Flowers Foods Inc (FLO) 2009 Q1 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Flowers Foods first quarter 2009 earnings conference call.

(Operator Instructions)

It is now my pleasure to introduce your host, Ms. Marta Jones Turner, Executive Vice President of Corporate Relations. Thank you Ms. Turner, you may begin.

Thank you Claudia, and good morning, everyone. Our first quarter earnings were released this morning. And if you don't have a copy of the release of course you can find that on our website, just go there and access it if you need to. Before we start our call, I must point out that our presentation today may include forward-looking statements about our Company's performance. Those comments could include discussions about future performance, and we may use terminology about earnings per share, net sales, margin, operating profit, interest expense, cash flow or other such items. The statements we make are based on our view of things today so they may contain some degree of uncertainty. Although we believe our statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters we'll discuss during the call, important factors relating to Flowers Food business are detailed fully in our filings with the SEC. Participating with me on the call today, we have George Deese, Chairman of the Board, Chief Executive Officer and President, and Steve Kinsey, Executive Vice President and Chief Financial Officer. George and Steve will discuss our first quarter results, and then of course we will open the call for your questions. Now it is my pleasure to turn our call over to our Chairman, CEO and President, Mr. George Deese.

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

I am pleased with the team's ability to deliver good results in the face of the economic and competitive pressures, and a tough comparison to last year's strong first quarter. Our branded products out performed the category, reflecting the value of or product quality and brand strength, even in times of recession. We are fortunate to be in a position of financial strength during these difficult times. That allows us the flexibility to execute on our long-term objectives while meeting current demands. During the quarter, we invested in a new bakery in Kentucky which started production earlier this month. We'll talk about that later.

We also invested in additional advertising and promotions to support our brand growth. We invested in product safety, as we work to comply with the global food safety guidelines. We also invested in our share repurchase plan, and in capital expenditures to improve efficiencies, and we continued to pay our dividend for the 26th consecutive quarter since our spin off.

We invested in new markets, including those out west where we have introduced the Nature's Own brand. These investments are a testament to our ability to position Flowers for long-term growth, without having to sacrifice the near-term value our shareholders have come to expect us to deliver. During the quarter, we continued the integration of the Holsum and ButterKrust acquisitions which remains on track. This month we implemented SAP at Holsum operation. I am pleased to say that both acquisitions continue to perform well, even better than expected.

Now, let me review some of the results from the first quarter. We delivered strong sales growth and solid earnings for the quarter. Sales were up 19.3% versus as a very strong first quarter last year. Net income was up 4.5%. EBITDA margin was 10.3% of sales, and operating margin was 7.3% of sales.

Now let's take a closer look at the sales categories. Our branded retail sales were up 14.8%. The data from IRI shows that in our core markets Flowers brands hold a 24.4 share. It is important to note that IRI captures only about 48% of our sales. Our internal data shows our strength at a marketplace even more directly and clearly. Across all product categories, our brand products performed well, showing the strength of Nature's Own, Whitewheat and other brands.

Turning to how we are performing in light of in the category growth. Our internal sales data shows our products and brands out performed the fresh, per package breads category. Our branded white bread led by Whitewheat and regional brands delivered solid growth. In the soft variety category, our Nature's Own brand again achieved strong growth, and we are pleased with consumer acceptance in our new western markets. Sales of Nature's Own all natural super premium bread were flat, that reflects that the premium bread category was affected as consumers traded down somewhat. Our breakfast items, new under the Nature's Own brand experienced strong growth in the quarter. Our branded buns and rolls and our snack cake brands also were up double digits.

From a private label perspective, store brands, branded buns and rolls also were up in the quarter. Although most of that increase was the result of the Holsum and ButterKrust acquisitions, both having a stronger presence in private label.

As I mentioned before, in the IRI south market, private label bread has about a 40% share of units, and about a 25% to 26% share of dollars, and that is roughly the level it has been in for a number of years. In other food category, private label growth had been characterized as dramatic, over the past year. But IRI for the total US, shows the private label bread gained less than a point in dollar and unit share. In our core south market, private label share was up only 0.40% in dollars and 0.60% in units. As our branded share has grown through the years, our private label business represents a smaller percentage of our total sales. With our recent acquisition included, private label represented about 16% of our sales in the first quarter. That is about half of the private label business in our market. We believe that our mix between brands, private label and food service is about the right mix to allow us to maximize shareholder value, and it is a great business model.

Now, turning to food service, in the quarter, our food service sales experienced growth. However much of that growth in food service attributable to our recent acquisitions. For the first time we are seeing slower growth at quick serve restaurants. We believe that is because people are consuming more food at home.

Turning to new markets. We continue to strengthen our position in our expansion markets. In the quarter these markets contributed just over 1% to our DSD sales, which is in line with our goals for market expansion. We are also especially pleased with our new western markets where we have introduced Nature's Own. The brand is gaining in consumer acceptance in those markets and we see wonderful growth potential for Nature's Own.

New products also are very important to the Company. We expanded our Nature's Own breakfast line this past quarter, adding new varieties of English muffins, bagels, breakfast breads and a new improved nutritional profile in whole grains, more vitamins and calcium. We are pleased with consumers' reaction to the Nature's Own line expansions in the breakfast category. Although our presence in the breakfast category is still small, we see opportunity to grow.

As I told you earlier, our new bakery in Bardstown, Kentucky had a smooth start up earlier this month. In fact it was the best start up in our history, thanks to all the talented team who pulled that off. In keeping with our strategy, Bardstown brings production closer to our expansion markets, and also helps relieve production capacity pressures in our northern most bakeries.

Recently some of you asked about our promotional activity, and whether that threatens our ability to deliver earnings we have projected for the year. I mentioned in our February call that we were watching the market closely, and that we would promote more if needed to protect our business. By mid quarter, we did add promotional pricing in many markets and we continue to do so as market conditions warrant. It is important to note that private label is not the reason we felt the need to promote. As I mentioned, IRI shows that private label share in the category is up only slightly. However, we did experience competitive pressures in many markets, and we took appropriate action to maintain our market share.

Now to the question of whether promotional activity puts at risk our ability on our earnings guidance. I will point out that we delivered solid results in the first quarter that were in line with our previously stated expectations, proving our ability to offset promotions and other costs while delivering quality earnings. We have confidence that our products, the markets we serve, our growth opportunities, and our efficient operations, and cost controls can offset any earnings dilution from promotional activity. Our team has experience to combat the margin impact of promotional activity, with efficiency gains and strategic cost reductions that is do not impact the quality of our product or services. Our bakeries are the most efficient in the industry. Our distribution systems are also efficient and very effective. When faced with the need to offset higher input costs over the past several years, and higher promotional costs the first quarter, our team put plans in place that allowed us to deliver solid earnings growth even when gross margins declined.

You may ask how did we do that. We are in fact the lowest cost producer of baked foods. Our team knows how to cut costs further, and improve the business to offset costs when needed, as evidenced by the last several years of higher input costs and our delivery of earnings growth. We improved efficiencies 3% in 2008, and in the first quarter we achieved even greater gains of efficiencies. We are constantly and continually evaluating our operations platform for further opportunities, and I am confident in our team's ability to achieve continued efficiency gains throughout the year.

So sales of our branded products are solid and growing. Although there continues to be some movement between channels, for example, food service to retail and so forth. Our product line and our access to the market makes us well positioned to address these changes and deliver earnings in line with our guidance. That gives you an overview of our operations for the quarter. Again let me tell you how proud I am to report the earnings and sales and the great job of our team. Now I will ask Steve to give you the more detail report of the quarter's financials.

Thank you, George. And thank you all for joining our call today. As George said up front, the first quarter 2009 performance was strong. We had outstanding sales growth during the quarter, in spite of tremendous head winds. The gross margin as planned, did experience pressure basically due to higher input costs, primarily flour. The operating margin or EBIT as a percent of sales was down 70 basis points for the quarter at 7.3% of sales, compared to 8% last year. The decline in the overall EBIT margin is primarily the result of higher promotional and advertising activity as George mentioned, and a significant increase in the ingredient costs quarter-over-quarter. Even with the pressure on margins, we delivered on our first quarter earnings target. As a matter of fact, we have seen pressure on margins for several quarters now, even so we have continued to deliver good earnings growth as a result of branded sales growth, improved efficiencies, cost control, a great service. Net income for the quarter improved roughly 4.5% quarter-over-quarter to $37.4 million, or 4.6% of sales. Diluted earnings per share for the quarter was $0.40 per share, which compares favorably to a very strong first quarter last year of $0.39. The quarter was negatively impacted by approximately $1 million in charges due to the customer bankruptcies, and another $1 million of expenses related to the Bardstown, Kentucky plant start up.

Overall, this rounds to about a $0.02 effect on earnings per share of the quarter. Acquisitions excluding the additional interest and amortization were accretive in the quarter, approximately $0.02 per share. Taking a deeper look at sales for the quarter, despite the heavier than anticipated promotional activity during the back half of the quarter, sales growth was strong, and our brands continued to perform well. As George mentioned, we had solid growth in our brands during the quarter. Consolidated sales growth for the quarter was 19.3% over the same period last year, with price and mix contributing 6.8% of the growth, volume representing about 0.5% of the growth, and acquisitions contributing 12% of the growth.

Looking at the two segments, direct store delivery group and the warehouse group both posted strong sales gains in the quarter. The DSD group was up 20.7% for the quarter, with price and mix contributing 4.6% of that segment's growth, and volume was up 1.5%. As George said the expansion markets continue to contribute approximately 1% of the volume growth. Acquisitions added about 14.6% of the DSD segment growth. Embedded in the acquisition growth, is the growth related to the introduction of certain Nature's Own products into the Arizona, southern Nevada and southern California markets. Our warehouse delivery group sales were up 13% quarter-over-quarter, with price and mix contributing 14.9%. Significant gains in the branded cake business quarter-over-quarter contributed to the positive shift in price and mix. Volume in the warehouse group was down 1.9%, primarily the result of planned declines in the contract cake category.

Gross margin dollars in the quarter increased approximately 15.6%, however, the gross margin percentage declined 150 basis points to 46.8%, compared to 48.3% in the first quarter last year. The decline was due to higher ingredient costs, primarily flour as we have discussed. Ingredient cost excluding acquisition in the quarter were up almost 15%. We are targeting gross margin improvement in the back half of the year, as our highest hedges roll off, and input costs move lower compared to the first half. The acquisitions also affected the gross margin slightly negatively in the quarter as well. As you may recall the business model is slightly different with heavier store brand and institutional business. All other components of cost of goods sold were relatively flat to down slightly, as a percent of sales for the quarter. Of the Bardstown, $1 million in start up costs, $800,000 was recorded as the cost of goods sold.

We do continue to benefit from lower selling, marketing and administrative expenses as a percent of sales, which decreased some 80 basis points in the quarter, to approximately 36.4% of sales, compared to a prior percentage of 37.2% The quarter-over-quarter improvement as a percent of sales was driven primarily by increased sales, and lower distribution costs and labor costs as a percent of sales. As a reminder, SM&A will be negatively impacted throughout the year by higher pension expense. The first quarter expense was up $3.5 million, quarter over quarter and the year-over-year pension expense is targeted to be up some $11 million. The decrease in net interest income for the first quarter is the result of higher interest expense from debt service on the acquisition-related loan, and the outstanding balances on our revolver. You will also see that the first quarter tax rate was 36.6%, compared to 35.7% last year in the first quarter last year. This 1% increase in the rate is the result of last year's first quarter rate including a favorable discrete item related to state income taxes, and a decline in the variable interest entity income for the first quarter of the year. For the full year, we are targeting a rate somewhere around 36.5%.

Moving to the balance sheet and liquidity. Cash provided from operations in the first quarter was approximately $58 million, and we ended the quarter with $18.5 million in cash on hand. At the end of the quarter, we had $243 million in bank debt, with $143 million of this debt related to the term loan executed for the two acquisitions, and the remaining $100 million or so was drawn on the revolver. Cash flow in the quarter was strong. During the quarter we funded approximately $15 million in capital expenditures, paid dividends of $14 million, we repurchased approximately 945,000 shares of common stock in the quarter for $21.6 million, or an average share price of $22.88 per share. This leaves about eight million shares of the 30 million authorized to be repurchased. And as we told you in the past, we will continue to buy in shares opportunistically.

We also paid down approximately $14 million of debt in the quarter. We believe that our operating cash flows will continue to be strong throughout the year, and will be our primary source of cash. Looking ahead at the remainder of 2009, as noted in the press release, we have left guidance unchanged. Since our last call however, we are projecting additional improvements in the overall cost structure. As the year has progressed, we have taken on additional coverage related to input costs. The full-year input costs ingredients, packaging and natural gas are now targeted to be up approximately $53 million. This is a $12 million benefit over the $65 million provided on the last call, primarily the effect of lower packaging costs. The majority of this benefit will come in the back half of the year. In our current assumptions for the year, the effects of this additional benefit and any increased promotional and advertising activity as George has discussed, has been considered in our guidance. Based on our performance in the first quarter and our forecast, we are confident in the earnings range projected. Thank you, and now I will turn it back to George.

Thank you, Steve. And I want to reaffirm what Steve has just told you, I have full confidence in our ability to deliver good results in 2009. In addition to the detailed assumptions already in our guidance for promotions, commodity costs, hedging and cost savings, Flowers Foods is well positioned to deliver to our shareholders. Let me tell you why. First, we have invested in technology and efficiencies over many years. As a result, we have efficient production capacity that is well-located to serve our markets. Our newest bakery in Bardstown shows we remain committed to making investments in new production capacity where we need it, to serve the market. Being the most efficient producer helps us to deliver value to our customers and consumers. Being the low cost producer is a valuable asset that gives us a competitive advantage we strive to maintain each and everyday.

We also have invested in product development and in brands. We continue to push the envelope to create new products, and to enhance the nutritional profile of our products as consumer's needs change. Today, our product mix reflects consumers needs and our retail brands continue to grow. We are comfortable that our product mix and our channel mix are appropriate for delivering value in this business. Our branded retail products hold a solid market share and we have room to grow in core markets and in our expansion markets. Our team is well grounded in the baking business. Throughout our business, we are fortunate to have experienced and determined managers who understand how to execute in the marketplace. We are continuing to improve efficiencies and logistics and to reduce costs where ever possible. This is a way of life for us at Flowers. It is how we think, and how we work everyday.

Again, we are committed to this business, and we are determined to continue serving our customers and consumers, while building value for you, our shareholders. As I have said before, our mix between channels, retail and food service and the various sub-channels is a strength as consumers change their buying habits. Looking ahead, we remain focused on delivering good results in 2009. We will continue to make investments that will enhance our efficiencies, our products our information and our team. Our growth strategy remains unchanged. We will continue to grow in our core markets and expansion markets, and we will make acquisitions that fit strategically with Flowers Foods. Again, congratulations to the new team in Bardstown, great job, and great start up. And congratulations to our entire team for once again delivering solid growth in challenging times. Bakery foods are our business and we are well positioned to deliver good results in 2009. Claudia, I would now turn it back to you for our Q&A, please.

Thank you.

(Operator Instructions)

Our first question is coming from Farha Aslam with Stephens. Please state your question.

Hi. Good morning.

Good morning.

Morning.

Steve, on the $53 million entire cost you anticipate this year, how much of that was already experienced in the first quarter?

I would say over half of that -- well, the quarter I'm not sure we would not give the exact percentage, because we don't disclose our hedges, but I would say the majority of this will be experienced in the first half, and with some improvements in the back half.

And, with regard to your wheat hedges, the last conference call you were pretty much covered for three quarters of the year. Have you extended those at all?

We have. We are basically covered through the year.

So you know your wheat cost for whole year. That's part of the reason you are confident.

95%, 98% of our costs are covered, that's true.

Okay. And then when you look at promotional activity, you had mentioned that private label wasn't the source of your challenges in terms of promotional activity. Are there certain regions or players that are are giving you a tougher time? And why do you think branded players are promoting?

Let me come back to the private label for just a moment. I think there has been so much news in the food industry concerning private label, I think everybody has been watching it real close. And you know, I have said many, many times that in my career I have always looked at 40% unit share in private label in units, and roughly 25% on sales. In fact, Milling & Baking had a great article, going back a few months ago talking about private label, and they had some information from IRI, that supports what I have said. Again, I think everybody is so in tune to private label. This is a competitive industry, and as many of you know, the landscape has changed somewhat, with Bimbo and Weston coming together.

With IBC of course coming out of bankruptcy and Sara Lee as a very formidable competitor, and you always have regional players also which are very tough. So, it is always been competitive. I say it will remain competitive. And I wouldn't say if any one state or any one region. I think it is pretty well market wide that we face day in and day out. That really has not changed that much even though there's more promotional activity. As you know, most people took price increases over the past couple of years, trying to make sure they recovered the costs. Some did, some didn't. We said we got a lot of ours through efficiencies in our bakeries, and didn't get it all in price. At the same time, come back to the point that the market is competitive with prices up and people promote off the higher prices.

Okay. And then when my final question, is when you look at share repurchase, this is a first quarter after a couple, that you have engaged in share repurchase activity, can you share with us your appetite for share repurchases at this level?

We had said that we would still be looking at our cash allocation as we have historically. Share repurchase is still an important part of our philosophy and use of our cash. As long as cash flow remains strong, I think you will see us continue to buy in opportunistically. We thought the level we bought in the quarter was a good value, and so we were back in the market at a fairly substantial level. And I think you will see that continue, when we think the opportunity exists.

Okay. Thank you very much.

Thank you Farha.

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

Hello, Good morning.

Morning, Mitch.

Good morning, Mitch.

So, just staying on the competitive pressure for a second, when I was looking at your gross margin, you had cited, I guess Steve -- promotions -- is that just a numerator denominator issue. Are most of your promotions taken off the top line?

Yes, most of our promotional activity hits the top line.

Okay. So it is just really having a, a lower numerator. For the reason that promotions are impacting the gross margin; is that correct?

Correct.

Okay. Just making sure of that. And what type of promotions as you look out, let's say if you look at your promotions, are they coupon? Are they BOGO? What type of promotions are being used right now?

I would say, Mitch, and I won't say everything for competitive reasons, but in the main I would say that it is in the form of price promotions at store level, execution at store level.

And so since, on in your region, in your bakery presence, have the ability to change pricing and alter whatever needs to be done, like on the fly?

Not just on the fly. Of course we have, as you well know we have a centralized philosophy, but decentralized operations.

Right.

And they do have that authority if need be.

Okay. So okay. Moving on. Just food service, QSR was down you said?

Well, I said, we see a slowing.

A slowing. Okay.

Mitch, I would say the reason we wanted to mention it, obviously is that some of the fast food people are doing better than others. But for the first time in many, many years, it seems like we have seen slower growth. We have not lost any customers, just store traffic, I would say has been impacted more so in the last couple of quarters than any time in my history.

Okay. And do you have the ability -- I mean you do not, in terms of market share in your core territories in food service, I mean there are still other, are there other distribution points that you still have targeted, or is this -- are you saturated in your core markets?

No, we are never saturated. We are pleased with where we are in food service, but it is a wide range of customers we still would like to serve.

Okay. In terms of breakfast breads, what type of -- you have increased distribution?

We have.

Is there anyway you can quantify, either on a ACV basis or store doors that are actually selling your breakfast breads right now?

Mitch, I don't have the percent, but I am going to say a majority of food retailers have our products. Some with obviously more space than others, but most supermarkets -- our product line would be available to some degree. And we are just getting started. As I mentioned it is a big category, we are a small player. And it would just be -- steady as we go, and gaining as we go.

Okay. Three more quick questions. One, in your western markets, is there any, is there a market share number that you think you have?

Mitch, I have it, but I don't recall it. I can give it to you off line. I would say in Arizona, the Holsum bakery, on loaf bread, would rank probably number one in branded share. But I would say in Las Vegas and California, we have a long way to go.

Right. But you are registering on the, on the scale there?

Oh yes, yes we are.

Okay. When it comes to capacity needs, has there, when do you anticipate needing additional capacity?

I believe we will continue to need capacity coming on every 12 to 18 months, and talk about Bardstown, just for a minute. As you may know, the first line was a bread line. We will be putting the bun line there this fall, getting ready for next spring. And we have on the drawing boards, future facilities that I can not mention competitive reasons. When we started this growth strategy to expand into new markets about five years ago, we said then about every year to 18 months we would need a new bakery and that's pretty well held true, up to this point.

Okay. Last question, as it concerns the second quarter. So, this was the -- the sort of peak in ingredient cost hit for the year; is that correct?

This past quarter here. For the guidance, we said the heavy part of that was the first half,.

First half. So the second quarter will look a lot like the first quarter. I mean in trends or second quarter guidance?

Mitch, can't give quarter guidance.

Okay. Alright, good enough.

Thank you.

Thank you. Our next question is coming from Eric Katzman with Deutsche Bank. Please state your question.

Hi. Good morning everybody.

Morning, Eric.

I don't know if you have had a chance to see the stock this morning, but it is down quite a bit, 8% kind of close to, I guess it is 52 week low, and I think you've adequately answered the question about private label within the category. That has been kind of the bear thesis on the stock, and you seem to be kind of peaking at least in terms of the cost environment. So, I assume that the market is reacting to the competitive challenges, and I guess to what extent do you think George you and your team are maybe under estimating what the changes in terms of consolidation in the industry mean for the business?

Okay. Eric, I don't think we have underestimated it. I think, as I said it has always been a real competitive market, and we've been a small company competing years ago with Continental Baking Company, which is part of ITT. We've competed against Sara Lee's bread business when they were part of Anheuser-Busch. We competed with most of today's Weston business and Bimbo which was a big part of Best Foods. So we've always had to compete with big guys. And we certainly don't underestimate, and we don't want to overestimate it either because our brands and products have a lot of strength. We have the depth and management in all of our team members to do a great job in the marketplace, and that's why we didn't think about changing guidance. We feel good about and year, and the years ahead.

Could you characterize the more competitive environment as being rational, given the input cost rollover, given that private label doesn't seem to be the issue? Or would you kind of say that it is, that it surprised you? Maybe it's because Interstate is coming out of bankruptcy, they're being a little more aggressive, but maybe you can just kind of give a little more color on that.

Well, I think everybody in the industry probably was concerned about the private label issue. That was probably their number one motive, and the economy which turned down, and everybody had head winds with the economy. And I don't think any of this is long-lasting. I don't think, if you look at other company's earnings, I don't see why anybody would want to stay where they are in light of their earnings. And we will just have to see how it goes. But I am very confident that we have the strength to, and by the way, price has not been the same everywhere. There's so much more than just price. There's also quality, there's service. There's -- product profiles, there's different choices. I hope I haven't overemphasized or implied that it is a terrible world out there. I didn't mean to -- what I was trying to get across though, we did have to promote more in the last half of the quarter, and as we go forward we will probably have to continue that until things sort of level out. But it will level out at some point.

Okay. And last question and I will pass it on. The, it seems like the integration of the Holsum and ButterKrust has gone well. You are very cash flow positive and you have been using it to buy back stock. What is the kind of M&A environment look like and are you more inclined to just kind of stick with what you have for the moment and continue to build? Or is there more M&A that is possible given the volatility in the industry and maybe some of the regional guys getting out?

The word you used was "volatile". I think with the economic environment, I would guess people might be more or less hesitant. In one sense, I think maybe the multiples might be down, compared to what's going on with the whole banking arena. I'm not sure if it is a good time to be selling a business. Or a lot of people might think this is not a good time to sell. But I think from Flowers perspective, historically we have shown we are wanting to grow through acquisitions as long as it makes our Company stronger. There are companies that would make our Company stronger, and we want to continue growing in that direction.

Thank you.

Thank you.

Our next question is coming from Heather Jones BB&T Capital Markets. Please state your question.

Hi. This is actually Brett Hundley standing in for Heather. Good morning.

Good morning.

Most of my questions have been answered here, but I apologize if I already missed this, George. You talked about how private label has gained less than a share point on a 52 week basis, and in multiple markets, and I was wondering if you could provide any changes in private label share gains on a more recent basis. maybe in the last 12 weeks or so?

No, I have quarterly information for the last 16 weeks. That's what I was referencing in my opening remark. I wouldn't see that much change in the last two or three four weeks. I would have to see the numbers but I wouldn't think so.

Okay. And then it looks like there was better operating performance in warehouse than what we were expecting, and I was just wondering if you believe this segments quarterly performance as a result of realizing improvements from mix changes, or something else there, if you can kind of speak to that.

I will let Steve follow up as well. We did have solid performance. And I think it is a lot about mix changes. Our strategy is sound, as we have so many customers who have the need to go frozen nationwide, and we are happy to do that. But if some customers want fresh product, our strategy works well with our DSD segment. So, all in all, I would say we have a, even though I didn't talk about it much in my presentation we have a very solid team heading up that business. And it is gratifying to see the improvements last year and again this year, both on the cake and the frozen bread side. Steve, any comments you would like to make on that?

I would just follow up Brett, with -- in the quarter, we have said for several quarters we have been very focused on growing our Mrs. Freshley's snack brands, and we have great momentum with that brand with several large retailers. And they have had pretty significant growth with that brand in the quarter, while we have exited some lower margin contract business. The snack category is contributing much better than it has in the past.

Okay. Great. Thanks, guys.

Thank you.

Our next question is coming from Akshay Jagdale with Keybanc Capital. Please state your question.

Good morning.

Morning.

A few follow ups just on pricing and costs. You spend a lot of time talking about promotions and private label et cetera. But bottom line, is that price mix for DSD came in at 4.6% for quarter, and you haven't really, you haven't changed guidance for the full year, which was implied from I think from 4% to 4.5%. So, I just wanted to get a sense of what would that price mix number be for the month of March per se, because you did say the latter half got worse, in terms of promotions? Please answer that, and I want to follow up after that.

We would stick with our guidance that we have given -- the annual guidance, of price and mix in the 4% to 5% that we have given in the past. We wouldn't venture out to give monthly information.

Great. But bottom line is you still came in 4.6% on the DSD. So, I think that is something I just wanted to focus on. The other thing I was surprised about, is that you are the cost leader. So, why is, how are your competitors able to lead pricing? I mean -- I see -- it seems like from our conversations with Bimbo, et cetera, that they seem to be a very rational player who doesn't want to start, really a pricing war here. But it seems like somebody led ahead of you, in -- when it comes to pricing, which to me the only rational explanation to that is, maybe the timing of your hedging is different than your competition. And we have always thought the industry was three months hedged on wheat, and it seems as though from the data you are reporting, you may be a little bit longer than that. But can you just talk about why somebody, why another branded player is leading, when you're the cost --- you have the cost advantage?

For legal reasons, I can't talk about that. Number one - I don't know what other competitors are doing other than what I see on the shelf. I certainly don't know what they're thinking, but I mentioned earlier a lot of people might have been fearful of the economy, and thought well. we need cheaper product in the market. I just can't answer, that because I don't know the answer.

Okay, and then just coming back to COGS, I mean based on my calculation, which is simple math, just adjusting for volumes and acquisitions, I calculate that your COGS were up $35 million. when I make those adjustments, which makes me think there's only about $18 million to $20 million worth of this cost left to go, for the remainder of the year given your $53 million guidance. But I wanted you to clarify, when you said most of the $53 million is in the first half, shouldn't that be all of the $53 million, or did you really just say most.

We said majority of that would happen in the first half.

So there would still be some increase in cost in the back half.

Yes. That's true. It is just at a lower level.

Okay. And lastly, just I guess a comment but I think your gross margins this quarter was, were the second lowest that we have seen in the history of the 2Q '08 being the worst. I mean everything points to a sequential improvement in gross margin, and that's probably what you guided for anyway in the first place when you talked about 1G being the worst in terms of a cost comparison endpoint. Is that roughly correct?

We are sticking with the guidance we have given, that there would still be improvement in the back half of the year. As George said, the first half is the highest input cost. So you should see some improvement in the back half on gross margins.

Okay. And then this last one is you obviously reduced your costs guidance around 65 and 53. That's about, you know, 40 bips or so in the top line. I mean you didn't change your EPS guidance or your sales guidance. Is that roughly sort of, when I look at that in relation to the 4% and 4.5%, pricing that you talked about, it seems like pricing now may be more close to 4% as promotions continue, but that will be offset by some of these costs coming down. Is that a good read into what you are saying?

No, I won't comment on the specific level of price, but I will say that the promotional activity we have all seen it tick up, and we anticipate to continue to stay at this level, and the improved cost in the back half should offset any additional promotional activity for us. So, that's how we are looking at it.

Okay. Thank you very much.

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

Good morning.

Morning, Ann.

I want to make a comment and ask a question about your sales guidance, what is the embedded organic volume assumption now, is it still in 1% to 2% range?

If you look at the guidance, it is still unchanged as far as the sales guidance and the organic growth probably -- 1% to 1.5% growth.

Okay, and then you referenced about a $1 million in charges due to customer bad debt, how should we look at that number as we move through the year? Will it stay at that pace, or can you give me an update as to what to look for?

We hope not. I don't think it will stay at that level. We have our typical normal bad debt reserve, and I won't give the specifics of that, but we do target certain days outstanding, or look at how many weeks outstanding to establish that. And these were actually customers who were within our (inaudible) criteria, but unexpectedly ended up having to file for bankruptcy protection. And our policy is to write off the majority of the bankruptcy when it happens. So if we recover any of that it, it will come back later, but right now this is our best guess at what we think the loss will be. We don't anticipate that continuing at this level throughout this year.

Great. And then CapEx now going to be in the range of $75 million this year, it's at the lower end of the range you put out on the last call, can you comment on the reason for that?

Yes. As we've -- bring on the Bardstown facility, part of that facility's operating lease, and then just as cost control measures, and watching our cash flow because of the economy, we are trying to make sure that we are only doing the necessary projects that continue to deliver the best value, and for that reason, I think we got it, towards the lower end of the range.

That's great. Thank you.

Thank you.

Your next question is from Bill Chappell with Suntrust Robinson Humphrey. Please state your question.

This is Linda Gutmann in for Bill Chappell. I wanted to know if you guys had anything -- could share anything with your most recent acquisition with the Cedar Rapids bakery?

I would say Linda, that this is not a bakery, it's a mix plant. A couple of years ago we bought a small mix plant up in Maryland that makes our doughnut mix. This is a small transaction that is not material. It will just be producing a lot of the mix product for us, and some other customers.

Okay. So nothing meaningful to the --

No. It is not material.

Okay. And then just if you guys have any change in the business trends, thus far in May compared to April, what you guys are seeing?

No, I wouldn't, I wouldn't see anything significant to talk about on that.

Okay. Great.

Thank you.

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

Good morning.

Morning, Tim.

My question revolves essentially around the second half pricing. You sort of have a flattish price forecast for the year, or at least that's kind of embedded in your performance. I didn't think the first quarter performance was surprising at all, and looked like a good quarter. A lot of folks -- your competition does have higher prices in the first half and you were talking about cutting prices in the second half. What gives you confidence you will be able to hang on to pricing in a declining price environment?

Tim, I had rather not talking about pricing from a competitive standpoint. Some people have -- I think -- misinterpreted what was said about promotions. I don't -- the last thing I see is a price war, that's -- somebody mentioned that earlier. This is about, how much do we have to promote to keep our brand viable and growing. And that's about all I can say about that.

Okay, Sara Lee mentioned that they picked up about 300 Wal-mart stores for private label, and I don't know what the geographic mix would have there, but was any of that in your area? Did you see any change in your exposure to Wal-Mart's private label business?

No, I did not.

Okay. And then I assume the change in corporate expense related to the change in pension? Is that right?

Yes, that was the primary change.

Okay. Was there a meaningful change in stock comp expense? With the shares down, I would think that would have been a lower.

No, there was nothing really significant there.

Terrific. Thanks so much for your help.

Thank you.

Our next question is coming from David Lebowitz with Horizon Asset Management. Please state your question.

Good morning.

Morning, Dave.

A few items. One, traditionally branded companies have beaten back private label by using couponing. I have not heard that word used in the conference call. Am I to presume it is not one of the options you are considering?

We do a limited amount of coupon, David. It is not a big part of the mix though.

Okay. Secondly, if (inaudible) I was just finding it rough going, and your competition is clearly not living in a life of wonderment , I presume acquisitions are now being shown to you for greater great frequency? Is there anything you can report on that?

Dave, I can't comment on acquisitions, except our philosophy and our philosophy on acquisitions is strong. We want to grow our company with companies that fit in operationally, and fit in financially. We would certainly be interested in taking advantage of that.

And what about doing anymore contract baking? Is that in the cards, or is that something that you are not aware of anything out there that would be significant enough to cause you to turn around and say, yes, this is something we want to go after?

The question has not come up today, but a lot of times I'm asked the question, what is our percent of capacity, and our bread lines are over 100%, our bun lines are over 100%. And when I say that, I am talking about three shifts, 40 hours a week, that's the measurement. So we don't have a lot of extra time. Most of the time you might take on contract manufacturing if you have a lot of capacity. If you need to cover some overhead, you might want to do it. We look at each opportunity that comes our way, and if it makes sense, sometimes we take on the business. If it makes our Company stronger we do it, and otherwise we probably wouldn't.

Okay, and last question if I may. Any blip in the number of distribution routes you have to sell at the moment, or are you down to your standard level?

David, we are basically carrying about the standard level, from the turnover and resell of distribution territory it could be down slightly, but for the most part its fairly constant.

Thank you very much.

Thank you, David.

(Operator Instructions)

Our next question is coming from Bill Leach with TIAA-CREF. Please state your question.

Actually my question was already asked. Thank you.

Thank you, Bill.

And it appears we have no further questions. I would like to turn the floor back over to Mr. George Deese for closing comments.

Well to close, let me thank all of you for participating today. Our strategies are working. We have been innovative with our products and brands, and our team is fierce and determined to win every day in the market place. Thank you for the confidence you have in the future of Flowers Foods. Thank you.

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