Flowers Foods Inc (FLO) 2010 Q1 法說會逐字稿

Greetings and welcome to the Flowers Foods first quarter 2010 earnings conference call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Marta Jones Turner, Executive Vice President Corporate Relations for Flowers Foods. Thank you Ms. Jones-Turner you may begin.

Thanks, Claudia, and good morning, everyone. We appreciate your joining our call. Our first quarter earnings were released earlier today and if you need a copy you will find the release posted on our website. We do plan to file the Q on June 3rd.

I must remind you that our presentation today may include forward-looking statements about our Company's performance. 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 Foods business are fully detailed in our filings with the SEC. Participating on our call today are George Deese, Chairman of the Board and Chief Executive Officer, Allen Shiver, President and Steve Kinsey, Executive Vice President and Chief Financial Officer. Before I turn the call to George, I want to encourage to you mark your calendars for September the 22nd. That's when we'll host our analyst day at our Bardstown, Kentucky bakery so mark your calendars and we hope to see you then. Now, I am pleased to turn the call over to our Chairman and CEO, George Deese.

Thank you, Marta and good morning. And thank you for joining our call this morning and for your interest in Flowers Foods. I am happy to report that our net income increased 8.8% year-over-year and at earnings per share increased 10% to $0.44 per share versus $0.40 per share in the first quarter last year.

Flowers Foods and many other consumer products companies continue to face a challenging marketplace as the economy continues to pressure our customers and consumers. In spite of these pressures, I am pleased that we increased our retail branded sale by 2% and volume grew more than offset price declines. These increases were driven in large part by our Nature's Own core items and new products introduced this quarter. Our overall sales for the quarter declined as a result of lower sales in store brands and continued softness in foodservice sales.

However, it is important to point out that compared to the beginning of the year we are seeing improvements in our sales as we go forward. That encourages our team as we look to the quarters ahead. I want to thank our team for the improvements we made in our efficiencies this quarter. We all recognize that when one of Flower's strengths is our team never rests on past accomplishments. We constantly work to improve our bakeries, our products, and all aspects of our business.

Because of our ongoing efforts, our bakeries today are more efficient than ever. We are growing our branded sales, we are growing our share in a highly competitive market. In short our business model is sound, and I have confidence in our strategies and our team.

This morning, we will follow the format we introduced last quarter focusing on the questions we believe are the most important for our Company and our investors. In our presentation today, Allen, Steve and I will answer questions in our discussion. The first question is about pricing and promotions. Second, what about market share. Third, what about sales growth, and the last question is about gross margins. Now, Allen will report on Flower's brands and market share. Allen.

Thank you, George. And good morning. The market share information that I referenced this morning is from Flower's custom date base for the IRI south market. Remember, IRI data only captures about 48% of our total retail sales.

Flowers brand performed well in a very competitive marketplace. Our branded sales out performed the market in both dollars and in units. For the quarter, IRI reports Flower's branded sales of 3.9% in dollars and up 8.8% in units. With our branded sales increase, our market share also improved. We were up 40 basis points in dollar share and up 70 basis points in unit share.

Overall our market share remains strong with a $22.8 share and a 19.1 unit share of the total category as reported by IRI south. Our brands holds strong market share positions across multiple product categories including white bread, soft variety bread and buns and rolls. On a national basis, using IRI reviews database for loaf breads, Nature's Own is the number one brand in the bakery category based on unit sales and the number two brand in the country based on dollar sales.

We constantly review the performance of our individual product offerings and introduce new products to keep our brand vibrant and relevant to today's changing consumer. For example, Nature's Own 100% Whole Grain which was introduced last fall, as a new item in the soft variety category is doing very well and continues to gain strength in the marketplace.

This past quarter was also very active in terms of new product introductions. We launched Nature's Own Sandwich Rounds and also Nature's Own Thin Sliced Bagels system wide. The introduction of Nature's Own sandwich rounds has been one of the most successful new product introductions in recent years. With only 100 calories and five grams of fiber, consumers are excited about our new Nature's Own sandwich rounds.

We continue to grow in our new markets. As a reminder, we define new markets as markets where we have distribution or where we have had distribution for five years or less. Northern Virginia has been one of our most successful new market expansions, and this year we dropped this market from our calculations due to our five year rule. Without Northern Virginia our total new market contribution for the quarter was slightly less than our target.

Overall we continue to grow our brands and improve our share in new markets. We are working closely with our key customers on opportunities for future market expansions. What about private label or store brands? Unlike other categories in the supermarket, market share for store brand bread and rolls continues to decline in both dollars and units.

IRI data for the total US shows private label or store brand down 100 basis points in unit share and down 40 basis points in dollar share for the quarter. Store brand share for the quarter was 26.5% in dollars and 39% in units. As George mentioned earlier we are experiencing store declines in our store brander sales but we're encouraged by the branded growth we're generating in this tough promotional environment. Our foodservice sales were also down in volume reflecting softness in the overall foodservice category.

Foodservice is an important part of our business, about 28% of our total sales. Although foodservice remains soft, we have seen some improvement in our foodservice sales trend over the past several periods. Our sales and our product development teams are working closely with our existing foodservice customers to develop new value-added bakery products that enhance our customer's menus. Our team is also working hard to build relationships with new customers to enhance our growth in the foodservice segment.

Turning back to the retail marketplace, our share growth this past quarter is evidence that we have the ability to correct short-term market share and volume issues when necessary. The competitive landscape remains challenging and promotional activity continues to be higher than normal in our category. Industry experts have repeated on several occasions that prolonged, deep price promotions are not healthy for our baked foods category or the baking industry as a whole.

Our strategy is to reduce our levels of promotional activity as the year unfolds. We will continue to leverage our competitive advantage of strong brands, quality products, cost effective bakeries, and superior execution by our sales team at store level. Our focus will continue to be on steady, incremental market share gains over long periods of time.

We will achieve our sales objectives through innovative new products, growth in expansion markets and through strategic bolt-on acquisitions. Thank you for your attention. And now I will hand off to Steve Kinsey for our financial report. Steve?

Thank you, Allen, and good morning, everyone. The revenue comps in the first quarter compared to first quarter 2009 were tough. As you may recall in the first quarter last year, we had implemented pricing actions to offset the cost pressures we were facing.

Over the course of the year or so we gave back a significant portion of those pricing initiatives through promotions and features as we competed in a highly competitive landscape. Net sales in the quarter you were down 1.5% quarter over quarter. The main driver of this decrease was erosion in that price.

Promotional activity was up significantly quarter over quarter from the DSD segment for the majority of our promotional spend occurs, promotional fees were approximately 5.8% or 6% or so of DSD sales. We were, however, pleased with the improvement in product mix in the quarter driven by the Nature's Own brand.

However, volume on our existing business excluding acquisitions went down primarily in branded white breads, store brands and foodservice which is in line with trends in these categories. We did, however, see better trends in our sales as the quarter progressed as George and Allen mentioned. The DSD segment did experience good brand in retail growth during the quarter driven by strong branded volume increases offset by price mix declines.

The store brand category was down in both price mix and volume. Non-retail DSD sales continued to be pressured by softness in the foodservice and restaurant category. Overall, revenue growth was in the warehouse segment was driven by acquisition. Excluding the acquisitions, the warehouse segment continued to be pressured by softness and foodservice and within the categories.

In spite of the softness in revenue, we did see the gross margin expand in the quarter some 100 basis points. This improvement was driven by lower input costs primarily flour and efficiency gains. Overall input costs, ingredients packaging and natural gas excluding our acquisitions was down roughly 9% to 10% of the quarter. The DSD segment saw 200 basis points improvement in gross margin on lower input costs quarter over quarter while the warehouse segment margin declined about 100 basis points as a result of higher input costs and lower margin contributions from acquisitions.

Based on the first quarter performance, and looking ahead, we believe 100 to 125 basis points improvement in gross margin is achievable on an annual basis for 2010. Selling, delivery and administrative costs as a percent of sales was up roughly 40 basis points. The SG&A margin as a percent of sales is being driven by several factors, primarily softer sales, higher employee related costs, and increased advertising.

Early on, we had predicted marginal improvement on the year-over-year basis in SG&A margin, and now appears that the current leverage is probably more sustainable in the near term. Marketing and advertising spending was up significantly in the quarter as we invested more significantly in our brands through more advertising. EBITDA as a percent of sales increased 70 basis points to 11% from 10.3% in the prior quarter. We are pleased with the continued growth trends and EBITDA.

The overall improvement in the operating margin or EBIT of approximately 50 basis points to 7.8% of sales was driven primarily by improvement in ingredient costs. In the current environment, we are pleased we're able to deliver 10% increase in EPS quarter over quarter. Cash flow during the quarter was strong with improvements in networking capital.

During the quarter we spent $29 million on capital expenditures and paid down roughly $38 million in debt. The 2010 guidance remains in line with the guidance provided in our February call. Just a quick note on the deconsolidation of the variable interest entity. The deconsolidation prospective the prior years will reflect results of this entity.

Overall the results of the BIE are not material to the Company's result and did disclosed in our form 10-K and prior quarter 10-Q's you will find the effects of the BIE on revenue and assets in prior years and quarters which should help with your modeling. The deconsolidation is the result of changes in accounting from variable interest entities that resulted in Flowers no longer being the primary beneficiary in this entity. Our guidance takes into consideration this deconsolidation. Now I will turn it back to George.

Thank you, Steve and Allen. As you can see our fundamentals are sound. We delivered on the bottom line and we're beginning to see some improvement on the top line as well. As we told you the last quarter, we are investing to improve efficiencies, to locate production closer to the market and to add new capacity.

In the quarter we started production of our new Bardstown buns line and a new bun line in Leland to support our growth in Texas. This summer we'll bring on new capacity to support snack cake growth opportunities. The rollout of our ship and automation continues. Improving our distribution efficiency and trekking our products even better than ever before.

At the beginning of the call, I will mention the questions that we believe are the most important for Flowers Foods at this point in the year. Those questions are, what about pricing and promotion? Allen told you that the competitive landscape remains challenging.

For most activity is higher than normal in our category. Our approach is to reduce our promotions as the year unfolds. We're using more targeted promotions and our strategy is working. That is evident in the growth of our branded products in the quarter. We also expect to offset costs with pricing actions later in the year.

And what about market share? We will maintain our market share and steadily increase our share over time by introducing new products, leveraging the strength of our brands, and executing in the marketplace. Again, our eyes show that we increased our share and that our brands out performed the marketplace. Now what about sales growth? As we mentioned earlier sales improved as the quarter unfolded.

Sales for our new products and our core items, the strength of our Nature's Own and our ability to execute in the marketplace gives me confidence in our ability to deliver sales growth for this year and over the long-term. Our strategy for retail is to maintain the strength of our core sales base, introduce innovative products and expand our geographic reach for DSD to deliver growth that out paces the industry.

Our strategy for foodservice is to leverage our R&D expertise, cost structure, and customer service to grow our foodservice business and our strategy of our acquisitions remains constant. We also will grow by making strategic acquisitions that broaden our geographic reach. Product offerings and customer base. Our acquisition strategy has been an important part of our growth strategy since Flowers listed publicly in 1968. Going forward, we will continue to see opportunities for growth through acquisitions.

Finally, turning to gross margin, Steve reported a gross margins improved 100 basis points in the quarter as our input costs declined and efficiencies once again improved. Through revenue growth and continuous improvement, we plan to drive margin expansion. To put it simple, we understand the business of baked foods.

We believe our business model is right and that our strategies are sound. Throughout my career and that's been a long time, we have had frontiers to conquer. There is always been a new market to grow, a bakery to improve, an acquisition to bed down. We have opportunities today just as we have always had.

I am confident in our team as we address those frontiers. One of our strengths is that our team is focused on continuous improvement. In every aspect of on our business and at all times. As a result, our bakeries are more efficient than ever. Our information and distribution systems more basic, and our brands and products mix is stronger. Our team is focused on opportunities to continue growing through new cost innovation, acquisitions, expansion markets and further penetration of our core territories to deliver earnings growth for our shareholders over the long term. Claudia, now we will open the line for questions.

Thank you. Ladies and gentlemen, we will now be conducting the question and answer session. (Operator Instructions) Our first question is comming from Eric Katzman with Deutsche Bank. Please state your question.

Good morning, everybody.

Good morning, Eric.

I guess a couple of questions. First, George, you mentioned something about how the forecast assumed some pricing on higher input cost as the year progressed. I am kind of surprised that you're talking about higher in-puts given what's going on these days in terms of overall commodities. Can you go into that a bit more and what gives you confidence that pricing could move up if the category remains pretty competitive?

Well I didn't mean to say input costs. Costs do go up. Input costs on the commodity side we said repeatedly that we feel good about the rest of the year and Steve also hit on that on the commodities side, I believe, so we're not seeing -- talking about input costs from a commodity standpoint.

Labor does continue to change. Healthcare continues to change, pensions, there is always costs moving that they're not always stable or down. I am not saying overall blanket price increase. I mentioned less promotions, and there are selective item that is we need to be looking at from our true costs in what we're getting for that product in the marketplace, so we're always looking to that and I believe with the strength of our brand that we will be able to have less promotions, more targeted promotions as well as some selective pricing in the back half of the year.

Okay. And I guess the -- did you mention, Steve, how much advertising was up in percentage terms in the quarter?

No, I didn't. But Eric, if you look at total spend, which would include the features and advertising, we're up about 130 basis points. Advertising I itself is up roughly 25%.

25%, okay. And then, George, maybe you could kind of touch on what you see out there in the market that -- why would private label be down? Is it the level of promotion that the branded players are putting into the market or is it that the consumer is maybe feeling a little bit better and that's kind of coincident with the better foodservice trends that you started to see as the quarter progressed?

Eric, I did say that. I still see problems in the economy. I still think, though, the average consumer does feel somewhat better.

To really turn though, we need full employment again and that's going to take time as we all know. I would say, though, I think the main reason that private label has slowed down has actually been down the past two quarters has been the innovation that the baking industry continues to be innovative with new products like bagel thins, like sandwich rounds.

I believe that does take some of the private label up as well as heavy promotions than normal on core items like wheat or Nature's Own, and the whole industry, as you know, is promoting heavily on different product lines, different customers, different weeks, so it is heavier, so that does give the consumer an opportunity to trade up even though overall it does affect overall sales and overall prospects, so that's where we are, and but I do sense again that the consumer does feel a little better based on foodservice trends, and the trading up.

Okay. I will pass it on or get back in the queue. Thank you.

Thank you.

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

Good morning.

Good morning.

A couple questions. You talked about the new markets, you know, those open five years or less slightly lower than target where we take the Northern Virginia market out. Can you talk about how your West Coast expansion has been performing?

You said West Coast, Mitch?

Yes, please.

I think we did say on the last quarter that we had really increased our distribution to the West Coast with a number of routes that are serving the marketplace. We continue to go in additional accounts in the market, so we're pleased. It is a tough market.

The economy is tough out there, probably tougher than most of our markets, but we're pleased with the progress in California and we know that it is going to take time. It is not an over night success. It is just being persistent, quality products, having the right price points, and having the customer relations to get access to the market, and then beginning to see the take away.

So when you talk about being slightly less than target, are you referring to -- is it across all of the other new geographies or is there one area --

I think what Allen was saying was because Northern Virginia was our first targeted market that we introduced some five and-a-half years ago, we had real success year-over-year over year in that market. Now that 's dropped off. So we feel good about the markets we have entered, but when you take away a lot of sales base out of that number, it goes down until we build up those other markets.

Okay. Are you still on track for the 1%, 1.5% new geography contribution this year?

Too early to tell but that's not the run rate as we speak today.

Okay. Got you. Promotional activity, you know, I see it in the numbers, the national numbers. Is there a particular area that's more promotional than others or is it pervasive you know across all of your markets?

It is pretty pervasive throughout.

My final question is most categories, food categories, your top three players have a big share, 70 plus share of the market and in bread, you know, just based on my calculation is looks more like, you know, the top five might have 50. How much of a factor is that in, you know, pricing, in this promotion, is there just too many large players in the market fighting for the same space or, you know, do we need to see further consolidation? Can you talk a little bit about that?

Mitch, there are always too many players.

Two's to many.

But let me say that you are right. If you look at different food categories throughout the supermarket, basically you have two or three strong players you might have some in the private label segment, as you know and you said so well that it is different in the baking industry, and if you look at the baking industry as a whole, we feel are suffering somewhat.

We still have not -- we do not have the earnings that a lot of the big consumer products companies have when they get down to three players, but that is what it is. And what we have to do is manage through that, some consolidation would be nice, but we can't predict that. We just working on the best things that we can do to keep driving our sales and earnings not predicting we will have consolidation. We have to operate on the facts that we have today.

Okay. Thank you.

Our next question is coming from Heather Jones with BB&T Capital Markets.

Good morning.

Good morning, Heather.

You mention that had you're going to add snack cake capacity. Are you all running at capacity right now for that for your existing snack cake capacity?

Heather, this is Allen. We're not at capacity today, but we do anticipate picking up some additional snack cake business as we go into next year, so in order to cover that additional volume that's coming on, we did need to add some capacity with new items.

And the core volumes for that category were a little softer than we were looking for. Is your snack cake business still growing volumes nicely and it was just all related to foodservice for the warehouse division?

Heather, our snack cake business is strong. We continue to see growth in both in the Mrs. Sussman brand as well as our growth in private label brands as well.

Okay. And then on the foodservice portion both DSE and warehouse, I thought but I may have misunderstood, did you say that that is getting -- you're seeing improvement there and if so, are you now flat to up year-on-year or has the declines just moderated somewhat?

Of course the entire foodservice category we all see the numbers has been in decline for some time. Our rate of decline is less. We're still not running positive numbers in foodservice, but we are seeing somewhat of an improvement in the trend line.

Okay. And I believe it was in Q4 the numbers you were giving for the IRI data were pretty positive for DSD. Is the situation similar to I believe it was Q4 where the declines and foodservice and I guess private label were just fairly pronounced for the quarter?

I think it is the same trend. Foodservice and store brand was also down in the fourth quarter.

Right.

And this just is a continuation.

Sounds like they must have been down pretty significantly to get to your blended DSD volume numbers. Am I thinking about that correctly?

That is a fair assumption.

Okay. On the SG&A front sounds like you're raising your guidance as far as that spending for the year relative to sales, but taking out the higher ad spend, et cetera, I mean, you all have taken out a fair amount of costs on thank you line over the last couple of years and just want -- you know, assuming the economy gets better and the promotional environment becomes more normalized, I mean, do you believe these costs that you have taken out over the past couple of years, are those sustainable?

They are. I think what you see in the quarter, and Steve I think hit on it when you have lower sales automatically your percent goes up.

Yes.

The leverage that we have we certainly believe is sustainable and will not enter back in and advertising and map spend as Steve indicated is higher, and we do want to get our brands out more, but we have a great distribution system, and I also feel our shifting issue that I mentioned as we rule roll that out, I am not going to say we'll have more down pressure, I'm saying we're going to be more efficient effective though to another that area we need to tackle and that is overall shipping department for more efficiencies.

So, I just want to clarify, when you all said it would be at this level for the year, it was roughly 30, I think 36.8 for the quarter, so you're saying that roughly it will be in that range relative to sales for the whole year?

Heather, this is Steve. You will see it in the 36.5, 36.8% area.

Okay. Going back to the promotional environment, and again you may have addressed it and I missed it but sounded as if you said that that's getting slightly better. Did I misunderstand or is that a fair characterization?

This is Allen again. I think what we said is the promotional environment is still, you know, very competitive and very active. There are some sparks of improvement in different markets and different categories but overall we're seeing a continuation of the same kind of aggressive marketplace that we talked about last quarter.

Okay. With just sparks of improvement.

Correct.

Okay. Final question. George, you talked about increased pricing later in the year to offset higher I guess labor costs, et cetera. I assume you're talking about reducing promotional spend so that implied realized pricing would go up?

That is correct.

Okay.

It has been very active. We will be more targeted. We will have less investment in promotion activity. We feel like in the back half of the year and that's why I feel like the net getting price should be better the last half of the year which in fact it is hopefully some pricing and I did mention several items that we feel were when you look at the costs of an item, the margins on some items might not be where we would like them to about and we plan to take some increases on those type of items as well.

Actual list price increases?

On certain items.

Okay. And finally, on the volume front given that the foodservice rates of decline seem to be moderating somewhat and given your pretty strong performance at retail, should we expect better volume performance out of DSD going throughout the rest of the year?

Heather, I wouldn't be at this point we did see toward the back end of the quarter some improvements on the top line, but I would not go out on a limb and say we will see huge improvements because foodservice will turn around. I still think the economy is pretty tough, but as you will recall second quarter is where we started our promotional activity, last year third and fourth was really heavy, so we anticipate somewhat different this year or year-over-year improvements along those particular equations.

Okay. Well good quarter and thank you.

Thank you, Heather.

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

Good morning.

Good morning, Tim.

Just trying to -- It is a little follow-up on one of Heather's questions where this is this inner play between private label brands and the mass club which is not measured by the ERA data because the ERA data looked great, but you know you did show a volume decline for the quarter, and you showed one for all of last year excluding the extra week, so would you say that your under performing in the mass club or would you say this is all about, you know, your share of the private label business declining? How would I better understand that?

I think the overall as we indicated earlier we have seen decreases in private label now for four straight quarters, not only in the Flowers side but when you look at total US, so we're right along the same trends. I would not say we're under performing in the mass merchandise market. I'd say we're pretty well on track there. The private label is definitely down.

Would you call that a change in emphasis on Flowers approach to the market or is that just you accepting what's happening in the market?

No, we have not change our philosophy on private label. As I said before, it is important segment to us, and I just think it is in a situation where, number one, I think the consumer does feel a little better about what's going on, but more importantly I think the all the innovation that came out on the branded side is giving consumers more choice than it had before and with pricing promotion on branded a lot of people are trading up because the gap is not as wide as it has been.

Got you. Congratulations on that. As I think about the foodservice environment, where are you seeing the rays of sunshine in 2010 years? Is it QSR or I assume your biggest exposure is QSR. Do you have any granular detail on that George?

I don't. I will say that it depends from customer to customer. We serve a wide range of quick serve restaurants, a lot of different customers, and it depends so much on promotion of calendar and/or new item that is one chain might come out -- many changes that one might have over the others for a given period of time. I would say maybe though the midtier you get away from the quick serve a minute and just say that I think the mid-tier restaurants are beginning to come back to life. They were pretty dead for a while and you begin to see that mid-tier pick up some activity.

Okay. Thanks for your help.

Thank you, Tim.

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

Good morning. Congratulations on a good quarter.

Thank you, Akshay.

Just a couple of follow-ups, a lot of questions have been asked, but if I look at your sales growth expectations haven't changed after this quarter and is it a fair characterization based on your comments to say that the main thing that's going to pick up relative to 1Q is just going to be pricing on DSD vis-a-vis the promotional activity? How should I think of what's changing from 1Q onwards for 2010?

It will be dependent on less promotions. And more targeted promotions still driving volume and being competitive but not leaving too many cents on the table.

Right. But that will be the biggest piece followed by some recovery in foodservice, correct?

That is correct.

Okay, and then on the gross margin guidance, I believe Steve said, 100 to 125 basis points improvement, I am just trying to make sense of that. If sales increased even at the low end of your guidance and if costs are down 5% like you had said last quarter, you could get to gross margins way north of what you're suggesting. Am I missing something there? Is costs -- guidance for costs being down 5% change at all?

No, Akshay. I think early on we told you we're conservative because we're not sure what the promotional environment, how the things unfold and as George said, our goal is to target less promotion and things are dependent on that, so I would say we're probably being a little cautious there.

And your cost guidance, nothing changed. I know you said --

From a cost perspective on cods nothing has changed significantly from what we talked about.

Okay. And just one last one on private label. Can you give us more color into what's driving the weakness? I know many people ask this question in different ways, but we were specific retailers driving the price down for bread. Is that the case here or is it just because you have new innovation on the branded side that that's taking space from private label?

I will let Allen take this one.

Akshay, I think there are multiple reasons why. I think, you know, certainly the level of promotional activity on the branded side as George mentioned is just the GAAP and the price point of store brand and name brand. I think there has been a lot of innovation on the branded side which has not taken place in the private label side. I think also even though there is some spotty price reductions on private label, I think, you know, more retailers are realizing that, you know, the bakery category, you know, is one of the, you know, most important categories as far as sales and profit for their stores and that deflation across the board and the entire category is a bad thing, so hopefully, you know, we continue to see branded growth, and I think the private label situation will probably stabilize with time.

Thank you. I will pass it along.

Our next question is coming from Alton Stump with Longbow Research. Please state your question.

Thank you. Good morning.

Good morning.

I don't know if I missed this but with the branded retail sales being up 2% in the quarter could you give me a ballpark as to what the volume versus pricing component of that was i.e., you know, how much the volumes up in that overall 2% sales number?

We're trying to find that number. We might have to do it off line.

That's fine. I am trying to get an idea of, you know, what the leverage can be if we do start to see pressure on the volume front in the branded business, if you can maybe touch on that?

Gavin reported that units were up considerably on the branded retail side and private label side it was down, and we know the pricing was down as well. We can give you that off line.

I don't have the exact percentages here. I'll have to get that for you.

Okay.

Looking at one thing here, it is more volume driven.

Sure. I am trying to get an idea if you can maybe give me color what the contribution margin might be if we did see pricing get to a flattish number on the back second half of the year?

Okay. We'll get back to you on both those issues.

Okay. That's all I had. Thank you.

Our next question is coming from Bill Chapelle with Suntrust Robinson Humphrey. Please state your question.

Good morning.

Good morning, Bill.

Just want to follow up on the top line expectations if I am doing the math right, seems that you need to do 4.5% for the rest of the year to get the low end of your guidance and 7% to do the high-end of the guidance and just are you expecting pricing to come in near term or give me some more comfort that those numbers are achievable?

I would say in the back half of the year is when we would see the majority of it.

So you could see high single-digit growth in the backhalf of the year?

We could see growth in the back half of the year. I won't go out on a limb and say yet what I think it will be.

To get to your full year guidance of 2.5% to 3.5% top line growth trying to do the math, I think that's kind of what you're hoping for, is that right?

Yes, that's right. We would obviously be forecasting improvements after the second quarter and smaller in the back half.

Okay. And then just trying to get a little more color on your commentary of easing back on the trade promotions as we move through the year, is this something that you're seeing the whole category do or you that you're going try to lead and hope that others follow and what level do others don't follow and does the share, how are you looking at it as we progress through this year?

Bill, so many things go on in this business, there is no way to keep up with what you can go five stores and see different specials. What we're going to do is what we feel like we can do best and execute best and not trying to lead, not trying to -- that's not going to try to do what's best for Flowers Foods to drive shareholder value and protect our brands and grow them.

But, just going back to your comments, your thoughts are for the rest of the year seeing some of the trade promotion that is occurred over the past couple of quarters start to ease from a Flowers standpoint?

Correct.

Okay. And then just one last question on acquisitions. I know you do most of your deals with stocks so there is not big tax implications but at the same point we heard more entrepreneurs worrying about capital gains taxes. Is the activity level picking up for that reason or is it pretty steady?

Bill, we just can't comment on that. We're obviously always talking to prospective people, but I would say pretty normal on that discussion.

Great. Thanks so much.

Thank you.

(Operator Instructions) Our next question is coming from Alec Patterson with RCM Capital Management. Please state your question.

Yes, good morning. Thank you. Just to clarify on the 2.5% to 4% sales growth approximately a point of that is from Leo foods?

That's correct. Acquisitions are roughly point on average. That would be Leo's foods and the Nickel plant that we acquired for the second quarter last year.

Okay. And then just to frame the promotional environment a little differently, as you talked about it improving through the first quarter, were the actual promoted price points stabilizing, that is we talked about these promotions on a year-over-year basis, so I am trying to get a sense of the actual price points are stabilizing on the promotions.

Allen, you can back me up. I think pretty well what happened the first quarter same thing going on in the fourth quarter that price point.

Pretty consistent. As far as the individual price points there has been little change on the specific numbers it's just we continue to see promotional pricing in multiple categories but there really has been no change, just a continuation of what we talked about last quarter.

Okay. So this is just really an easing of the base comparison that should help generate better results?

That is correct.

Lastly in snack cakes, two things. One, there has been talk about shelf space changes at a major customer of yours specifically to the Mrs. Freshly's line. Can you speak to whether there is anything going on there we should be aware of and then secondly, I 'm just curious you talked about some new business for next year which is impressive you've lined up new business is that far in advance. Is it with a current customer or do you see this as a new area of business entirely?

We won't address the future on that. What I would say, though, back to your first question was space allocation does get shuffled as people have resets, at least once a year, sometimes twice a year, and space does change throughout the bread and cake business, and we have seen some change.

But you don't see this as material although this point since you're actually expanding your snack cake capacity? Sorry.

We feel very comfortable with our investment in the cake business with this new capacity, and we think the shareholders will be rewarded through that.

Okay. Thank you.

Our next question is a follow-up from Tim Ramey with D.A. Davidson. Please state your question.

Hey George, get being back to this question of what's seem from a volume perspective because you said before you're committed to keeping your volume with whatever adjustments you have to make will increase promotion. You are still losing volume and you lost volume all last year. Is that was the Genesis of my question on is there a strategic shift away from private label? Are you willing to lose volume in private label so long as the brands hold up good or is that how I should think about it.

No we're not. I think you have to get into the numbers. You look at Nature's Own, we have been from -- we have had growth year after year after year, and powerful brand it continues to grow quarter after quarter year after year. As Allen reported it is now the number one brand in the United States on units, number two in dollars so we can't say we haven't been growing. We can say safely though we did see shifts in foodservice. We have seen shifts in the store brands, that's not because we're willing to give up private label. That's because the consumer has changed some. You lose an account occasionally but that's the way business is. But no, we're not changing our philosophy on private label. We'll fight to protect that. It is important to us.

But with sort of consistent volume declines DSD, why would you be talking about decreasing promotions?

Well I've said, though, when you look at certain of our categories we've had very good growth and we have pricing power on certain issues, and that's as far as I can go with that. We'll take the initiative on items that we feel like we can increase and ones we feel like we can't we won't.

Okay. Thanks .

Thank you.

There are no further questions at this time. I would now like to turn the floor back over to Mr. George Deese for closing comments.

Well thank you, Claudia, and I do thank all of you for joining our call today and look forward to seeing all of you in Bardstown and in the mean time, we're working hard to build the Company to be stronger and reward our shareholders accordingly. Thank you.

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