Flowers Foods Inc (FLO) 2010 Q2 法說會逐字稿

Greetings and welcome to the Flowers Foods second-quarter 2010 earnings conference call and webcast. (Operator Instructions). It is now my pleasure to introduce your host, Ms. Marta Jones Turner, Executive Vice President, Corporate Relations for Flowers Foods. Thank you. Ms. Jones Turner, you may begin.

Thank you, Jackie, and good morning everyone. We appreciate your joining our call. Our second-quarter and first-half 2010 earnings were released today. If you need a copy of that release, you will find it posted on our website. And we plan to file the 10-Q on or before August 26.

As we get started, of course, I must remind you that our presentation today includes 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 will discuss during this call, important factors relating to Flowers Foods business are detailed fully in our filings with the SEC.

Participating on our call today are George Deese, Chairman of the Board and Chief Executive Officer; Steve Kinsey, Executive Vice President and Chief Financial Officer; and Allen Shiver, our President. Before I turn the call to George, I do want to point out to you that during our presentation we are showing a few charts. You can find those on the webcast.

I also want to remind you that we have an analyst day at our Bardstown, Kentucky bakery on September 22, and we hope that you're planning to join us. If you need more details, just contact me later.

Now let's get on to it. I am pleased to turn the call over to our Chairman and CEO, George Deese.

Thank you, Marta. Good morning. Thank you for joining us today, and thank you for your continued interest in Flowers Foods.

We are pleased to report good earnings growth and margin expansion for the second quarter. Net income increased by 11.3%, operating margins improved by 8.4%, EBITDA margins as a percent of sales expanded to 11.7%, and our earnings per share came in at $0.37.

These results are even more impressive if you take into consideration the accounting gain from acquisition of $3 million, or $0.02 per share, that was in last year's second quarter. We delivered good earnings growth in spite of downward pressure on sales.

Our results validate our strategies, our business model and the efficiencies we have in our systems and processes. Flowers Foods, like most food companies and business in general, continues to feel pressure on sales as a result of the weak economy. The fresh bread category continues to have higher than normal promotion levels, which also impacts the top line.

Even though sales for the quarter declined, we achieved volume increases of 1.9%. These increases were driven by Nature's Own brand and store brand snack cake.

During the quarter new product introductions played a vital role in our sales. In fact, new products contributed just ever 5% to our sales. As a result, according to IRI, we continued to increase our marketshare. Allen will give more details in his report.

Manufacturing operations performed well in the quarter as we continued to bed-down two new bun lines and our new sandwich round line. These three new lines offer improved efficiencies to help us supply our customers and consumers with good value, while serving as an asset for our future growth.

This morning we will follow the format we introduced earlier this year, focusing on the questions we believe are the most important for our Company and for our investors.

First, what about wheat and other commodity costs, given the run-up in recent weeks? Second, what about the promotional landscape? And third, what about sales growth for the remainder of the year and beyond? We will answer these questions at the end of our presentations.

Now I will turn the call to Steve for more details about our financial results. Steve.

Thanks, George. Good morning everyone. Despite pressure on the top line, we were able to grow our EBIT margin mid single-digit, and improve our EPS double-digits.

Now taking a look at a summary of our second-quarter and first-half results. As George mentioned, the fresh bakery category has been under pressure across the whole. Our retail business continued to be impacted by the economy, as well as high levels of promotional activity. The foodservice channel continues to experience overall declines as consumers look to stretch their food dollar.

For the quarter net sales declined 1.1% on a reported basis. Price mix contributed a negative 3.5%, and the deconsolidation of the variable interest entities contributed 0.5% of the decline. With the volume up 1.9%, as George mentioned, and sales from acquisitions contributed 1%.

Heavy promotional spending in the quarter was offset slightly by favorable mix shift. Promotional spending for the quarter and our DSD Segment was 7% of DSD sales. I would remind you that the DSD Segment carries the majority of our future and promotional spending.

The favorable mix shift was a result of gains from new products, as well as gains in the soft variety category. Volume gains in the quarter were driven by new product, sales from acquisitions and the Warehouse segment, primarily in the store brand cake category.

The DSD Segment sales declined 3.5% quarter over quarter as a result of the heavy promotional activity. The segment did experience volume increases of about 1%. Allen will speak to share gains in a moment.

Store brands declined in both dollars and units in the quarter. The Warehouse segment grew sales 10.1% in the quarter on flat pricing, with strong mix and volume increases, even when you exclude the acquisition. The segment experienced strong growth in store brand cake, offsetting any decline in branded cake.

Looking at the foodservice channel across both segments, foodservice continues to be soft. We continue to see improvements in gross margin, up 190 basis points quarter over quarter. This improvement was driven by lower input costs, primarily flour. Overall, input costs, including ingredients, packaging and natural gas, excluding acquisitions, was down roughly 8% to 9% in the quarter.

The direct store delivery segment experienced a 260 basis point improvement in gross margin quarter over quarter, and the Warehouse segment gross margin increased about 100 basis points. Both of these increases were the result of lower input costs.

We continue to forecast full-year improvements in gross margin, and we believe that gross margin should improve approximately 100 basis points or so over last year on a full-year basis. This improvement is being driven primarily by lower input costs year-over-year.

Selling, distribution and administrative costs as a percent of sales were up roughly 50 basis point driven by several factors, primarily lower sales, higher workforce-related costs and increased advertising.

As we stated on the first quarter call, selling, distribution and admin expense as a percent of sales are forecasted to be up for the full year by 50 to 75 basis points.

Earnings before interest, tax, depreciation and amortization as a percent of sales increased 70 basis points to 11.7% from 11% in prior quarter, driven by the factors mentioned above and the gross margin in [SD&A] discussions.

The overall improvement in EBIT margin for the quarter was approximately 40 basis points. Again, the big driver in the improvement is the overall lower input costs.

We are pleased that we were able to deliver a 12% increase in earnings per share quarter over quarter. As George mentioned, and I would also call out, last year's second-quarter results included a nonoperating $3 million or $0.02 per share gain on the acquisition. Excluding the gain, earnings per share in the quarter increased almost 20%.

Cash flow during the quarter was strong. Operating cash flow in the quarter was $72.7 million. And during the quarter we spent $26 million on capital expenditures, and paid down roughly $35 million in debt between the term loan and the revolver. During the first half of 2010 we have paid down approximately $75 million of debt. This basically takes our revolver down to minimal levels.

Looking out for the remainder of the year, we are adjusting our full-year sales guidance down to 1% to 2% from the prior 2.5% to 4.5%. This change in full-year guidance reflects negative full-year pricing, overall volume increases and the increase from acquisitions of 0.5% provided earlier in the year.

Based on earnings year-to-date and our earnings forecast for the back half, we are still targeting full-year EPS growth of 10% to 15%.

Now I will turn the call to Allen, who will report on sales and marketing.

Thank you, Steve, and good morning. The marketshare information that I will share with you today is from Flowers custom database for the IRI South food, drug and mass markets. Remember, IRI only captures about 48% of our total retail sales.

For the quarter, IRI reports Flowers' branded sales up 2.2% in dollars and up 7.6% in units. Our branded sales continued to outperform the category in the quarter.

Flowers' units were up 7.6% compared to the category increase of 2.4%. Our dollar increase was 2.2% for the quarter compared to the category, which was flat at 0.2%.

With our branded sales increase our marketshare also improved. Our dollar share of the total category was up 40 basis points, and our unit share was up 90 basis points. We continue to hold the number one branded share with a 23% dollar share and a 19.1% unit share, as reported by IRI.

Our strongest share growth remains in the soft variety bread category, where our Nature's Own brand performed very well this past quarter. In fact, IRI numbers for the South market confirmed that in the soft variety bread segment Nature's Own has a 42.8% share of this segment of the market.

On a national basis, using the IRI reviews database, Nature's Own continues to be the number one brand in the bakery category based on units, and the number two brand based on dollar sales.

At Flowers we are committed to developing value-added new products that provide our customers with a meaningful point of difference. This past quarter our new products contributed approximately 5% of our total sales. You'll remember that we measure new products as those introduced in the past two years.

At the beginning of the third quarter we introduced several new products, including Nature's Own whole-grain white bread, and our new Nature's Own breads with only 35 calories per slice. We also added a third variety, 100% whole-grain, to our successful Nature's Own sandwich rounds.

At the same time we also introduced three new soft textured specialty breads under our Cobblestone Mill brand, Cobblestone Mill Italian, potato, and 100% whole-wheat. You may remember that those products have been in test markets. Now they are available throughout most of our DSD footprint. New products will continue to be an important part of our growth, and we expect good performance from these new items in the second half.

Turning now to store brands. Given the continued difficult economy, we monitor store brand share very closely. And like many food categories, store brand breads continue to trend down in both unit and dollar share. For the second quarter IRI data in the total US shows store brand down to 70 basis points in dollar share and down 120 basis points in unit share.

Moving on to our geographic expansion. We continue to grow in our new markets. As a reminder, we define new markets as markets where we have had distribution for five years or less. We are pleased with our steady growth in Southern California, specifically Los Angeles and San Diego. We now have 95 Flowers distributors serving California, and our business continues to grow in both the retail and the foodservice segments of that marketplace.

We also are pleased with our continued growth in expansion markets such as Louisville, Kentucky; St. Louis, Missouri; Indianapolis, Indiana and Washington, DC. We will continue to expand into new markets, building on the confidence and the trust that consumers have in our brands, while leveraging the positive relationships that we have established with our trade and customers.

Sales from new markets contributed 40 basis points to our DSD sales results this past quarter.

Now to foodservice. Foodservice is an important part of our business, about 28% of our total sales. Our foodservice sales remain soft, reflecting the overall trend in foodservice connected to the difficult economy. We are confident about the long-term growth of our foodservice business based on our manufacturing capabilities and our strategy of offering both fresh and frozen distribution to our foodservice customers.

Let's talk about promotions and brand strength. The fact that our brands, such as Nature's Own, continued to grow in sales volume, sales dollars and marketshare is convincing evidence of our brand strength. Consumer loyalty to Nature's Own is very strong. We continue to generate growth even with the high level of promotional activity that continues to be a significant factor in the bakery category.

Through the second quarter we continue to experience pressure on the top line related to higher than normal promotional pricing. As we enter the second half of the year, we will continue to work to manage our promotional activities and feature pricing to achieve our goals.

Going forward we will continue to leverage the strength of our brands, our quality products, cost effective bakeries and superior execution at the store level by our sales team.

Our goal is to continue generating steady, incremental marketshare gains over extended periods of time. We will continue to grow our Company through innovative new products, growth in our expansion markets, and through strategic bolt-on acquisitions.

Thanks for your attention, and I will now turn the program back over to George.

Thank you, Allen. As you heard from Allen and Steve, and as you can see, our fundamentals are very sound. We have improved earnings and margins and our sales trends are improving. We will continue to invest in our business with two new cake lines and a new sandwich round line that will start up in the second half of the year.

Our investments in new product developments will continue, and will also support our new product introductions.

At the beginning of the call I mentioned the questions that we believe are important for Flowers Foods at this point in the year. First, what about commodities and wheat cost?

Well, this is the first time our team has experienced volatility in ingredient cost. As you know, our purchasing strategies have been in place for some time. We work to understand our future costs so that we can take action internally and take pricing as needed. Steve gave you an update on how we view our input costs. Beyond that we won't comment on wheat and other commodities on how we are covered for competitive reasons.

Second, what about promotional activity? Through the second quarter, as Allen said, we continue to have a significant level of promotional pricing. As we are in the marketplace and reviewing the IRI data, we can see some improvement taking place. Our team is working to streamline our promotions and the level of discounting we offer.

On the pricing front, as commodities, especially wheat, finds a new level of cost, given the Russian wheat prices, we will, as we have during previous spikes, take appropriate action to defend our margins. We are confident in our ability to manage through this. For competitive reasons we will not give further details on the subject.

The third question, what about sales growth? Since the beginning of the year our sales trend has improved steadily as we execute our strategy to introduce new products and develop new business.

As I am sure you have read, the market does expect some inflation as a result of the recent commodity spike. Foodservice is important. The trend continues to strengthen, and that should contribute to our performance in the back half and into the future.

New production capacity will also help us grow sales in the back half. As I mentioned, we have two new bun lines and one sandwich round line already producing. In the second half we will start up a second sandwich round line to help us capitalize on this growing segment of the bread market.

I am also pleased with the progress in the snack cake side of the business. We have new sales and new capacity starting up in the back half of the year. In addition, we have new growth opportunities in tortillas and wraps through the acquisition of Leo's. Of course, you know that we also continue to look for acquisitions that will add strength and reach for both our DSD and Warehouse business units.

In closing, we remain focused on the opportunities that are before us in the baking business. With our outstanding team and the strong balance sheet, coupled with strong fundamentals, we are confident in the guidance we provided for you today. We also feel confident in the future of Flowers Foods as we work to build value for our shareholders.

Now, Jackie, we will turn the line open for questions.

(Operator Instructions). Heather Jones, BB&T Capital Markets.

A very good quarter. I had just a couple of questions. Going to your sales guidance for the full year it does imply a pretty meaningful acceleration into the back half, and you detailed the new production capacity, improving foodservice trends. But I was wondering, it would seem that you also are anticipating a better pricing environment on the promotional front. And just wondering if that is correct.

We do. We feel -- we see a better improved -- we mentioned promotions would be improved. And we also see inflation in the overall food category. And we will just monitor and see how things go, but we feel comfortable with the guidance that we have given.

Do you expect it to be -- because, you know, in DSD I think it was down 3.9% for the quarter. Your guidance would indicate that you would expect positive pricing in the back half -- for the entire back half. Is that a fair analysis?

As you will recall, third quarter last year we really just begin to get into the promotional fray. Fourth quarter is probably one of the worst of the year, so this year should be an improvement over that.

I missed the commentary on your expectations for ingredient costs. I heard the commentary for Q2, but are you still expecting a 7% full-year reduction or did you change that?

There is really no change to our full-year guidance. (multiple speakers).

For 7%?

Right, it is still in that -- well, 7% to 9% range for the year.

Then, finally, just wondering on the SG&A front, for the quarter it was up year on year relative to sales. What is your stock option expense doing? I notice in Q1 it was up, and is that going to continue to be up for the remainder of the year?

It could be up slightly, but I don't expect anything significant out of that.

Okay, thanks, and congratulations again.

Eric Katzman, Deutsche Bank.

A couple of questions. I guess the first one is -- your ability to pull back on promotion, I mean, some of the industry, I suppose if they are maybe locked in for whatever it is, three months forward, maybe it is a little bit more difficult. But I am wondering if to the extent that you have greater percentage of the business at scan-based trade does that allow you to pull back on promotion much faster?

This is Allen. I really don't think the scan-based trading is a tremendous tool for our Company, but in terms of making changes regarding promotional activity, I am not really sure that it is a big factor there. It does allow you to do some things that really make our distributors' life much more efficient, but in terms of rapid -- quickly changing pricing, I wouldn't say that it gives us a big advantage.

But, Allen, would you disagree that it can take the lead time within the category -- maybe bread is a little different from others, but I guess typically it is a couple of months to pull back on whatever is already promised in the market.

In terms of price changes, of course, different customers have different policies. We just work within each one of those customer's requirements.

Then I guess maybe this is more to the mix shift, but I was unclear in that -- you know, the snack cake business within the Warehouse, it sounds like private label and contract manufacturing was up there. And I would have assumed that is a mix shift negative, and yet your profits there were up 30% on a fairly difficult comp. Yet in the Warehouse -- sorry, in the DSD private-label was down. And yet while the profits were up, they weren't up as much as you would have thought given that private label was down.

So maybe you can help me understand as to how that dynamic of -- is playing through in terms of private label and the different segments versus the profit growth in the different segments.

I'll jump in, and maybe Steve or Allen can add to my comments. As you know, we do not break out foodservice versus snack. That is the total Warehouse program. And, of course, we look at it internally, but we do not break it out to the marketplace yet by those particular categories.

I did say in my opening comments that we did have a strong quarter on store brand cake. I did say I was -- I am really encouraged by our snack cake business. We are putting in capacity. In fact, one line started up last week and we have another line starting up in another 30 days from now. So we do have some good plans for the growth in our cake business. And overall we see that trend continuing to get stronger.

Okay. Can you follow that up with how a (multiple speakers) versus private label growth in each -- the difference in each division?

If you look at the snack -- I mean, the store brand snack cake, you compare that to the branded snack cake -- if you recall, Mrs. Freshley's was already kind of a value economic type cake, so a shift from that into store brand doesn't really necessarily affect the overall mix. But the volume growth we have in the store brand cake, because several major retailers are actually -- have been pushing that, was pretty significant in the quarter. So that really drove a lot of that margin improvement.

I guess last question, I will pass it on or maybe get back in the queue but, George, there has obviously been some speculation out there from the -- from various press reports about Sara Lee considering putting up their business.

Where do you see the kind of the business with -- you know, with input costs going up and promotional levels still high, although maybe one adjusts the other, but it just seems like something has got to give here in terms of one of the bigger players, whether it is IBC, Hostess or Sara Lee being consolidated. What do you think about that for the health of the category and for Flowers?

Obviously, I can't comment. I read the same article you did. It came out of Chicago. I would say that since I have been in this industry it has always been consolidating. I have said that numerous times on past calls. Whether or not that ends up being one of the four or five biggest [people], companies, or it is more of the regionals, as pressure comes on on wheat and other costs, health care, everything else involved, it puts pressure on possibility of tax changes coming on capital gains -- I personally thought we might have seen more consolidation this year than we have seen so far.

But I can't speculate on -- I have always said this, we are going to be hanging in there competing. We have had bigger competition, equal competition, lower competition, but from Flowers' perspective I have never felt better about our opportunities to keep growing in the marketplace, expanding our footprint, building those plants that we need to build, and acquisitions as they come, as those opportunities present itself.

So I feel wonderful about the future. There will be peaks and valleys. This wheat situation brings on opportunities with new customers, or whether or not it is acquisitions. I look at it -- we look at it as an opportunity, not a negative.

Okay, I will pass it on and get back in the queue if need be.

Farha Aslam, Stephens.

George, you had talked about two new cake lines. In terms of each line, how much sales can that generate, and how quickly do you anticipate filling up capacity on those two lines?

Pretty often you all ask me what percent of capacity are we running, and on these two particular product lines that I am talking about we were well over capacity. We knew there was some business coming our way, so we invested in moving forward with those.

I would have to look off line and give you more precise number on that as far as how much sales we could increase on both of those lines. Top of mind, I just don't have that number.

No problem. Then I know you didn't want to comment about pricing going forward, but kind of the pricing that you have historically put in the market and the category has, is it for about $5 to $6 wheat? Because the category never really rolled back list pricing. They simply increased promotional activity. Do you think in this kind of wheat price you and the industry might be better positioned versus the spike in 2007?

Going back to 2007, thank goodness we managed through that well. We don't know when the spike will hit. Maybe it has been -- we have seen it already or maybe we hadn't, but we are going to be prepared either way.

And we constantly monitor what is going on around the world and try to take appropriate levels as we need to. And as cost go up, we work to maintain our margins and defend those margins.

You are beginning to hear about inflation in the marketplace. I saw one, a release yesterday that talked about 2.5%, 3% increase in food inflation is beginning to take place. So that is just what is taking place in food in general I think already. I don't think we have seen all the evidence yet to know what those increases will be when all costs get in.

Generally when you negotiate your foodservice and private label contracts that can extend for a few months to a few years, do you generally take coverage on your commodities to lock in a margin on those contracts?

I would say this, for competitive reasons I won't answer that, but I would say this, we always bake that into our guidance to you.

Then my final question is is you didn't repurchase shares during the quarter. Was there a particular reason that you didn't repurchase shares?

No, we think it is a great value. And as opportunities present themselves, this matter of where we are putting that cash, I did mention and Steve mentioned, we did have a heavier than normal capital investment program for the quarter and we do for the year. I think we are planning on investing $90 million to $100 million, but we still think Flowers Foods stock is a wonderful purchase, and we will be opportunistic about that.

Mitch Pinheiro, Janney Montgomery Scott.

So just staying on the commodity and coverage, George, can you at least answer whether or not you are covered out far enough to be able to implement higher pricing in the marketplace that matches these potentially higher flour costs? Do you have enough runway to, if you decided to raise prices to be able to do that, to match so there is not a margin hit in any particular quarter?

I will say our plan is to defend those margins. We think with a good margin level and can improve those margins so that we can continue to be a valuable baker to the marketplace, not only to consumers, but to the customers and that takes good R&D, it takes new bakeries coming online who are more efficient.

So we have to generate money to do that -- good profits. And we will defend that so that we can continue to expand the market. But I will let Steve follow up on that as well.

If you recall, our strategy has always been to know our cost in advance so we can get the appropriate factions into the marketplace to protect our margins, and I would say we are not straying from our strategy. We work to make sure we maintain and know our costs in advance, and that is what we are continuing to do.

Okay, that's helpful.

And we will protect the margin.

Back, I guess when flour and the other commodities spiked in late 2007 and into 2008, have you -- it was interesting, you were obviously protected very well for a period of time, and then were stuck in some higher cost contracts.

Have you looked at -- is there any change in your strategy or just philosophy, maybe not tactically, but in a bigger way? Would you be less inclined to have long positions as prices rose? I know it is trying to guess where the market is going, but at some point does it make sense to be a little closer in when you have -- when the commodities are spiking to historically high levels?

Our philosophy really hasn't changed. You're right in that -- the good news is though you work through those, and we did work through them without too much damage, I trust. But it is hard to beat the market all the time. We think we are as good as most certainly.

But obviously what we try to do is buy where we think we can meet our targets on margins as well as meet our profit goals. That is the number one objective. We are not trying to beat the market. We are not speculators. We need the product, so we are trying to be very in tune with how we feel like those buys match up with pricing and our margin.

Changing the topic to foodservice, both on the DSD and the Warehouse side, were volumes down in the quarter on both of those in the foodservice side?

On Warehouse, I think foodservice, and what we said it is getting better. Our route structure, our DSD business, as well as our normal foodservice business through the Warehouse, we see improvements quarter after quarter. Not still above the line positive, but less down quarter to quarter.

Is that strictly a food away from home shift to food at home, or is there more to it than that? Is there anything up that you can discern from the trends?

I think consumers are real cautious. With unemployment and the weak economy, I think people are very cautious on eating out. We have not had loss of customers or anything that would change our numbers, except less people are eating out.

Last question, I look at the IRI data and I know it is less than 50% of your entire sales, but just in that context, what is interesting to me is you continue to gain meaningful share in your core markets, where you are the far and away leader. When I look at some of the expansion markets, it seems to be taking longer than I would have expected, given the fact that you have national relationships that would allow you to move geographically faster.

I was wondering whether, once again, how you view your progress relative to maybe where you thought you would be a year, 18 months ago. And, B., what are some of the factors affecting, at least from my perspective, to be slower expansion. It is still growing; it is still expanding, but I thought you would see a stronger rate of increase. And meanwhile you are doing far better in your core southern markets. Can you talk about that a little bit?

Yes, this is Allen. I think -- we are pleased with our growth in our expansion markets. I think when you look at the IRI data, you've got to remember and realize that many of these markets we are moving into are very large markets, and it takes a lot of new sales to move the needle from an IRI share standpoint. So I would say overall we are pleased with the progress.

Naturally some markets we are doing better than others. So that is to be expected. But the overall reception, especially to our Nature's Own brand, in these new markets and has been really, really good. I would say we are still very bullish about continued expansion. In some markets we are on track; in some markets we are a little ahead of schedule. But again, I think the reason you are not seeing more movement in the IRI numbers is because of the size of some of the markets we are moving into -- the category size.

Yes, does -- how about your new -- in your expansion markets, is foodservice keeping pace with the same type of expansion with your national customers?

Again, it depends on the market, but in most cases the foodservice growth is going hand-in-hand with the retail route expansion. A lot of our national foodservice customers are working with us as we continue to expand in new markets. So, again, it is a market-by-market situation, but I would say overall we are growing foodservice as well as retail.

Okay, thank you. That's very helpful. Thanks a lot.

Akshay Jagdale, KeyBanc.

Good morning everyone this is Adam Josephson in for Akshay. Thanks for taking my questions.

You guys mentioned last quarter that your approach was to reduce your promotions as the year progressed. And if I heard Steve correctly, promos were about 7% of DSD sales, which is higher than in previous quarters. What, if anything, changed in the quarter?

This is George. I will answer. We said we were working toward that. We knew that it would be later in the quarter and into third and even into the fourth. Somebody mentioned earlier, how long does it take to unravel some things. Sometimes it takes longer than life. That is our philosophy though of less promotions and not as deep promotions. But it does take time. But that is our philosophy and that is where we are headed.

Right. How do you think the rising wheat prices are -- assuming wheat prices stay roughly where they are, will change the nature of the competition that you're dealing with right now?

I don't know about our competition. I think all -- looking at it as we increase -- our costs increase we work like crazy to make sure that everything in our plants are correct and all of our costs are correct. And once we do that, then we work on the sales and promotion side of that, how can we be more effective.

It is an ongoing process. Naturally though when costs go up big spikes, I don't think anybody can absorb all of that. You have to work on it and try to improve the situation.

A general question, would you rather have wheat costs rising or falling, all else equal?

I know I said on this call that things like the little inflation is probably healthy for the grocer and healthy for the manufacturers. Hyperinflation or huge spikes might be harder to manage. Deflation is also hard to manage -- maybe harder. So I would say that some inflation is pretty positive and probably a good thing.

All right. Then lastly, if wheat prices stay at roughly current levels, do you expect to be able to pass on the higher prices to retailers, given that bread is a staple type item, and given the pressure that retailers have been under in recent quarters?

Adam, for competitive prices I won't talk about what we are going to do on pricing, but I would say that we are going to protect our margins. And inflation is -- will be coming, I am sure.

Bill Chappell, SunTrust.

Just maybe ask the same questions a different way. If I'm looking at the gross margin for the full year, it really got up 100 basis points, and you have done up 140 year to date. So I am trying to understand if with your normal hedging policies, it would seem like you are better prepared from a margin standpoint with the price increases should actually boost gross margin. So I don't understand why they may contract versus what you have seen year to date.

If you look at last year, the first half was our highest cost, so the improvement is much more dramatic in the first half than the back. Clearly in the back is when things from a cost perspective leveled out a little bit for us. So that is one factor contributing to that.

Then we've had some startup cost with the new lines in the back half. We will have some of that. I don't think it should be huge, but there will be some startup costs in the back half with the lines, as George mentioned.

So there are a few things there that we think the 100 basis point improvement can probably be improved upon, but that is where we are most comfortable right now setting the guidance.

Then looking again at the top line for the second half, again, it implies kind of 4% to 6% top line growth to get to your number. I'm just trying to understand, is half of that pricing, is it three-quarters pricing? And do you feel like there's a chance you could beat those numbers or is this, with what you have, a pretty good guide for the rest of the year?

We have really worked hard on this trying to make sure we have the guidance right. We never want to mislead you or misinform our investors, and certainly we don't want to misinform ourselves. So we really feel comfortable with this number based on the business we have, based on promotional activity we talked about, based on some cake business coming our way, and some other business that we know and feel comfortable with. And that is how we arrived -- and Steve went through that on the chart, I believe, on where those different growth areas would come from.

I guess just one last follow-up. If I look at the basket of costs for the second half, excluding your hedging policies, clearly wheat is higher. How about the rest of the basket, how does that look, both for second half of this year and maybe even going first half of next year? Thanks so much.

Well, as part of next year we really haven't put any guidance out there, so on this call I don't think we can comment on that. We are still -- we are actually in our planning phase, so it might be a little early to comment on next year.

But if you look at all other costs, outside of the input costs, it is really in line with where we guided at the beginning of the year. That really hasn't changed much, because once we get into the year we know that pretty well. That was in that 4. Those costs were up 4% to 5%, which was offsetting the benefit from the ingredient cost.

(Operator Instructions). Heather Jones, BB&T Capital Markets.

Thanks for taking the follow-up. So you mentioned the new business coming online for snack cakes and the new capacity. So the comparisons from a volume standpoint get meaningfully more difficult in the back half. Should we expect an acceleration in year-on-year volume growth, given this new business and new capacity?

You would have to look at certain channels and certain products. You might not see it throughout the proper mix, but certain in certain categories we will see that.

In your press release, in your comments in the press release you talk about improved trends in the most recent weeks. I am just wondering if you could give us some color on what kind of improvement you saw through the quarter? Specifically on the pricing standpoint, like was promoted pricing down significantly more early in the quarter than it was say in the last few weeks?

So when we said we saw trends improve through quarter over quarter, since the fourth quarter, in fact, we said strengthening to be less down. What the meaning was -- what we have seen so far this quarter is a continued trend overall was not -- is not necessarily pointing to promotions being more or less. It is just our overall business versus same time last year you begin to see a better comparison.

So, I will ask the question explicitly then. In the last few weeks has pricing -- promoted pricing been down last year on year than it was for all of Q2, the 3.9% decline?

I don't think that would be true. I think we have seen -- there's been some improvement in some markets, but I don't -- from an overall standpoint I doubt that would be the reason (inaudible) improvement.

I understand your caution, you know, speaking for your competitors and all, but given -- it sounds as if you all have some attractive coverage in place. But given the significant increase in wheat prices, significant increase in export projections for Hard Red Winter Wheat, and some of the more aggressive of your competitors, their share hasn't improved. Is it unreasonable to assume that later this year, going into 2011, that some of this competitive activity should abate in your view?

In my view, you would think so, but I can't -- I don't have any control on it, except what we do, and I said explicitly what our plan is.

Eric Katzman, Deutsche Bank.

Thanks for allowing the follow-up. I guess my question has to do with the retail landscape, particularly in the Southeast market. I guess your share points to that business as being pretty strong, but has there been some, I guess, Winn-Dixie closing some stores, some retailer disruption, did that have any, let's say, short-term impact on the business in the second quarter? And does that -- how does that play into the second-half outlook?

This is Allen. If we look back at the quarter in terms of changes with our retail customers, there has been a couple of situations where stores have been closed. But in terms of going forward, it is not a material change to us as we look at the rest of the year.

I appreciate it. Thank you.

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

Thank you, Jackie. And again, thank you for your interest in Flowers Foods. And we hope to see you in Bardstown, Kentucky on September 22 at our analyst day. Thanks for joining us.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.