Flowers Foods Inc (FLO) 2011 Q2 法說會逐字稿

Greetings, and welcome to the Flowers Foods second quarter 2011 earnings conference call and webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marta Jones Turner, Executive Vice President of Corporate Relations for Flowers Foods. Thank you, Ms. Jones Turner. You may begin.

Thank you, Dan, and good morning, everyone. Our second-quarter results were released earlier. And if you need a copy, of course, that is posted on our website. We also filed the 10-Q this morning, so that information is available with our SEC filings. During the call, we'll be using a PowerPoint presentation to support our speakers, so you can find that presentation on the webcast listen page.

Of course, before we get started, I have to remind you that our presentation may contain -- may include forward-looking statements about our Company's performance. Although we believe those statements to be reasonable, they are subject to risks and uncertainties that could cause the actual results to differ materially. In addition to matters we will discuss during the call, important factors relating to our business are detailed fully in the filings with the SEC.

A quick review of our schedule this morning, George Deese, Flowers Foods' Chairman and CEO, will give opening remarks. Steve Kinsey, our CFO, will give you more details on the financials. Then Allen Shiver, President of Flowers Foods, will talk to you about sales and operations. And then George, of course, will come back, and we'll open the call for your questions.

So I'm very pleased to turn the call over to Flowers Foods' Chairman and CEO, George Deese.

Thank you, Marta. Good morning, each of you. And thank you for your continued interest in Flowers Foods. I'm sure by now you have received and read our 2011 second quarter sales and earnings report. As Marta told you, Steve will give the detailed financial information, and Allen Shiver will follow up on the operational segment for the Company.

Before I turn the call over to Steve, let me give you a quick overview for the quarter. First, we were pleased to announce a 3-for-2 stock split, which was effective June 24. We also increased our annual dividend rate by $0.10, or 12% per share.

In the quarter, we completed the acquisition of Tasty Baking Company, which will add about $200 million to our annual sales. We believe Tasty Baking will give Flowers Foods a national platform to grow our fresh cake business.

Just as important, we feel we can leverage our Nature's Own brand of bread and rolls across the mid-Atlantic and into the northeastern portion of the United States. By serving this important area, we will reach 61% of the US population, moving toward our 5-year target of serving 75% of the US population through our DSD network. I'm also pleased to report that the integration of Tasty Baking is well underway and right on schedule and is going as expected.

Getting back to the quarter, sales for the quarter increased 5.7% year-over-year, and excluding 1-time charges related to the Tasty acquisition, earnings per share was $0.23 versus 24% (sic - see Press Release), a decrease of some 4.2%.

Looking more closely at our results, you will note that our DSD business came in right at expectations. We were up -- by the way, that represents some 75% of our business and the main portion of our business, which had a very good quarter.

We were up against tough comps in our warehouse segment, which represents 25% of our business. You may recall that in the second quarter of 2010, warehouse sales were up just over 10%, so we did have tough comps.

In this year's second quarter, our biggest impact to earnings came in the warehouse segment, which had a shortfall in sales and volume due to a delay in some business and also a lag in pricing, as compared to ingredient costs. We should see improvement in pricing in the third and fourth quarters, as well as improved volumes later in the year.

My main concern for the immediate future lies with our input costs, pricing and consumer demand. I'd say, though, out of these 3, consumer demand is the real concern. Reviewing the IRI data, you will see the fresh, packaged bread dollar and unit growth rates did not perform well as total food.

We saw a similar trend in Quarter 2 of 2008. And what I think we're seeing is a weak consumer confidence, and less visits to the supermarkets in general. And I think as you hear the supermarket reports from around the United States, that you will see the same type discussion, is the consumer not as confident, and they are making less visits to most supermarkets.

Now, [I'd like] to turn it over and say I'd like to turn the -- answer briefly the questions I get most often from each of you. And that is, number 1, you're always concerned about the input costs going forward. I would say, roughly, we're looking at more of the same. And more of the same means that commodities are high, input cost is high. We do not expect that to subside as weather events, more grain usage around the world has created problems for the food industry in the United States. So we don't see any big letdown or comedown on input costs.

I would say this is somewhat different than when we had spikes in certain commodities as far as the Russian embargo or China issues, or whatever, big weather problems. Normally, you might just see wheat go up, but what we're seeing now is [over] all ingredients, as well as energy continuing to, not necessarily spike on each ingredient, but all ingredients and so forth continue to rise at levels that we've not seen on a level basis.

I would say in addition to that, they are volatile. We see more swings in a day than 20 years ago we'd see all year, up, down, up, down. That does create uncertainty and real stress on management to do a great job to level these costs out the best we can.

And I know you always ask, how do you plan to offset the costs? We always look first of all at cost savings initiatives, before we start raising price. For example, this year, we've continued to reduce our dependency on smaller lines, like 400 bun lines.

This quarter for example, we're putting online a new bun line, which does give us increased capacity, which will, again, reduce our dependence on the smaller lines. We're also enlarging our bread line in our northern region, which also will help that region from a capacity standpoint.

We continue to look at inefficient plants; example, Bluefield that we closed in the first quarter. We continue to see how can we consolidate production lines, and we proved that by closing 1 of our mix plants and consolidated production into 1 facility. I'm proud to say that due to our administrative area, with signature capture and distributor portal working through our administration, we were able to reduce a lot of costs in our administrative area.

We've also mentioned the shipping automation continues to be up front. As you go through our bakeries, you will see that the bakeries are completely automated, but when you come to shipping, we always have a lot of labor shipping product. We want to become less dependent on that, and we are investing to improve shipping.

Also, you have probably read we're in the process of getting all the synergies from the acquisition of Tasty Baking Company. That is moving forward and we expect by the first of the year to have that complete in the new fiscal year.

I would say that from a pricing standpoint, we only look at pricing after we go through and look on what we can take out of the business from a cost standpoint. So, we have taken pricing; I mentioned we will be having more cake increases the third and fourth quarter.

We will also have more pricing as we go through the rest of the year on the DSD standpoint. We also have new business that we talked about last quarter, and Allen will talk about in a few minutes, coming -- it's already begun in the back half of the year.

So, we do have cost increases. We have worked to eliminate as much cost as we possibly can. And then we look at improved margins, and we have improved margins over time. If you look back at our EBITDA, wasn't too many years ago, we were looking at 8%.

Now we are talking about from 11% to 13% as our 5-year target. But we're increasing those margins, not on pricing, but we increase margins based on innovation, based on technology, new products, and new business to increase these margins.

The next question that I get most often is do you see continued consolidation in the baking industry? I will say absolutely yes. Not only in the baking industry, but nearly any day you pick up the paper, you see some M&A activity in the United States related to industry in general, but specifically, in the food industry. And I think it's all about growth, on how we grow the top line and be more important to the customers that we serve.

Looking back specifically then as we look at the baking industry, we do see, as you've seen, the larger players announcing merger activity, just as we did with Tasty Baking this year. And I think as we look at the smaller players, the independent players, the [recent] players as they continue to face commodity pressures, as they decide on do I spend new investment in equipment and/or new facilities, as they go through succession planning costs, as they plan for their [estate] planning.

And more specifically, I'd say that most of us know that the capital gains will probably increase tremendously -- or some in 2013. So, I think there's a lot of thought pattern from independent business people to look at that gain coming and to exit the business at this point.

So, my prediction is that the rest of 2011 and certainly in 2012 that you will see probably more activity from an M&A standpoint. Those are the 2 most -- questions I get most often. We will open the line up later for Q&A, but at this time, I will turn the call over to Steve Kinsey. Steve?

Thank you, George, and good morning, everyone. Before we move to the financial review, I did want to remind you that we did file our second quarter Form 10-Q with the SEC this morning, simultaneous with our earnings release.

Now, turning to the financial information, during the second quarter, sales were up 5.7%. This increase, as shown, was driven a by price mix of 4.5%, primarily attributable to price, and a contribution from the Tasty Baking acquisition of 3.3%. Partially offsetting these increases was a decline in volume of 2.1%. The volume declines were the result of pressure in the branded retail channel, and as George mentioned, tough comps in the warehouse segment.

GAAP EBIT of $43.1 million was down approximately 15.9%, compared to the prior quarter. However, excluding 1-time costs of $4.5 million associated with the Tasty Baking acquisition, EBIT, on an adjusted basis, was down 7%, or $3.6 million quarter over quarter and decreased 100 basis points to 7.4% of sales on an adjusted basis compared to the prior-year quarter.

GAAP EPS was 21% (sic - see Press Release) per share, down 12.5%. Excluding the 1-time costs related to the Tasty Baking acquisition, EPS was $0.23 per share, compared to last year's $0.24 per share, down approximately 4.2%. Though second quarter earnings were somewhat pressured, year-to-date earnings per share, as you can see, excluding 1-time costs, was up 3.7% over the prior year.

As George said, sales performance in the second quarter was solid. As shown here, sales have been improving sequentially since we began seeing pressure back in early 2010. Excluding the Tasty Baking acquisition sales in the second quarter this year, sales were up approximately 2.4% on the quarter. This gives us confidence as we enter the back half that we can meet the sales targets discussed in today's call.

Gross margin improved in absolute dollars during the quarter, but was down 80 basis points as a percentage of sales. The overall decline in the gross margin percentage is the result of higher input costs across all segments. Input costs, ingredients, packaging, and natural gas, were up almost 8% on a volume neutral basis.

Furthermore, in the warehouse segment, pricing lag, significant cost increases, and overall volume declines and volume shifts affected the overhead coverage during the quarter. During the second quarter, Tasty Baking negatively impacted margins approximately 20 basis points.

However, as we have said, we expect this to improve as we continue to expand distribution of the Tastykake brand, growing sales and improving operating efficiency in the plants. As a reminder, input costs for the year are forecasted to be up 8% to 10% on a volume neutral basis, and this also [excludes] the effect of the Tasty Baking acquisition.

The second quarter gross margin was not affected by any 1-time costs. However, year-to-date, gross margin did include some 1-time costs, as shown on the slides. Without those 1-time costs gross margin year-to-date as a percentage would be slightly up year-over-year.

EBITDA in the quarter declined to 10% of sales, compared to 11.7% in the same quarter last year. Excluding the $4.5 million of 1-time costs associated with the Tasty Baking acquisition, EBITDA as a percent of sales would've been 10.7%, or down approximately 100 basis points year-over-year. Without these costs, the overall decline in EBITDA margin was driven, as I discussed earlier, by the pressure on gross margins.

Selling, distribution, and administrative expenses were 36.8% of sales, compared to 35.9% of sales in the same quarter last year. The costs associated with the Tasty Baking acquisition affected selling, distribution and administrative costs by 70 basis points as a percent of sales.

Excluding the acquisition costs, SD&A costs, as a percent of sales for the quarter, would've been relatively flat. In the back half of 2011, we anticipate an additional $1.5 million to $2 million of 1-time costs associated with the acquisition. The tax rate for the quarter was in line with 2011 guidance of 35% to 35.5%. Looking quickly at year-to-date EBITDA, excluding the 1-time acquisition cost, EBITDA at 11.4% of sales, compared to last year's 11.3%, was slightly up.

Briefly commenting on the balance sheet and cash flow, as you can see, cash flow from operations during the quarter was negative. The negative cash flow was primarily the result of hedging activities and heavier accounts payable.

We continue to execute on our strategies for the use of this cash, investing in our bakery and paying dividends to our shareholders. Though there were no share repurchases in the quarter, 7.7 million shares remain available for repurchase under our plan, and we remain committed to repurchasing shares on an opportunistic basis.

We did add levers to the balance sheet this quarter as a result of the Tasty Baking acquisition. Even with this additional leverage, we believe that our balance sheet gives us the strength and flexibility to continue to execute on our cash strategy as well as provide for future growth.

As George mentioned and as you've seen, we are adjusting our 2011 guidance today. Sales, including Tasty Baking, are now forecasted to increase 7% to 11% year-over-year. Tasty Baking is forecasted to be 4% to 5% of the increase.

Organic growth remains in line with the previous guidance of 3% to 6%. Earnings-per-share are now forecasted to be flat to up 5%, compared to our original guidance of up 5% to 10%. The forecast anticipates that Tasty Baking will be neutral on EPS for the full year, and also excludes any 1-time charges during the year.

The downward revision in the 2011 guidance is the result of uncertainty, as George mentioned, in the back half because of the slower-than-anticipated economic recovery. Risk to our guidance continues to be the overall competitive environment, as well as consumer response to pricing actions in the back half.

We are also revising our capital expenditure guidance downward to $85 million to $90 million from previous guidance of $95 million to $100 million. Now, Allen will update you on sales and operations. Thank you.

Thank you, Steve, and good morning. As George mentioned earlier, consumers continue to adjust their shopping patterns as they experience financial pressure from the tough economy. In the fresh bakery category, volume continues to be soft, as consumers focus on core items and resist incremental purchases.

In the quarter, IRI reports the fresh packaged bread category in the total US was down 3.5 percent in units and up 2.3% in dollars. In IRI South, the fresh bakery category at retail was down 2.7% in units and up 3% in dollars. In the total US, IRI shows that Flowers was down 2.5% in units and up 4.3% in dollars.

In the IRI South market, Flowers' branded sales in reported channels were down 2.9% in units and up 3.6% in dollars. I'm pleased to report that IRI shows that our market share held steady. In the South market, our brands hold a 23.1% share of dollars and an 18.9% share of units. For the total US, Flowers dollar-branded share is 7.9%, and unit share is 7%.

For the quarter, IRI for the total US shows a 6% increase in average price across the fresh packaged bread category. In the South market, the category increased in average price by 5.9%, or about $0.11 per unit.

Store brands did show some growth in the quarter, up 40 basis points in dollar share, and 80 basis points in unit share. In general, store brand continues to be below share levels held in previous years. Flowers' overall store brand business increased as a result of continued growth in store brand snack cake and incremental growth from new store brand business in the DSD segment.

Our internal data shows growth in channels not reported by IRI. As a reminder, current IRI data captures 49% of our retail branded bread sales, or 24% of Flowers Foods total sales. For the quarter, excluding Tasty, Flowers' internal sales data shows our branded retail sales were down 2% in units and up 3% in dollars.

New products continued to perform well in the quarter. In July, we introduced Nature's Own Cinnamon Raisin Thin Sliced Bagels. We also introduced Nature's Own whole grain sandwich rolls and hotdog buns, as well as specialty items under our Cobblestone Mill brand.

Our total food service sales improved slightly, as compared to the first quarter of this year. As I mentioned in last quarter's call, we are adding new business in the second half with several new food service accounts and expanded distribution with several of our current food service customers.

Our new markets are also performing well. In the quarter, excluding Tasty, new markets contributed 3.5% of our total DSD sales, and growth from our new markets was in line with our goal of 0.5% to 1%.

George mentioned that our integration of Tasty Baking Company is going well. In July, we started offering Tastykakes as part of our product lineup in Florida and most of Georgia, Alabama, and South Carolina. Over the next 12 months to 16 months, most of our remaining regions will have the opportunity to sell the Tastykake brand. As we've told you before, we are confident that the Tastykake brand will strengthen Flowers' ability to gain share in the $4.3 billion fresh cake category.

Our plans are also underway to introduce Nature's Own and the other bread products in the Tasty DSD markets. As we increase sales, we will need additional bread and bun capacity to effectively serve those new markets. We're currently evaluating our manufacturing alternatives. Our plans are to leverage Tasty's excellent relationship with key trade customers as we introduce our Nature's Own brand and other product lines in the key markets into the Northeast.

In summary, our position in the marketplace remains solid, and we are focused on opportunities for further growth. Thank you for your attention, and I'll now turn the call back over to George.

Thank you, Steve, and thank you, Allen. Before we take your questions, let me take just a few minutes to summarize where I see our business. I believe we are on track to achieve our 5-year plan that we discussed with you in March.

Let me remind you that over the long term, we expect sales growth of 5% to 10%, with 3% to 5% from organic growth, and 2% to 5% from acquisitions, an EBITDA margin of 11% to 13% and return on invested capital range of 13% to 15% and double-digit growth in earnings per share. I have full confidence that everything we are looking at and working on and focused on will deliver the five-year plan.

From time to time, we do face volatility in commodities. Pricing may not always be what we expect due to competitive or customer pressures. As you know, we've had a weak economy with high unemployment and that impacts consumers, our business, as well as other businesses.

But whatever circumstances we face, we will continue to conduct our business the Flowers way. We will right the ship and reward our shareholders over the long-term, which we've always proven that we can do that.

I [also have] to say that I can have full confidence of that because of the outstanding team throughout Flowers Foods. This has never been a 1-person show or just the top management team. It's all about what the team can achieve throughout our operation, as well as outstanding support from our distributors in the marketplace. With that, Dan, I will now turn the podium back to you for Q&A.

Thank you. Ladies and gentlemen, we will now be conducting the question-and-answer session. (Operator Instructions) Our first question comes from Heather Jones of BB&T Capital Markets. Caller, please proceed with your question.

Good morning.

Good morning.

I had a couple of questions. Wondering, given your -- the note of caution you sounded, particularly with regards to consumer demand, I was wondering if you could give us a sense, with as much visibility as you have given that we're in mid August, your sense of comfort with your updated guidance for 2011.

Heather, I'll certainly do it. And then Steve and Allen can add to it. I would say as we looked at and really focused on the softness in the marketplace, we did do a lot of study through our IRI, as well as our sales at our warehouse, et cetera. I guess it's 1 of the first times that I've seen -- of course, we did look back quarter-to-quarter, 2008 going forward, and we saw the same trend, exact same trend in quarter 2 of 2008; quarter 1 of 2008 was similar. It did take 2 or 3 quarters for that to work itself out.

I think the lack of confidence, I think people are being very cautious, I think they're trying to be wise with their money, and I think they are taking less visits to the store, the supermarket. And I think it's a cautious time until we see unemployment get -- see some improvement there, and confidence back with the consumer. It's not a drop off the bridge situation, but you do see the volume and units down pretty significant in the bread business.

But I do believe that good times or bad times, that Flowers Foods will perform. I think it will be because of what I said earlier, the team, the innovation, the quality of products, great execution at the supermarket. So, it was cautious, but not to the point where anybody's jumping off the bridge. It's not that kind of caution. It's just saying we've seen a little difference with that consumer, lack of confidence to this point.

And looking then at the sales guidance, looking at the last few weeks, and knowing what's coming ahead, we feel very confident, that sales guidance given this morning. Steve did indicate the risk on the earnings in the back half will be the consumer as well as pricing activity, how all that works out. But we're as confident, I think, as anybody can be, given the circumstances and the new announcement we made on that this morning.

Okay. And looking to 2012, it seems to be a different scenario than 2008, given that in 2008, in the back half you had input costs start to plunge and continue to trend down as you went through 2009. Clearly anything can happen, but the fundamentals for input costs do seem somewhat different this time. So if you could give us a sense of your out -- not guidance for 2012, but more of a qualitative outlook of your ability to put through more pricing for 2012 as needed, and how you think the consumer is going to react. Because again, it looks like the pricing environment is going to be different than it was in the 2009 time frame.

I think -- Heather, I thought you was going to ask for guidance. I was about to give it to you. But no -- (multiple speakers) (laughter) I think as we look at 2012, I think all of us can see that the commodity situation has firmed up. You look back 90 days, going forward, we might see some relief and then all of a sudden, it firms back up again, and we see the firmness as we speak even now.

We don't forecast, in our minds, a big spike from where it is today. I think I said earlier on, I thought we'd see more of the same. But we have seen, if you look at IRI, I think the baking industry and all people in the food industry that is buying these commodities, most everyone is taking pricing in the marketplace, as you review it through IRI and other -- going out to marketplace and seeing it. So, I think we'll be able to price, and today I feel very good about 2012.

Okay. And my final question is just you affirmed your long-term goals. Just wondering, should we expect some potential movement in that year-to-year, just given that we are in a soft economy, don't know when that's going to improve, given we're in a high price environment? Is that your long-term goal? But potentially, like I said, could be some movement year-to-year?

I think that's a wonderful question. That's 1 thing that I always like to remind our long-term shareholders about, this is a long-term business. That's why we like to look at it over time, and we set 5-year targets, because things can change from quarter-to-quarter. This is a daily business. Fresh DSD bread bins is day-to-day. So, we do stay focused daily and weekly and periodly and quarterly. But things can change quarter-to-quarter, and it can change year-to-year.

But if you look out over time, and always look back at that time 5-year time frame, you will see that Flowers on a compounded growth and earnings per share, sales and all of the above, usually -- and that's what gives us confidence. Commodities and pricings do change. But over the long pull, all these things work out. You can have pressure for a couple quarters; you could have a pressure for a year. But over time, with the proven business model that Flowers has, the efficient bakeries that we have, the investment we continue to make in our people and our bakeries and our products, with our customers, it all comes together to build a wonderful Company called Flowers Foods. And we just have full confidence in our ability to move this Company forward.

Okay. Thank you so much for that color.

Our next question comes from Farha Aslam of Stephens. Caller, please proceed with your question.

Good morning.

Good morning, Farha.

George, a question about the volume that you discussed that was delayed from this period to later in the year. Could you give us some color around the size of that, and what were the factors that had it fall more to the back half?

Farha, I can't say all of the specifics that you would like to know. Obviously, there was a delay in the timing that we had anticipated for a number of reasons that I can't go into completely. As you know, we said last year we had invested in our cake business, and anticipating new business coming our way, and it is a delay. It's not that we're not giving the business; it's just things didn't line up and time out exactly the way we anticipated. But we have confidence that everything will work out toward the back half of the year.

And roughly the size of that business?

I'm sorry, I just can't specifically give you that number.

Okay. And then when you looked at pricing, it said that pricing lagged commodities. Was it that when you went in, you got pushback from your retailers and you have to just work through it? Did they put it out for bid? Could you give us some color on -- because you have had your commodities hedged pretty nicely. We're just trying to understand pricing and the pushback you've gotten.

I would say that I'm real pleased that 75% of our business, DSD, did have nice pricing and things did go through. I'd say if you think about it -- and I've heard other food companies say the same thing -- if you think about our DSD business, it's basically wrapped around branded products. We look at our warehouse programs, we are, unfortunately, a little more unbranded. And we have not -- we were not as successful as we would have liked to have been in pushing all of our commodities through. Somebody -- some of that also is timing due to different agreements with different people. But we should see some improvement in third and fourth quarter against those commodity costs. So it is -- it's not no; it's just a delay, but the delay will be eliminated.

Okay, and my final question is regarding your commodity positions. Normally you'd share with us the degree that you're hedged on wheat going forward, and your non-wheat costs. Could you give us some color on your coverage, please?

I'll repeat what Steve always repeats. We always look in -- we always think about 6 months to 9 months as our targeted area. And I would still repeat that today that's our philosophy, and we try to stick as close to that as we can. At some point, if it is low, we're going to longer. If it's higher, we're going to get a little shorter. So that's about all I can say. But that's our philosophy, and we're pretty well sticking to that.

I would comment on that as well, and say for 2011, we gave the cost increases of 8% to 10% on the input cost basket, and we're pretty confident in that number.

Okay. Great. Thank you very much.

Thank you, Farha.

Our next question comes from Eric Katzman of Deutsche Bank. Caller, please proceed with your question.

Hello, good morning everybody.

Good morning, Eric.

Couple of questions. I guess maybe following up on Farha's on the warehouse volume that was deferred. I was kind of surprised at the impact on the fixed cost; I think, Steve, you mentioned that. Was that basically because you built the volume -- you built the capacity ahead of time, and because the volume wasn't there, that's what you're referring to? Because normally, you guys run at a pretty high efficiency, and I wouldn't have assumed that 1 contract would have had as much of an impact.

Eric, I would say, number 1, it's more than 1 -- it's not just 1 company. We just didn't get there as well as we thought we would, as quick as we did. There was a major event, though, in addition to that. But you are right. And we said last year, we did -- we saw great opportunities with this business. Looking back over the past several years in that business and the warehouse has been very productive. And this is just a lapse in time that commodity increases didn't hit the way we -- prices didn't hit the way we thought it would, and the volume did not come through on the time horizon that we had put. Steve, do you want to follow up on that (inaudible) fixed costs then?

I think you're right, Eric. If you recall last year, we talked about all the production capacity we added to that division. And as George mentioned, and we had new branded products, as well as other opportunities in that arena. And the timing just seems to have slipped a little bit.

Okay, and then just a housekeeping item, first of all. The Tasty Baking $4 million-plus cost, in terms of the segment model, was that all in DSD? Or was it in corporate or split? How do we exclude that on the segment model?

The acquisition costs are in the corporate number.

In the corporate number. Okay. And then just going back to -- or just touching again on Tasty, is my memory faulty or did you indicate that you had expected it to be possibly modestly accretive this year? But it sounds like now you're just factoring in neutral, or am I just splitting hairs in a tough environment?

Yes, I would say that there's opportunity for it to be slightly up. It's going to -- it won't be material. Eric, I'd also say that brings opportunities for next year though. And you did see that we had -- I guess we did make an announcement last week that cost reductions in -- as you know, they had corporate overhead. We've got a corporate overhead, and obviously we don't need but 1. And some of that cost is there and some other areas. But it's all about the synergies that we know are there, and we're pretty well getting there, but there is a cost associated with fixing that, so we can get the year started out exactly the way we feel like we need to be.

Okay. And then last question. George, it seems that -- and maybe Allen, you could answer this too -- but it seems as if what's happening is at the very low-end, private label is doing all right. The better -- or, I should say the higher-priced, the premium brands, like Nature's Own or Pepperidge or something like, are doing look okay. And it's really like the local and regional brands that are suffering. Is that how you see it? And what do you think, other than the economy getting better, can help those brands that are in the middle?

Eric, I think you're right. If you look at the entire category, loaf breads, and what I'll refer to as the core items, specifically Nature's Own, Nature's Own brand is doing well. As far as being able to absorb additional pricing, that is something that we feel like the Nature's Own brand can do. We will look back at 2008, the whole category was really trending similar to the category trend that we're seeing today. But in 2008, the category actually absorbed more pricing than the category has absorbed now. So, we feel like, given the commodity situation, that there is more pricing to come.

In terms of what's going to make a difference, I think our strength is really on those core items. And I mentioned in my comments earlier that some of the discretionary impulse purchases I think are the first to go when consumers are under financial pressure. But I have confidence in our guidance, based on our strength is in the core items. And I think those will be the items that are not as affected by pricing, in the overall demand situation.

Okay. Thank you. I'll pass it on.

Okay.

Our next question comes from Akshay Jagdale of KeyBanc. Caller, please proceed with your question.

Good morning. This is Adam Josephson in for Akshay. Thanks for taking my questions. George, you talked on the last call about how consumers were buying much more bread at the beginning of every month than at the end of the month, owing to their financial problems, and that this buying behavior is broadening or was broadening. What patterns, if any, did you see in the second quarter?

Same. The same. I've heard, and you've probably heard the same thing, that it's amazing, at midnight that the first of the month -- the day the checks come out, or other economic things that comes to a lot of people that, at midnight in supermarkets is some of the busiest time they have. Because that check has hit the bank and you can go shop at the end of the month. I'm hearing that from our customers. So, that tells me there's tremendous pressure on the consumer for the tail end of the month. They're just waiting for that check to be downloaded into the bank.

So, first of the month you still see a significant (inaudible) lift. And you go throughout the month, and I think the worst is when you have a 5-week month. That fifth week is not even close to what the first of the month is. And in the fresh baking business, that makes it even tougher, because you still have that space to take care of. You still are trying to take care of the marketplace. So, we have to get smarter and smarter on how we distribute our product toward the tail end of the month and manage that category versus the first of the month.

Great. Thanks for that. In terms of price increases, to what extent do you think higher prices are contributing to the category's ongoing volume weakness? And what, if anything, can you do to prevent continued volume declines?

Well, I think -- and I'll let Allen certainly follow up on this one -- but you are seeing heavy promotions, obviously. But we did see heavier promotions in the second quarter. So, Allen, you want to follow up on the question?

I think higher prices do impact volume, but again, our confidence and our strength is really in those core items. And bread is still a very good value, bread and buns. And in terms of it fitting the household, it's still very much of a routine purchase. As long as we keep our brand strong and our product quality is extremely high and differentiated versus our competition, we should be able to handle the price increases as they come.

Great. Thanks for that. And last one. On a dollar basis, what was your input cost basket up in the first half, and roughly what are you expecting it to be up in the second half?

Steve is taking that one. I don't know if he's got that right at hand.

I don't have the -- we haven't really given the dollar magnitude. The full year, we said it was up 8% to 10%. The first half was -- the first quarter was down roughly 2% to 3%. The second quarter was up the 8% I gave today. Does that help you get there?

Yes. No. That's helpful. Thanks, Steve. Thanks a lot. Appreciate it.

Yes, sir.

Our next question comes from Ted Ramey of D.A. Davidson & Company. Caller, please proceed with your question.

Thanks. George, I sometimes see things as binary. The question is always are you preserving volume and growing the basic business? Or are you doing like what Sara Lee did last quarter, you just say, let the volume just plummet, and we'll take some margin? And you're somewhere in the middle. I don't totally understand that strategy. I guess historically, I would think of Flowers as being more, we have to fight to maintain market share, and maintain our volumes. Can you talk to that question little bit?

Tim, I will. As always, it's a question in judgment. And I think we've displayed, over time, that we do use the right judgment. I'd say that as you look at -- over time, if you look at our market share, we have protected, and it's up slightly, our market share. And as you know in this business, there's big volumes, so you don't move 2 or 3 points in any given time. It's ticks of a percent. Again, if you look at 5 years, 10 years, you would see that we have increased our market share.

Now, I'd say this -- our main point is we will always try to grow at or above the category. If the category is down 3% in units, we will try to beat that. If it's up in dollars, we try to beat that. That's more of a guiding light to us than pure volume, because if the volume is not there, if the volume is truly down, sometimes that's hard to predict. Hard to beat that number.

So, that's our philosophy, and I think it's proven well for us over time. There might be a quarter, here or there, that it doesn't work out, but we'll get it right. As I said in my closing remarks, when something's not right, we'll right the ship, whatever that takes. And I'd say that about protecting our business and growing our business.

And if I could just follow-up on your comments on the economic impact on your markets. If we were having this discussion 10 years ago, I think we both would have said, gee, bread is the ultimate bulletproof, consumer defensive, stable business. And if something's going to go down, it's going to be Chipotle Grill in a weak economy. And now, you're telling us that this is overly sensitive to the economy, and maybe more upscale things, like Starbucks or -- more upscale things that people can do with their money, aren't. How do you think about that?

Tim, I hope I didn't give that complete impression. When I said -- all I pointed to was we saw a similar trend in 2008. We are seeing a similar trend now. But we didn't just look at the bakery category. We went back and looked at what are the alternatives for people to purchase at the supermarket in lieu of bread. And we didn't find any great signals that people traded off of bread to buy something else. We looked at numerous, numerous categories in examining this.

I'll always believe that this baking category will -- you won't see huge gains, but you're not going to see huge losses over time either. So, I think it is a stable business. I think there are times when -- and we did see it back in the low carb issues and all -- there are times when you do see some reduction. But it always comes back, and I have full confidence it will come back.

I'm like you, I do see people eating out at different restaurants -- are they going to fast foods now as much as they did, or are the upscale restaurants doing good? You see all of the above. So, it is a different economy, and depending on where you're at in that cycle as a consumer, I do -- and I've said -- I didn't say today, but I said I believe that people are wasting less than ever because they are so stretched. Less waste does mean you have sometimes less volume because less goes out the door. But at the end of the day, Flowers Foods will find a way to increase its volume and its presence in the marketplace as we continue to expand to that 5-year horizon.

Thank you.

Thank you.

Thank you. Our next question comes from Bill Chappell of SunTrust Robinson Humphrey. Caller, please proceed with your question.

Good morning. I guess first, just housekeeping, on the CapEx number, I guess you fine-tuned it more to $90 million versus to $90 million to $100 million. I didn't know if that was just fine tuning or if that's reflective of the acquisition opportunities you see out there, or how I should look at that.

Really what it is, Bill, it's kind of a combination. We looked at some projects that Tasty Baking had on schedule, 2 minor projects to finish a couple of lines at their new plant. And then we looked at our projections for future production capacity in markets where we may need some. And then looking at M&A activities and what's going on there, and looking at the opportunities across the whole -- we pulled back some as we're -- put a few projects on hold. So, it's kind of a combination of both.

I guess with all that in mind, would you expect CapEx to be up in 2012 versus 2011?

I think it will come back -- it will really depend on the M&A activity. We will continue to invest in projects that help give us better quality and reduce our costs. Those are always the front of mind -- I mentioned that earlier -- on all that we're doing this year and previous years. I think it has to do a lot with the M&A activity that we've already had, and looking at some that might come. As Steve said, we just slowed down. But we have been busy the last several years on the capital investments. We will, next quarter, talk more about 2012. But depends on -- so much on what happens. And that's not trying to be vague, but it does.

Okay. And I hate pin you down, but on the Sara Lee refrigerated dough business, is that something you would've been interested in, or are you really focused more on fresh baking?

They steal a lot of our [punitives] in fresh bread baking and our cake business. That is the focus. It goes back to what I talked about earlier, so much M&A activity. We're not experts in that type business, even though you could make the case, well, it's the same ingredients, it's a slightly different process. But at this point in time in our career and stage of the Company, we just don't want to get sidetracked with something that's not exactly non-core to the business. In fact, most people who have divest -- are divesting businesses, trying to get more core-like. We've been core for a while.

Okay. And then just final question, just trying to understand the price versus promotion. If I'm looking at pricing year-over-year being up, is that more indicative of list prices, or just that promotion really has eased off within the category? Do you expect anything near-term, as I assume the Bimbo/Sara Lee transaction is consummated at some point in the future?

Bill, this is Allen. I think if you look at everyday or regular prices, that is really reflective of the, I think, $0.13 on a national basis for the category. So, the everyday prices are up. Promotional activity continues to be high. But the price points of those promotions are gradually moving up. So an item, looking in the rear view mirror may have been at, we'll say, a $2.19 price; in the future, it may be higher than that, based on the commodity costs that are having to be passed through. And we see that really across the entire category.

And then in terms of the merger and how that might change the landscape?

Of course, [the view of] Sara Lee, there is no news at this point. As far as change in the landscape, I think that remains to be seen. There's still a lot of variables that could influence the category based on that transaction, and I don't think we need to speculate here.

Okay. Thanks for the color.

Thank you.

Our next question comes from Ann Gurkin of Davenport. Caller, please proceed with your question.

Good morning.

Good morning, Ann.

Just a couple questions, one regarding the pricing you talk about in the second half. Is that in the marketplace or are those on situations that you're still discussing with customers?

I'd say most of it has been unannounced.

Most of it is either going in as we speak or very soon.

Okay. And then regarding food service, some companies have talked about food service demand dropping off after Mother's Day. And I was just curious if you saw a similar reaction in your business.

Overall, our food service, I think, year-to-date is relatively flat. However, looking at recent weeks, we are showing an uptick in our food service business, but it's primarily because we are acquiring new food service business; it is not reflective of an increase in our base customers. It's really being driven by new business.

And then George, I'd love 2012 guidance. Do you want to give us fiscal '12 -- (laughter)

I got it in mind, Ann, but I can't say yet.

Okay. That's all I have left. Thank you.

Thank you.

Our next question comes from Amit Sharma of BMO Capital Markets. Caller, please proceed with your question.

Good morning, everyone. George, I just wanted to focus on the snack cake portfolio. Relative to 2008, it's a much bigger portfolio, officially, if you include Tastykakes. Is that part of the business more impacted by the economic environment, given that it's more impulse, discretionary spending? And do you see more evidence for price elasticity in that portfolio versus fresh bread?

When I talked about the 2008 time frame versus now, that strictly had to with the bread and bun category, loaf bread, in particular. As to the economics in the overall cake business, I'd say -- and we've got some things to learn, but I'd say that real hot weather, always the summer is the slowest time of the year for the cake business. There is always a big back-to-school time horizon, and that's -- back around to the May time frame, is probably the best time for the cake business.

As you know, a lot of times, people are not going to the supermarket just to buy cake. To me, it's a lot about impulse, being in the right location, the displays, great product, looks good, good quality, the right price is, to me, what drives the cake business. So, I've not seen any big fall-off because of pricing, and yet we've got a lot to learn yet in this category.

Really just to add to that, one reason we are excited about the Tastykake brand, not only is the brand very strong from a consumer standpoint; Tastykake has some very unique items that are inherent with the brand that we feel like, long-term, can position us to gain more pricing over time.

Okay. And same question is, the Q shows that white bread sales declined again. Can you give us some idea of what the magnitude of decline is? Is it mostly in line with what we have seen over the previous [seven] quarters or is it more or less? And the follow up to that is as white bread sales continue to decline, what kind of impact it has on your gross margin. Can you just provide some color on that, please?

The -- as you know, the white bread category is in decline. We've speculated on the reasons why. But I'd say looking back at this past quarter, our rate of decline in the white bread category has been less than the category in general. We're working hard to try to grow our white bread business. It is important to our gross margin, and our goal is to beat the category trend. And at the same time, if consumers are moving from white bread to other categories, it's important that we capture those sales through our Nature's Own brand in those other categories, whether it may be soft variety or specialty white pan breads. But looking at the past quarter, our white bread trend is slightly better than the category trend, but the category does continue to trend down on white bread.

And my final question is, was 2Q volume impacted by any tornadoes -- we had tornadoes and flood in some of your territories. Was there any material impact from those weather events?

While it was devastating to the people involved, especially in Tuscaloosa, Birmingham and then over into Missouri,. from an overall business standpoint, we had a little -- we lost electricity in our Tuscaloosa plant, but because of our reciprocal baking, we were able to get product from other plants and get it into the marketplace. So, there's not a measurable financial hit to the Company because of that.

Great. I really appreciate taking all the questions.

Yes, sir. Thank you.

Our final question is from David Leibowitz of Horizon Kinetics. Caller, please proceed with your question.

David? Are you there?

David Leibowitz, your line is live.

Good morning, David.

Do you have a question, sir? David is experiencing technical difficulties. David Leibowitz, your line is live. One moment.

In that case, there are no further questions at this time. I would now like to turn the floor back to management for closing comments.

And if there was a technical glitch, David, feel free to call back in to Marta, Steve or one of us, and we'll be happy to answer your question. I thank all of you for your continued interest in the Company. We feel great about our position and the business model that we have in place. And with the team we have, we'll just march forward and continue to do the great job that we've always done, and continue to reward our shareholders. Thank you.

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