Flowers Foods Inc (FLO) 2006 Q1 法說會逐字稿

Good morning. My name is Jackie and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Flowers Foods first quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period.

It is now my pleasure to turn the floor over to Marta Turner, Senior Vice President of Corporate Relations. Ma'am, you may begin your conference.

Thank you, Jackie, and good morning, everyone.

Participating on our call today we have George Deese, Flowers Foods' Chairman, Chief Executive Officer, and President; and Jimmy Woodward, our Senior Vice President and Chief Financial Officer. Jimmy and George will discuss our first quarter results and then we will respond to 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 such expressions will identify those forward-looking statements. While we believe those statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters that we will discuss during the call, important factors relating to our business are found in our filings with the SEC.

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

Thank you, Marta, and good morning. Thank you for joining our call today and for your interest in Flowers Foods. I hope you've had a chance to review our earnings release this morning.

We are pleased with our overall results for the first quarter. Flowers Bakeries' performance continued to be very strong and helped offset the under-performance by our smaller Specialty group.

Now let me bring you up to date on the highlights for the quarter. Sales growth continued at a healthy pace in the quarter with an11.4% increase. Sales growth was strong in all channels except contract production.

Branded retail sales were up 16%. Once again, the growth was driven primarily by three retail classes: White bread, led by Whitewheat, and our local white bread brands out-performed the category.

Soft variety bread category, Nature's Own again grew by double digits and outperformed the category as well. In multi-pack snack cakes, where our Mrs. Freshley's cake brand also grew by double digits as we expanded our distribution.

Store brand, or private label, also increased in the quarter by double digits, which, by the way, represents roughly 12% of our sales in Flowers Bakeries, about the same as last year.

Our food service business continues to grow very well, even though we had tough comparisons on the frozen food service side from the first quarter of '05, due to one national food service customer's introduction of a new product that was not similarly promoted in this year's first quarter.

Our market share continues to grow and we expect that trend to continue as the competitive landscape continues to change. IRI reports for the first quarter shows that Flowers' share in our core markets gained over a point, both in dollar and unit share, adding to the leading position Flowers' brands holds.

We announced the acquisition of Derst Baking Company in February, and the integration of Derst into our Baking group is going well. In a quarter-to-quarter comparison, Flowers Bakeries added roughly 1% to our DSD sales base, with our expansion in new markets. This growth initiative was announced, as you know, in the third quarter of 2003. The markets added since that time continue to add roughly 1 to 1.5% to our annual sales.

Our expansion continues into geographic territories that adjoin our DSD footprint. Just last week we started distribution in the Cincinnati market. Flowers fresh bread and rolls are now available to almost 108 million consumers.

Our Whitewheat breads were introduced in 1991 as the original healthy family white bread brand, offering the nutrition of wheat bread with the taste and texture of white. Sales of our Whitewheat bread continues to grow at a fast pace and we are pleased to announce that we added hamburger and hot dog buns during the quarter, with good results.

As we have discussed over the last several calls, our robust sales growth requires us to add new and more efficient production capacity in certain regions. During the quarter we made progress on those projects. We opened a bun line in the Leeland Street bakery in Houston, which we acquired from Sara Lee in 2004.

The new bread line at our [inaudible] Georgia bakery started up May 1st, and our bakery in Newton, North Carolina will begin producing buns next month. Both lines are about 30 days behind schedule. Therefore you should expect some additional start-up costs during the second quarter.

In regard to our Snack Cake business, we have mentioned before our efforts to reduce our contract production volume and to grow our branded Snack Cake business. That effort is the correct long-term strategy for our Snack business. However, the change is still in process and we will continue through the year as we work to take cost out and improve margins in our Snack Cake business.

In the first quarter we incurred costs to relocate our Snack Cake distribution to a central distribution center. The start-up costs associated with that cause impacted margins in our Specialty group. However, the distribution center is running well and costs are improving.

I am pleased to announce that during the quarter our information systems grew successfully, implemented and completed roll-out of our third generation of hand-held computers and upgraded our SAP system as planned and on budget.

I'm also happy to say that things are really on track back in Louisiana. New Orleans is running well. As we know, there's still a lot of people displaced. But as we look at not only New Orleans but really look at the entire state, sales are back and I want to congratulate our people for the outstanding job they've accomplished to take advantage of the opportunities that are presenting themselves.

At this time I will now turn the call over to Jimmy Woodward to discuss our financial performance for the first quarter. Jimmy?

Thank you, George, and good morning.

Our consolidated sales were $563.6 million for the 16-week first quarter, which was an 11.4% increase over the $506 million reported for the first quarter last year.

Net income for the quarter was 22.9 million, an increase of 14.6% over the 20 million reported for the first quarter of '05, and income from continuing operations before the cumulative effect of change in accounting principles for equity-based compensation was 22.3 million, an increase of 11.3% over the 20 million reported a year ago.

Our diluted net income per share from continuing operations before the cumulative effect of the accounting change was $0.36, an increase of 16.1% over $0.31 per share reported last year.

The consolidated sales increase of 11.4% resulted from favorable pricing of 7.3%, a positive mix shift of 4.7%, and those were offset slightly by a volume decline of 0.6%.

The bakery group sales increased 13.3% due to a volume increase of 7.4%, favorable pricing of 5.5%, and a 0.4% favorable mix shift. The volume growth in bakery was driven by branded white bread, including the Nature's Own Whitewheat and Nature's Own soft variety bread, both of which achieved double-digit growth.

The acquisition of Derst Baking Company added 1.7% to consolidated sales and first year DSD expansion markets were 0.8% of the increase.

Now, the Flowers Specialty sales increased 4.2%. We had favorable pricing of 12.3% and positive mix shift to 4%. However, these increases were offset by a 12.1% volume decline in the quarter. The loss of contract snack production more than offset the increased sales of branded retail snack cake. The branded snack cake did grow double digits in the [fee store], mass, and vending channels. 1% of the sales increase was due to the acquisition of Royal Cake Company, which we acquired in September of 2005.

Except for the national food service customer that had a successful product launch in Q1 of last year, which last year gave us a volume increase as we feel the supply chain, our food service frozen bread sales showed increases in virtually all broad line food service distributor and national chain accounts.

The gross margin you see improved to 50.4% of sales from 50.1%, primarily due to favorable pricing and positive mix shift. We did have a favorable hedge position in place for Q1 for certain of our major ingredients and therefore had lower ingredient and packaging costs. However, some of this was offset by higher energy costs.

Our sales and marketing and administrative costs as a percent of sales for the quarter was 40.9% compared with 40.3% last year. The increase for the quarter was due to higher labor costs, and as George mentioned, that included the cost of relocating the Specialty group snack cake distribution center.

We recorded higher equity based compensation expense since we did adopt FAS 123 R as required this quarter.

Our stock-based compensation expense increased $3.7 million, or $0.04 cents per share for the quarter, when compared to last year. And of that increase 1.8 million, or $0.02 cents, was the result of adopting FAS 123 R. And as we previously disclosed, we estimate the incremental effect of 123 R on the fiscal year will be $0.05 to $0.06 cents per share.

The balance of the increase in the quarter and what we expect for the year is due to the grant of equity-based compensation in January of this year. As I have previously mentioned, these new equity-based awards were a combination of options and restricted stock, with certain performance hurdles that must be achieved to trigger vesting.

As a result of the adoption of 123 R., we recorded an expense as a cumulative effect of a change of accounting principle of $600,000 net of tax. And as required, we revalued -- this was related to revaluing the liability for certain outstanding stock-based awards at the date of adoption.

Our annual guidance, which we will review momentarily, reflects all of the above-line equity-based comp expense, including the 123 R expense.

Increased distribution expense also was a factor in the increase in the selling expense, as Snack Cake sales shifted from contract production, where customers bear the distribution cost, to branded retail sales, where distribution costs to the customers' warehouse are incurred by the Company. The increased distribution costs resulting from this shift were further impacted by higher energy costs year over year.

You see we recorded a gain of $700,000 in the quarter from insurance proceeds which were received due to equipment damaged by a fire that occurred during the quarter at our Montgomery, Alabama facility. This equipment has been replaced and the production line is in full operation. Other expenses incurred of about $600,000 related to the Montgomery fire are currently under review by our insurance carrier for possible reimbursement.

No additional insurance proceeds from outstanding claims related to Hurricane Katrina were received during the quarter. However, we do continue to pursue hurricane-related claims with our insurance carriers.

You'll note that depreciation and amortization expense for the quarter was relatively flat as a percentage of sales and our net interest income for the quarter was 1.5 million compared to 2.1 million last year, due to higher interest expense on borrowings under the credit facility. And those borrowings resulted from our repurchase of shares.

The effective tax rate for continuing operations of 37.4% was down from last year's first quarter, primarily due to the decline in state income tax. We had a state tax audit adjustment in the first quarter of 2005. We expect the 37.4% to be the approximate tax rate for the balance of the year.

The income from discontinued operations in the quarter was $1.2 million, again, net of tax, and that represents insurance proceeds we received. If you'll recall, we previously reported a loss related to a lawsuit concerning pie shells produced during our ownership of Mrs. Smith's. And this is insurance proceeds received in the quarter to offset the cost of that lawsuit.

We did acquire -- the Company acquired 1.1 million shares of common stock for $31 million. That's an average price of $27.69 per share and since the inception of the repurchase plan and through the end of the first quarter of '06, the Company's acquired 10.6 million shares, totaling $214.5 million, which represents an average of $20.33 per share. And you will recall, the plan now authorizes the Company to repurchase up to 15.3 million shares of its common stock.

Our cash flow from operations remains strong at 46.4 million for the quarter, supporting our efforts in the stock repurchase program, our capital expenditures, the limited amount of cash for the acquisition, and our dividend payments. In addition, you will note we had a voluntary pension contribution of $14 million which was made in the quarter and we do not expect any additional contributions to the plan this year.

We've confirmed our annual guidance for '06, anticipating sales growth of 9 to 10.4%, which could be 1.870 billion to 1.895 billion, and income from continuing operations before the cumulative effect of the change in accounting principal and exclusive of any additional insurance proceeds, either for the Montgomery fire or hurricane issues, is expected to be 3.6 to 4% of sales, or some 68.6 to $74 million.

With approximately 62 million shares outstanding on average and assuming no additional share repurchases, income per share from continuing operations before that cumulative effect and the change in accounting principal is expected to be $1.10 to $1.19, again, an 11 to 20% increase over last year.

Our capital spending in '06 continues to be estimated at 58 to 63 million, reflecting the Company's ongoing production capacity expansion and our maintenance capital spending. And, as always, the Board will consider the dividend at its regularly scheduled meeting and any action taken on that will be announced following that meeting.

George?

Thanks, Jimmy.

As Jimmy mentioned, we continue to expect 2006 sales to be in the 1.87 billion to the 1.895 billion range, and as Jimmy explained, the net earnings should come in at 3.6 to 4% of sales.

I'd just like to say that our fresh DSD business is doing well. Our Food Service business continues to grow, and our Snack business is moving in the right direction for the long-term, with greater emphasis on branded sales.

As new production capacity comes on line we expect to see a [bump hit] in the second half of 2006 as profits are based closer to our growth markets. With the new capacity, we expect to be in position to take on new business later in the year as changes in the marketplace continue. The new production capacity also will allow us to introduce new products we have in the pipeline, including several new Nature's Own items that we'll roll out this fall.

Pricing actions we took in fourth quarter of '05 and the beginning of 2006 partially offset our [inaudible] higher costs. The negative is, we expect sharp increases in commodity costs as well as continued high fuel costs. This will require us to consider further price actions later this year.

Once again, cash flow from operations continues to be very strong for Flowers Foods. This company's ability to generate cash truly is one of our greatest assets. As Jimmy said, allowing us to make our normal capital expenditures, pay dividends to our shareholders, to consider strategic acquisitions, and to continue our share repurchase program.

In summary, I am pleased with our performance and feel our strategies are right on track. All of us at Flowers remain focused on growing our business, on driving out unnecessary costs, and on creating value for our shareholders.

Now Jimmy and I we will be happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question is from Tim Ramey of D.A. Davidson.

Good morning. Congratulations.

Good morning, Tim.

You've done a great job of dealing with the cost pressures in the business, but I'd love to hear you comment a little bit about the recent run up in the price of wheat, what that might mean. And also just refresh us on how the distributor system is feeling about the price of diesel and what that means to their costs and whether they are hanging in with their profitability?

Sure, Tim. I'll take that.

Jimmy did mention in his comments that our hedging program is in place. We've said many times that we try to hedge out as far as practical, so all of our guidance for the year does take into consideration all the costs that we do anticipate for the year. Next year is another subject and we are covered some for next year and we just have to see how that goes next year. But we feel very confident, that's why we are feeling good about giving the guidance, reiterating the guidance that Jimmy and I discussed earlier.

On the distributor side, we do look at this quarterly, every quarter, and with the sales increases that we are having is more than offset, more than offset any fuel price that has gone up to this point. And that might not be true for every distributor because of higher gains in some markets and not in others, but we do look at it for some 3,000 distributors once a quarter to make sure that they are doing well and nobody's jumping ship. And again, I think it's basically back to -- related to the increase in sales that we are able to maintain. And the margins that they -- derived from the products that they sell.

Great. And can I have one quick follow up too? The third gen hand-held, can you describe what advantage that might have over the previous unit?

I'll let Jimmy also add in, but really, the basic hand-held hardware is a new model. They do wear out. But the software package, we feel like we did upgrade and we feel like our distributors will be able to continue to get closer to the market. Freshness still means a lot in this business and our goal has always been to have the right products in the right market, right price each day.

And by the way, the people who helped us with this software always is our internal group from our technology group, but also the business group out in the field really assist in helping write that software that meets the needs of our distributors in the marketplace.

So it is an improvement and each generation does improve those goals of getting the right product in the right market on the right date.

Thank you.

Thank you. Your next question is from Farha Aslam of Stephens Inc.

Hi. Good morning.

Good morning, Farha.

My congratulations as well.

Thank you.

And I'm just trying to get more detail: on the analysts' day, we had heard that commodity prices would cause cost of goods sold to maybe increase 3 to 6% next year. Is that still the right number?

Farha, I'm sorry. I didn't quite understand the question. You didn't come through real clear.

Sorry about that. I'm on a cell phone.

When we look at record wheat prices and record sugar prices, and you think about cost of goods sold for next year, are you still thinking that those ingredients costs are going to increase around 3 to 6% as we heard on the analysts' day?

I think that it's fair to say, if the futures stay where they are at this level, we would anticipate 3 to 5 to 6%.

And do you think you can pass that along in terms of higher pricing, or is the market getting kind of tight in terms of how much pricing you can take?

Well, I think it's incumbent on this management team, before we look at pricing to look real hard at our cost structure, knock out any efficiencies that we have, and even though we always think we do a good job we can always do better. So that's always the first rule that we look at: how much cost can we take out? And after we do all of that, we know that we need to maintain our margins and we will go to the marketplace with that at that point in time.

Ultimately, the consumer votes with their purchase, and this year, as you well know, we had increases back in October of last year. We had some more increase in January of this year. And, you know, I do believe this: I think the consumer hears every day about -- they know about energy prices, for sure, and I think the consumers are beginning to hear more about other costs, particular grains and fuel and so forth. I think it's on the top of the mind and all of us, a year ago, when we filled up our tanks, I know the first two or three times I filled mine up it was a shock. But I've gotten accustomed, unfortunately, to the prices I'm paying today, because I know that's what it takes to stay on the road.

And along with saying that, Farha, I think our customers understand cost increase that we cannot do anything about and we work diligently with them in good times and bad times to let them know the state of our company and the state of affairs in the industry, and we just have to see how it goes.

Jimmy, do you want to add on anything to that?

So your goal would be to maintain margins going into next year, despite the increase in commodity costs. Do you think you can maintain your EBIT margins?

About that, we are going to die trying, but that is our goal. Absolutely.

That's fair.

And then, George, you talked about the additional capacity that's coming on line that can allow you to get increased sales in the back half of the year. Could you just share with us kind of how much that new capacity that's coming on line adds to your production capacity and capabilities?

As you think about the size of bread line we have installed in Villa Rica, the bun line in Newton, North Carolina and the bun line in Houston, I think it's fair to say a bakery with two lines these size is very capable of picking up an additional 60 million in sales -- not to predict that that's the number that I'm going at here, but we would have the capability and the capacity to do that.

Okay. Good deal. Thank you. Congratulations again.

Thank you, Farha.

Thank you. Your next question is from Heather Jones of BB&T Capital Markets.

Thanks, and congratulations on a great quarter.

Thanks, Heather.

I wanted to follow up on the wheat question again, and just some of the commodity markets, the futures have been moving higher somewhat as a result of commodity fund inflows. I was just wondering, based on what you understand the plannings to be, do you think the market has gotten ahead of itself or are you anticipating wheat to stay at current levels?

Wish I knew. Jimmy is really involved in this process.

Let me just say that I was talking to one of our guys this morning who happens to be in the wheat fields in Kansas this morning looking at the crops. We do know, and, of course, the U.S. government has already said, that this year's crop would yield 15 to 20% less than last year. Would project, though, based on what we see, the quality of the wheat will be much better, which also helps in the overall cost of the final result.

We are at a very high price. Usually high price brings on more acreage for future plantings. And the farmer will have to decide will it be wheat or will it be corn for ethanol. But -- I'd better turn it over to Jimmy -- but my assessment would be, though, as -- to beat record prices that are out today, we will see more plantings of wheat in the future. And then we will see some rationalization probably in the overall price. Jimmy? Do you want to add on?

I would just add, there again, we, like most end users, are very aware of the [blend] activities in the market that trade, Heather. Again, our position is that we always had a short position. We were always a user. We look at historical data, as do all market participants. We look at the carrying costs of the financial inventory and were there opportunities for us to take coverage out in the future at prices that we think enable to us meet our goals, we go ahead and take that coverage as it's available. And we just monitor the markets and take those opportunities as they come about.

Okay. And since a 15 to 20% reduction the USDA has projected, is that purely a function of soft demand or has there been -- I've read about some quality issues, but is it largely a function of soft demand and, as George said, high price to secure it? Or, what is your understanding of that?

This is George. Let me come back and repeat what I said. I said the USD -- the government has projected that the crop, when it's all harvested, would be 15 to 20% less than last year, the final yield. That's what I meant by that.

And the other question was -- ?

Heather let me add -- you have to be very careful to -- wheat, when you think wheat and you think flour, we use a wide variety ingredients. Flour is obviously our largest, and as George mentioned, the quality of the hard red winter wheat we typically use, the high protein, the high gluten flour we would typically use on our specialty bread products. There are enormous differences in all of these markets. Depending on the quality of wheat in any given year we add more or less gluten to the bread flour, and all of those things can impact the prices and the costs that we ultimately incur.

So sometimes you have to be careful. It can be -- the yield in a particular year can be tremendous but the quality for baking purposes be lower than what it has been, and therefore we buy more gluten. And the next year the yields can be lower but a higher quality, therefore we buy less gluten. It's a very complex worldwide market. We don't pretend to be traders in the market. We are just -- and really would not give you -- we are not prepared to give you a view on what the futures market in wheat would do. We just, there again, fundamentally say that we have a short position. We are always users of flour and we will continue to take coverage when it's available at prices we think we can meet our goal.

Okay. Thank you. And as far as the price actions you've taken, I have two questions there. One, I was wondering the order of magnitude of each of these? Have they been in the 2 to 3% range?

And then secondly, I know that IBC announced that it was going to take pricing in early April, but your other competitors, have they been taking pricing commensurate with you? Have you been a price leader? Just wanting to get some idea there.

I think at the end of last year we publicly said that we thought our price increase would amount to 3 to 4 to 5%. As far as the competitors are concerned, the prices in -- you go out in the marketplace and it depends on what's being promoted, what's the end price. Really, what we try to do more than anything else is focus on our products and say, what would the consumer be willing to pay for this product, and that's how we finally end up. Each local market sets their own price based on local conditions in that marketplace. But we did have some price increases last October and again in January.

So that 3 to 5% range, each local market has discretion over where it's ultimately going to end up, but there was a general price increase across the whole company.

That is correct.

Okay. And if you end -- the cost of commodity increase, having to raise pricing again later this year, would it be of similar magnitude?

I wouldn't want to project that at this point.

Okay.

As I said earlier, our first steps would be, how much more cost can we take out of our supply chain by doing things better. That's always the number one target. And then to maintain our margins we would have to look and see how much more we might have to do on the pricing side to maintain those margins.

Okay. All right. Thank you very much.

Thank you, Heather.

Thank you. Your next question is from Leonard Teitelbaum of Merrill Lynch.

Good morning.

Good morning, Lenny.

Well, since you wouldn't answer Heather's question about how much your next price increase is, I won't try it either.

I want to just ask some things around the edge a little bit here. How much has your -- the new cut into the IP systems, Jimmy, it sounds like it's pretty well completed by now. How much has that been costing you and should we see some kind of an easing up on the SG&A expense as we get through the balance of this year?

Lenny, I don't expect you'll really see any easing of cost. There again, it was -- those were -- we view on this project, an SAP upgrade is a part of the ongoing system maintenance. The hand-helds, again, so now we are just moving on to additional additions to the better tools so we will complete these projects and move on to new projects.

All right. I was referring more to the SAP side of the business.

Really, though, I wouldn't look for an overall decrease in the SG&A line due to the drop-off of that cost.

Okay. On the commodity front, I think we've beaten the wheat thing pretty well, but I know sugar costs were causing some problems because of refiners who should be now been running almost at full blast, unless my information is wrong. So could you confirm that the supply of sugar has now started to be increase in the U.S., now that Domino and the rest are up, running -- well, we're hearing full out. I don't know if that's right or not.

I think you are right in that. I think, as we know, all the problems with Katrina did create havoc with the sugar supply, but it does appear they are getting back up to speed and I think that is relaxing some for the rest of the year and into next year. I have to say, though, that we are covered on sugar. And --

But wasn't there a question of getting supply even though you had coverage, and wasn't there a Force Majeure attempt to try and back off some of the contracts? You got the status on that?

That is true. That was going on and did happen. But that's been well over now for quite some time.

Now, I think it was Tim that asked the question on energy. I understand what your thrust here, that the drivers are making more money, absolutely, and that's covering the cost of their energy. Are we to to take from that that you had to make no adjustments on their discounts in order to accommodate for higher prices and it's their risk at any point -- and anyway, it's their risk, not yours, and the price is what the price is, you don't have to share the pain, so to speak?

Lenny, that is correct. With the way the sales have been increasing, that it more than offsets by far the absolute fuel price. And I'm not saying we just leave them out there on their own, we are constantly working with them through advertisements, sales promotions, working with the key accounts to make sure that we get the volumes. And based on their margin structure, the larger routes and the increase in sales, just really takes care of it.

And could you comment a bit on your packaging costs, George? I know that clearly there's been an increase, again, I guess fuel related. Do you have coverage on that as well?

You can only cover a small amount of tha,t but in fact, resin prices have subsided somewhat. It's better than it was a few months ago, and we feel better about packaging -- bread packaging, not necessarily the corrugated, but bread packaging. Feel better about the rest of the year.

And just to clarify, Jimmy, the guidance: we've got this $0.01 from discontinued ops and it seems to be offsetting the stock-based comp, et cetera. Your guidance -- that's before the cumulative accounting change, I appreciate, but does that include anything from discontinued operations in that? Or is that just continuing operations?

It is purely continued operations.

I have no more questions. Thanks very much.

Thank you, Lenny.

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

Good morning, everybody.

I think the cost questions have been beaten to death here. Let me move on to the share number that you highlighted. I think you said that in the markets you are serving, your market share was up 100 basis points.

That is correct.

First, kind of in terms of definitions, does the markets you're serving, is that kind of the 108 million people you referenced?

When I say core markets, that's the mature markets that we've been serving well over five years in the past. The reason I want to say it that way, [inaudible] the last 10 million people that we we're serving were new so even that we look at that as -- I think it's unfair to look at it that way. We try to look at the core market and what's really going on there.

Okay. So the core markets, and I think that you've traditionally said that your market share is 21% in the core. Is that right?

A little above that.

A little bit above that. So, I'm just trying to kind of -- obviously, the performance is excellent, but I'm trying to kind of figure out, if the bakery volumes were up seven and the Bakery, the Derst Bakery acquisition was about a little less than two, okay, so that means your volume was up, let's call it 5.5 or so, and you said that the DSD added about a point. So that's like 4.5, is the core volume, if that number is right, how much of that is the category growing versus share gains?

Quite honestly, the category is not growing to amount to anything. In truth, our share does continue to go up, which really means we are gaining share from competitors.

Where is the absolute share level now, do you think? You said it was above 21, so where are we? 23, 24, 22?

No, we are in the neighborhood of 23.

23. And I guess from a profitability standpoint it's -- I would assume that the share gains that you get in the core markets are more profitable than any share gains you get through distribution into new territories, at least initially. Is that fair?

That is fair.

And it just seems a bit -- I think, Jimmy, you and I had talked about this a while back, but if your share is only 23% in your core markets, I mean, you still have just tremendous growth potential even in the existing markets. I mean, so how do you balance the kind of -- the opportunity to take another 10 or 15 share points which a market share leader with a low cost position such as yourself should probably get in your core markets versus the capital to move into new markets, which I understand over the long term is a great opportunity, but it's a good problem to have, but maybe you could kind of walk me through how you make that kind of decision.

Eric, that is a fair question. That's why a lot of times I know we might get criticized because we are not moving our footprint faster, and I've said all the time we wanted to do it cautiously, confident that we are not taking money out of the bank and hurting our shareholders' earnings as we grow that footprint.

Then I would say that people are very loyal to the brands. We've been in business since 1919, and our share, even as we speak, and you can see it on the IRI as well as other data, still says we are at roughly 23%. The Private Label has a strong share in the marketplace, with some 20, 25%, depending on which markets you are in.

And then you have a lot of different competitors. In any given market you have Interstate, Sara Lee, Bimbo, Westin, Pepperidge Farm, and Private Label being the biggest competitor, by the way, as I mentioned. So when you really look at it, even though in our core markets we do hold the number one position in most of those markets, there is still plenty of opportunity, but it just takes time to convert somebody's that has been used to buying our product to switch over to some other competitor's brand. It does take a long time.

But I do agree with you and that's why we are excited about our business. We still think there is plenty of opportunity and we've just got to keep coming out with the right products that gives a person a reason to switch over, like the low carb bread that we came out with early on and some products we're looking at this fall under our Nature's Own brand, like Whitewheat. All of that's helped grow our market share.

Yes. Okay. And then, just as a follow up and I will let it go, we hadn't talked about scan-based trading in a while and I know that you are pretty far along on that. What percentage of the DSD business is now scan-based trade? And Wal-Mart has talked about that as being kind of the ultimate structure that they would like to move to in many products. So maybe you could just touch on that for a bit and I will let it go.

Okay, Eric. This is Jimmy. On the scan-based trading, we continue to expand that to stores as available. I think we will probably have $500 million-plus in the bakery group under scan-based training this year and we continue to increase the store count. There are still a few of the major chains that are not capable and we are not doing that with yet that we hope we can work with them and get them on that program, and we will continue to use that technology. Again, it's about in-store execution and providing that driver with the time and the tools to gain market share.

Okay. All right. Thank you.

Thank you, Eric.

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

Good morning.

Just getting back so we can beat the dead horse here on wheat, my guess is that you guys were sort of locked in and hedged with most of your wheat earlier in the year, because I recall it being sort of at year-end last year. And the wheat prices are only a recent increase and I see the basis down, I see rail freight costs going down, so my guess would be this year cost of goods in wheat or flour would be no more than flat or maybe even down, year over year. Is that a fair assessment or -- where am I wrong?

Mitch, you are partially right. We did say last year that we were almost covered. [Inaudible] still open, of course, and that's always a moving target. We were not 100% covered for the last quarter. We are covered, but we will see some flour increase in the fourth quarter, and Jimmy, year over year, a slight increase.

A slight increase. Not tremendous.

Okay. Fair enough. Looking at your guidance, the range, particularly at the low end of the range, if I do my math correctly, if you are at the low end of the range that's only about a 7% year-over-year growth for the remaining three quarters, which would be below your trend. What is it that's keeping you with $1.10 as the low end of the range. What's either scaring you, or is it just, it's still May and there's a lot of year left? Or how would you talk about that?

Mitch, I can address that from the financial side. There again, we are early in the year, it's, as we all know, June 1st, the hurricane season starts. There is always the potential for movement of populations and changes in buying patterns. We continue the transition of the snack cake business with some higher distribution costs there, and that's the guidance that we are comfortable with maintaining at this point in the year.

Okay. In terms of -- one thing that caught my ear was Private Label. You said Private Label sales were up double-digits for you guys. And, is that -- so, question one around Private Label is, are Private Label prices up as much as branded prices?

You know, on Private Label, the reason I wanted to mention the percent on sales, I'm questioned on that quite often because we said last year that due to the competitive factors going on we took on some additional Private Label and food service business. I'm questioned quite often, where you're getting a lot bigger percent of your sales in those type of products. And when you look at the overall equation, that is -- we're not. It's still pretty consistent with our 11 to 12% that we've had now for many years, and we feel comfortable with that.

Private Label retails are up in the marketplace. I want to say it's -- that's [inaudible] brand, I hadn't looked at it exactly that way. I would say, though, looking at ROI, that Private Label is down quite a bit in sales in the marketplace. And I think as a result of -- not only Flowers, but the whole industry, competitors as well, continuing to come out with new products that gives people a reason to trade up. If it's just the same product as we know points straight up, but I think the bakers are -- Flowers is certainly trying to make a difference in new and improved and better-for-you products, and people are trading up because they are health conscious.

So, you're saying that Private Label, the category is not up.

No, it's not.

But in your business it is up.

It's only because of new customers that we took on last June and July.

Okay. And so it kind of surprises me that Private Label in this -- with higher gas prices really hurting the lower end consumer, you wouldn't see some trade-down right now.

Mitch, I would certainly agree, but the trend has been that for quite some time that people continue to trade up.

Okay. And in terms of, is Private Label pricing up, is your Private Label pricing up?

Yes, it is.

Okay. In sort of the same percentage as your branded?

I would rather not get into that. It is up.

Okay. And when I look, with your private label being up, does that have margin implications because of the mix?

Mitch, from a philosophy standpoint, our philosophy has always been just to produce Private Label is not what the Company is about. Okay. We are all about growing our brands. The reason we think when an opportunity comes with the right customer to do the Private Label, it really enhances our position with that customer, our position in the store on the bakery department, space in the supermarket as well as [inaudible] displays, et cetera. So what drives us to look at Private Label is all about building our brands and we've been successful doing that, over time, by taking Private Label when it really helps our brands.

Mitch, if you connect -- you know, George said our Private Label increase was really new customers we've picked up, and you connect that with Eric's question earlier, there again, when you initially pick up customers you may tag a little higher percentage of the sales in that store initially with Private Label, and then our job over time is to use the tools, the technology, the things in our brands and grow our branded share where we have gotten these new Private Label customers and hopefully we've gotten new space and position for the brand, and therefore you will see our 23 market share move up from that.

I have trouble connecting the dots, Jimmy, at my age.

What about -- last question, and congratulations on your move into Cincinnati. I was just curious, how many routes is that, is that five new routes, is that ten? How would you characterize that? 100?

No, no, no. It will probably be in the neighborhood of ten within 30 days. Mitch, let me say again, the reason -- I learned a valuable lesson a long time ago. We went to a market and I was young and eager and I wanted to break the market with gangbusters and we did put on 50 or 60 routes overnight, but the P&L impact of it was, it took my breath away. So I learned a valuable lesson: to go in slow and easy, just like we accomplished in northern Virginia, as we moved into that market. It was slow and easy, but now we look back and we have 75 or 80 routes in that part of the world.

No, I agree with the slow, disciplined approach. I guess my follow-up just to that question and my last question is, should we expect additional new market announcements through the end of the year, or is it going to be fill in for where you are now?

Cincinnati worked out well for us because of some new capacity coming on, and we will have to look at how well that capacity in Villa Rica and Newton progresses and then we will have to make decisions after that.

Okay.

But I would hope we would have another announcement.

Okay. All right. Thank you very much.

Thank you, Mitch.

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

Hi, guys.

Hey, Alton.

I just have one question for you and then I will hop back in the queue.

Of course you talked a bit already about the competitive landscape. Just want to get an idea, obviously, you guys have been gaining share here at a pretty steady pace for the last couple of years. How do you really see that playing out going forward over the last three quarters of '06, or maybe a little more detail, [inaudible] asked that question, is do you think that the gains you could get over the next three quarters or in '06 as a whole could be as much if not better than what you got last year, or is that coming down, that benefit?

Well, it was a tremendous benefit last year, as bakeries were closing. I do not see that trend this year as far as bakeries closing. That was of huge advantage for us last year, even though in cramped our capacity because we did introduce some of the new products we wanted to introduce, we just -- was holding on to supply the market. So these new lines will enable us to extend those product lines, which, hopefully, that's the way we will gain business the rest of the year.

I don't necessarily see that there's going to huge customers coming our way. I didn't want to implement that. I see continued growth on market share because of these new items that we'll be going to the market with,.

Long story short, the landscape did change tremendously last year. I do not see that much change this year, particularly with the plant closings, There can be other changes that we're not aware of, but it is [polluted]. There's a lot of things going on in the marketplace.

Great. Thanks, George.

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

Good morning.

Good morning, Dave.

A couple of totally unrelated issues: One, the conversation today made very little mention of any future acquisitions, and yet that has always been a major part of the company in your normal presentations. Is there anything you can update us on?

David, no. What we've said, gosh, we are looking all the time. Not too many weeks or months go by that we don't know of something going on, not obviously necessarily just in the baking business, but other businesses that might make sense for the Company. We are still focused on those acquisitions that yields operating strengths to the Company and therefore eventually -- not eventually, but would add to the financial strength to the Company. So we are just as acquisition minded as we have ever been.

You remember, maybe the last call or the call before last, we talked about the number of companies that are still within that 150, 200-mile radius of our existing footprint was a number of substantial companies that at some point might decide to do something different than what they are doing today. So, let me disabuse you that -- I didn't mention that much in my comments, but we are as interested as ever in growing our company.

Okay. Second question, how many routes do you currently have for sale and how quickly do you expect to sell them?

I would say this: on any given time you could say roughly 10% of our routes are available for sale. That can be up or down, depending on how many new markets we are in. That's a rough estimate and pretty accurate.

Didn't we have a lot of Derst routes to sell?

Yes, when I say the 10%, that excluded that, by the way. And we have notified that acquisition of Derst, we met with all the employees in the sales department and they are fully aware that it is our intent, after we put in our systems, SAP hand-helds, et cetera, that we will be moving forward with independent distributors in the Derst market.

So we're talking, we still have, what, six months to go before those would actually be offered for sale to the employees?

I think that's pretty accurate timing.

Okay. And the last question, new product introduction is another area you usually expound upon at great length. We heard very little today. Are there any new products you would care to share with us as being particularly successful? Or, conversely, areas you've gone into that you've decided to exit?

I mentioned Whitewheat is a great brand, Nature's Own Whitewheat is a great brand for the Company. We were very successful in introducing buns under that umbrella of Whitewheat. We are very pleased with that.

Ongoing -- new product development is always ongoing. Our healthy line of snack cakes are now in the marketplace and we feel it was a good introduction and it will take time to see how well -- is it sustainable or not. We think it will be.

I mentioned Nature's Own. This fall we are launching several new items that we think will be very attractive to the consumer. Jimmy and Marta, any other new product you all can think of right this minute?

But, yes, I've mentioned before, David, it's crucial to us and we are putting a -- we have broken ground on a facility here in Thomasville for R&D and it's not a multi-million dollar deal, but it's important to us because we are putting our marketing and R&D functions together for brain power and -- R&D people are always [inaudible] doing something. Marketing people are thinking something else. We really wanted them to come together and build on new products for the future. And we should have that up and running, probably in January of this year.

Thank you very much.

Thank you, David.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is from Margo Murtaugh of Snyder Capital.

Thank you very much. I just wondered, on the snack food area; What are your strategies and goals there? Tell us a little bit more about that.

Margo, for years we were quite dependent on contract manufacturing for our other people. Margins were very, very tight, very, very slim, sometimes nonexistent, even though it did cover overhead. We are focusing on our two brands, Mrs. Freshley, which goes directly to our customers' warehouses and they are responsible for the distribution and merchandising of those profits, and of course BlueBird goes through our route DSD system.

So the strategy is that we want to build our brand, which we have control over, that one given month people will not just quit us and we don't have anything to go in its place.

So we feel like that is the long-term strategy and the goal is that we will allow 100% distribution. It's always the goal to have 100% distribution in the markets that we serve. We are strong in the mass merchandising channel. We are strong in the [VIN] channel. We are very strong in the -- are getting stronger in the convenience store channel, and making inroads into the supermarket channel.

So we think the strategy is right. Our gross margin is better, going this direction. While we've got enough work out and we're working hard to do it, is make sure we have a good handle on the FD&A side of that.

So hopefully I've answered your question.

Any financial goals you can share with us at all?

Margo, our overall goal that we stated a couple of years now, is for the Specialty group to achieve margins approaching the baked foods group. Now, Specialty will be a combination of the frozen bread and rolls and the snack cake. But that continues to be our internal goal and that's why this quarter was a bit disappointing, but we think we are taking the right steps to move in that direction by centralizing the snack cake distribution and focusing on the Mrs. Freshley's brand, primarily in the multi-pack format, warehouse distribution to provide alternatives in the mass, supermarket, and other channels.

But if you wanted a goal, our goal continues to be to get Specialty up to the levels of the Bakery.

Okay. Very good. Thanks a lot, Jimmy.

And also, on share buybacks, how do you think about that? Your stock has hit a nice price. How do you view the share buy-back versus other alternatives in view of the fairly rich stock price?

Margo, what we said, using this cash flow we want to make sure we reward our shareholders with a dividend payment. We continue to use it to make sure that we keep our bakeries the most efficient again, so that capital expenditure program is always underway.

So we are looking at acquisitions two ways: One, acquisitions of other companies or acquisitions of our own stock, which, every time we buy or every time we look back, we wish we could have bought more. So when you look at it even though the valuation is high we still think it's an attractive proposition for the Company. And in this quarter you will notice, as we stated, the Derst acquisition was a stock for stock tax-free transaction desired by the sellers, and again, our stock repurchases, the intent was to roughly offset the Derst acquisition so there wouldn't be a dilution there. It's part of that as well.

Okay. Thanks very much, guys.

Thanks, Margo.

Thank you. Your next question is from Chris Kapsch of Merrill Lynch.

Thank you taking my question. I had a couple of follow ups, one on the Private Label discussion: I understand the year-over-year share gain that you've made in Private Label. I'm just wondering if you can speak to how those trends look on a sequential basis.

Chris, I understand the question. [Inaudible] did say that when he looked at our overall sales in our bakery group, our share -- not our share, but our percent of sales of Private Label and everything else is consistent with roughly 11.5 to 12%. We gained new Private Label customers because of all the bakery closings in the Southeast. Once we hit those costs in July or so, we would think -- because I don't remember if any new customers came on since then -- that year-over-year, then, those comps will be very similar to what is going on in the marketplace probably. And I did say Private L abel is down. I'm not predicting we'll be down, but I'm just saying the category is down and we are up, so you've got to wonder why. And the reason is because of new customers.

Okay. But on a sequential basis, you are not getting incremental new customers, it's just still the benefit from the last summer customer gain, right?

That is correct.

Okay. And then, just, I'm a little new to the story, so but just to follow up on the new capacity discussion, the expansion plans previously announced, is that exclusively in the bakery group and could you just provide some timing and quantify what percentage of your overall capacity that investment represents, please?

Chris, I will, and it is, all three items that I mentioned is, and our bakery group, Villa Rica, Georgia is one of our finer plants, near Atlanta. This is their third line. This plant will have two bread lines and one bun line. New plant in Newton, North Carolina, it's brand new and starting out with a bun line and a bread line will follow. Then I mentioned the bun line out in Texas.

I did say, based on an average bakery that would have two to three lines, you can anticipate -- if you just go out and get the customers, that's not necessarily the way you do it, it takes time, that plant would be capable of generating 50, 55, 60, 65 million in sales based on product mix.

So since you are new to the story, we've been running well over 100% capacity now for quite some time on both bread and buns, and we felt like it's continuing our growth that we projected, that we had to have these facilities. As you know, the Southeast, Southwest continues to grow population-wise, and as you look out in the future, it was just absolutely necessary that we invest in these new lines to take advantage of the growth that we know will come.

Okay. And just as a percentage of your existing capacity, these expansions, do you have a ballpark on what they represent?

No, I don't. I would say, though, that in the bakery division I guess we have some 30 plants and this will be equal to one more plant, basically.

Okay. Thank you very much.

Yes, sir, Chris.

Thank you. Your final question is from Maryann Kotas of Thrivent.

Just as a reminder, on that loss of the contract snack business last year, didn't that occur in the September quarter?

Maryann, this is Jimmy. When we talked about the contract production, there are numerous customers. There was one rather large customer that we did not lose, in effect, until the end of the calendar year. We were forfeiting contract production, really, throughout the year last year. Several customers. One, January of last year there was about a $5 million customer. And then there were some others during the year, and then a pretty large one in December of '05.

Okay.

[Inaudible] You are seeing the full impact of the loss of the contract production that we expect to lose, you are seeing that in this quarter. There shouldn't be any additional losses.

Okay. Very good.

And on the frozen bread side of the business, I know you had the KFC rollout last year. How are you participating in Wendy's Frescata sandwich?

Wendy's is a very valuable customer of ours and we are participating with their new product.

Are you the full supplier?

No, we are not. They have other suppliers, but we are pleased with the amount of coverage that we will have with this, it will be significant as we go down the rest of the year as it rolls out.

And is it simply in your standard market of the Southeast?

No, it's not. Because they are going frozen, you know, you could almost have a nationwide distribution. We do not have the capacity to handle the nationwide part of it, but whatever makes the most sense for Wendy's and Flowers, we would end up with that geographic market, based on distribution cost to both companies.

Okay. Very good. Anything else you want to say about that?

No.

Thank you.

Thanks, Maryann.

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

Thank you, Jackie, and as always, thank you for your interest in our company. Thank you for your questions and input today. As always, we are very confident about the Company and proud of our team. They are doing a wonderful job. So thanks for joining our call and we appreciate your continued interest in Flowers Foods. Take care.

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