a plus every way you look at it.

And also, on the third generation hand-held, does that have an RFID function? I couldn't remember.

It does not that I'm aware of, Tim. Again, in the DSD business, other than using RFID for the bread trays, on the units of product themselves, we've still not seen a specific application for it. We are moving forward with RFID initiatives in the Specialty group with case and palate shipments to our customers, but I'm not aware on the hand-helds of a particular RFID capability, nor really the application of it.

Okay. Thanks.

Thank you.

Thank you. Your final question is a follow-up from Mitch Pinheiro of Janney Montgomery Scott.

I just want to make sure I have it right. The [inaudible] accrual reversal, was that about a penny and a half per share?

I think that's right, Mitch. Yes.

Okay. And in terms of commodity expenses and other input costs for the remainder of the year, you had sort of indicated that, obviously, flour would start to get better. The last call. Flour would get better as the year progressed. How else would you -- is there any other comments you can make surrounding [inaudible] costs?

Mitch, I think -- what Jimmy indicated were pretty well hedged, the basis you cannot hedge. If you recall the last quarter of the year, I think I'm right to say that we really got high on the basis that last quarter and it's hard to sit here today and project what it will be. The indications are though that it will be more than last year but we don't know that because we can't hedge it.

So I would say, Mitch, there again, we continue to monitor and look at anything related to energy usage. You have to watch that. Hopefully that will continue to be relatively stable. And we look for everything to basically balance out and help us achieve the annual guidance that we gave.

All right. Thank you, guys.

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

Thank you, Jackie. Before I close, let me make sure I do thank all of our people and associates and trading partners for helping us achieve an outstanding first quarter. I thank you on the call today for joining the call and your interest -- continued interest in Flowers Foods and we look forward to our next analyst call on August 18, when we will report our second quarter report.

Needless to say, we are pleased with our business and look forward to seeing the year progress. Thank you very much.

Thank you. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.