Flowers Foods Inc (FLO) 2008 Q1 法說會逐字稿

Greetings and welcome to the Flowers Foods first quarter 2008 earnings conference call and webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Marta Turner, Executive Vice President of Corporate Relations for Flowers Foods. Thank you, Ms. Turner, you may begin.

Thank you and good morning, everyone. Thank you for joining us. On the call today we have George Deese, Chairman of the Board, CEO and President, and Steve Kinsey, Executive Vice President and Chief Financial Officer.

Before we get started with our discussion, I must point out that our presentation may include forward-looking statements about our company's performance. These may include discussion about a number of factors regarding future performance such as earnings per share, net sales, margin, operating profit, interest expense, tax flow, cash flow and other such items. The statements are based on our view of things today, so they may contain some degree of uncertainty. 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 the matters we will discuss during this call, important factors relating to Flowers Foods' business are detailed in our filings with the SEC. George and Steve will discuss our first quarter call, and of course then we will open for your questions. But I do want to point out that our first quarter earnings release was sent this morning and is posted on the website. A separate release was also sent this morning, which is also posted on our website, and in that release we announced several executive appointments, and a new alignment of our operations. You should note that for reporting purposes we will still will share segment information as we previously have, but the names of our segments have changed, and our first quarter release takes that change into consideration. In our earnings release that was put out this morning, the direct store delivery segment was previously called our bakeries group, and the warehouse delivery segment was previously reported as the specialty group. Going forward, our discussions and our filings will refer to DSC or warehouse delivery as our business segment.

Now I'll turn the call over to our Chairman, CEO and President, Mr. George Deese.

Thank you, Marta. Good morning, and thank you for joining our call.

This was a wonderful quarter for Flowers Foods. In our DSC business, our sales were up in every category, and we outperformed the market in each of those areas. Our brand strength was evident. Our bakers performed well, we improved efficiencies and had tighter control of our operating costs. As we have told you before, this year our input costs are significantly higher. Our strategies allowed us to forecast those higher costs and take pricing actions late in 2007. With the price and inflation [since] December, we have not seen consumers react negatively to higher prices for our products.

Before we talk about the details of the first quarter, I want to mention our announcement this morning of several new appointments in the realignment of operations. These changes support our long-term growth. Our team has proven we can deliver growth at the top end above our long-term goal. Part of that growth is from expansion of the territory we serve, [CDSD], part is growth in core markets and some is from acquisitions. The changes we announced put us in even better position to grow the business. The changes also are a continuation of our leadership leadership development, strategy, and management succession plan. It is important to note that individuals in our press release are not new to our company. They are a few members of the team that have delivered good results over time for our shareholders. This aligns our team to perform even more effectively. I have never felt more proud of the Flowers team and our ability to execute our strategies. Marta mentioned that the titles of our segments have changed.

Going forward, we will discuss our DSD business and our warehouse business, and provide segment data in that manner. We believe that it is more descriptive of how we go to market, and how manage our businesses. Now looking at the results we reported for the first quarter. Sales were up 10.9%. Net income increased 25.6%. Earnings per share was up 25.8% to $0.39. EBITDA for the quarter was 11.1% of sales. As you know, our long-term goal for EBITDA has been 10 to 12%. EBITDA for 2007 passed the 10% mark for the first time. It is gratifying to see further improvement in EBITDA in the first quarter of 2008 as we were to improve our efficiencies and control costs throughout the business.

Now, let's look more closely at our operating segments. Sales for the DSD business increased 13.3% in the quarter. EBITDA margin for the DSD segment was 12.8%, reflecting the improvements we are making. For example, in the DSD segment our team achieved about 1 point improvement in our sale returns. In the warehouse segment, sales increased 1.5% as we experienced softer sales to food service customers served by the warehouse segment. EBITDA margin for the warehouse segment was 9.3% for the quarter. We are pleased that even with pressures on the top line growth in the segment, our efforts to sell higher margin products and the improvements we made over the last two years in distribution are paying off.

As a reminder, in our warehouse segment, which we previously reported as the specialty group, we include snack cakes and frozen bakery items that are delivered to customers' warehouses. Our warehouse snack business performed well during the quarter. However, much of the food service business in the warehouse segment goes to casual dining restaurants, where consumption is [trading] down. Also, there were certain key food service customers in our warehouse segment who did not promote items that use our buns and rolls that were promoted heavily a year ago.

In our DSD segment we include food service sales that are delivered fresh to our independent distributors. The majority of food service sales in DSD are to quick-serve or fast-food restaurants. In the quarter, sales to quick-serve customers and other restaurants who serve our DSD segment grew in line with our overall sales growth. On a consolidated basis, increases in DSD sales for quick-serve customers more than offset softer sales to warehouse-delivered customers.

Now for even better news. Sales of our branded retail products were up a robust 13.8% in the quarter. Many of you ask if consumers are trading down to private label products in our DSD fresh baking business. As I mentioned earlier, we have not experienced trade down to private label. Even with the pricing actions we took as our commodity costs increased this year, consumers are not trading down to private label. Across all product categories, our branded products achieved solid growth. Our brands had strong dollar increases as well as unit growth in all categories. Sales of our branded retail products also represented a higher percentage of our total sales in the quarter, a trend that has been ongoing. That demonstrates the power of our Nature's Own, Whitewheat and other brands. Today's consumer wants healthier varieties, flavor choices and the assurance of quality that our brands offer.

Looking at our retail sales by category, our white bread brands, led by Whitewheat and local white bread brands grew 13.8%, which was well ahead of the category. Sales of Nature's Own variety breads in the quarter continued very strong with double-digit growth, well ahead of the soft variety category. As we often remind you, Nature's Own is the best-selling soft variety bread in the country, even though it is only available in a breadth of 38% of the U.S. population territory. Our Nature's Own premium breads continue to experience strong growth. Sales grew in double digits in the quarter, outperforming the premium specialty category. Our brand buns and rolls were also up double digits for the quarter, and performed better than the category. Once again, according to IRI our brands gained share in both dollars and units in the quarter. Our snack cake brands, Mrs. Freshley's and Blue Bird, achieved single-digit growth in the quarter. We continue to shift our focus to branded snack cakes and exit contract production, and it is gratifying to see growth in this category. Our sales of store brand or private label brand buns and rolls also increased in the quarter, due primarily to pricing.

During the quarter, as I mentioned our hedging and forward-buying strategy that helped us forecast our costs continues to pay off. Our team focused on operational improvements to further control our costs, and to increase our efficiencies in the bakeries and in the distribution system. Those improvements, along with pricing, helped cover the higher costs. Our team continues to execute well on our strategies, as you can see from our performance in the last quarter. Late in the quarter, we introduced a new line of breakfast items under the Nature's Own brand. They have been on the market several weeks, and we are pleased so far with the consumers' reaction to Nature's Own bagels, breakfast breads and English muffins. Our team got [started] off though on our new bakery in Bardstown, Kentucky during the quarter. Because of weather delays, we now expect to start up that bakery with one production line in the first quarter of 2009.

Now, Steve will discuss more details about the first quarter. Steve?

Thank you George, and good morning.

As George commented, the first quarter performance was outstanding, despite the commodity and cost headwinds we faced and we will continue to face. I would remind you, however, that our first quarter did a 16-week reporting period. Net income from continuing operations for the quarter improved 25.6% quarter-over-quarter to $35.8 million from $28.4 million. Our operating margin or EBIT for the quarter improved to 8% of sales compared to 7.4% a year ago, up 60 basis points. This growth is attributed to our strong brands, cost management, efficiency improvements and pricing strategy. Earnings per share for the quarter did grow 25.8% year-over-year to $0.39 per share from $0.31 per share in the prior year. Sales growth for the quarter was 10.9%. Pricing and mix contributed approximately 9.5% of the growth, and volume represented 1.4%. For DFD, formerly the bakeries group, sales were up 13.3% for the quarter. Pricing in mix in this segment contributed 10.4% of the growth, and volume was up 2.9%. As George indicated, our Nature's Own brand continues to perform well. Expansion markets were approximately 1.9% of the first quarter sales, contributing about 1% of the sales increase.

For warehouse delivery, formerly the specialty group, sales were up 1.5% quarter-over-quarter, with price and mix contributing 2.8%. However, volume was down 1.3%. Snack cake products performed better in the quarter, while in the food service category, both in casual dining and broad line distribution, and contract manufacturing, both dollars and units were down. The gross margin of 48.3% as a percent of sales in the first quarter was down 140 basis points from the first quarter last year, where it was 49.7%. Though we took pricing to offset planned cost increases, the pricing actions did not maintain gross margin as a percent of sales. As you may recall, the full year 2007 gross margin was approximately 48.9%, and in the fourth quarter of 2007 gross margin was 48.7%. Throughout 2007, we did experience significant pressure on the margin, and we had targeted the 2008 gross margin to be in line with that of the fourth quarter of 2007. However, we are off about 50 basis points.

Looking forward, we will continue to face pressure and remain focused on minimizing the impact on gross margins. With the spike in commodity and energy costs, we are focused more than ever on removing costs and improving efficiencies. Each discipline throughout the company is engaged. The sales force, using our IT infrastructure, is focused on sales forecasting, keeping the right products stocked, and as George mentioned, leading [to stale] reductions. Manufacturing and shipping are focused on various key performance indicators such as damaged product and scrap dough reduction, and we have seen significant efficiency gains in the first quarter based on these indicators. Human resources, they are focused on scheduling and overtime reduction in an effort to reduce labor costs, and corporate more than ever is focused on administrative cost reductions.

Selling, delivery and administrative expense as a precent of sales decreased approximately 37.2% for the quarter, approximately an 180 basis point improvement over the prior year percentage of 39%. The quarter-over-quarter improvement as a percent of sales was driven by increased sales, more employee-related costs, primarily stock-based comp expense reduction, and - as well as lower distribution and marketing costs in the quarter as a percent of sales. Obviously the SD&A costs have not escalated the same rate as commodities and other input costs. It also shows that we continue to benefit from the distribution and production rationalization we began a year or so ago, minimizing the miles required to move product. The full year 2007 SD&A costs were approximately 38.7% of sales, so the trend on a percentage basis continues to be favorable. Depreciation and amortization as a percent of sales was relatively stable quarter-over-quarter. The increase in net interest income for the first quarter is due to lower debt service, and an increase in interest income on distributor notes as a result of the sale of the our [Durst] territory and the northern Virginia expansion in 2007. The first quarter tax rate of 35.7% does reflect the slight benefit from a discrete item. The full year 2008 rate, however, is estimated to be approximately 36%.

Our balance sheet continues to remain strong. At the end of the quarter, we had no borrowings on our credit facility. During the first quarter, we funded approximately $23 million in capital expenditures, $11.5 million in dividends, and repurchased $5.8 million of the company's stock. Cash flow remains strong, providing us with the liquidity and leverage to pursue acquisitions opportunistically, buy stock, pay dividends. Basically, we will continue to hold steadfast in our cash usage philosophy.

Turning to 2008 guidance. As you see, we have updated our 2008 guidance based on the first quarter performance and targeted remaining performance. As a reminder, 2008 is a 53-week year for us based on our fiscal calendar. As most of you are aware, we had fully covered our major ingredient costs based on current volume entering the year. The majority of our costs are known for the year, with some variability remaining in energy and certain non-key ingredients. Input costs are estimated to be up approximately 21% fiscal 2008 over 2007. We have, however, continued to execute on our strategies of hedging and forward-buying.

We have increased our 2008 sales projection, excluding any acquisitions, to $2.22 billion to $2.271 billion, roughly a 9% to 11.5% increase over fiscal 2007. Price and mix are expected to provide 7 to 8% of the increase; volume, 1 to 1.5%; and the 53rd week will be 1.5 to 1.6% of the increase. Net income is now expected to be 4.8% to 5% of sales, or $106.6 million to $113.6 million. Given the approximately 92.5 million average shares outstanding, this equates to an expected earnings per share of $1.15 to $1.23, a healthy increase of 12.7% to 20.6% over 2007. The 2008 capital spend remains unchanged, and is estimated to be $95 million to $100 million. This will include our normal maintenance spend, as well as construction of our Kentucky facility. This does not, however, include equipment that may be required on operating leases for new production lines at existing or new facilities. As you are aware, we do not forecast share repurchases or dividends.

To sum it up, the first quarter results were outstanding. As we move through 2008, we still face tremendous cost pressure year-over-year. As George mentioned ,we will face our greatest commodity pressure for the year in the second quarter, with summary lease in the back half. Our 2008 guidance, however, takes this into consideration. With the exception of food service and casual dining, we have not seen any indication of a trend to trade down in the bakery category. However, the impact of the global and U.S. economy on the American consumer remains a concern. The discretionary spend of the consumer we feel is definitely being squeezed by rising prices. However, we are still very encouraged about our 2008 performance.

With that, I will turn it back to George.

Thanks, Steve.

Our team delivered outstanding results in the quarter, as you've heard. Now, we're focused on achieving the same going for the remainder of the year. I told you on our last call that we've stated our costs for ingredients, packaging and natural gas to increase roughly $130 million year-over-year or roughly 22%. We now expect our costs for 2008 will be about $126 million or 21% higher than last year. That improvement of about $4 million is due to the coverage we have now taken for the back half on items that were outstanding when we last spoke to you. This change is reflected in the updated guidance that we gave you today.

It is important to note that a large percentage of our increased costs for this year will fall in the second quarter. As Steve mentioned, our updated guidance takes into consideration our good performance in the first quarter and recognizes that during the second quarter we will experience the most difficult spikes in input costs. We will continue to assess the need for further pricing as the year unfolds.

To sum up our expectations for this year versus last year, we will continue making improvements in our selling, marketing, and administrative costs. Pricing and a positive mix shift should add 7 to 8%. We expect 1% growth in volume, the 53rd week will add roughly a 1.5 to 1.6% increase. Our cash flow remains strong. We continue to invest in capital improvements, dividends to our shareholders, strategic acquisitions, and continue to repurchase Flowers stock. Our strong cash flow and credit facilities position us well to take advantage of growth opportunities that may arise. We are fortunate that consumers buy bakery products in good times as well as more difficult times. Our products are a good value, and they deliver the flavor, variety, and quality consumers demand.

We believe we are well positioned to deliver good results for the remainder of 2008 and beyond. Our team can and will improve our efficiencies even further going forward. Our business model is right, our strategies are proven, our team is experienced and focused as we work to build value over the long term.

Now Steve and I will take your questions.

Thank you. We will now be conducting a question-and-answer session.

(OPERATOR INSTRUCTIONS)

Our first question comes from Eric Katzman with Deutsche Bank. Please state your question.

Good morning, Eric.

Hi, good morning, everybody. Congratulations on another great quarter.

Thank you, sir.

I guess my first question has to do with your comments about the consumer and the lack of -- or absence of trade-down, at least as far as you can see. I guess, George, maybe you can comment on why you think that is, given the obvious pressure that the consumer is under? Is it a function of the health or ethnic or other marketing initiatives that you're pushing through in terms of the product line?

Okay, that is a great question, considering everything you hear on the news. And as you look at it, as I look at it, we're so pleased that we're not just living on basic products that we had years ago. We have been been very innovative in giving more variety, higher quality, better for you-type products. If you look at the category as a whole, in the South the overall category was down on packaged bread, flat to down 1% on units, pricing was up roughly between 7 and 8%. But I think Flowers has been, again, very innovative, and so has the rest of the industry, to have better for you-type products, and I think that is the result that we're seeing today.

So in essence, while the consumer is under pressure, if the product line is viewed as kind of giving a noticeable benefit, they're willing to pay up for that?

That's what we see so far.

Okay. And then next question has to do with the realignment and some of the changes in, I guess, reporting and management responsibility. Obviously, fundamentals are quite good. Maybe there's some questions about, you know, whether this change could actually disrupt that, but my other question has to do with - are there any, you know, cost savings or other efficiency gains that you see from these -- the changing alignment?

Eric, that's a great question. Number one, let me say that this was really thought out, not just overnight but for a long period of time. We feel that this will improve the efficiencies at the bakery level and at the marketplace level. We think the end result, we'll be more efficient. In turn, I think we'll continue to grow sales volume in the future as we have in the past. I think more focus - because now everything will be under the Flowers Bakeries organization, I think we'll have more focus between all the teams on driving. As we said, fast-food, the restaurant customers can get their products either DSD or warehouse delivered, and nobody else basically in the industry can do that as well as we can.

But I just think it brings the whole team together. We've got a wonderful team. I'm extremely proud of the organization. I think these moves did recognize some key individuals who have been with the company a long time who have delivered wonderful results. I've been a part of the strategy that has been developed, and if you think back, we have not changed the organization basically since we sold Mrs. Smith, and if you look back, we were roughly $1.4 billion at the time. Today we're looking at - this year, as Steve indicated, 2.2 to $2.27 billion. So we have had a lot of growth. We have expanded territories. It does put us in a better position to, we think, even move faster as a company and be more efficient.

Okay. Thank you. I will pass it on.

Thank you, Eric.

Our next question comes from Heather Jones with BB&T Capital Markets. Please state your question.

Good morning. Congratulations.

Thank you, Heather.

I have a few questions. Was wondering, the expense leverage for the quarter was very good, and was just wondering how sustainable that is? I mean, I know you mentioned leveraging DSD costs, benefits of rationalized distribution, but I think year-on-year was down roughly 180 BIPS. Is that kind of leverage sustainable?

If you look back over the past two or three years, you've seen that lever getting stronger and stronger. I feel that - if you remember, what we've talked about several times is trying to make sure that we have our manufacturing production lines where the mass of the people are, and that's why we built a new plant in Newton. That's why we're planning another plant in one of our core markets, where a lot of the population bases are. So - and as we continue with better information systems and logistics in total, we are just doing a better job from plant to the consumer, in all aspects of that cost structure. So is it sustainable? I feel that we will continue on this road. Whether it goes down that much more, I will not predict, but I do feel that where we're at now, as sales continue to grow, that we can sustain the trend that we're on.

Okay.

Steve, you want to add to that?

Heather, I would comment that in the quarter our stock-based comp went down significantly. You may recall last year we had a stock appreciation right that matured in July. With stock appreciation rights, there's a lot more variability than some of the other stock-based compensation, so we had a run-up in stock in the first half last year, we did have significant expense that we will not have this year, so that will play a part in SD&A.

Q1 and Q2?

Right, Q1 and Q2. It will not be there - you know, that benefit will not be there in the back half. And then also we did move, I believe, some marketing expense out of the first quarter to the back half, and I think you may see an uptick in that with the new product introduction of the breakfast line. So it's hard to predict exactly what the effect will have as a percent of sales, but there will be a little more pressure in the back half than the front.

Okay. So you moved some marketing spending out of the first half into the second half in anticipation of the breakfast introduction?

Correct.

Okay, so we'll likely see leverage but your point is, it's likely not going to be 180 basis points magnitude in the back half?

No, I would not think so. That's right.

Okay. And as far as your comments on Q2 being the most difficult, are you indicating it's going to be a more difficult comparison than even Q1, or just the remaining three quarters, Q2 will be the most difficult?

As we look at the four quarters, Q2 is the most difficult as far as the spike in our commodity costs.

Okay. And do you feel like you have enough pricing in place to generate year-on-year growth, or could EPS be potentially down year-on-year in Q2?

No, we feel like pricing is in place. Again, our guidance is for the year. I just repeat one more time, we just have a spike for the second quarter on the commodities compared to Q1, 3, and 4.

Okay. My final question is on specialty. I was wondering what is going on, I know for awhile there, there was a purposeful reduction in volumes away from less profitable customers. I was wondering, is that still what's contributing to the volume decline? And secondly, the price mix there wasn't up as much as I would have anticipated, and I was wondering if - will you be taking further pricing action in that segment this year? Just if you could speak to that?

We have taken some more pricing in the first quarter on the food service side, and on the snack side. Not a major amount, but an increase. Volume, as I've indicated, though, was hurt by some customers who really promoted strong first quarter last year and did not promote this year, and that does make a difference. Also I would like to say that we did close our Atlanta pet plant in the first quarter, end of the first quarter, and Steve, I think the cost on that did hit the first quarter for about $400,000 or so?

Right.

And that was a part of the ongoing rationalization of our co-packing business. That's pretty well the end of what we'll see going forward. That will be, I think, the last point that we'll be talking about discontinuing -- not discontinuing, that's the wrong way to put it. But it's all been about margins and trying to increase our branded sales, and this pretty well completes that process.

Okay. All right, thank you. Congratulations again.

Thank you, Heather.

Our next question comes from Tim Ramey with D.A. Davidson. Please state your question.

Good morning and congratulations.

Good morning, Tim. How are you?

I'm good, thank you. Hey, I was very impressed by one of the things you said earlier in the call, which was you achieved a one percentage point improvement in returns, which is a hard thing to do and I assume had some pretty profound impact on margins. Can you talk a little bit about how that occurred? Last time people were saying that it was extended shelf life, and I doubt it's that?

No, rest assured it's not extended shelf life. I would -- I'm going to give our team all the credit in the world. As we focused on knowing that we were taking on absorbent costs for '08, as compared to '07 and commodities and all costs, the team really put together a plan to reduce -- go after efficiencies in the plants, as far as waste. They really went to work on waste in the marketplace, excess sales and trying to sell the right product in the right store at the right day at the right price, and my congratulations to the team for achieving that. It was just a hard-nosed focused equation that - in using our technology and information to make sure that happened, and it worked well.

You think that's the start of a trend or a one-time benefit, or how should we characterize that?

Tim, I always feel that we can do better in distribution. Information systems are wonderful; what we do not know sometimes is what the shopping pattern is from store to store, but we have wonderful information that has been put together by our information technology group, and I'm not going to say it's a trend from here on, I just feel like we can do a better job of distribution in general, though, and that shows that when you make up your mind because of high costs you can do things that you might not have thought possible.

Just a follow-up on an earlier question. It seems to me that the realignment, you know, puts everything that's on the truck in one reporting structure. I guess it's obvious. But it wasn't before, and that seems like it would give somebody greater management control and maybe someone, you know, a better ability to fine-tune what's going on the truck. Should we expect the realignment to create some efficiencies, in that everything that's on that truck now reports to one person?

Let me correct one word -- one way you've stated that. Everything is not on one truck. We still have two ways to the market. DSD is one system, and the warehouse delivery will stay in place. Two segments, but it all reports in to one head, and all of it is in one organization. And I think you're absolutely right, I think over time we will gain synergies, we will be more efficient and be closer to our customers than ever before. But it will still be two distribution systems.

No, I understand that.

But thank you for pointing that out, because I fully believe that's the case.

Thanks so much.

Thank you, Tim.

Our next question comes from Farha Aslam with Stephens Inc. Please state your question.

Good morning. Congratulations as well.

Thank you so much.

Could you just focus on the bigger picture opportunities for Flowers? You've been opening bakeries. Could you just remind us about how much a bakery costs, how much sales a standard bakery adds, and how much EBIT that would add?

One at a time. Let's go back to what does a bakery cost. In today's world, basically a bread line and one bun line, building, land, et cetera, total cost would range from 55 to $60 million. As you will recall, normally we would go with operating leases on the major equipment lines, still money going out the door, money being spent, but some of it is capital and some would be under operating expense. In the main, an average bakery will average in the neighborhood of $50 to 60 million in sales. And if you look at our average, we had 8% EBIT for the quarter. So if you can use that as an average - of course, the first day you open up the bakery you will not have $60 million in sales or the 8%. It does take time to ramp up. But I would be happy to say that we've certainly found evidence of that in our Denton plant, in our newest plant in Newton that is certainly the case, and as we put a new line in Villa Rica that has certainly been the case, probably even better because the overhead was already in place in that particular plant. So we are excited about growth opportunities, and as we build another plant in one of our core markets, and begin to push out like we are in the Kentucky plant to serve new markets and be more efficient and effective getting to those markets, we're excited about it.

And about how long would it take a Kentucky-type plant to reach maturity, that 50 to $60 million in sales and sort of roughly corporate average?

Yes, I would think in terms of the latter part of two years, early third we should have that plant pretty well in -- on average with the rest of our operation.

Okay. And then you said you are opening up a plant near core markets. I'm sory if I've missed that. Where is that located?

We've not announced that yet. What we've said I think for -- we said last quarter, and I think even the quarter before, that we do need some more capacity, and we're looking at a certain area, and hopefully we'll be able to announce that in the near future.

Okay. And that would be, again, similar size and scale of what we've been seeing in your Newton or else your Kentucky bakery?

Yes, it would.

Okay. And so that ramp-up time would be much faster, maybe a year or so, right? Almost half?

You're talking about as far as getting up to an average?

Uh-huh.

Are you putting pressure on us, Farha?

Not a [indiscernible].

[Laughter] I would say a two-year project.

And then, you've been historically, you've said, targeting opening bakeries every 18 months, but recently you seem to be announcing bakeries a little bit faster. Kind of what is the rate of new bakery builds are you targeting, and how does that balance out with your acquisition strategy?

Well, I would still stick to our previous statement, even though we're announcing we're still thinking in terms of until we see that we have gone -- are up to where we need to be. I still think every 18 months is the accurate way to look at it. What was the second follow-up question, I'm sorry?

How do you balance new bakery builds versus acquisitions?

Oh, versus acquisitions. Well, in -- we've always looked at acquisitions to grow the company. I think due to the change in the marketplace, due to the customer consolidation, we have been able to look at it different. 30 years ago, customers -- the customers were not as large as they are today, and the consolidation was not there, so when you went to a new market you had to start all over with customers did you not know. Today with the consolidation of the mass merchandisers and the consolidation in the food -- the fast-food business and the food service business, those customers in those 200-mile boundaries that we keep talking about in our territory know Flowers well. We serve them in the Southeast and Southwest. I think we have a wonderful reputation, with one that is quality service, great execution. So they're looking for alternatives, and we're trying to fill that niche.

And George, historically Flowers has been a consolidator of the small family-owned operators. But recently you haven't made those acquisitions, and I would imagine with high wheat costs there would be a lot of businesses up for sale?

Of course, I can't comment on what we're doing on the acquisition front. We always have our hook in the water, so we're out there. But coming back, I want to follow back up on the original question, though, do you go greenfield plants or do go acquisition. It all depends. It depends on how well the bakery that might be available, how well it's performing, does it meet our target of improving our operations, and then can we find a way to bring it in that fits financially? If all those work, we'd rather go most times with the acquisition, but sometimes that does not work and we just to have go ahead with our greenfield plant.

Okay. And my final question is on wheat costs and kind of commodity costs overall. Wheat costs have been coming down recently. You have been hedged on '08. Could you talk about your coverage going out further in '09, and how you're thinking about your commodity basket overall?

Our strategy is in place. We are always trying to look out six to nine months. Obviously nine months will not go into '09. We're just not -- because '09 is so uncertain at this point, we'd rather not talk about anything in '09 at this point. I would like to go back and say '08, as you well know, and Steve said that we we're covered, we feel great about the back half. The second quarter will be tougher year-over-year with -- that's the peak of our costs, but we had the opportunity last week to go out to the wheat country and look at the wheat market, and being raised on a farm, to me the wheat market looked good. Green, most of it, especially in southern Kansas, had proper rain. The Western part might be suspect. But you are right, wheat is down from those historic highs of a few months ago. But I think it's too early to start predicting what will happen to the '09 crop, because it's not planted, obviously, yet, and we don't know what will be planted, but hopefully things could moderate some. Hopefully we don't see another uptick from where it is today, but only time will tell.

Okay, thank you for your comments.

Thank you so much, Farha.

Our next question comes from Diane Geissler with Merrill Lynch. Please state your question.

Good morning. Congratulations.

Thank you.

Congratulations to you.

Oh, thank you very much. A question for you on soaring fuel prices for the DSD. I know in the past, you know, price increases that you've taken on your bread line have offset that. Now we've seen, obviously, sort of unprecedented moves there on the - for the drivers. Could you comment a little bit, are you fully offsetting that with your price increases, and what are you hearing back from your drivers?

I'm happy to say with the way sales have increased and the margins that they make on our product, on average goes way above and beyond anything to do with gas costs. Even though I'm concerned about it, if I look at the first quarter's cost to our distributors, we know that the second quarter things are escalating, but so are sales continuing to outperform. So we still feel good about it. I hate to see these [exorbitant] prices for any of us, and particularly for our distributors. We're doing all we can do to help them drive sales into the marketplace to help offset this. You might be interested to know that according to our average distributor, they have about 340 miles a week. If you look at eight miles to the gallon, we're talking 30 or 40 gallons of gas. Sometimes I think some of us think they might be using 100, 200 gallons a week, but on average that's really not the case. It's pretty minor in the big scheme of things. It's major to the person, and I never take that for granted. But when you talk about maybe 30, 40 gallons a week, it's not like it's a 200 or 300-gallon spend per week.

Thank you. Good color there on the driver level. I guess just to circle back around with the commodities in 2009, just maybe philosophically, not trying to get into where you are, et cetera, but if you expected, based on your market intelligence, that wheat was coming down even further, I know traditionally you want to know what your costs are and you're willing to go forward into a market even if prices are very high, because you want to have the certainty, but if you had fairly good market intelligence that wheat was going to correct even further, would that alter how you might normally place your hedges?

It could somewhat. Instead of being -- if we saw intelligence that it would come down, we would certainly not go out a year now, we would throttle back somewhat. That is our strategy. We want to be hedged, but we can either be hedged short term or long term based on the intelligence that we feel like we do have. Again, the strategy is in place to always try to be covered six to nine months, but that could be flexible based on intelligence.

Okay, terrific. I guess no shares were purchased in the quarter, is that right?

About $5.9 million, $5.8 million in the quarter.

I'm sorry, I didn't hear that.

We spent about 5.9 million in the quarter on share repurchases.

Okay. And what is remaining on your authorization?

If you remember, the Board reauthorized I believe last Board meeting, so we have roughly 10 million shares left that we could purchase.

Okay. Perfect. Thank you.

Thank you, Diane.

Our next question comes from Ann Gurkin with Davenport. Please state your question.

Good morning. I want to follow on a comment you said that as you -- you will continue to assess needs for pricing as the year unfolds. What would trigger the need for increased pricing?

Fuel for our transports could be a reason. Diesel fuel is up tremendously as compared to when we put in our plan for the year. That could depend on what happens there. Of course, these other costs that go up. But in the main, as we look at next year's plan, '09 plan, we would begin to make decisions based on what we thought the cost was looking like in, say, October, as we look at the year ahead and, you know, we try to get out in front. We don't want to be behind. We try to be at least equal or a little out in front of what we expect to happen, and make those decisions and do what we feel like is necessary.

Okay. Are you in any partnerships for brand development for Wal-Mart, the Wal-Mart segment?

Ann, I didn't get the question, I'm sorry?

Are you in any brand development strategies with Wal-Mart right now?

We've always had a strategy with all of our customers but nothing different or -- than where we've been.

Okay. And then last, in the press release you talked about lower advertising costs as a percentage of sales in the quarter. Can I get some more color behind that statement?

I would say this. We talk about - a lot of food companies talk about mapped spending. Our total spend, I think, as Steve indicated, was down roughly $2 million. Our promotion spend, though, was even to up slightly from last year. We continue to see how do we best spend our dollars. That's why I mentioned earlier about strategies with each customer. The more we can do with off-rack displays, special displays in the supermarket, great point of sale, so spending can change based on a promotion this year that we didn't have last year and vice versa. I don't think we did anything to try to save costs on that issue. It's a matter of when we have new things to come out or new products or special promotions, and we spend appropriately.

Great. That's all I have left. Thank you very much.

Thank you.

Our next question comes from Mitchell Pinheiro with Janney Montgomery Scott. Please state your question.

Good morning. Most of my questions have been asked and answered. I have a couple of odd things here. One, when I look at your guidance, the low end of the range, you look at the last three-quarters, and taking into account the extra week, the low end of the range would suggest a back three-quarters of maybe 3% EPS growth, if my math is correct, or certainly, you know, mid-single digit, maybe half were well less than half of your current rate. What is your thinking on the low end of the range? What keeps that down there? What would cause you to hit the low end of the range?

Well, we increased the range. We raised our guidance today.

Yes, but $1.15, you know, when I look at the back half - maybe my math is wrong, but I was looking at $1.15 would suggest $0.76 for '08 versus $0.71 for '09.

Mitch, what I would say, then I'll let Steve jump in, we did say the second quarter repeatedly was a more difficult spike in commodities. I would say that. I did say earlier the third and fourth quarter we had a better buy and saved some commodity dollars on that. I also, though, would say even though we feel so great about the consumer, we know based on everything we read and see and hear from other people, especially the news on television, indicates that something is going on with the consumer. So we put a range out there that we feel comfortable with, and we just look at that each quarter.

Okay. So the bottom end of the range is mostly the unknown as to, you know, how the consumer will react in the current economic environment?

That is built in. But Steve, would you like to follow up on that?

I would agree with George, there's still a lot of uncertainty in the economy with the rising prices, whether it's fuel or food inflation. So, you know, I think the bottom end of the range takes that into consideration, and the growth really is more about high single digit growth rather than 3% for the bottom end.

Okay.

I think you're on point, it's really consumer-focused and how the economy affects the consumer.

Okay. Then if I take -- looking at the second quarter, so I mean, you haven't given guidance specifically on the second quarter, but does the toughest commodity quarter for you mean that, you know, are we going to see a down quarter in Q2? Is that -- how do we -- how do I think about Q2 as far as being the most difficult of the remaining three?

We don't give quarterly guidance, Mitch, as you know, but we still feel comfortable that we will not be down for the quarter.

Okay, thank you. In terms of -- I think you said $126 million of higher input costs in '08 versus '07. Is that the right number?

Yes, sir.

Is there a way -- can you sort of break that down a little bit, energy versus the other raw materials? Roughly, I mean.

Steve, I don't have that. I don't know if you've got anything to -- We typically do not give that detailed information. I don't know if we have -- if we have the - right here available, we might be able to do it offline, unless Steve has it available right quick, like?

I would say the majority of that is going to be with ingredients, roughly. I've got it right here in front of us. Roughly $110 million or so is that would be tied to ingredients.

Okay, great. The barge town, the delay, does that have any impact on your operations?

No. We're running, like I said, 60 to 90 days later than we thought [for], but it will not have a real adverse situation for the company.

Okay. Did Suwanee, the purchase of the facility, did that have any impact on the first quarter?

No, it did not.

Okay. And then final question, how long have the breakfast breads been in the marketplace?

We went on about the last week in the quarter, maybe a week prior to that in test markets, but -- not test markets, but we did go a little early in one of our regions. So it's early on, as I indicated, but way too early to make a prediction. We're happy though with the - to see the sell-off that we are having.

Would that have an impact -- that would probably have a negative impact on your sell rate in Q2?

It could slightly, but I don't think it would be a major event.

Okay. Last question is in sales, looking at your sales by channel. With your strong double-digit growth, was there any -- any differences among grocery mass discounters, [C] store, any differences there as far as how your growth broke down?

The best I remember, Mitch, and I think I'm correct when I say this, we had great growth in all channels, normal supermarkets as well as mass merchandisers. You read that maybe the mass merchandisers pick up business when the economy is tougher, but all of our grocers had good growth -- or we had good growth with the grocer for the first quarter. It wasn't just in one or two places.

Okay. Thank you very much.

Thank you, Mitch.

Thank you.

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Our next question comes from David Lebowitz with Vernon Securities. Please state your question.

Good morning.

Good morning, David.

Normally when things are going good, you always look over your shoulder and ask what can go wrong. At this juncture, where are your biggest concerns?

I think I stated awhile ago when Mitch asked the question about the lower range versus the higher range, I think the unknown would be what does happen in the economy in the United States and around the world. And it is a world economy, as we all know, that affects energy and commodities. What goes on affects us. And there's so much news out there about where the economy is headed; I'm certainly not an economist. I hope I'm a good bread man, but, you know, we're focused on that. We're not losing sleep over it, but we just stay keenly aware, spending time in the supermarkets, watching the customer to see what they're doing. And so far, that would be my biggest concern today, David, is will there be a huge shift in the future, which we do not see yet, but based on all the news we're staying tuned for it.

Secondly, with your largest competitor still in bankruptcy, is that changing the competitive arena in any way that is noticeable to you?

David, I'd say that it was more noticeable two or three years ago as several plants were closed in our geographic market. That did give us some lift. But, you know, all that seems to be -- everything is sort of back to a norm, I would say now those plants were closed and what customers go in different places, all of that has leveled out. I'd say that is more of a level basis now, so I don't see a lot of big change right this minute.

And last question, if I may, the introduction of your 100-calorie packs, have you increased the number of offerings, and in how many brands do you have the offerings?

We have expanded to a snack pack. As you remember, it was strictly in the multipack for basically supermarkets. We're just in the process of going to the convenience stores with single serves. We think that will give us a lift, and give those people who -- consumers who are just going to the convenience stores to have an opportunity to buy a better-for-you type product. But that's way too early to predict. I think we have some seven or eight varieties, and they change. If we see one's slow, we want to come out with another one that we think might sell better. So that would be ongoing until we get just the right product mix, that we feel like should serve the consumer well.

Thank you very much.

Thank you, David.

Our next question comes from Vivian Lin with UBS Global Asset Management. Please state your question.

Hi, good morning.

Good morning.

I have a couple of questions. First of all, for your pricing mix up this quarter, can you just break it down roughly how much due to pricing, how much due to mix?

Vivian, I'm sorry, we do not break it down. We just put it together as price mix.

I mean, is pricing the majority part of it?

Yes.

Okay. And the second question, how are the contracts with your distributors structured, in the sense that - because I wonder, under the current high gas price environment, do you have to restructure your contracts with them to reflect their increased cost structure? Otherwise their margin will be like relatively squeezed? So can you just talk about that a little bit?

This model has been in place for a long time, and you do see swings given different times, but in the main our contract has been in place and has not changed significantly in any way. But we - that was taken into consideration when we went to this program. Going back to -- and somebody else asked the question about the squeeze on our distributor. Let me repeat again, the average - and you get in trouble with averages. Number one, I am concerned that our distributors do not get squeezed, and we're working very hard to make sure that we drive -- that we're continuing to drive sales by helping those distributors on the income side so that they can more than offset the cost in gasoline.

Okay. So those contracts are pretty much fixed for some time, and you don't have to, like, renew or restructure for a certain period of time, because I wonder whether -- up to that point, whether your cost structure would be different than before?

No, it's ongoing.

Okay. And the other things that you mentioned, you haven't seemed to trade down in fact in the bread category. Do you think it's going to be the case for the rest of the year, if the costs continue to stay high? Or you potentially have to position yourself, if the trade-downs start to happen?

As I -- both Steve and I both have indicated we have not seen any trade-down. In fact, we've seen the same trend continue. Private label was down again on units, up on dollars because of price increases in the marketplace. If there was some huge trade-down, we'd adjust to it, whatever adjustments we'd have to make, but we don't see that right now.

Okay. Thank you.

Our next question comes from Eric Katzman with Deutsche Bank. Please state your question.

Thanks for taking the follow-up. Kind of a quick, I guess, question on IBC. Yes, it's kind of maybe flattened out to the extent that their business is kind of being maintained in Chapter 11, but what are you hearing - if you're willing to comment, what are you hearing from retailers as to concern as to whether that company may be forced into Chapter 7, given the credit problems and input costs? And how do you prepare, how does the industry prepare for that amount of volume potentially not being on the shelf?

Eric, that's a tough question. Obviously we don't --

I give you the tough ones.

Obviously we don't know any more than you do about what's going on at Interstate. Do we have some customers concerned that they will not be on the shelf one day? I have not heard that directly. I'm sure that -- I say I'm sure, I don't know. I would think, though, that Interstate people are continuing to see those customers, trying to assure them that they will have products and services. But I think back to what is Flowers doing to prepare, I think part of our strategy is continuing to grow our production lines, put in facilities where we think we'd be vulnerable if that did happen. I'm not sure what the rest of the industry is doing, but we are trying to prepare in case something does happen drastically to them. That's hard to anticipate that that would happen or they sell the business or break it up.

Okay. Thank you.

Thank you, Eric.

Thank you. Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to Mr. Deese for closing comments.

Thank you, sir. Again, thank you for your patience today and listening to our story. We think we have a wonderful story, and real proud of our team, and look forward to talking to you at the next earnings call. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.