Flowers Foods Inc (FLO) 2007 Q1 法說會逐字稿

Good morning. My name is Tiara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flowers Foods first quarter 2007 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. Thank you. 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, Tiara. Good morning. We appreciate each of you joining our call. Participating in our discussion today are George Deese, Flowers Foods' Chairman, Chief Executive Officer and President, and Jimmy Woodward, Senior Vice President and Chief Financial Officer. George and Jimmy will discuss our first quarter results and then open the call for your questions. First, I must remind you that our presentation today may contain forward-looking statements. We may use words such as expect or believe to identify those forward-looking statements. While we believe our statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters we will discuss during the call, important factors relating to Flowers Foods business are detailed fully in our filings with the SEC. Now I'm pleased to turn the call over to Flowers Foods, Chairman, CEO and President, George Deese.

Thank you, Marta. Good morning to each of you. Thanks for joining our call today and for your continued interest in Flowers Foods. As you have seen from our earnings release this morning, our first quarter results were very good. In fact, both sales and earnings were at record levels. These results were achieved as our entire team worked to execute our operating strategies, our philosophies, and our proven business model. Let me share a few of the highlights of the first quarter. Net sales increased by 8.2%, which is in line with our expectations. You will recall that we acquired Derst Baking Company in February of '06. Derst contributed 1.3% of the 8.2% sales increase in the quarter. Income from continuing operations (inaudible) EBITDA for the quarter was 10.7% of sales, an improvement over the 9.6% of sales in the same quarter last year. For the quarter, sales for our Bakeries Group increased 8.8% and EBITDA increased by 12.3% over last year.

Looking more closely at sales for the Bakeries Group, our internal sales data is the measure that captures the entire picture for us. That internal data shows that branded retail sales were up 8.1% in the quarter. Our white bread brand is led by white wheat, and local white bread brands grew by 9.9%. Sales of Nature's Own variety bread grew by double-digits. Our newest brand extension, which you remember we introduced last fall, Nature's Own all-natural premium breads, also performed very well. Our buns and rolls grew at a modest 3.6% for the quarter. Store brand and private label breads, buns, and rolls increased by double-digits. It our food service business increased by double digits. Our DSD food service business increased by double-digits.

According to IRI, Flowers Foods showed a slight increase in market share for the quarter. Additionally, IRI reports show that the overall bread category improved this quarter. And this is good news. Hopefully, the Grains Foods Foundation is beginning to make an impact for the overall category and hopefully, much progress will continue to be made in this area. With the strength of our DSD business, with our great brands and products, we are positioned for the future.

Turning to our Specialty Group, sales increased by 6.1% and EBITDA increased 34% for the quarter. As I stated on our last call, I felt like we were making a very positive turn in the Specialty Group. These numbers are evidence of that improvement. Commenting more on the Specialty Group, the big turn, of course, you remember last year first quarter, we had difficulties at our Crossville -- new Crossville distribution center. That has worked out this year in our [SD&A] really went down as a result of that. Food service growth was due to more and more customers going from fresh to frozen. Our National Account business was very strong with some new customers, but cake sales were slow for the quarter, were up only 1% with Mrs. Freshley's brand.

As you know, we successfully took pricing in the latter part of 2006 to help offset the higher costs we knew we would experience this year, particularly commodities. I will comment further about this in a few minutes. On the capital investment side of our business, our Newton, North Carolina, bakery which in June of '06 began producing -- supplying our market with buns, now has a fully operational bread line. This is a state-of-the-art bakery which puts us closer to our larger population bases and certainly helps our SD&A situation. I want to thank our entire team who have made this start-up the smoothest in our history. Additionally, automation of our Crossville snack cake packaging line has now come on-line very successfully. Now Jimmy Woodward will review our financial performance for the first quarter in more detail.

Thank you, and good morning. The information in the press release, I think when combined with the comments George just made, sufficiently cover sales. So I'm going to move on down the income statement to the gross margin, and you will notice a slight decline. And that's a reflection of, as George mentioned, the higher pricing that we took towards the end of last year that was offset by the higher cost of our flour, gluten, and sweeteners were the main areas where we saw significant cost increases. However, during the quarter we were able to markedly improve our selling, marketing, and admin expense as a percent of sales. This reflects, as George mentioned, the improved distribution costs, as production is located closer to the sales market, particularly in that -- our northernmost territory. And in addition the consolidation of our snack cake distribution in Crossville, as George mentioned, significantly improved over last year's first quarter results. Depreciation, as you will see, as a percentage of sales was stable, and we expect CapEx for the year still to be in that $65 million range, with $14 million of that extended into first quarter.

Interest income increased as the balance on our distributor notes receivable increased. This is due to the sale of new territories, such as those at Derst Baking, which we acquired that business last year. And then as we have routes that we repurchase and resell, those sales prices are higher because the routes are sold at a multiple of branded sales, so the selling price and, therefore, the note receivable increase is due to higher selling prices of branded products. The effective tax rate is expected to be about 36% for the year, as we benefit from additional manufacturing jobs tax credits this year. During the first quarter, since the variable interest entity had income of almost $2 million, and since its income is not taxed at the corporate level, the consolidated effective tax rate was slightly lower than the 36% we expect for the full year.

As will be fully discussed in the Form 10-Q that we expect to file May 31st, we have adopted FIN 48, which is the accounting for uncertainty in income taxes. This resulted in a balance sheet entry with only about a $400,000 charge to retained earnings, and had no effect on the income statement or the tax rate, pretty much a non-event for us. And then also we adopted FAS 158, the new accounting for pensions, and changed the measurement date for measuring the plan assets of the defined benefit plan, which is a frozen plan, and that measurement now aligns with our year end at the end of December. And this also was a balance sheet entry only, with a credit to retained earnings of about $700,000. Again, the details of these two changes will be fully disclosed in the 10-Q, and the good news is that they were -- they had minimal balance sheet impact, and no real significant issues there.

The balance sheet otherwise is pretty much consistent with the year end in prior quarters. Our cash load from operation continues to be strong at $49 million, CapEx, as I stated, was some $14 million, the dividends of about $7.6 million, and then we did make payments on our line of credit. That was the primary use of the cash. We did not execute any share repurchases during the quarter. We are reaffirming our guidance for the year, and although, as George has covered, and as you see from the release, we've started with a very strong first quarter, we do expect, based on our hedged commodity positions, that we'll have higher ingredient cost in the back half of the year, and as these increases unfold, we felt it was appropriate to maintain our guidance at this time. So, George, I'll turn it back to you.

Thank you, Jimmy. To say it again, our first quarter results were strong. As Jimmy just said, we have complete confidence in our annual guidance for 2007. Many of you may feel we should raise our guidance due to our strong first quarter performance. But as Jimmy said, it's early in the year, and we know we have headwinds with added commodity costs in the back half of the year. Also, we are seeing more price promotions which could have some slight effect on future results. Reiterating what Jimmy said, our flour needs for the year are now 90% covered. The cost of this coverage, as you know, grain markets are up, and is higher than expected. Therefore, we feel it will be necessary to adjust prices in the September-October time frame of this year.

But looking ahead, with confidence, we're continuing to grow our DSD business in new territories and to increase our business in our core markets. This month we introduced Flowers fresh bakery products into the Texas panhandle market. This adds more than 0.5 million new consumers that can now purchase Flowers Foods products. With the new North Carolina bun and bread lines in production, as I said earlier, we're now baking closer to our new markets, particularly in northern Virginia and the D.C. market, and we're experiencing solid growth in those markets.

On the new product front, this month we introduced Nature's Own honey wheat hamburger and hot dog buns throughout our DSD territory, which is just in time for the holiday season and the summer season. We also introduced Nature's Own all-natural honey wheat berry to our line of premium Nature's Own breads, and we will be adding other new products throughout the year. On the Specialty side of our business, we're continuing to come out -- market new items under the Snack Away brand, which is a healthier alternative, and we are seeing good results with this product line. We're also -- we'll be introducing some 100-calorie snacks late this year.

In addition, we continue to look for acquisitions that will strengthen our operations and enhance our return to shareholders. As Jimmy said, our cash flow remains strong. We will continue to use this cash to make capital investments, pay dividends to our shareholders, make strategic acquisitions, and buying stock under the share repurchase plan. As always, we're focused on growing our business, on driving out costs, on improving our margins, and as our annual report says, doing what we do best, and that is creating value for our shareholders over the long-term. Now, Jimmy and I will take your questions. So Tiara, we'll turn it back to you.

(OPERATOR INSTRUCTIONS) Farha Aslam, Stephens, Inc.

Congratulations on a great quarter.

Thank you.

Just one detail question. Your new North Carolina bakery now is fully operational in terms of bread and buns?

Yes, that is correct.

Okay.

In fact, we're inviting the analysts to see the plant, I believe in October, so we welcome all of you. We'll get that note out in the very near future.

(inaudible) October.

So, give you a chance to see a state-of-the-art bakery.

Look forward to it. And then you mentioned more price promotions in the market. Could you just cover the whole competitive dynamics in bread a little bit for us, George?

I will. We said when we introduced our price increase last October, with a lot of confidence, the questions came from the analysts at that point, would it stick, and I'm happy to say the pricing has stuck. There's not been any movement back in overall pricing. I did mention that private label was up, private label nationwide did tick up with pricing increases on the brand side. So I think competitors, as well as Flowers, are promoting a little bit more on some of our brands, but that's not unexpected. That normally happens when you have price increases, to hold your volume you do promote it a little bit more. We did not promote a lot the first quarter, but we do anticipate some added promotions. But I wouldn't let that worry us. It's not a worry. It's just keeping our brands out before the consumer.

Okay, that's helpful. And then you mentioned that you didn't purchase any shares this quarter. Is that because you were prevented from purchasing shares? A reflection of the stock price? Or is there other uses of cash that you're looking at?

Farha, this is Jimmy. It's not a prohibition from purchasing shares. We just thought it was appropriate with guidance from the Board to continue to monitor the situation, let the market behave as it would, and then we will continue to assess it. And as George mentioned, part of our plan for the use of cash going forward is to continue the balanced approach of dividends, capital investments in the plant, share repurchases when those opportunities exist and we feel they're appropriate.

Great. And one final question and I'll pass it on. In terms of your debt-to-cap, it's quite low. But you also have some off-balance sheet financing for your plants and equipment. When you combine it all, could you tell us where that combined debt-to-cap ratio is, and where you feel comfortable and optimal in terms of a baking company?

Yes, it's -- I don't have the number off the top of my head. And we do have some leases on some equipment. Again, we felt that that was appropriate because the terms and conditions were very favorable. We're -- as you've stated, we have very low debt level, even when you include those leases, we're continuing to look at that and assess the situation. We are -- our ratings with the agencies are stable and investment grade, and I think we'd like to continue to maintain that profile, and then just use the leverage as appropriate, if any, after we have further discussions with the Board.

Great. Thank you very much.

Tim Ramey, D.A. Davidson.

Good morning and congratulations.

Good morning, Tim. How are you?

I'm great. Thanks. And thank you for scheduling around Hormel. I sure appreciate that. Hey, the question that I think is probably on everybody's mind, the huge improvement on distribution costs. Is there anything odd about this quarter, or is that kind of something we could sort of trend line forward? And maybe you could talk about how much of that relates to the new plant, and how much relates to just other efficiencies that you may be putting in place?

Tim, thanks for that question. I'm proud you brought it up. Our strategy for the past two or three years, as you remember, we've had huge issues with the right capacity, especially in the right places in the marketplace. Strategically, we did -- have been looking at where do we need these locations to cut down on the transportation costs, and you're beginning to see that. The huge -- one of the huge improvements I did mention was relocating our snack operation distribution facility right near our Crossville big volume producing plant. Really helped out tremendously. They did have issues last year. They have zero issues this year, so that's been a huge improvement. There's also the new plant in Newton, North Carolina, does, and has cut down on a lot of transportation costs. And as the summer goes along, we'll see. Because last summer we reported to you that we had moved a lot of bread from other parts of the country into the North and South Carolina and Virginia region. This year we will not have to do that, and we will see an improvement. On the offside of that we do have a new plants and new costs on the manufacturing side, but again, a huge improvement on the sale and delivery side of it.

I'd also say in Texas, with the new bun line in Leland, at a plant we purchased from Sara Lee, we have started up that plant with buns, and that has reduced a lot of costs, moving buns out of Louisiana and other parts of the country into the Texas market. So improvements continue to be made. We're not to the end of the road yet. There will be further improvements over the next two, three years as we get more lines in the right population bases to continue to eliminate costs. And that is a strategic move that we're making that will help tremendously. So, back to your question, we feel very positive about SD&A. We don't feel that we're to the end of it. It's hard to say when you see the rest of the improvements come, but you will see them, particularly for this summer.

And, Jimmy, you mentioned that there would be some improvements kind of baked in the cake for -- or not improvements, but degradation in gross margin baked in the cake for the second half of the year. Can you in any way quantify what might happen to either your raw dollar costs for inputs or your gross margin?

Yes, well I think, Tim, a couple of dynamics will be going on. To the positive, as George mentioned, we saw in this quarter we did start up the Newton bread line. And so that -- and you start that up with only one shift, so you're not fully utilizing the Newton bread line at this point, and you did have some start-up costs, so there was a little pressure on the gross margin there. And then just the overall input cost. As we move through the rest of this year, we should see Newton, with the summer bun season and the bun line there fully operational, and with that bread line filling up its capacity, and getting really bedded down, that should help the gross margin as we move throughout this year. But then as we mentioned, in particular, we know our flour coverage and we know it will tick up as we progress through the year from quarter two, then with the higher costs being in quarter four. And then it will be a function of what pricing opportunity, if any, that we see, as George mentioned, I think in the September time frame. I don't think you will see big shifts in the margin. There will be -- there's things that will positively impact it, but then -- being pricing and continued improvements in operation. But then pressuring it will be the known increases in our commodity cost, and hopefully we would expect all that to essentially balance out and not be a drastic change.

Do you need the September-October price increases to make your guidance?

Jim, that's a great question, and it's hard to respond to that. We will need some pricing. It won't have to be a major situation. But we had the price increase last September and October. And, of course, commodities will be higher, as Jimmy indicated, in the fourth quarter compared to last year. So bottom line, we will need some pricing.

Okay. Thank you so much.

Diane Geissler, Merrill Lynch.

Just have a question you may have -- somebody may have asked this. I'm sorry, I got pulled away for a second. The private label and your commentary in your press release about slight unfavorable product mix shift, could you give me some details on that? Is that a switch into private labels, because you did say your private label was up low double-digits in store brands.

We did, and there was a slight shift in brand to private label nationwide and in the southeast. But again, that's always expected when you have the price increases. It's not unexpected.

What is the normal tail on that in terms of the initial sticker shock and the switch-down, and how long does it take to get them back to branded then, get the consumer back to branded?

Let me reiterate, though, it's not such a shift that we should be worried about it. That's why you're seeing a few more promotions going on. I would not get frustrated with that. We just need to be aware of it. But, this is not a long-term situation.

But historically when you've taken pricing and you've seen a switch -- .

Historically you do see that. But I'll also mention that we do -- have picked up some new private label business, so the whole category is not up double-digits. I said we were up double-digits.

But my question is, in the past when you've taken pricing and you've seen the consumer switch to private label, how long does it take for them to come back to branded, based on your -- historically when you've taken prices?

A lot would depend on the economy. Some years you could see it a little more than others. I don't think it's a long-term effect. It's not a -- .

(inaudible) quarters?

I'd say a quarter. So you'll see more promotions to bring people back to the branded category.

And then did you give your coverage on wheat for the year?

Yes, I did. Diane, I said we were about 90% covered.

Okay. And what are your expectations as you look past 2007? I mean, how do you think -- I mean, obviously, the markets have run up. A lot of that is -- I mean, some was based on last year's (inaudible) crop and obviously in sympathy with corn. How do you think about '08 as you start to think about coverage for next year?

We -- interesting, our two lead people who head up purchasing, particularly on wheat, are in the wheat fields this week. I talked to them last night. If you recall, a couple months ago, maybe a month ago, there was -- it probably two months ago they had a late freeze which ran wheat up for awhile. But the reports coming from the people, our people that are actually in the fields, I think will have a good crop, even though it was reported this morning we had big rainfalls there yesterday. So there's always some weather issues going on with wheat, but I think the wheat crop will be fine. I think more importantly, what goes on with corn and ethanol will have probably as much or bigger impact than what's going on with the wheat crop specifically. But we're optimistic about the wheat crop for next year. We think at this point it should not be any worse than it was this year. We think if we could be even on wheat prices year-over-year, we would be in good shape.

Do you have a viewpoint on where you think wheat will trade, just a baseline price, now that corn seems to have settled in the $3.50 to $4 range?

Diane, I don't at this point. I think March closed at like $5.06 yesterday. And everybody -- everything I read says that we should see down pressure on that, $0.50 maybe. But I cannot guarantee you anything on that.

Then I guess on the geographic expansion, I'm not sure if you've announced new markets yet this year?

Diane, what I did say in my comments earlier that we had moved into the panhandle of Texas, which now gives us full coverage. That was the last part of Texas that we did not serve. So all the consumers now in Texas can buy our product. But we do not announce in the future what our future plans are for competitive reasons. We tell you after the fact. And that's why I'm saying we just moved into Amarillo and Lubbock in the panhandle of Texas.

I think that's all I have. Thank you.

Bill Leach, Neuberger Berman.

I just had a simple question. Your annual guidance implies earnings per share growth for the remaining nine months of the year between 9% and 21% by my calculation, excluding the hurricane stuff last year. Why do you have such a wide range? That's an unusually large range for a business like yours, which is relatively predictable?

Well, I think, Bill, we are confident in our operations and what our input costs. We always enter the back half of the year with weather uncertainties. And we just felt it was appropriate at this time to leave the guidance. As George mentioned, some of our opportunity is potentially in pricing later in the year. So within that range, we're comfortable that between cost increases, between potential for pricing later in the year, and then all -- and as always, the potential for weather disruptions, we're just trying to make sure that we leave the guidance where we're comfortable at this relative -- to the rest of the year.

I guess my point is, the guidance is so wide that it's not really guidance. It's almost like saying between 0% and 100%.

Well the challenge for a Company with roughly 60 million shares outstanding, and we're. what, $1 million dollars pretax is $0.01 a share. It's -- I know the guidance appears to be wide, but $1 million dollars is not a whole lot of money on $2 billion in sales. So we're just, at this point, trying to be cautious and conservative and continue to maintain, and then leave it up to you and the others to interpret whether we will be at the lower end or the upper end. We're still comfortable with that range of guidance.

Okay. And one last question. There's been some speculation, as you're probably aware, that you might pay a special dividend. Do you have any comment on that?

Bill, I don't. The only thing I would say, that our Board, as you know, meets quarterly. And we always look at opportunities that will enhance shareholder value at every meeting. And our Board always ends up doing the right thing, whatever we feel like we'll deliver those long-term shareholder value results for our shareholders. And if you look back over time, we've always been able to do that. I feel like we'll continue to do that. But I would not speculate on that question.

When is the next Board meeting?

Next week, in fact.

Okay. Thanks very much.

Eric Katzman, Deutsche Bank.

A few questions. One, I think you had mentioned that maybe you're seeing some signs of increased promotional activity. Is that still coming from the captives, primarily, or is that also from some of your branded competitors?

I'd say everybody in the bread business probably are promoting some. So captives would be involved, as well.

Okay. Because I thought like in particular, HEB was being particularly aggressive, and I just didn't know if it had kind of spread a little bit more, but it sounds like maybe it's a little bit more pervasive. Okay. And then second question, can you just remind me, Jimmy, what percentage of your business now is scan-based trading? And then, George, maybe you could talk a little bit about how pricing works when scan-based trading. Like that -- doesn't that pretty much like kind of guarantee the price increase if you're on a scan-based trade system?

Eric, there again, I think we're about 5,000 stores, and somewhere around the $500 million of bakeries business is scan-based trading with the national retailers. And certainly, a key to the success of that is price synchronization between the retailer and the -- and us. And so, obviously you then have to certainly have established the pricing and established what promotions, if any, exist, and be firm on that to execute it appropriately.

Okay. And so far, based on the price increases that you have taken, that method of going to market is -- that's worked out fine?

Absolutely. We wish we could get -- have more and more of our retailers going in that direction. It's very positive for our administrative end. It's very positive for our distributor, because he can spend more time -- he or she can spend more time merchandising and selling products (inaudible) waiting at the back door. And it also helps the retailer on their administrative side and labor in the store from a check-in procedure. And so we're always encouraged, and we always have three or four future retailers we're working with to try to convert them over to our scan-based trading.

Okay, that's helpful. And then I think my last question on snack cakes, maybe you could talk a little bit about the -- George, the competitive environment there. You're now, I guess wholly-owned, just manufacturing your brands. Where do you think kind of that goes? And is it, I don't know, just -- are you having the little bit of challenge on the top line there versus -- I mean, obviously the bottom line recovery was quite strong. But at top line, is that snack cake category doing okay? Or is that, I don't know, losing out to granola bars or something at the check-out counter? Maybe just talk a little bit more about that.

Eric, that also is a great question. Years ago, we looked at competitors as being IBC with Hostess or Tastykake, if they was in the market. But you know and I know that as people look for healthier alternatives, competition now is health bars, granola bars, et cetera, that we do not produce at this point. I am -- back to the real question, though, top line with the snack, as you know, we did -- and we have given up most of our private label co-packing business. We still -- there's a little more left, but that will also disappear in the future. And the real focus then comes back to two Freshley's and to BlueBird, and we are seeking product improvements, particularly in the healthier good-for-you category. And as you know, Nabisco and Keebler and everybody else has came out with 100-calorie snacks, which I think has also been a real competitive issue for our Company. So we are also looking, and I did mention in my earlier comments, we will also be introducing a line of 100-calorie products to increase our top line.

I think also, if you just focus strictly at the snack group, it means so much also to our distributor to have a cake line where we have opportunities to sell bread. For an example, if our distributor did not have cake, some convenience stores and some mom and pop-type stores, we would have a hard time competing if only he sold bread and rolls. So you have to look at the total. When you look at the total business of Freshley and BlueBird and what does it for the total Company, I'm pleased with where we are. You're never pleased with sales when they're flat or up slightly. But that's the management's job is to find a way to increase those sales, and that is the challenge. But I think our team is up to it.

Okay. Then my last question, George, you mentioned on IRI that the data was showing that the fresh bread and roll category was actually up.

Yes.

A bit. I assume that that's units and not dollars.

That is correct.

And you have a much better view of the actual category given your scan-based trading data and obviously your close relationship with Wal-Mart. How quickly do you think the -- or how much do you think the category is growing?

I think we're looking at -- where it was down, I think we're looking at up a half to two ticks on units percent.

Okay. All right. Thank you.

Mitchell Pinheiro, Janney Montgomery Scott.

Your next Board meeting, is it June 1st?

Yes. That's the date of the shareholder meeting also.

Okay. So that's when your Board will meet again regularly?

Yes.

Okay. Second question. Outside of flour, any other commodities that you're concerned about?

I think two areas, or maybe three. Gluten will -- is an issue that we're addressing. Soybean, soybean oil, and oils in general are much higher, and will be next year. We're in good shape this year. And I think any product related to corn, like sweeteners will be an issue because of what all is going on in the ethanol side of the business. But I think it's manageable. I don't think it's a run-away situation. We'll just have to find a way to manage around it.

Getting back to gluten just for a second, I know, Jimmy, you had talked before about your trying to trace your ingredients back to the farm field, looking at projects with other partners. Have you -- are you fully aware of where all your gluten sources come from?

Yes, we are.

And it's all credible and -- ?

Yes, it is.

And chemically free sources?

Yes.

Okay. In terms of price, you've talked about price promotion. I see a lot of companies out there raising list and then dealing off back. But the deals are a lot less favorable to the consumer, or more favorable to the manufacturer than in the past. So instead of a two-for-one, you're getting three-for-two, that kind of thing.

Yes.

So as that -- are you experiencing the same -- is some of your price increase a function of more favorable promoted prices?

Yes, it is.

Okay.

(inaudible) promoted, it wouldn't be the deep discounts that you might have seen five years ago.

Okay. Has -- when you talked about seeing some competitive activity in terms of some price promotion, is it the same idea? Are their price promotions less agressive?

That is correct. I think it's just a matter of each competitor and each company trying to see what they can do to drive their new -- their brands, and get it back before the public. And sometimes you have to do that.

Does -- is it in terms of product category, is it -- are the price promotions more aggressive in the white and wheat side, as opposed to the super premium? Or are you seeing price promotions across all categories?

I would in general say that super premium is not that aggressive. I would say, as you know, private label white bread has huge share. So if it ticks up, most of the time you'll see the baking industry promote white bread brands. But -- so that was I'd say on the white bread side, more so than any other.

Okay. In terms of route growth, so you entered new markets. Can you put a percentage growth rate on the number of routes you have ending Q1this year versus ending Q1 last year?

Mitch, no, I can't off the top of my head. I'll be happy to get back to you. We're probably up, though, in the 50 or so category.

Okay. 50, the number 50.

Yes.

Okay. That's still -- I would think that -- I thought you'd have a plan to grow a little bit faster than that. 50 on 3,000 plus routes is not a huge growth rate.

Well, as you recall, as we continue to talk more and more about -- the past two years about our whole capacity issue.

Right.

And we've been busy putting in new lines so that we could grow more aggressively.

Okay, yes.

And also, I've reminded all of you that we are after consistent growth in sales and earnings, and we don't want to outrun ourselves. We want to do it systematically, so that we can take care of the market on the manufacturing side, and not destroy the value for our shareholders at the same time.

Okay, that's a good thing. And then as far as the routes, I'm curious, you talked about Derst and buying some of the routes or converting from Company to owner-operators, excluding those, and also excluding the fact that your sales are up there where the routes are more valuable, are you seeing acquisition multiples in the routes increase? Or any comment there?

No, I think it's pretty constant where it's been.

Okay. Couple more things. One, in terms of -- what's your acquisition pipeline look like? You talk about using acquisitions or cash used for acquisitions, how would you characterize it?

Mitch, as you know, we don't comment on what's really going on on the acquisition side, except to say that we're constantly looking at those opportunities. And we are looking all the time, quite candidly. And finding those right things that -- opportunities that can add to our operational base and enhance shareholder value is right on top of mind. We do want to grow into the markets that adjoin ours. So we're -- that's where we're constantly looking and working.

Is it -- would -- I guess I'm more interested to know -- I know acquisitions aren't predictable, but should I be surprised if we did not have an acquisition in 2007? Would it be surprising to you that you wouldn't -- I mean, I know things change. But I'm just trying to get a sense if something -- are there -- will we see a continual one a year, one every 18 month kind of flow? Or -- ?

If you look back since the spin-off of Flowers Foods, we've averaged about one a year, I think, but I couldn't predict that for this year. But history usually is a pretty good guide, so -- I can't comment beyond that.

Okay. Last question is on margins. You had a terrific quarter, and I understand the reasons. Where -- are these peak margins? Are these -- where are these margins relative to where your goals are?

Well, as you know, we've said the past two years our goal is to get to 10% to 13% on EBITDA.

Okay.

We came in, what, at 10.7%, and you'll have some quarters hopefully over the next 18 months, it's better. You might have a few that it could be worse. But we are -- we feel that with our improved operations, with getting our facilities in the right place, with new lines in the right locations, continuing to drive out costs, building our brands and mix, we still think there's margin opportunities.

Okay. All right. Thank you, guys.

Heather Jones, BB&T Capital Markets.

[Brett Hunley] speaking on behalf of Heather. Actually, all my questions have been answered, so I do thank you for your time, but I'll jump back in.

Thank you so much.

Ann Gurkin, Davenport.

Just a couple things. Cost of goods for the year originally I think was forecast up 10%. Have you changed that number?

Not fundamentally. That 10%, Ann, was our -- was not really cost of goods sold in total, it was our major ingredients, our packaging, and our natural gas for the ovens. And that still looks to be in that 10% range.

Okay. And with respect to sweetener pricing, do you anticipate setting contracts in the September-October time frame this year, like what happened last year?

Heather, I'm sorry, I missed the question.

With respect to sweeteners, do you anticipate setting contracts or entering contracts for sweeteners in the September time frame this year? Kind of earlier than historic trends?

Ann, we feel like we are covered -- in pretty good shape on sweetener, and we do have some more to go. Not for this year, but for next year. We also have some coverage for next year already. But, yes, that would be anticipated.

Okay. And then with respect to the pricing, do you anticipate raising prices in the 5% range, or more kind of in the 2% to 3% historic range?

Well, I think what we try to do in the September-October time frame is, if we have in our planning process, which I think we have a great planning process with all of our people and really looking out at what are all of our new costs for next year, commodities and associated costs. And I don't have a handle exactly on that yet, because we haven't gone through the planning process. But what we try to do is in that September-October time frame, look at not only that last quarter, but for most of the next year. So we're not running back to retailers and food service people three or four times a year, we're trying to do it once a year. Sometimes have to do it twice if something really spikes. But -- so it's hard to say until we have a better picture on what '08 costs will be on commodities. But right now, we'd anticipate the 3% range, but I don't know what the cost will be for next year. Could be 5%, depending on what happens to the commodities.

Okay, that's great. That's all I have. Thank you.

(OPERATOR INSTRUCTIONS) David Leibowitz, Burnham.

A few totally unrelated questions. First, when you were talking about snack foods in answer to a prior question, you said the Company doesn't make granola bars. I thought you had acquired a company last year that did, in fact, make granola bars. Did you discontinue that line?

No, David. Let's say it this way, we did have an acquisition last year, Royal Cake Company. We make fruit-type bars, but not the granola-type bars. (inaudible) fruit bars, it would be like apple or a filled fruit bar as opposed to a pure granola bar.

Very fine. Also, your introduction of 100-calorie snack packages in the fourth quarter, can you give us some idea which of your existing products would meet those criteria?

David, you're trying to get me to give away competitive secret information.

Oh, okay.

I'd like to answer that, but I can't.

Would it have the Royal name or Mrs. Freshley?

No, it will be under our present brands, BlueBird and Mrs. Freshley.

Okay. Next, on terms of the route sales, you noted the significant pickup in the first quarter. Are we going to have further pickups the balance of the year?

I don't think so. I think, we -- the Derst routes, we've been roughly a year since we acquired Derst, so we had more sales in the first quarter, as we had the routes structured appropriately and ready to sell at Derst. So I don't think you will see as much of that throughout the balance of the year.

Okay. Also, there was question about acquisitions, and I have a footnote on that one. Is it cheaper to make an acquisition to build a new plant from scratch?

David, it always depends on the situation. We love acquisitions if they can be purchased at the right price, what we think is fair and so forth. Greenfield plants are expensive. But as you recall, what we've been trying to do is build those plants adjoining our territory, so that we can call -- fill half the plant with overflow of business we already have, but expand it out another half territory, which would fill the plant. Either one works. It comes down to who is for sale and what they expect versus what we can build the plant for. And it as always, judgment comes into play and what you're having to pay for the acquisition.

Okay. And lastly, Interstate Bakeries still is in their bankruptcy. When they come out of bankruptcy, whether in truncated form or otherwise, does that become a positive or a negative for you, since you do compete with them in enough territories that you would notice it?

Tough question. IBC has always been a tough competitor in our neighborhood, against our plants, even in bankruptcy they have been strong. They have lost some share, as you see it in IRI. It's no secret. So it's hard to expect what to expect as they come out of bankruptcy. I would expect more of the same, but I can't predict that.

In other words, while in bankruptcy, they're not doing more price cutting or whatever else simply to keep the top line okay, recognizing that when they come out of bankruptcy, their debt situation is so different that they could then move up the price scale or what have you, so that that would be a positive pricing umbrella for everybody?

I think you made a fair statement.

Okay. Thank you very much.

Tim Ramey, D.A. Davidson.

Just back to the route truck expansion, it didn't look like there was a whole lot in this quarter. Should we anticipate, given the new distribution system and the new capacity in place, that you will kind of play catch-up in the latter part of the year? And any way of quantifying what that might look like?

Are you talking about new additional routes?

Yes.

Tim, I'd rather -- that gets back into what new territories we might be moving into. I'd rather not speculate on that. We have great coverage throughout the Southeast, Southwest, so we're not adding a lot of routes in the existing markets. Most of our routes will be in those new territories as we move in and get stronger, and get a better position in the new markets. But I'd rather not tell our competition exactly what we're doing in those markets.

Well, you don't have to tell us where, just how much.

And we don't -- I don't think you will see a substantial difference. I didn't -- it was not my intent to overstate. I was trying to explain the increase in the interest income. There again, that the note receivable balance is slightly higher because we're selling the Derst territories, and then territories that we repurchase and we resell are at slightly higher prices because they're a multiple of the branded sales, and we've increased branded sales both in price and units. And then when you -- you're always trying to get the right route structure in areas like Derst and others. So I don't think you will see a substantially different pattern throughout the year than what you saw in the first quarter.

Okay. And then on the health-oriented product, you mentioned the 100-calorie packs, and the natural products and so on. But I was expecting more over time in like the omega 3 enhanced spreads or other kind of positive health story, rather than just absence of a negative, like the 100-calorie packs. Is there anything more to talk about there, or is that sort of died down a bit?

Well, I think our whole Snack Away is all about the healthier product. I think we do have omega 3 in some of our products, and we have been promoting that. And I think the news for the past 18 months has all been about whole grains, and that's what our all-natural new Nature's Own line is all about, and higher fiber. So we've been doing quite a bit, and I think there's more coming in that direction, to stay competitive and stay ahead of the marketplace, because people are looking for alternatives, and we've got to fill that need.

Great. Thanks a lot.

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

Again, thank you for calling in this morning. Thank you for your continued interest in our Company, and look forward to talking to you next quarter. Thank you.

This concludes today's Flowers Foods first quarter 2007 conference call. You may now disconnect.