Flowers Foods Inc (FLO) 2013 Q1 法說會逐字稿

Welcome to the Q1 2013 Flowers Foods first-quarter earnings conference call. My name is Sandra, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Ms. Marta Jones Turner. Ms. Marta Jones Turner, you may begin.

Thank you, Sandra. Good morning, everyone. Our results were released this morning, and the 10-Q also was filed. If you need copies of those, you'll find the release on the website and, of course, a link to the 10-Q.

Participating on the call this morning we have George Deese, Flowers Foods' Chairman and Chief Executive Officer; Allen Shiver, our President; and Steve Kinsey, our Executive Vice President and Chief Financial Officer. As Sandra said, we'll deliver prepared remarks, and then open the call for your questions a little bit later. You will find slides that support the comments on our website, if you want to access those.

As we get started, you know that I must remind you our presentation today may include forward-looking statements about our Company's performance. Although we believe our statements to be reasonable, those statements are subject to risks and uncertainties that could cause actual results to differ materially. In addition to the matters we'll discuss during our call, important factors relating to Flowers Foods business are detailed fully in our SEC filings.

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

Thank you, Marta. Good morning to each of you, and welcome to our first-quarter conference call. We appreciate your continued interest in Flowers Foods. From many perspectives, our first-quarter results were outstanding. Across every function, in every bakery, in every department, our teams' efforts are simply amazing as we serve our customers, and make certain consumers have the breads, buns, rolls, and snack cakes they need as the marketplace adjusts following Hostess's departure in November. Our team achieved a 26% increase in sales, and a 64% increase in adjusted earnings per share. We believe this was the best quarter in our Company's history.

Now, comparing our first-quarter results to the long-term goals we established in 2011, we certainly exceeded our goal for 5% to 10% sales growth. Our adjusted EBITDA margins in the quarter was 12.3%, which is in the middle of our goal for 11% to 13%. Our long-term objective is for double-digit earnings growth. The 64% increase in EPS for the quarter measured up very well against that goal.

We continue to strike well ahead of schedule on our goal to have our fresh products available to at least 75% of the US population by 2016. In early June, we expect to have completed our roll-out of a new Sara Lee business in California. When that occurs, more than 77% of the US population will have access to Flowers Foods' fresh baked foods.

It was another very busy quarter for Flowers Foods. We announced an agreement to acquire 20 Hostess bakeries and 5 Hostess bread brands in January. The bankruptcy court approved the transaction in March. Currently, the proposed transaction is undergoing regulatory review, and we expect that process will be completed in the second half. I know you have many questions about the proposed Hostess acquisition, but let me tell you upfront that since this matter is under regulatory review, we will not be able to answer your questions regarding this transaction.

Now, back to the highlights for the first quarter. We completed the acquisition of Sara Lee California, and continued our efforts to integrate last year's acquisition of Lepage Bakeries in New England. We announced a new term loan, and amended our credit agreement in anticipation of pending acquisitions. And keeping within our management succession plan, we announced that Allen Shiver will take on the duties of CEO at our shareholders' meeting next week. More on that in just a moment.

In the press release, we offered some discretionary directional guidance for the second quarter, but not for the full year. I can tell you that I believe it will be a record year, and that it will meet or exceed our long-term objectives. With the Hostess transaction still under regulatory review, we are unable to give you full-year guidance. We expect that process to be completed in the second half.

Our integrations are ongoing, as planned, and we have significant growth still to be achieved in our new markets and other parts of the country. Our team is doing an outstanding job. In my career with Flowers, I've never been prouder or believed more strongly in the Company's future. I want to thank each member of our team for their efforts. Keep up the good work.

Before Allen and Steve give their reports, I'd like to remind you that we take management succession very seriously at Flowers Foods, not just at the top level but throughout the Company. Each of our managers realize it is their responsibility to plan for the future. Having experienced leaders who understand our strategies and our culture has contributed to our Company's success through several generations.

Since Flowers was founded in 1919, which is 94 years ago, we have only had five individuals in the CEO position. Next week, the sixth Flowers CEO will take that responsibility. At Flowers Foods, we strongly believe in continuity of leadership and continuity of philosophy, which we think has been a real competitive advantage for Flowers Foods through the years. Allen Shiver's been with the Company his entire career, 34 years, and a few more years counting his work part time while in school. He gained a broad base of experience and knowledge about our business through many assignments in operations, sales, marketing and other areas.

I, along with the Board of Directors, have full confidence in Allen's ability to provide insightful leadership, and guide our Company for the future. I also know the quality and experience of the executive team and of our leadership team throughout our Organization. That gives me confidence that as Allen takes on his new role, you will see the Flowers way continue as we focus on opportunities to grow and build value for our shareholders.

Now, I'm pleased to turn the call over to our incoming Chief Executive Officer, Allen Shiver. Allen?

Thank you, George. We certainly are pleased to report such great results this quarter. It's important to remember, it wasn't by chance that our team was in position to capitalize on the opportunity presented by the Hostess exit from the marketplace. Through the decades, Flowers has continuously invested back into our bakeries, improving our product quality and enhancing our brands.

Today, we continue to apply innovative solutions to our processes across the Organization. Those certainly are very important to our ability to perform as we did in the first quarter. However, there is no doubt in my mind that our Flowers team is the most important contributing factor in our ability to deliver exceptional results. Using the systems and resources our strategies have created over time, our team is aggressively growing our business as we serve the needs of customers in this changing competitive landscape. The Flowers way is a proven, solid approach. As we move forward, we will continue capitalizing on opportunities, and building on the strategies that have worked so well in the past.

First, let's look at the marketplace, and how the fresh bread and roll category performed in the quarter. You will recall that from our past presentations, that 98% of households in the US buy fresh packaged breads. For the total US, as reported by IRI, the fresh packaged breads category declined 0.8% in units, but dollars showed an increase of 0.7%. This is a slight category improvement from our last quarter's call. The wholesale bakery department remains one of the most important product categories in the supermarket, contributing significantly to both sales and profits for our retail customers.

Before we take a look at how Flowers brands performed during the quarter, let's take a look at store brands and the market share in the category. For more than two decades, store brand has held a large share in the fresh packaged breads category with roughly a 25% share of dollars, and a 35% share of units. In total, the store brand share moves a few percentage points up and down over time, but it has stayed in that range for many, many years. This past quarter, we did see a slight uptick in store brand share that we believe is attributable to the competitive changes taking place in the industry.

You probably won't be surprised to know that IRI shows our sales volume increase translated into very good growth in our branded products. Our brands increased 20.4% in units, and 21% in dollars. That's using the total US multi-outlet data from IRI, and it includes fresh bread, buns, rolls. Remember, these IRI numbers do not include cake.

In the most recent weeks, since the quarter ended, IRI reports, and our internal data confirms, that we're seeing a slightly stronger increase than the quarter's view, with our Nature's Own brand and Sara Lee in California driving much of that growth.

Looking now at Flowers branded share -- according to IRI, Flowers Foods' share of the fresh bakery category, again, including fresh bread, buns and rolls for the total US, increased to 13.1% of dollars and 11.5% of units in the quarter. Looking at recent weeks, our share continues to grow, reflecting growth in our core markets, as well as the Northeast, California, and other expansion markets. As we've told you before, each share point in the total US fresh bakery category equals about $103 million at wholesale.

Now turning to the cake category. IRI data shows that in the quarter, the cake category declined 4.9% in units and 1.9% in dollars. We were pleased that our Tastykake and Mrs. Freshley's brands performed very well in the quarter. In fact, our cake business was up double digits. All segments of our cake business increased, but the strongest growth was our single serve snack cakes. As noted in our release, net price mix was down 1.1%. This change was driven by our growth in single serve snack cakes.

Across both segments, DSD and warehouse, food service sales were strong for the quarter. This growth was achieved from our existing customers, as well as new business. Our growth in food service was not driven by the departure of Hostess from the marketplace. Our expansion markets delivered sales significantly greater than our goal of 0.5% to 1% of our total sales increase. New products also contributed more than our goal of 3% to 5% of sales.

At our Analyst Day in March, we reported that we've added new business across all our channels. In fact, today we're serving over 20,000 new store locations compared to last year. This is an increase of over 20%. That increase includes acquisitions, along with new business throughout our core and our new markets. You may remember that we introduced Nature's Own and Tastykake in Lepage markets in the Northeast last Fall. We are very pleased with how consumers are responding to these brands.

Since February, we've been expanding our California sales operation, and adding the Sara Lee business we acquired from BBU. The bakery category in California is one of the largest in the country, representing tremendous growth opportunities for our Company. I'd like to give a special thank you to our West Coast team. They are working extremely hard to successfully build our business in California. I'm happy to report that our California integration is on schedule.

The improvements we've made in efficiency levels over the past few years have helped our bakeries absorb the substantial sales increase that we've seen in recent months. Congratulations to our manufacturing team, whose efficiency increase has added the additional production capacity of 2.5 of our most efficient bakeries.

Our newest bread line in Oxford, Pennsylvania started production earlier this week. This added capacity will help us serve the growing needs of our newer markets such as Philadelphia and Pittsburgh, while relieving some tight capacity in our bakeries currently serving those markets.

These are exciting times for the baking industry and for Flowers Foods. Our DSD reach stretches across the country, and some of our greatest growth potential is in high-population states like California, Pennsylvania, and other markets in the Northeast. As we have expanded our reach over the last decade, Nature's Own has achieved tremendous growth and is in position to exceed our $1 billion retail target by year end. With the addition of Tastykake and the expansion of this brand across the majority of our DSD footprint, we're seeing encouraging consumer acceptance and sales growth. Our retail sales target this year for our Tastykake brand is $400 million.

I am truly honored to lead the best team in the industry. George commented on my new role as CEO, but I want to remind you that as Executive Chairman, George will continue to give guidance as we navigate our growth opportunities and work to stay true to our culture and proven operating strategies. As I move into my new role as CEO, I have tremendous confidence in our future. We have great bakeries, strong brands, and the most experienced team in the industry. These are the reasons why I believe the best is yet to come.

With that, I'm happy to turn the call over to Steve Kinsey for the financial review. Steve?

Thank you, Allen, and good morning, everyone. Our first quarter net sales, as you've seen, of $1.13 billion increased almost 26% compared to last year's first quarter. Volume was strong in the quarter, up 19.3%, primarily the result of gains in the marketplace as a result of the Hostess Brands exiting the market back in November of 2012. Price mix in the quarter, as Allen stated, was down 1.1%, with pricing gains being offset by a mix shift in our cake business.

The Lepage and Sara Lee acquisitions contributed 7.7% to the first-quarter revenue growth. Lepage is performing as expected, and we are pleased with the contribution from the Sara Lee acquisition in the quarter.

Operating earnings in the quarter, excluding the bargain purchase gain and acquisition-related costs, were up approximately 76% this quarter over last year's first quarter. Overall, the increase in operating earnings was driven primarily by the impact of stronger volume and the contribution from Lepage -- the Lepage acquisition. Interest expense was $8.8 million in the quarter, up $4.6 million over last year, due to the increase in debt related to recent acquisitions.

The reported effective tax rate in the quarter was 22.8%. However, if you exclude the gain on acquisitions [and] income, the effective tax rate was 35%. This is slightly better than our forecasted rate of 35.5% to 36% for the full year, and this slight improvement is the result of certain favorable discrete items recognized in the quarter.

GAAP earnings per share were $0.81 for the quarter. This includes a bargain purchase gain of $0.37 per share related to the Sara Lee California acquisition. We also incurred acquisition-related costs in the quarter of approximately $0.02 per share. Earnings per share adjusted for these two items was $0.46. This compares to $0.28 per share in the first quarter last year, or an approximately 64% increase. As expected, the Lepage acquisition contributed $0.02 per share to the quarter's earnings.

Gross margin in the quarter as a percent of sales increased 150 basis points to 48.2%. This overall improvement as a percent of sales was driven primarily by stronger sales volumes. On a volume-neutral basis, excluding acquisitions, input costs, which we define as ingredients, packaging and natural gas, were up approximately 3% quarter over quarter. Selling, distribution and administrative expenses as a percent of sales were 36.4% this quarter compared to last year, 36.8%. Excluding the acquisition-related costs of $4.6 million, selling, distribution and admin as a percent of sales was 36%. This is down 80 basis points over last year's first quarter. This improvement is the result of leveraging SD&A costs on the stronger sales results.

Turning to our balance sheet. Cash provided by operations was a positive $87 million in the first quarter. We ended the quarter with approximately $638 million of debt. This is slightly better than we had forecasted.

During the quarter, we closed on the Sara Lee California acquisition for $50 million, and we escrowed $18 million for the Hostess transaction. Since year end, we have paid down $34 million on our existing term loan, and we drew approximately $66 million on our revolver. Our cash flow remains strong, and we continue to focus on paying down debt. We did put in place this quarter financing for the pending Hostess transaction.

As George mentioned, we have deferred giving any specific full-year guidance on 2013 as we await the outcome of the regulatory review of the Hostess transaction. However, looking at the nearer term, we continue to see sales improving significantly. We expect sales in the second quarter to be strong. During the second quarter, we will continue to roll out the Sara Lee brands in California. We anticipate that all phases for this roll-out will be completed by mid to quarter end. Operating earnings are trending as anticipated. But we do continue to incur costs associated with our integration of the Sara Lee California acquisition, and also costs related to new markets.

The back half of 2013 will be affected by the timing and the outcome of the regulatory review. Our forecast for input costs is still to be up approximately 3% to 5% on a volume-neutral basis year over year. And also I'd like to remind you that we will cycle the Lepage acquisition at the beginning of the third quarter.

Thank you for your interest, and I'll turn the call back to George.

Thank you, Steve and Allen. In closing today, and before your questions, I'd like to tell each of you that it's been a real honor to serve as Flowers Foods' Chief Executive Officer for the past 9.5 years. My personal thanks to each of you for your tremendous support through the years. Now, I look forward to my new role as Executive Chairman, and my full support, along with your support, will be with Allen as he assumes his new role as CEO next week.

And as always, we believe our strategies are strong and sound. Our team is the best in the industry. And we are moving forward to take advantage of growth opportunities in the baking category, and we will continue to build value for you, our shareholders.

This concludes our prepared remarks, and Sandra, I will now turn it over, if you will open the call for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Farha Aslam from Stephens.

Hi. Good morning. Congratulations on a great quarter.

Thank you.

Thanks.

And my question is regarding capacity utilization. Was all of the businesses that you've brought on, what would you say your capacity utilization was during the quarter and is there room for you to take on more sales?

This is Allen. I mentioned in my comments what a great job our manufacturing team had done with increasing our overall efficiency, which really went a long way to help us take care of the additional sales. In addition to Oxford, we have recommissioned some additional lines across the Company and we continue to be able to handle the sales well.

I would say that as we expand into new markets, those are the areas that we're looking for the appropriate production solution and we're well -- we've got a lot of options there to pursue. As far as actual capacity percentage, I can get back to you with that number, but we were running at pretty full capacity in many of our markets.

Okay. And then in terms of the pace of sales during the quarter, did they accelerate? Did the growth rate accelerate as the quarter progressed? And could you just give us perhaps some more color about the second quarter sales, do you anticipate them to grow in line with first quarter numbers?

I mentioned in our comments, the weekly IRI numbers confirm this. Our internal numbers confirm it. We are seeing a slight increase in the rate of sales growth. There is seasonality to deal with as we move into the warmer months, which always has a positive effect on our business. So I would say that we are seeing a directional improvement in sales.

Thank you.

Also, Farha, if you recall, we closed the Sara Lee transaction kind of mid to late first quarter, so we also will have that impact to sales in the second quarter as well.

Awesome. My final question is really on the Sara Lee acquisition. As you've closed the transaction and are working to integrate it, you guys highlighted in your press release that you are absorbing some of the costs. Could you just kind of share with us what impact that might have on margins as we model the second quarter?

When you look at the costs associated with this, in the second quarter, we're anticipating from an earnings perspective it's roughly $0.02 per share, give or take, depending on how fast we can roll things out.

So it's going to have a positive $0.02 for the second quarter?

That would be a negative effect (multiple speakers).

Negative.

That's a start-up cost.

Okay. And that's going to flow through the P&L, no kind of extraordinary one-time charge?

Correct.

Okay. Perfect. That's exactly what we needed. Thank you.

Thank you.

Bill Chappell from SunTrust.

Hi. This is Vijay [Ciniglia] on for Bill. My first question has to do with the competitive environment. Are you guys seeing signs of a more rational competitive environment after the Hostess bankruptcy?

Vijay, this is Allen again. I would say that the marketplace remains competitive. This is very much of a market by market situation in regards to pricing and promotional pricing. So I would say the market continues to be competitive. There may be a slight improvement, but in general, if you take a step back, it's really no change from pre-Hostess concerning the competitive marketplace.

Thanks. And then my second question has to do with the share gain. With regards to incremental share gains, are you seeing them hold or I guess how do you see them going forward?

Our team's done a great job improving sales, which improves our share. We're going to work very hard to hold onto the share gains that we've achieved. There will always be threats, but at this point, we're going to work very hard to hold onto the share gains that we've accumulated.

Thank you. That's all the questions I have.

Brett Hundley from BBT Capital Markets.

Hi, it's actually Heather. Good morning. George, it's been a huge pleasure working with you and I wish you the best as -- I guess you're not really retiring, but still I wish you the best in your new role.

Thank you Heather, same goes here.

Thank you. My question's first on gross margin. I was just wondering, for the quarter, it obviously was an outstanding quarter, but the gross margin expansion year-on-year wasn't as large as it was in Q4, but you had the benefit of Hostess for an entire quarter. So just wondering if you could help us think through how we should be thinking about the gross margin line, given these market share gains.

Heather, when you look at -- from a cost perspective, if you look at commodity costs, on a volume neutral basis we're up and then as new business, commodity costs are up year-over-year, so the cost of the product is affecting that. And then also when you look at running our plants and the utilization, there is some overtime associated with that, so that's also affecting the margin as well.

Okay. So as we go through the year, first of all your bringing on the new Oxford plant should help ease some of the overtime pressures. But given what wheat has done, as we move through the year, I guess you will work through some of the higher cost wheat. So should we expect that to help gross margin later on in the year?

I think from a commodity perspective, we won't give specific coverage. But from a coverage perspective, the 3% to 5% cost increase is kind of level throughout the year. I don't know that you'll get significant help in the back half. There could be some slight improvement in the back half.

And one other factor affecting the gross margin, also I think Allen mentioned the mix in the cake business. There's a slight shift there from a dollar perspective and the cost of that manufacturing has also had some effect on our overall business and the margin.

And I wanted to ask you about the cake, because I was under the impression generally that C-store business tends to be higher gross margin. So I had that question. But also, you're seeing this negative price mix in your warehouse unit and you're citing higher single serve sales. Is it that a lot of the new convenience store business you're picking up is being warehouse delivered? Because isn't C-store typically delivered on a DSD basis? So just was wondering if you could help me understand better those dynamics.

Heather, we're seeing growth in both; our Tastykake brand is doing really well with DSD delivery into convenience stores. In areas where we do not have DSD today, our Mrs. Freshley's brand is also growing through the warehouse channel. As I mentioned, our total cake business is up significantly, and it's both DSD and warehouse.

Okay. Thanks. My final question is, so you mentioned the $0.02 dilution related to Sara Lee in Q2. Was there much of an impact from a dilutions perspective from Sara Lee in Q1 and should we expect similar Hostess-related acquisition costs in Q2?

When you look at the first quarter, with the California expansion, it was similar, because we had -- we were preparing the market for that closing of the transaction. So there was also -- we were incurring a lot of costs up to the closing as well. So there was $0.02 to $0.03 dilution in the first quarter as well.

Okay. Perfect. Great quarter. Thank you.

Thank you.

Akshay Jagdale from KeyBanc.

Good morning. Congratulations on a very good quarter.

Thank you.

So I just wanted to follow up on the gross margin issue. It was great. You also put out your 10-Q this morning so we have the segment details. So the gross margin in warehouse sequentially came down quite a bit. And is that -- how should we think of that in the context of an outstanding sales growth and just overall sales performance in that segment? And why is -- why have gross margins and EBIT margins in that business sequentially compressed pretty significantly?

When you look at kind of the mix of the business and warehouse, there was a shift. You have two components in warehouse. You have cake and you also have food service. There was some mix shift in cake and some mix shift in food service that affected the overall margin.

So how should we think of --

The volumes were pretty strong in that because of the single serve, but from a pricing and margin perspective, particularly in food service, there was a shift from a mix perspective in the margin.

So as a follow-up to that, then should we expect the mix to be similar going forward? In other words, the margin profile to be similar to -- more similar to 1Q or 4Q? How should we think about that going forward?

I think in the near term, I would say it will be similar until we settle some of the Hostess transaction and how the cake is rolling out. In the back half, since we're not giving guidance, I'm not really prepared to comment on that, just because we don't know how the final outcome of some of the cake business will work out.

Okay. And then anything unusual on the DSD gross margin this quarter? I mean, for example, the Sara Lee transaction or just the acquisition, I'm assuming from a gross margin perspective was kind of dilutive to the overall business. Is that fair? I mean, you're talking about $0.02 to $0.03 in expansion related costs. Those are on the SG&A side, I'm assuming. But isn't it also somewhat dilutive to gross margins? I know it's very small. But anything going on in the DSD business that may mask the actual performance margin-wise in that business?

Yes, there's nothing really, any one material thing in DSD that's affecting the margin. With regard to the Sara Lee California business, that's 100% branded retail. So it would not have significantly affected the margins in a negative way.

Okay. And just two questions on sales. One on DSD. The price mix was a lot lighter than I had expected and I believe you had mentioned that, and we have heard, that the industry had taken a price increase late last year. It doesn't seem to be playing through. Is that a sign of the competitive sort of nature of the business today? Or how should I think of -- so bread pricing was taken at the end of last year. I think you had said on your conference call last time that it was sticking, but it's not flowing through in any meaningful way in your P&L right now.

Akshay, I think we did say, and it is true that the pricing that we took early in the fourth quarter of last year continues to hold in the marketplace. The promotional environment is about the same, maybe slightly better. But I think as I mentioned earlier, we had seen a significant increase in our overall cake business. And in that number is a significant amount of single serve cakes. And so when you look at the mix impact of that additional Individual snack cake volume, it has an impact on our overall numbers. But I would say that our price -- the pricing that we took continues to hold, promotional activity is consistent with what we've seen in the past, and we'll continue to evaluate the need for additional pricing as we go through the year.

Great. And just one last one on warehouse sales. Obviously, outstanding performance this quarter and last couple quarters. You did mention that some of the gains were food service related that are not Hostess-driven, if I may. Can you help us understand what percentage of your volume gains came from sort of non-Hostess related growth?

Akshay, it's difficult to give you a percentage. I will say that most of the growth that we've had in food service, a lot of it came with existing customers. We had growth as we entered new markets, and Hostess, quite frankly, had very little food service business at the point that they filed for liquidation. So really proud of our team in capturing additional food service business really on expansion markets and the muscle of our core customers.

Okay. Just a follow-up on that. I mean, with Hostess on the cake business planning to reintroduce product later this year -- in a few months, actually -- how should -- how are you planning for that, basically, and should we expect a slowdown in sort of sales growth as a result of that, starting in maybe 3Q? Or how would you say we should think about that particular threat?

Akshay, I mentioned earlier that we're really proud of our team, both on the DSD side and on the warehouse side of capturing available cake business. We continue to build even stronger relationships with our trade customers on the cake side. We feel like we've demonstrated to many of those customers that we can do a good job helping them take care of their cake category. That's a positive.

On the other side, we always are looking out for competitive threats. We feel like everything that we can do to build our Tastykake brand and our Mrs. Freshley's brand even stronger, we're staying very close to our customers, and I feel like we'll be ready for whatever competitive pressures come. That being said, whenever there's a new entry into the marketplace, it is a threat and we'll deal with it as it comes.

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

Timothy Ramey from D.A. Davidson.

Good morning, thanks so much. George, let me add my congratulations for having built really the finest organization I think in bakery in your tenure.

Thank you, Tim. I appreciate that very much.

Hey, just a couple of nit-picky questions from the Q. I noticed a big jump-up in the distributor routes, and I'm guessing that relates to the Sara Lee routes, because you classified I think $27.8 million as distributor assets or something like that. Is that what we're looking at there?

Yes, Tim, that's the majority of that increase would relate to California.

Okay. And then just the line below that, the contingent refundable consideration, is that related to the hold back agreement or what is that?

That comes from the contract on the sale of the territories.

Okay.

Wait a minute, are you looking at the purchase price allocation? I'm sorry.

No, I'm looking at the balance sheet, so there was a $7.6 million contingently refundable consideration, but the hold back was $10 million, and I just -- I don't know where that comes from.

The $7.6 million hold back has to do with when we exit our supply agreement with BBU.

Okay. Great. And then just a question on the quarterly business done with Walmart and Sam's. It was down as a percentage of sales. And would that just be kind of a change in territory mix that you're experiencing as a Company, where Walmart is just a less significant retailer in the Northeast, for instance, for sure? How would you characterize that?

Tim, I would say our business with Walmart and Sam's is probably stronger than it's ever been. We have entered new markets where our brands are probably underdeveloped and we are growing in those areas. But I would say our overall business with Walmart is very strong.

Okay. And then I guess just my final -- back to Akshay's question. Really, the 800-pound gorilla in the room is the reintroduction of the Hostess cake brands. And kind of tie that to a category that I think you said was down 4% and change, almost 5%. It has to cause concern that these are kind of windfall sales, I would think. How do you think about that and how do you position yourself for that going forward?

Tim, we really don't think of them as windfall sales. I feel like -- I mentioned earlier, our team has done a great job of being in position to take advantage of the opportunity when it presented itself. Again, that being said, we're working very hard to make sure the business we've gained is secure. But again, whenever you have a new competitor re-entering the marketplace, there's always a threat, and our job is to do everything that we can to hold onto the business we've gained and also grow from that base. So we are putting our plans together and I feel confident that we'll be successful.

Terrific. Thanks so much.

(Operator Instructions)

Jonathan Feeney from Janney Capital Markets.

Good morning. Thank you very much. I wanted to -- on the Walmart question, just broadly speaking, as you're taking on and evaluating some new territories, have you seen any change in the trend among national retailers to look at the business in a supra-regional way, as in giving special consideration to you because you do so much business in other territories for them? Or the other way, an increased focus on lowest delivered cost despite what other regional relationships might be. Any change in that trend or tenor -- all national retailers, obviously not just that one.

Jonathan, I would say as the category continues to consolidate, our key customers -- and Walmart is just one of those -- but I would say all of our key customers, they know who Flowers Foods -- they know who we are. They also know our reputation for service. They are aware of how our brands contribute to their sales and profits. And in most cases, we have a team based at their headquarters or based in their hometown which we get to know on a personal basis.

So I would say as we enter new markets, our good reputation really helps us in terms of getting the initial shelf space. And as we do a good job for our customers, that space continues to grow and sales continue to grow. So I would say that as the industry consolidates, the good reputation at Flowers Foods that we've developed over the years is helping us grow, especially with the Walmart's and the other large supermarket chains.

Okay. So not really much change. If anything, they're getting a little bit stronger?

Correct.

Great. Just one other question about the -- as Tim described, the 800-pound gorilla here. How are you thinking about the Wonder brand, the Wonder brand you've inherited. You didn't inherit, actually. You acquired. Are you -- is time of the essence? Is this going to be -- do you need to kind of hurry back to market and make sure this brand returns in appropriate scale? Or is this going to be -- or is this just a small part of -- is it a small part of your consideration of servicing these -- some of the new territories you'll have access to via the acquisitions, how that brand fits in your plans versus the obviously new opportunities for distribution you have with those 20 facilities. Just -- thank you.

Jonathan, I wish I could answer your question, but as George mentioned earlier, the entire Hostess process is under regulatory review and we really need to stay away from that at this point.

Do you like Wonder bread? I'm just kidding. Thank you very much. I appreciate your answers.

Okay.

Amit Sharma from BMO Capital Markets.

Good morning, everyone. Allen, you mentioned private label share has picked up a little bit and certainly IRI data shows that. Have you captured your fair share of those increased private label volumes or does it mainly come from regional bakers?

I would say that in our core markets, our overall branded share is growing strong. I wouldn't say that we've picked up additional private label business. In some of the accounts that we already manufacture their store brands, we are seeing a slight uptick there. But as I said earlier, if you look at it through the years, private label has always had a significant share of this category. It was up slightly this past quarter, but I really don't see any significant change in terms of the long-term trend with private label.

Got it. And the other question is, have you had conversation with your retail customers in terms of [how this] category shelf space reset will happen this year. There's a pretty sizable brand that exited and now it will probably come back whenever you complete the transaction. Are they changing in any way in terms of timing, when categories or shelf resets happen or is it going to be on schedule as usual?

It's really an account by account decision. Some retailers reset their racks in the fall. Some are twice a year. And as I mentioned earlier, we have account teams that stay very close to each individual, whether it's Walmart or other supermarket chains, and they look very closely at the brands that are turning the most dollars for them in their bakery department, and usually our brands are on that list and we continue to grow our shelf space. So I would say there's really been no dramatic change in their schedule on when they reallocate shelf space.

And the final question is, given the performance of your brands, is it fair to assume that when some of the Hostess brands do come back to the market on the fresh bread side, your overall shelf space will [not] decline?

Again, I think we need to -- as I mentioned, the Hostess situation is under regulatory review and we really need to stay away from speculation at this point.

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

Heather Jones from BB&T Capital Markets.

Thanks for taking the follow-up. And I just wanted to ask -- I understand your hesitancy to talk about the second half outlook, but wondering is it fair for us to assume that the commentary provided at your March Analyst Day still holds?

Yes, I would say that's all still true, Heather.

Okay. Thank you very much.

At this time, we have no further questions.

Well, thank you so much for joining us today. It's always a pleasure to bring you up-to-date on what's going on at Flowers Foods. And we would invite all of you to join in on our shareholders meeting this coming Wednesday. Thanks so much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.