Flowers Foods Inc (FLO) 2008 Q2 法說會逐字稿

Greetings and welcome to the Flowers Foods second quarter 2008 earnings conference call ad web cast. At this time, all participants are in a listen-only mode. A brief 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 Jones Turner, Executive Vice President of Corporate Relations for Flowers Foods. Thank you, Ms. Jones Turner. You may now begin.

Thanks, Doug. And good morning, everyone. Thank you for joining us. On the call with me today are George Deese, our Chairman of the Board, Chief Executive Officer and President, as well as Steve Kinsey, Executive Vice President and Chief Financial Officer. We'll discuss our second quarter results, our earnings guidance and also update you on operations and our recent merger and acquisition and then we'll open our call for your questions. But before we get started I must point out that our presentation today 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 rate, cash flow, and other such items. These 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 matters that we'll talk about during the call, important factors relating to Flowers Foods business are detailed more fully in our filings with the SEC. Now, I'm pleased to turn our call over to our Chairman, CEO, and President, George Deese.

Thank you, Marta. Good morning. Thank you for joining our call. Before we get started with the discussion of the second quarter let me welcome two new teams to Flowers Foods. As you know, we've recently finalized our merger with Wholesome's Bakery in Phoenix as well as our acquisition of Buttercrust Bakery in Lakeland, Florida. I want to say how pleased we are to welcome these two companies to FLowers. The Wholesome merger brings about $150 million in annual sales. Two efficient bakeries, excellent products and brands, and a very talented team. Wholesome also fits well with our growth strategy of expanding into new geographic territories, bringing us access to new markets in Arizona, New Mexico, Nevada, and Southern California. Buttercrust brings $70 million in annual sales, a very good manufacturing facility, great products, and a talented team. The Lakeland Bakery also addresses our need for additional production capacity in the fast growing Florida market. Both Wholesome and Buttercrust operate profitably and we expect synergies over time. Steve will give you updated guidance that takes the merger and acquisition into account. Let me say once more, we are very pleased to have these two fine companies joining Flowers Foods.

Turning to our second quarter results, we exceeded our internal sales and earnings plans for the quarter. I am pleased with the results we delivered, especially when you take into consideration that during the quarter we had our steepest commodity cost increases for the year. You will remember that we told you the second quarter would be impacted by those steep increases and we also told you to expect some leveling of commodity costs in the back half of the year. During the second quarter, our products, our bakeries, our team, performed well in spite of challenging costs. We continued our efforts to improve our efficiencies and reduced our operating costs. Looking at the results for the second quarter. Sales were up 13.1% driven by pricing and good unit growth. Net income increased 8% even with the highest commodity costs [hitting] during the quarter. Earnings per share was up 8.3%. EBITDA for the quarter was 9.7% of sales impacted by the higher costs.

Looking at our sales categories, our branded retail sales were up 15.8% in the quarter, delivering this strong dollar growth as well as unit growth shows that Flowers sales are strong despite current economic trends. Across all product categories our branded products achieved solid growth, once again sales of our branded retail products represented a higher percentage of our total sales in the quarter. That shows the strength of our Nature's Own, white wheat, and other regional brands. Once again, according to IRI, our brands gained share in both dollars and units in the quarter and we outperformed the fresh packaged breads category as a whole.

Looking at our retail sales by category, our white bread brands led by white wheat and local bread brands grew double digits which was well ahead of the category. In the soft variety category we had double-digit sales growth and units were also up showing the strength of Nature's Own brand. Our Nature's Own all-natural breads also showed growth in the quarter. Our newest entry, Nature's Own breakfast products, also outperformed the category. Our brand of bread, buns and rolls were up in double digits for the quarter and performed better than the category. Our snack cake brands also achieved double-digit growth in the quarter. Our sales of store brands our private label bread, buns and rolls also increased in the quarter due primarily to pricing. Private label did have a slight uptick in the fresh packaged bread category. So, let me point out again that Flowers brands outperformed the category and also outpaced private label in terms of growth.

In summary for the quarter, we reopened our bakery in Arkansas to add capacity. We needed a sales of Nature's Own premium specialty breads continued to grow. As we announced earlier we closed the snack plant in the Atlanta area. We made progress on the new Bakery in Bardstown, Kentucky, which we expect to open in the first quarter of '09. Our Nature's Own breakfast line, which was introduced in the late Spring, gained good consumer acceptance. Of course I have already mentioned the addition of Wholesome and Buttercrust and the opportunities those new companies brings to us. The second quarter was by any measure eventful for our company. We are pleased to deliver good results in a different -- in a difficult commodity environment. That was possible because our team stayed focused on our strategies and outperformed in the marketplace. Now I will ask Steve Kinsey to give you a more detailed report for the quarter.

Thank you, George, and good morning. The second performance was good, meeting our internally established targets even in the face of our steepest input cost increase for the year. Net income for the quarter improved roughly 8% to $23.9 million from $22.2 million. Year to date, net income was up 17.9% compared to the same period a year ago. Our operating margin, or EBIT, as a percent of sales for the quarter declined approximately 50 basis points to 6.7% of sales compared to 7.2% a year ago, as a result of pressure from the ingredient cost increases. The EBIT margin for the first half, however, was up slightly at 7.4% compared to 7.3% of sales for the same period last year. Diluted earnings per share for the quarter grew 8.3% quarter over quarter to $0.26 per share. Earnings per share for the first half was up 18.2% over the prior year at $0.65 per share. Sales growth for the quarter was 13.1%. Pricing and mix contributed 10.9% of the growth and volume represented 2.2% of the growth. The direct store delivery group sales were up 14.1% for the quarter. Price and mix contributed 12.1% of that segment's growth, and DFD volume was up 2%. Expansion markets in the quarter added approximately 1% of the sales growth. Our brands performed well in the quarter generating strong volume growth. Our warehouse delivery group sales were up 9.1% quarter over quarter with price and mix contributing 6.3% and volume 2.8%. Snack cake products performed well in the quarter while we continued to experience softness in certain segments of the food service category, primarily casual dining and broad line distribution.

Year to date, sales were up 11.9% to $1.22 billion over the $1.09 billion that compared to the first half of '07. The year to date increase was achieved through favorable pricing and mix of 10.2% and volume increases of 1.7%. The gross margin, as a percent of sales, was significantly impacted in the quarter, down approximately 300 basis points from 45.7% compared to 48.7% in the second quarter last year as a percent of sales. As we commented on our last call our ingredient costs, primarily flour, increased dramatically quarter over quarter. The 2008 Q2 ingredient costs were up some $38 million or 34% over the prior year. And approximately 430 basis point increase as a percent of sales. Also affecting the gross margin for the quarter, with higher allowances and promotions and $1.3 million of costs related to the closure of the Atlanta snack facility, which I will discuss in a minute. We also recommissioned an idle facility in the quarter and incurred costs related to this start-up. The year to date margin as a percent of sales was down just over 200 basis points at 47.1% compared to 49.3% for the same period last year. Ingredient costs year to date were up approximately $76 million year over year or 31%. The majority of the other components of cost to goods sold however, were relatively flat to down slightly as a percent of sales quarter over quarter and year to date. Gross margin dollars did, however, increase in the quarter by approximately 6% and year to date by approximately 7%.

Selling, marketing, and admin expenses as a percent of sales decreased to approximately 36.6% for the quarter, or just over a 200 basis point improvement over the prior year percentage of 38.4%. The quarter over quarter improvement as a percent of sales was driven primarily by increased sales and the lower employee related and advertising and marketing costs in the quarter as a percent of sales. The fuel costs were up in the quarter. We continued to benefit from the distribution and production rationalization minimizing or eliminating our miles driven. Depreciation and amortization as a percent of sales remain relatively stable quarter over quarter. During the quarter we did close and exit our Atlanta snack cake production facility and move production to other Flowers snack cake facilities as planned. The Atlanta facility was sold in 2007 and leased back until production could be moved this quarter. Under accounting rules the gain of $2.3 million was deferred until we exited the building this quarter. As mentioned above, we did have closing and severance costs of which the majority was reported in cost of goods sold, related to this transaction in the quarter of approximately $1.6 million. Therefore, the net effect of this item on the quarter was approximately $700,000 positive. We also had approximately $400,000 of costs in the first quarter related to the closure and move. This makes the net effect on earnings as a result of the sale and closure, to be approximately $300,000 for the year relatively inconsequential to earnings.

In the quarter we did also receive insurance proceeds of $686,000 related to the damage of a distributions facility in 2007. The increase in net interest income for the second quarter of 2008 continues to be due to lower debt service and an increase in interest income on distributor notes resulting from the sale of new territories. In the back half of 2008 and forward, however, for the next few years, we will see an increase in interest expense due to borrowings to finance our recent acquisitions which we will discuss in a minute. The second quarter tax rate of 35.7% does reflect a slight benefit from discrete items. We still anticipate the full year rate to be approximately 36%. The balance sheet continues to remain strong. During the second quarter we funded approximately $8.6 million in capital expenditures and paid $13.8 million in dividends. There were no share repurchases during the quarter. Cash flow from operations was negatively impacted in the second quarter, as a result of commodity hedging and margin cash being funded. However, looking at year to date cash flow, from operations, it came in very strong at $56.1 million. At the end of the quarter we had $6 million drawn on our credit facility.

We have updated our 2008 guidance based on our year to date and targeted back half performance, and the impact of our recently announced acquisitions. This does not include, if any, however, future acquisitions. And I would like to also remind you that 2008 is the 53 week year, giving an extra week in the fourth quarter. We've increased our 2008 sales projection to $2.4 billion to $2.425 billion. That's roughly a 17.8% or 19.1% increase over the prior year. Price and mix are expected to provide 9.5% to 10.5% of the increase, volume 6% to 7%, and the extra week, a 1.5% of the increase. The volume growth does include from the acquisitions approximately 4.5% to 5% for the year. Net income is now estimated to be approximately 4.5% to 4.7% of sales or $109.2 million to $114.7 million. Given the approximately $93.4 million average shares outstanding following the acquisitions, we are targeting earnings per share of $1.17 to $1.23, an increase of 14.7% to 20.6% over 2007. Though both acquisitions are profitable the effect of the acquisitions, including interest, the additional shares issued, and integration costs on the back half of the year will be dilutive. If the integration is successful we are projecting the acquisitions to be accretive to earnings by year two. We will not comment specifically on margins of each business. However, over time through synergies, efficiency gained, and brand extensions and mix improvement, both of these businesses we believe should see improved margin. As George commented we are very excited about the acquisition and the growth opportunities they provide Flowers.

In addition to stock, we did finance the acquisitions of bank debt. We entered into a five-year term loan for $150 million and drew down approximately $20 million on our existing credit facility. We anticipate that over the next five years, we will be able to fund this debt repayment through operating cash flows. The 2008 capital spend remains unchanged and is estimated to be $95 to $100 million. This includes normal maintenance spend as well as construction of our Kentucky facility. This does not include, however, equipment that may be acquired on operating leases for new production lines that exist in our new facility, and as we stated earlier, we do not anticipate any major spend in 2008 due to the acquisitions. To sum up, the second quarter results were good in the face of the commodity spike. As we move to the back half of 2008 we still face significant cost pressure year-over-year. However, we do expect some relief as compared to the first half. We will stick to our hedging and profiting strategy that the market permits, at this point in the year we are still encouraged with the back half and feel that our guidance reflects nice growth year-over-year. Now, I will turn it back to George.

Thank you, Steve. Our team is focused on delivering good results in 2008 as you can see from our guidance we expect to do just that. From guidance perspective I would like to point out that the fourth quarter will have additional pricing and we will have an additional week of sales and earnings due to our fifty-third week, as Steve indicated, for this fiscal year. So, I would take that into consideration. Our plan for 2009 is well underway. As you know the markets are very volatile. Although we are not ready to give you details for next year we do know that our input costs will be higher. I can tell you we believe our cost increases in 2009 will be similar to the levels we experienced this year. We will, however, follow our proven strategy that helps us have visibility for our costs. Once our future costs are defined and our plans made we will take action to further improve efficiencies and take costs out wherever possible, then we take pricing as needed in a timely manner. At this point we expect to take additional pricing late in the third quarter and at the beginning of the fourth quarter. On our third quarter call we will give you more detail about our plans and the outlook for 2009.

As you have heard me say before, 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 are well positioned to deliver good results for the remainder of 2008, and we're putting our plans in place to do the same for 2009 and beyond. Our team is excited about the growth opportunities we have with Wholesome and Buttercrust as well as the growth in expansion markets and core territories. The Wholesome merger brings two strong bakeries, wonderful quality products, a talented team, access to key markets in Arizona and Nevada, as well as reach into Southern California. Wholesome adds about 29 million consumers to our population served number, which means about 143 million people or about 47% of the US population will have access to Flowers products. With a base of $150 million in sales, Wholesome provides a solid foundation. Over time, we will introduce our Nature's Own white wheat and other favorite Flowers brands into those markets.

Buttercrust also is a fine bakery that brings us much needed capacity in one of our fastest growing markets. The additional production capacity added by the Lakeland Bakery will meet our capacity needs in the Florida market for many years to come. Buttercrust products are a great quality and have a strong team as well. The addition of Wholesome and Buttercrust strengthens Flowers Foods from an operational standpoint, from a talent standpoint and by broadening our relationship with existing customers as well as new customers. Flowers Foods has proven -- has grown through acquisitions since we listed publicly. These (inaudible) acquisitions are a good strategic fit for our company. Going forward, we remain committed to growing through acquisitions and through market expansion. In the third quarter, we will be entering new markets that are adjacent to our existing territory. For competitive reasons, we will not announce those new territories but we are continuing our strategy to grow off the muscle through market expansion.

In summary, Flowers Foods has never been stronger, and we look forward to a good finish in '08 and plans are well underway for fiscal '09. Our team is focused on executing our proven operating strategies, which will result in increased shareholder value. Our cash flow, as Steve said, remains strong. We will continue to invest in capital improvements, dividends to our shareholders, strategic acquisitions, repurchase of Flowers Foods stock, and pay down or manageable debt level. In closing, let me be clear this was a very important quarter for us. We completed two critical acquisitions, delivered good results, and increased guidance despite commodity and expense head winds. I've seen many recessionary cycles during my 44 years in this business. And I know good execution is what will drive Flowers Foods to continue to produce excellent results in any environment, and that is what we intend to do as a management team. Now, Doug, we will take questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Farha Aslam with Stephens Incorporated. Please go ahead with your question.

Hi,good morning.

Good morning, Farha.

You had noted that in the fiscal first half you had a 31% increase in ingredient cost. Would you be willing to share with us what that is for the fiscal second half?

Well, I think looking at the dollars, we had told you for the year we would be up roughly 22% on all input costs, including packaging, but the back half, obviously the greatest amount came in the first. And we will see some relief in the back half but I'm not sure we're willing to share the exact number at this point for competitive reasons.

Okay, fair point. And then, George, if you could share with us a little bit more about the Wholesome Bakery that you've acquired. That serves the Nevada and Arizona and California. Are they already in California?

Yes. Let me start back over there. Farha, we are excited about this opportunity. A wonderful company, wonderful owner who will continue to run our business. Great market position in Arizona, number one in the marketplace. I know they entered the Nevada market 10 to 15 years ago and have made good progress there. And they've always had some presence -- well for a number of years had a little presence in California but when a competitor exited that market it did give opportunity. And then some three or four months ago for them to move in more than they had been before. And as time moves forward we see that we can help them expand that market even more so than they are today So we see very good opportunities in California -- Southern California.

And, George, how much capacity does Wholesome have in their plant? Are they at 100% capacity or do they have a little bit extra capacity that they could leverage?

There is some extra capacity. We feel very comfortable that we can have good market expansion without any added capital the at this time.

And is there capacity to take the Nature's Own product in there as well? Or will you kind of need to build additional capacity because they have their own brands, and then you're going to layer on Nature's Own on top of that or are you going to maybe switch out and put some Nature's Own in place of maybe some regional brands?

Farah, they do a wonderful job on the Wholesome brand as well as [HanHanny] as well as the Roman meal brand. It's a solid business. We will layer on top of that our Nature's Own, which we have systematically done throughout acquisitions of the past. And we think this will built very good market, and again, there is capacity to do the Nature's Own brand until we get to a higher level, and if that takes more capital, we'd be more than willing to do it at the right time.

Okay. That's very helpful. Thank you very much.

Thanks, Farha.

Our next question comes from the line of Heather Jones with BB&T Capital Markets. Please go ahead with your question.

Good morning.

Good morning, Heather.

Great sales growth for the quarter.

Thank you.

I may have missed this but did you say that the acquisitions will be dilutive in the back half because of the integration costs?

Yes, due to integration costs and the interest, there will be dilution in the back half.

Right -- so -- can you give us an idea of implicit increase in guidance for the core business with your new guidance? Or, I guess another way to word it, estimated dilution from the acquisitions in the back half of the year.

We expect probably $0.01 to $0.02 dilution from the migrations and the acquisition costs in the back half of the year.

Okay, and do you anticipate, because you said accretive by year two and I assume your're talking about two calender years from ownership.

Yes, we expect by 2010, probably.

Do you expect them to be dilutive next year or just neutral?

Next year will be neutral to slightly dilutive.

Okay. And, George, your comments on pricing, and I may be reading too much into this, but my interpretation was you seemed a little more cautious about taking pricing than you have in the past, and again, maybe I may have misread that, but I just wondering if you could talk about your commentary -- (inaudible) your outlook going into fiscal '09 given that you're expecting costs to be up dramatically once more, do you see any indications that the consumer is becoming more resistant to higher pricing or -- if you could just speak to that.

Heather, its a great question, if I said I -- I was more hesitant about pricing, I certainly didn't mean to. I was looking at The Wall Street Journal yesterday on page A-3. The headline was Bumper Harvest, not enough to ease food costs and nothing to hold food industry. We had head winds last year. We're having head wind this year. They will be the same type next year. So, we really have no choice except, first of all, before we put out pricing what I did say, that we're always working for finding inefficiencies and take them out of our operation, reducing costs wherever possible, but then when we know how much more price we need to get we go do it. I think our customers have confidence as to, we're not trying to gouge anybody, we're just trying to stay in business and continue to expand our reach, expand out plants, build plants as necessary so that we can continue to serve the market place and our existing customers. And as much as we hate it this is part of the cost, and consumers, I think if you look at this year, and I've said repeatedly, private label has not gone up or trading down. I did say, however, that we saw just a slight up tick in this quarter, not enough to be concerned about, though. Flowers certainly outperformed that. So you can see a slight up tick, in this quarter, not enough to be concerned about, Flowers certainly out performed that. So, you can feel (inaudible) uptick (inaudible) I'm not overly concerned about it. I think all of us will manage through it through innovation of new products. And giving people a reason to stay with your brands or trade up.

Have you all taken advantage of the recent, I mean, it started moving back up again yesterday but over the past month the break in commodity costs? Have you all been working to cover your '09 needs?

Heather, I'd rather not comment on '09 at this point. We will do it at the beginning of next quarter but you can be assured that Flowers' strategy is working.

Thank you so much.

Heather this is Steve. I'm going to circle back real quick on your question about dilution. One other component I failed to mention was the number of shares, we have about 900,000 shares for the back half of this year. And e issued approximately 2 million shares on the acquisition. So, that will -- that's a part of the dilutive factor looking at the effect from the acquisitions as well. And as George commented, we think there's a great opportunity, and depending on the success of the integration and how well things move and how well we are at executing and getting the integrations in place, 2010, we think, you know we should be on track to see great performance there.

But the $0.01 to $0.02 dilution that you mentioned just a couple minutes ago, that includes these extra shares?

Yes, does it.

Okay. And actually I was getting ready to get off and I just realized I have one more question.

And , Heather, that (inaudible) it will be in our guidance. That is in the guidance.

Yes, our range includes the affect of the acquisitions.

Right, does your guidance include these gains on sale and insurance recoveries?

Yes. Does it. We have not removed any of the components of earnings.

My final question, I tried to adjust warehouse delivery margins for the gains and all together what's going on with the core business, and just was wondering if you could give us guidance under -- your direct store continues to be incredible how it's performing. But I am wondering if you could give guidance on where you think snack margins can go and, and, you know, timing of getting there.

Let me comment. I think Steve did mention in his comments that -- well I know he did -- that snack (inaudible) continues to improve, and see an improvement. I think all of us are aware that part of the warehouse segment is our food service business and food service has been slow and sluggish. That will improve as we gain new customers. More importantly it will improve as the economy changes. I think the result for retail though is the result of what's going on in food service. As food service people -- people are still consuming as much or more product. They just purchase in a different place. So, we see in the retail certainly addressing -- trying to take advantage of the trend to bring people back home. So, I think food service is still solid. We have not lost business, persay. It's just the customer has changed their eating pattern somewhat. So, there's some pressure because overhead and all is basically the same. So, we do see some pressure on food service until we get out of this economic slump.

Okay, alright. Thank you very much for the color.

Thank you.

Our next question comes from the line of Ann Gurkin with Davenport and company. Please go ahead with your question.

Good morning.

Good morning, Ann.

Good morning, Ann.

Continuing on with the discussion about the warehouse business can you help me understand the reversal from the decline in the first quarter to positive volume in the second, what drove that reversal?

In the second quarter, the volume increases driven by snack products. We've had nice volume growth in the multi-pack snack cakes.

Okay.

From the (inaudible) channel.

Okay, great, and then can you help me for the outlook for SM&A expenses in the second half since we (inaudible) in the second quarter?

We're still targeting the 150 basis point improvement for the year, so I think the back half should be relatively similar to the first half.

Great. That's all I have, thank you.

Thank you.

Thank you, Ann.

Our next question comes from the line of Eric Katzman with Deutsche Bank. Please go ahead with your question.

Hi, good morning, everybody.

Good morning, Eric.

Good morning, Eric.

I guess my question, a few questions, first of all, you know, you've made a strategic acquisition or two strategic acquisitions anybody who knows the company well, knows that Wholesome is a business that you've longed for, for a long time, and seems like a good match. To the extent that the input cost environment is quite volatile, how, you know -- and now that you own it and you're in there, were they as, let's say, well hedged as you have been, and is that part of the dilution equation in that you kind of have to true up their pricing vis-a-vis inputs, or is it more just a function of their ongoing margins and the price paid?

Eric, I'd say it this way, they are -- they were always pretty proactive. And always -- I don't if I am going to say always, because I don't know exactly, but I'd say they -- a little above where we would be at this point in time for this year. Even with a hedge, it is somewhat higher. But as you look out, and I know they've just taken some pricing recently to try to offset that, but as you look out, I'd say as we talk about margins -- probably the biggest difference in margins that they have versus Flowers at this point is probably their product mix. They're a little more heavily into restaurant institution business, buns, which does not carry quite the margin that bread does. That's why we will be so in tune to get Nature's Own introduced at the marketplace, which over time will help drive the margin to the levels that we're normally used to.

And has their business been taking market share from competition and benefiting from, I guess, the move from a very fragmented category to a more consolidated one, just like you have in your core areas?

Eric, I would say that due to a competitor pulling out of markets and being less effective they have taken advantage of that.

Okay. And then kind of more of a -- maybe more of a question for Steve, but kind of capital allocation, again, great long-term strategic positioning here. You didn't buy back stock in the quarter or much this year. How much of that is a function of being in kind of blackout periods due to M&A discussions versus allocation of capital? Because certainly even with the debt that you put on for these deals, the balance sheet is still very strong relative to what you could take on, and it seems to me that if you wanted to continue to buy back stock you could, unless the lawyers are telling you otherwise.

Yes, I think you're right. Most of the second quarter we were in the blackout due to the acquisition. I think our capital allocation, you will see us stick to our it strategy, investing in bakery, paying dividends and making share repurchases opportunistically. So, and that's part of the reason why we decided to go with the term loan, Eric, we wanted to keep our (inaudible) facility there. I guess, drop (inaudible) if you will, or any potential acquisition or Flowers stock if we think its the right time to make that purchase. So, you know, we don't see any constraints going forward because of debt levels to make share repurchases but again our strategy has been more to do opportunistic buys than to have a planned buy of stock, so it's still part of our strategy and we expect to stick with that going forward.

Okay, and then, I guess, lastly, back to George, you've done some initiatives which have obviously helped the top line in terms of the organic products under Nature's Own and kind of moving, like, the mix shift positively. I think you've had somewhat more mixed success with ethnic initiatives, but do you detect any limitation on your ability to move the mix-up even with pricing and the consumer maybe being a bit more pressured?

Eric, I think innovation is only limited by our imagination. I think there's still opportunities for Flowers to innovate on some "better for you" type products. We'll be very careful though that we do not put any products under the Nature's Own that really doesn't fit. As I've said repeatedly I think this will be a billion dollar brand in the very near future. If you look at, back to the IRI information, you did see a little pressure on the very top premium products this quarter. I mentioned a slight down tick. And it looks like that's where most of the pressure probably came, is in the highest priced products. Not necessarily (inaudible) Flowers from a category standpoint.

Got you. Okay. Very good quarter. I'll pass it on.

Thank you, Eric.

Our next question comes from the line of Mitchell Pinheiro with Janney Montgomery Scott, please go ahead with your question.

Yes, hello.

Hello, Mitch.

Good morning, Mitch.

I was looking at my notes from last year. By the end of the third quarter last year, it looks like you were 75% to 80% covered for your flour needs for 2008. So, as we look forward here in -- I know you're not talking about '09, but when we get to the third quarter conference call and we start talking about sort of commodity coverage, I was hoping if you could get a -- are we going to see -- are you going to be reasonably covered for '09 by then, or are you now covered, or can you talk about that in any way?

Yes, Mitch, I'll try. You trying to get me to talking about next year, which I did say that -- somebody asked earlier. I did say our strategies are in place, and we'll get into detail on the next quarter. Obviously I can't say too much more than that, but be assured that our strategies continue to work well for us as we look at next year.

Okay, well, so then if I look -- you'd mentioned today, and I'd love to get a little clarity on this that you expect to the take additional quarter and in the beginning of the fourth quarter?

Well, (inaudible) some of them might hit it last -- depending on the customers last weekend of third quarter but beginning of the first quarter pretty well everything will be into effect unless it's a contract or something they would have to until January 1. But in essence, we'll take pricing that will be in the fourth quarter which pretty well takes care of the fourth quarter as well as probably the first three-quarters of next year at that point.

So you will take -- so there will be an increase somewhere, you know, end of Q3, Q4, then again at the end of Q4?

No. There might be some selected contracts which might be on an annual basis that will have to be renewed January 1. But let me also follow up and say this, though. Even though we've tried to look at basically annual pricing the best we could, I think we're in a world that so many unknowns are in place that we are telling our customers, you know, we can't just talk about annual any more. This is the price for this season. And, you know, depending on what goes on, they might be further increased midyear, which we haven't had to do lately, but things are so volatile that we just don't know at this point. We will take enough pricing in the fourth, that under normal years would circle us around to probably the third or fourth quarter the following year.

Okay, I got you. And in terms of pricing, what -- the magnitude of the price increase -- can you help us there? Or roughly.

Mitch, we're not ready to say that yet for competitive reasons, but we'll say at the next call. It will be significant.

Okay. In terms of staying on the pricing side, is -- how has pricing fared in the New Mexico, Arizona, southern California markets? Have they increased,sort of, in line with your markets, or ahead of the game or behind?

I'd say typically the Western market retails are higher than the Southeast, as we've said for 35, 40 years, it seems like the Southeast is always one of the lower priced retail markets. So, they are somewhat higher than we are from a retail standpoint.

And has the price, the Delta, the price increases over, you know -- like year over year, have they been higher, lower, or like on par with the creases that you've been implementing?

I'd say pretty well on par. And its always -- historically get higher so, they are higher, but I'd say on year on year situation has probably been on par withe increases we've taken.

And are they higher (inaudible) pricing -- is it higher than the South just due to distribution costs differences and -- flour still costs basically the same. Is there any other -- is there some factor that drives those prices higher?

I would say typically that market is probably derived quite a bit from a California standpoint. A lot of the competition comes from California.

Okay.

And as we know, it's higher to manufacture and ship product out in that area versus I'd say the Southern part of the United States.

So shipping in from outside of California has always been a good strategy. Is that still additional -- a cost advantage (inaudible) strategy?

From California into Arizona?

Yes, Arizona into California.

I'd say that's good strategy.

Okay, looking again at the acquisitions, and I guess, Steve, you said that the acquisitions would be accretive in year two. So, does that means from basically August 1, '08, through August 1, '09, not to expect any accretion, and then basically fourth quarter of next year, or third and fourth quarter next year is when you think it's going to --

I'd say that would be pretty reasonable.

Okay and then last question.

And the reason I say it should be reasonable, should be through with putting in SAP systems, shared service concepts, inter-plant bake-in -- reciprocal baking arrangements that we go through diligently to make sure that we're the most efficient manufacturer in the United States. So, those basic things do take time. But we think the synergies are there, and we think the team will do it and do it well, and the back half of next year we should begin to recognize that.

And I assume we'll have some sort of late January, early February analyst meeting out in Phoenix.

What good golf season that would be.

We'll talk about that later.

Okay.

So, just the last question would be marketing spending. You had shifted some marketing spending for the breakfast breads from Q1 into Q2. Was that any impact in the quarter?

No. I would say, though, that was impact -- (inaudible) second quarter to do with -- as I think about second quarter, I think about memorial day and July 4th is always a huge season for buns. Typically buns are not as profitable as -- even though (inaudible) is very profitable, bread is our most profitable item, so a little shift there. As Steve indicated we did price along with competition with our customers to be in the arena for the consumer for those two holidays, and it's a pretty big impact.

The final thing, on marketing and related to breakfast, your new breakfast breads, are stale rates tracking on plan, and can you talk about how the breakfast breads have been received and any further tweaks to your strategy there?

I would say that under the Nature's Own banner that it's been well received by the consumer. We have gotten many letters in from consumers saying they are pleased with the product. Any new product that you go on the market with, especially of this caliber, until you build up the consumer franchise, you do have heavy sales. We have, but it was planned. It was anticipated. But that's a sacrifice we're willing to make poor the long term.

Okay, thank you very much.

Thank you.

Thanks Mitch.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of David Lebowitz, with Horizon Asset Management. Please go ahead with your question.

Good morning, a few unrelated issues if I may. First, the Wholesome transaction is accounted for as a merger and Buttercrust as an acquisition. Were these done for tax reasons or are there other implications to be read into that?

I'd say this. Steve, might want to follow up. The Buttercrust was all cash. It was a situation with one owner that did want to exit the marketplace, so it was a straight out acquisition. We look at Wholesome as a merger because the owner of a facility -- we saw it as a merger because putting his business with ours makes good common sense. And he will continue to run the business, so that was the reason for the merger.

So, there were no actual tax savings for doing these two transactions the way you did rather than both of them being either purchases or mergers?

I think, David, from Flowers perspective, the structures that we used we think offered us the best alternatives to completing the acquisitions. I would not want to comment on the seller's tax position. I don't think that would be appropriate. But the cash, the all-cash transaction in Florida, you know, provides Flowers with we think the best will give us good tax benefits. And then typically with the merger there's no step-up in basis for the acquirer, and there's not significant tax benefits from that transaction but we're still happy with the purchase price and we think the appropriate structure was used in that to complete the acquisition.

I don't want to be misunderstood. I was specifically talking tax implications for Flowers, having nothing to do with the sellers. Second question, the price of fuel has been coming down. How does that impact your operating costs, especially in terms of the baking itself?

Well we don't use gasoline, persay to bake with, we use natural gas for that. As you know, we do hedge out on that as much as we can. We're hedged out now. There was some impact at our levels compared to last year. On the gasoline itself, as you know, our independent operators supply their own gasoline for their own vehicles. Energy, though, does hit us at the bakery as well as our transportation system getting from the bakery through different haulers. They have to get the product from our bakery to these distribution centers, and that cost is passed along to us, which was pretty significant for the quarter. I think probably $3 million to $3.5 million impact.

Okay. Another question, in terms of the acquisitions that we hope to add on to the business, are any of them expected to close or might any of them close before the end of this calendar year?

We are closed. We closed on --

No, no, no, I'm talking about ones that George referred to or said he would not be specific as to where you were looking to move --

Thats our new market.

I'm sorry, David, I misunderstood.

That's all right.

That's new mark, not in bakeries.

Okay, my apologies.

And we will be moving in those markets in the very near future, before our next analyst meeting and call.

Very fine. And the last question, given the continued bankruptcy of one of your major competitors, is there a time limit where a judge must say either you exit bankruptcy voluntarily or we decide to change the Chapter 11 to a Chapter 7? Might that affect you?

Our legal advisers say there's no set time frame. It is up to that judge, and there's no magic date, to our knowledge. The judge can keep granting quarter after quarter after quarter, I assume, as long as that judge feels like there's some reasonable expectation of either coming out of bankruptcy or some other transactions taking place. But we're not knowledgeable of any of that at this point.

And does that give you an opportunity to perhaps encroach into their markets given that the longer they stay in bankruptcy the less deficient they have to be as a competitor?

I think does it present some opportunity because some customers would probably see it as -- I'm not sure what is happening there. I know Flowers can supply, you're successful, great product, great people, so could you serve me, we do have some of that, that is part of the reason we continue to expand our market.

Thank you very much.

Thank you, Dave.

There are no further questions in the queue. I would like to hand back over to Mr. Deese for some closing comments.

Thank you, Doug, and thank you for joining our call today, and thank you for your continued interest in Flowers Foods. Thank you.

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