Flowers Foods Inc (FLO) 2015 Q1 法說會逐字稿

Welcome to the Flowers Foods first quarter 2015 earnings conference call. My name is Ellen, and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Marta Jones Turner. You may begin.

Thank you, Ellen, and good morning, everyone. Our first quarter results were released, and the 10-Q filed early this morning. Of course, you'll find the release on the website, and a PowerPoint presentation supporting our discussion is posted on the conference call page.

Before we begin, I must remind you that our presentation today 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 actual results to differ materially. In addition to matters that we'll discuss during the call, important factors relating to Flowers Foods business are detailed more fully in our SEC filings.

Participating on the call today, we have Allen Shiver, President and Chief Executive Officer, and Steve Kinsey, Executive Vice President and Chief Financial Officer. We'll deliver the prepared remarks, and then open the call for your questions as we always do. Now it's my pleasure to introduce our CEO, Allen Shiver.

Thank you, Marta, and good morning. Thank you for joining our call today. During the first quarter of 2015, we grew the sales of our branded products, and we expanded gross margins with lower ingredient costs, and improved manufacturing efficiencies. From a big picture perspective for the quarter, in the overall fresh bakery category, we were up 0.9% in dollars and down 0.2% in units. Category growth came primarily from increased branded sales. Consistent with what we've seen in the past, the industry remains competitive; however, IRI data shows pricing in the category was up 1.1% in the first quarter.

Turning to Flowers, our total US market share of branded breads, buns and rolls was as measured by IRI ticked up slightly this quarter to 14.2. While our share of branded commercial cake market including convenience stores was down compared to the first quarter of last year, it was up from quarter four in FY14. Overall, our share of commercial cake is 9.6. On a consolidated basis, Flowers sales were down 70 basis points.

This morning, I want to look closer at our sales performance during the quarter, to highlight some encouraging results. In the DSD segment, sales of branded bread, buns and rolls grew just over 1%, driven by our white and soft variety bread brands, Nature's Own, Wonder and Home Pride. These brands resonate with consumers, and have contributed significantly to profitable growth in new markets.

Our store-branded DSD business declined, primarily due to the loss of contracts to produce store brand breads for certain retailers. The bid nature of the store brand category means that there are always contracts being won and lost. We have opportunities to grow our branded sales, and we want to make sure our production resources are available to support the growth of our brands.

Tastykake, which makes up the majority of our DSD branded cake sales, posted growth this quarter as our independent distributors continue to have great success growing cake sales in their territories. Our independent distributors work hard to build relationships with their store managers, and to secure display opportunities. Our recently redesigned shipper displays help our independent distributors capitalize on those opportunities and to grow sales.

We know that differentiating our products in the marketplace is key, and the consumer response from our new seasonal cake items and flavored donuts has been strong. As the year progresses, more new Tastykake items will be introduced. Sales outside the retail channel also contributed significantly to the DSD segment's revenue growth this quarter, primarily from volume gains with foodservice and institutional customers.

Turning to the warehouse segment, you will remember that in quarter three of FY14, we sold Leo's Foods, a foodservice tortilla operation. The effect of this divestiture largely explains the year-over-year decline of our warehouse non-retail sales. Our warehouse snack cake retail business continues to face a competitive environment, given it competes directly with the reintroduction of Hostess cake brands. To improve the growth of Mrs. Freshley's brand, we are introducing new products and refreshing our packaging.

Earlier, I mentioned the sales growth of our brand's had this quarter, and a big driver of that has been the growth in our expansion markets which accounted for 1.1% of our consolidated total sales chains this quarter. Recently, we announced plans to open our bakery in Lenexa, Kansas. This bakery will be the third we've opened in as many years, complementing the additional production lines that we've added at several of our other bakeries. Over the past two years, we've substantially grown our market share in the Midwest with the help of Wonder, Home Pride and Butternut. With the bakery in Lenexa, we'll have fresher bread in Kansas City and surrounding markets, while adding capacity to support new market growth.

Consumer's food preferences are changing, and we are positioning Flowers to benefit. Our Cobblestone Bread Company brand continues to grow, as more and more consumers enjoy the creative meals made possible with CBC bread and rolls. We've recently introduced breakfast items under the brand, and this fall we'll be rolling out more new products to build-out the CBC line-up.

During the first quarter, we completed our Cleaner label initiative for selected Nature's Own items. We've reduced a number of ingredients by half, while maintaining the highest standards of quality and freshness. Our innovation team has been busy, and we will soon be introducing several new bread varieties with nutritional attributes that are on trend for today's consumer. To this point, I'll now ask our CFO, Steve Kinsey to give us a financial report on the quarter. Steve?

Thank you, Allen, and good morning, everyone. Even though sales in the quarter were down 0.7%, as Allen stated we are pleased that our brands performed well during the quarter, and we saw growth also in our non-retail channel driven primarily by our DSD foodservice business. As planned, we did experience declines in our store-branded business and foodservice tortilla businesses, as these declines more than offset the growth in the other channels.

In our DSD segment, overall sales grew 0.3%. Volume was up 0.2%, driven by increases in white and soft variety branded breads, branded cake, and foodservice, offset by volume declines again in our store-branded business. Price mix was up 0.1%, primarily driven by a mix shift resulting from the branded growth.

In our warehouse segment, overall sales declined 5.7%. Volume was down 4.5%, and again, as Allen stated primarily due to the competitive situation for cake distributed through this channel. Both our branded warehouse cake and our store-branded cake were affected in the quarter, and warehouse sales were also impacted by the exit from the foodservice tortilla business. Again as Allen stated, we will cycle this during the third quarter of this year.

Price mix in warehouse was down 1.2%, compared to last year's first quarter primarily due to a shift of business within the foodservice category. Our gross margin as a percent of sales for the quarter was 48.9%, up 50 basis points as compared to 48.4% in the first quarter of last year. The overall improvement in gross margin as a percent of sales was driven by lower sales, lower ingredient costs, and improved manufacturing efficiencies.

Selling, distribution, and administrative expenses were 37% of sales for the first quarter, up 60 basis points as a percent of sales compared to last year's 36.4%. The main driver of this increase was increased unallocated corporate costs, specifically lower pension income, higher workforce costs and higher legal fees.

The lower pension income was planned, and we expect to continue throughout the year. As disclosed in our 10-K, pension income for the year will be down approximately $4 million on an annual basis. So this will be a pro rata decline throughout the year. This is primarily the result of the new mortality tables that were issued last year.

Workforce-related costs are elevated as a result of higher compensation expense in Q1, and higher consulting costs related to several key initiatives. We do expect some of these costs to abate as the year progresses. Legal expenses are harder to predict, but I do expect they could be up and down, quarter to quarter throughout the year.

Our first quarter consolidated EBITDA margin was flat compared to last year at 11.9%. The DSD EBITDA margin for the quarter was 13.9%, 20 basis points higher than a year ago. Overall, DSD EBITDA margin improvement was driven by improved selling and distribution expenses associated with some internal cost savings initiatives. We continue to see improvement at Lepage bakeries, which is also continuing to improvements and EBITDA.

The EBITDA for the warehouse segment was 11.7% of segment sales during the quarter. This is an increase of 190 basis points. The improved profitability was partially driven by the exit from the foodservice tortilla business in the third quarter of last year. Depreciation and amortization was up slightly compared to last year's first quarter. This is primarily the result of capital investments we made subsequent to the first quarter of last year, including a new bun line in our Knoxville, Tennessee bakery

Carrying costs related to the acquired bakeries were $5.3 million during the first quarter. Projected costs are still anticipated to be approximately $15 million for the full year. Net interest expense was down $1.6 million quarter-over-quarter. Approximately $800,000 of the improvement is from lower interest expense as we've continued to pay down debt, and roughly $800,000 was due to increased interest income related to increases in our notes receivable from the sale of routes.

Since the first quarter of 2014, or basically since one year ago, we have reduced approximately -- our debt approximately $136 million. During Q1 of this year, we reduced our debt $56.7 million. So as you can see cash flow continues to be strong. The tax rate was down slightly, 35.4% in the current quarter, as compared to 35.7% the year ago quarter. Our net income for the quarter was up slightly, and shares outstanding were basically flat. So this equated to earnings per share for the quarter, being basically flat year-over-year at $0.29 per share.

Turning to our guidance. As mentioned in the press release, we still expect sales for the fiscal year to remain in the range of $3.786 billion to $3.861 billion or a 1% to 3% growth over FY14. EPS is expected to fall in the range of $0.96 to $1.01 per share, and capital expenditures are anticipated to be in the range given of $85 million to $95 million.

Though the first quarter was relatively flat, and as Allen stated in the press release, we are encouraged by the start of the second quarter. As I stated at the New York Analyst Day, we expect comps to improve as the year progresses, with the exception of the comparison to the extra week in 2014. Again in Q2, we will cycle the exited store-branded DSD business, and we'll begin to cycle the Leo's divestiture.

Sales growth and key new markets will be supported by the opening of our Lenexa bakery. We continue to see improvement in our Tastykake comps year-over-year, partially offsetting some of the loss in our warehouse cake business. Finally, we are focused on cost control where possible, as we work through some strategic initiatives that will provide long-term benefits. We believe these factors will allow us to remain on track to hit our targets for 2015. Now we'll turn the call back to Allen.

Thank you, Steve. As we grow, it's important that we build a strong competitive position. In white and soft variety breads, we're strong in our core markets, and we're growing in our expansion markets. In the other product categories, we're less developed, and our focus is to grow sales both organically and through acquisitions.

This quarter we faced considerable top line headwinds due to business we exited. I want to recognize the hard work put forth by the entire Flowers team that largely replaced those lost sales. Our people will always be our most valuable asset.

I am excited about what is ahead for the remainder of 2015. As I just mentioned, the team has done a great job bringing on new business, and we'll start to realize that revenue over the next few quarters. Even more, we've got new products coming to the market, and we'll be opening the new bakery in Lenexa. Our bakeries are getting more efficient every day, and our brands are performing well.

Beyond 2015, I see a long runway for growth. We have share gains in underdeveloped markets, and we have opportunities to grow sales in underdeveloped categories. Our team is experienced, and committed to provide the fresh products and exceptional service that is Flowers reputation. All in all, we are positioned to deliver on our long-term goals. Thank you, and now we'll open the call for your questions.

Thank you.

(Operator Instructions)

We have a question that comes from Farha Aslam with Stephens.

Hi, good morning.

Yes, good morning, Farha.

Could you just comment on how the pricing and promotion cadence is going in the category? From IRI, it looks like things are improving sequentially as we look at the data. Is that what you're seeing as well?

Farha, we are. Again, as I mentioned earlier, that the total IRI, the category is up about 1.1%. We're seeing relatively the same volume of promotion, but promotions at slightly higher retail prices. And again, that is a different story from one market to the next. But overall, I think that is a positive indicator.

That's helpful. And could you share with us some of your metrics in terms of operations? Where is your plant capacity efficiency, and where are your sale rates right now, and what is your target by the end of the year?

Yes, Farha. This is Steve. When you look at plant efficiency, for the quarter we're up a little over 100 basis points, where we are 93.5%. From a capacity utilization, we typically don't disclose that for competitive reasons. But I would say, we look at capacity based on three shifts at 40 hours. So 120 hours is 100% capacity for us. So most of our bread, bun and rolls plants would be operating at that level or above. In the cake arena, we would still have some capacity obviously, based on volume there.

And sales?

And from a sales perspective, this quarter we did see about a 50 basis point improvement quarter-over-quarter. So we have seen sequential improvement in the sale ratio. Some of that is we're doing a better job from predictive analytics with ordering. We've seen nice improvements at Lepage, which was another area where we had struggled some with sales, and we had a misstep there about a year ago. So again, we're still focused on driving toward that 200 basis point improvement in sale over the next 18, 24 months. So this is a good step in that direction.

Great. My last question relates to M&A this morning. The Post had an article that highlighted that bids for Hostess were due and that you participated. Could you just put the Hostess bid in context to your other M&A opportunities you see in the Midwest?

Farha, as we've said in the past, we look at all acquisition opportunities within the category, and it really would not be appropriate for us to comment on Hostess at this point.

Understood. Thank you.

Thank you.

The next question is from Eric Katzman with Deutsche Bank.

Hi, good morning, everybody.

Good morning, Eric.

I guess, I just wanted to follow up on a couple of Farha's questions. The decision to pull away from some of the private label business, can you, Allen go into that a bit more? Is that kind of your desire to just focus more on the branded stuff? And did the new account wins that you mentioned, are those private label or are those more branded product, maybe just kind of go into that a little more?

Eric, the private label category is an important part of our business, and it will be tomorrow, and it has been. The cycle of the bidding process varies by retailer. Some retailers bid private label every year. Some do it every three years, and each situation is different based on the local market, and how much production capacity that you might have. So really it's a -- as far as private label in the future, we'll continue to look at the business we have today.

We are not making any type of across the board decision to exit private label. We'll deal with private label on a market by market basis as bids come up. We are focused on growing our branded business. And from a production capacity standpoint, we want to make sure that that is our first priority to grow our brands. If we have excess capacity in a market, then a private label helps to fill that capacity.

Okay. And then, the new account wins you mentioned vis-a-vis private label or branded?

No, the new account, the new business that we're looking for as we move into the summer months are primarily branded. We're focused on building the acquired brands, and we're also focused on building Nature's Own and Cobblestone Bread Company. So the new business we were referencing is branded business.

Okay. And then Steve, you -- in following the Company for so many years, I don't really remember you talking about legal costs as a kind of a -- an issue or a volatile component. Is there anything in particular that's going on, that we need to be aware of or focus on?

Obviously, Eric from a legal perspective, we wouldn't comment specifically on any individual item. But the costs were elevated this quarter, kind of for -- I would say for the first time to the magnitude that they jumped. We do have our legal disclosures in our 10-Q. So I would say, those disclose anything that we would consider material at this point. And beyond that, I wouldn't want to comment specifically on any one legal item. For the year, I do expect they could possibly be up and down.

Okay.

But before the quarter, they were up some.

Okay, and then thanks for that. Last thing, and I'll pass it on. Going back to the promotional situation within the category, can you describe, Allen, whether that is like -- whose kind of leading the better behavior, let's call it? Is it your branded competitors, or is it the retailers that are pushing, or not being as aggressive with private label? How is that developing?

The improvement in pricing, the 1.1% is really branded products. There's still promotional activity, but the promotional price points have moved up slightly, and I give our Flowers team credit for a lot of that. But at the same time, some of our major competitors are moving in that same direction.

But again, it's very different from one market to the next. It's very different from one product category to the next. But I think in general, it is a positive move for the overall segment.

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

Thank you.

The next question is from Brett Hundley with BB&T Capital Markets.

Hey, good morning, everyone.

Good morning, Brett.

Steve, I just had a question on gross margin. Your performance has clearly been very good there, past couple of quarters. And I'm just curious if you can couch how your new plant coming online this summer affects gross margin performance, given what happened last year with bringing some plants online?

Are you guys in a situation now where you can see relative strength on that line giving some better efficiencies, better stale rates, et cetera? Or does that new plant impact you, any way early on here?

That plant will support in the Midwest markets, that's been one of our better expansion markets. So there's a lot of growth in that market, so we've had good acceptance of the brands, as we brought them back into the marketplace there. So coming out of the box, that plant will have a bread line, and we expect that to basically be neutral to overall margins from that perspective. So we would anticipate today, that it would not significantly impact the margin.

All right. That's helpful. I appreciate that. And then Steve, I just want to get your view, and your team there on [hard red winter]. Just given some of the issues that have hurt the US crop so far, or supposedly have hurt the crops so far, can you give your outlook for wheat into next year? I mean globally, it seems like there's still a pretty robust supply. But I just wanted to get an updated view from you, given some weather events in the Midwest?

Yes, generally, we are still from a crop perspective, we still feel pretty good about the overall US crop. Again, globally just like you said, there's abundant supply. The crop reports are mixed, and there has been some weather in the last couple of weeks. But generally, we feel good about our 2015 costs obviously. And going into 2016 today, we don't really see anything major that could cause a tremendous spike. The dollar has continued to be strong, so that's also helped wheat, as well from an export perspective. So our outlook right now is pretty static, and we feel relatively good about wheat for next year as well.

And is that outlook a reflection of your being hedged maybe a little bit longer than traditionally?

I mean, we are still pretty much within our relative stated policies of four to seven months. Again, we're typically on the longer end of that. So I wouldn't comment specifically about 2016, other than saying we have begun to look at 2016, and the impact for next year.

Okay. And then, just my last question, Allen. In our market here, we've seen the national roll-out of some competitor products that appear similar to Nature's Own. But it actually appears that those brands have simply just cannibalized other brands that belong to your competitor. And it appears that your shares have been unchanged, at least again, as it relates specifically to Nature's Own. But anyways, aside from price, can you describe the competitive dynamic in the bread aisle right now, and maybe how that might evolve in coming months? And if you can skew your commentary towards Nature's Own that might be helpful? I'd appreciate it.

Okay. As I mentioned earlier, one of our goals is to have a strong brand in each of the product segments, and certainly Nature's Own in the soft variety category, Nature's Own is our number one brand. It's the number one brand in the country. So it's not a surprise that our competitors have developed brands that are very similar, in fact, can actually confuse the consumer.

The good news is our Nature's Own brand has very strong consumer loyalty. We continue, as I mentioned earlier, we continue to look for ways to improve product quality and product freshness. So there will always be competition. But I would say that I think what you're referencing, a recent introduction by one of our competitors appears to be directly aimed at Nature's Own. The good news is our Nature's Own sales continue to be strong.

The Cobblestone Bread Company offers an opportunity for us to develop products and categories where we traditionally have not been strong. Breakfast category is a big opportunity for us. The specialty bread, the wide pan bread category is a big opportunity, as well as in specialty buns and rolls, and we're excited about Cobblestone Bread Company, and the progress that we've made so far.

So I think there will always be competition, but we're really focused on what can we do to make our brand portfolio even stronger? And that certainly has application in new markets like we're dealing with on the West Coast today. So even though we're very established in the soft variety category, and also white bread with Wonder, Sunbeam, our other brands, we still have a lot of room to grow in other product categories, and we're working on that.

Did Nature's Own participate in volume growth during the quarter?

Yes. Nature's Own was up during the quarter.

All right. Thank you, sir.

Thank you.

The next question is from Amit Sharma with BMO Capital Markets.

Hi, good morning, everyone.

Good morning, Amit.

Allen, I just want to clarify 1.1% category pricing in Q1. Q2 pricing, at least in measured channel data looking stronger than that. Is that accurate or?

Amit, I do not have the Q2 data in front of me, but the trend we saw in quarter one should hopefully continue and improve in quarter two.

Got it.

I can get back to you on that quarter two number.

Okay. That's perfect. And then, Tasty you said was up. Can you give us year-over-year, and also sequential growth rate for that business, please?

Yes. Amit, when you look at our branded cake, the comps for Tasty have actually flat-lined. So they are not down, compared to last year, and this quarter I would say they are basically flat, on a dollar basis.

Got it. Okay. And then, if we think about the new bakery coming in, can you please walk us through the economics? Not just the margin impact, but how many lines you're opening, and traditionally how much time has it taken for you to breakeven? And as we go into it, what is the margin contribution, what is the sales contribution from opening a new bakery?

Amit, the bakery will open with one bread line first. Once that is settled, and our manufacturing standards are achieved, we'll look at opening a bun line also in the same facility. I'll let Steve comment on the financials.

As I said earlier, when you look at the bakery we're about to open, typically we try to -- we don't open a bakery until we have enough production to try to make sure it's basically -- we try to keep it neutral to the overall margin. And that would be the goal with the facility in Lenexa.

That's great. But perhaps a little bit more discussion around -- from the sales contribution? Not necessarily in the next quarter or two, but historically, when you open a new bakery, what does that has done to your penetration rate in surrounding markets and your market share as well?

Yes, typically a bakery, we like for our bakery -- we've said $75 million to $100 million of revenue once it's up and operating fully, which would be two lines, bread and buns. This will be a one line facility as it comes on, so obviously it will be something south of that number. So from a revenue perspective, you typically open it when you -- we like to have two shifts, and then ramp that up to full capacity within the next 12 months if possible.

Amit, once the bun line is up and running, we are producing bread and buns, we will be able to take a significant amount of transportation off the road. Those markets are being served by sister bakeries that are quite honestly too far away at this point, and this will give us an opportunity to have fresher product, and also continue to push our geography further north and west out of Kansas City.

Got it. And my follow-up question Allen, you talked about white and soft variety bread growing, but in some other categories, you are not growing. Can you talk about those categories? And if you look at your portfolio today, do you feel like you need to go out and get some of those assets to accelerate growth in those categories?

I think, if you look at the strength of our Company, it has been in white bread with brands like Wonder and Sunbeam, soft variety bread. Nature's Own is certainly a strength, number one brand in the country. We are also very strong in buns and rolls with multiple brands. When you -- and then, we are also growing in our cake business with Tastykake.

There are other segments, such as specialty bread, which is dominated by brands like Oroweat and Arnold. There are other product categories in breakfast, Pepperidge Farm. Those are competitors that are doing a really nice job in segments where we are not fully developed. So this is nothing new, but it does point to opportunities on how we plan to grow in the future.

Is there any urgency in perhaps looking outside of the Company to accelerate penetration in these markets or these categories?

We, there are always acquisition opportunities that we look at. And as I mentioned earlier, we are very familiar with the category of players, regardless of which segment they're strong in, and we look at all opportunities.

Great. Thank you.

Thank you.

The next question is from Bill Chappell with SunTrust.

Hi, this is actually Stephanie here for Bill. Could you guys just speak a little bit more on the competitive environment specifically on the cake side? And then my second question, if you could just touch on a little bit about the Lepage improvements you're seeing? Thanks.

Stephanie, the -- again, the overall environment remains competitive. If you look at average pricing based on the IRI information, we are seeing a slight improvement there. As I mentioned earlier, again it's a market by market situation. We do feel that one of our objectives is to continue to improve our margins. So we're looking very closely at pricing opportunities.

As far as cake, we are excited about our Tastykake brand. It fits really well with our independent distributors. A lot of new products and promotional activity where you get off rack displays, cake is very much an impulse product, and having it off the shelf and featured in a prominent position is really important, and we're doing a great job there. So that's really a summary of what's happening from a pricing, and from a promotion standpoint.

Great, thanks.

Excuse me, Lepage, Steve, we commented earlier on the improvement at Lepage. We're, I really want to make sure we recognize the good job the team is doing at Lepage. We have continued to make significant improvements week after week, and we appreciate the good job being done by the team there.

I want to correct one comment on cake, while we're talking about cake. When I gave the flat, a while ago on branded cake, that was all branded cake, not just Tastykake. Tastykake is actually up a little over [1%], back to Amit's question. So I wanted to make sure we corrected that.

Great. Thanks so much.

Thank you, Stephanie.

The next question is from Tim Ramey with Pivotal Research Group.

Good morning, thanks. If you mentioned it, I may have missed it. Did you comment on the performance of Wonder Bread, year-over-year in the portfolio?

Tim, we did not break out Wonder specifically, but we're encouraged with the growth of our Wonder brand. Wonder is, as we've mentioned in the past has a very high consumer awareness, and in many new markets Wonder is our lead brand. So we are encouraged about the growth of Wonder.

Okay. And then, on the litigation, I'm aware of three of the five class actions, but your disclosure today mentioned that there were a total of five. Could you say where those other two actions are? I think there is one in Northern California and one in D.C., the Jamestown one that you'd mentioned, but two that I'm not aware of?

Tim, it really is not appropriate for us to comment on legal proceedings. If necessary to disclose, we will do that, but it's really not appropriate for us to comment.

And then, on capacity utilization, I was struck by your comment that you were basically running full out in most of your facilities at 120 hours. Does that argue for -- I mean, clearly you're opening Lenexa, but does that argue for more bakery openings or more capacity expansions?

Yes, even -- Steve mentioned 120 hours is 100%, but bakery has the ability to go above that when necessary. So in our capacity situation is different from one part of the country to the next. I think what is important, is that the Company is committed to adding capacity to enable continued growth. And whether that is on the West Coast, whether that is in Lenexa, Kansas, or other parts of the Company, we understand how to add capacity where needed. And we are not going to let lack of capacity inhibit our growth projections.

The Lenexa facility, I have been in it -- don't recall how many lines it has. But I know it has more than one bread line and one bun line. Can you say what the ultimate size of that will be?

No. We plan to operate the bread line and the bun line, and both of those lines have been enhanced with, in really adding capacity, where we anticipate both of those lines to be able to help us significantly grow in the markets ahead. We'll operate two lines there.

Okay, thanks.

Thank you.

Our final question is from Akshay Jagdale with KeyBanc.

Good morning.

Good morning, Akshay.

I wanted to dig in a little bit deeper on the DSD gross margin. How did that come in relative to your expectation? I know there is a lot of commentary on EBITDA margins. But the gross margins in, excluding D&A and DSD came in below what we were expecting. So I am just trying to dig into that. First question there is, did that come in below your expectations?

Overall, the DSD gross margin, we were basically right at where we had projected for the year. We were about 10 basis points under that. But overall, (inaudible) but part of that has to do with the start-up expense at Lenexa. Although we would -- it's probably slightly higher than we had projected, but generally we were flat from the plan for the first quarter. Again -- (multiple speakers) -- go ahead.

Go ahead. In the 10-Q disclosure, which is very useful, there is an other item which was up 130 basis points in terms of negative impact on gross margins. And the footnote talked about, buying more items from the warehouse segment that are (multiple speakers) lower margins?

When you look at segments, you have to -- they stand alone. So there is some products in the cake area, some of the specialty items with Cobblestone mill are produced in the warehouse group, and they're sold inter-company to DSD. So that would be the impact of that. But again, we had planned for those costs, and we came in right at the gross margin we had planned for the quarter.

Okay. So those other costs, that's going to continue. Is that going to continue for the remainder of the year, or is there some sort of transition or lapping that we're going to reach some time in the year?

Again, that -- we would expect those costs to continue as we grow the Cobblestone brand. And then, again, some of our cake products like bagged donuts are produced in warehouse, and they have performed -- have been performing very well. So as things -- as we grow these products, that cost relationship between the two will continue.

I think it's more important to look at consolidated, and maybe not rely so much on the other, since it's all basically inter-company. We try to transfer it at cost, but sometimes there's some efficiency differences that go through that line on a segment basis. So generally speaking, I would say, the consolidated margin is up about 50 basis points. We're very pleased with that. And you can see that warehouse efficiencies are stronger, and DSD came in as planned. So we feel good about that as well.

And just on ingredients, just looking at the futures curve, and doing some analysis on how you could be hedged, it looks like commodities will be more beneficial than they were in 1Q, perhaps in 2Q and 3Q. Is that a fair statement or should the cadence be pretty similar across the year?

Yes, we did say I think early on, that we expect comps to improve as the year progresses, so we do expect the back half to be a little better.

Okay. And then just going back to pricing and promotional activity. We've done some work, just looking at overall bread prices at retail. Historically, there used to be a pretty significant strong correlation between those prices and wheat prices. And since the Hostess liquidation, that correlation has weakened significantly. So it, there could be many reasons for that obviously, but is it your contention from what you see that the retailers are doing better in bread over the last year, from a margin perspective than they have historically? And maybe eventually now, that's going to play through in the wholesaler arena for you guys as well? I mean, are -- what's your impression on [retailer] profitability in the bread aisle?

Akshay, I think you are accurate that our retailers are developing, through category management they are developing a better understanding of the profit contribution of this fresh bakery category. As far as the volume of promotional activity, again, different retailers have different lead times on how far in advance you have to commit to promotions, so each retailer is a little different in that respect.

But I do feel that overall, there's a growing understanding of the importance of this fresh bakery category. And I think more and more retailers are understanding (inaudible) that simply lowering the price of fresh bread does not necessarily generate enough additional income to help their margins stay up. So it's very much of a routine purchase, and category management I think helps retailers understand this in a better way.

Okay. And just going back to the corporate expense being higher this quarter. I understand you don't want to comment specifically on each of the items, but just regarding the legal expense plus the consulting expense, can you give us a sense of how much that was, as part of corporate? I am just trying to understand what a more longer term sustainable run rate is there?

Sure, legal was about a third of that, and then the --

A third of the increase, or a third of the total?

Of the increase.

Okay.

The consulting was about $1 million of the increase. So we expect that to abate kind of as the year progresses so. And then, the -- [pension] (multiple speakers).

And the works?

And the pension will be pro rata throughout the year.

And can you give us some sense of what we should be thinking, in terms of this consulting exercise, and what are you guys looking at? Is it more sort of M&A, or you had mentioned right-sizing the business? What are these consulting projects?

A lot of it is around technology solutions, whether it's in IT. We have some things going on in our sales in handhelds, and we also have a project going on in our procurement group to upgrade our IT solution there.

So what would you say a good run rate for the quarterly corporate expense for the remainder of the year?

It's hard, again, some of these costs are not predictable, so it would be hard to give an exact amount. But I would say generally speaking, we were -- it's a 16 week quarter -- we were probably about $3 million over our plan for the quarter so.

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

Thank you, Akshay.

We have no further questions at this time. I'd like to turn the call back to Allen Shiver for closing remarks.

Again, thank you for being on our call today. I think you can hear an excitement from our team, about not only finishing quarter one, but the way that we've had a good start to quarter two. We look forward to talking with you in a few weeks, as we approach the end of quarter two. Thank you very much.

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