Flowers Foods Inc (FLO) 2016 Q1 法說會逐字稿

Welcome to the Flowers Foods' first-quarter 2016 earnings conference call and webcast. 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 J.T. Rieck, Vice President, Investor Relations. Mr. Rieck, you may begin.

Thank you, Ellen, and good morning, everyone. Our first-quarter results were released yesterday evening and we filed our 10-Q then as well. You'll find the earnings release on the Flowers Foods' website. You can find the slide presentation that supports our discussion today, posted on the conference call page in the Investor Center at FlowersFoods.com.

Before we begin, please be aware 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 we'll discuss during the call, important factors relating to the Flowers Foods' business are fully detailed in our SEC filings.

Now let's get started. Participating on our call today, we have Allen Shiver, Flowers Foods' President and Chief Executive Officer, and Steve Kinsey, our Executive Vice President and Chief Financial Officer. We'll open the call for your questions following our prepared remarks.

Now Allen I'll turn the call over to you.

Thank you, J.T., and good morning, everyone. During the first quarter, we made progress, executing against our strategy to grow within our existing footprint and to drive margin expansion. The team delivered on our key objectives, as we worked to improve pricing, convert our Tuscaloosa bakery to an organic facility, and support the continued growth of our organic bread brands, by laying the groundwork for a successful roll out of Dave's Killer Bread on the DSD network. Our results for the quarter, reflect the steps that we're taking, and the investments we're making to drive profitable growth.

As detailed in our earnings release issued yesterday afternoon, and summarized on slide 4, compared to the first quarter of 2015, acquisitions drove total top-line growth of 5.1%, and EBITDA increased 1.7%. Earnings per share declined by $0.01 or 3.4%. Impacting earnings-per-share comparisons are approximately $0.01 of cost associated with the Tuscaloosa conversion which we expected.

We achieved improved price realizations during the first quarter, by reducing promotions on our core branded items. At the same time, we saw competitors increase promotions, which impacted our volumes during the quarter, and drove the decline in our branded sales excluding acquisitions. In a moment, I'll share with you the steps we're taking to strengthen our core brands and grow sales.

Our recently acquired organic bread brands, Dave's Killer Bread and Alpine Valley breads added over $60 million of incremental sales during the quarter. These brands are on trend with consumers' desire for fresh organic foods, and are well-positioned for many years of growth. Building a strong foundation for DKB and Alpine was a key focus this quarter, as we expect sales for those brands to steadily improve through 2016.

On April 25, just after the close of the first quarter, we launched Dave's Killer Bread on the DSD network. We invested significant time and money to make the launch a success. The team has not only worked with retailers to gain over 9,000 new store fronts, but also hosted events for distributers to come and learn about how adding DKB on their routes will grow their business.

Feedback from the independent distributers has been really positive. Sales these first few weeks are going well, and our distributer partners are capitalizing on this momentum, by gaining store space and adding special displays. Essential to the successful launch was the conversion of our Tuscaloosa bakery to an organic facility to produce both DKB and Alpine. This was no small feat, especially considering the unique production techniques and specialized equipment installed.

What makes Dave's Killer Bread so popular, is the combination of quality, non-GMO, USDA organic ingredients, as well as exceptional taste, texture and flavor. To make sure those qualities were not compromised, the manufacturing team from DKB's headquarters in Portland was on hand in Tuscaloosa, training the team, and working to ensure a consistent product. It was a lot of work, but we took the time to get it right, and I congratulate the team on an important job well done.

Organic breads continue to be the growth engine for the fresh packaged breads category, with IRI showing a 23.6% growth over Q1, 2015. Now that Tuscaloosa is up and running, we have the capacity to meet the growing demand for DKB and Alpine Valley products.

Turning to the category as a whole, as shown on slide 5, the overall fresh package breads market grew 0.5% in dollars, with pricing offsetting unit declines. Continuing recent trends, category unit volume has been under pressure, with store brands in particular, losing both dollar and unit share.

On slide 6, we have details for traditional loaf breads, the key category segment for Nature's Own, Sunbeam, Wonder and our other bread brands.

As I mentioned previously, with fewer promotions IRI data showed we improved our realized price by 2.2%, at the expense of unit volume which was down 2.5%. While we increased price, competitive pricing overall in the marketplace compared to Q4 was down. Store brands continued losing share, driven primarily by lower units, as well as slightly lower pricing.

Snack cake trends are on slide 7. The commercial cake category grew 1.3% in dollars, and 0.2% in units. IRI data shows Flowers' dollars down 2.7%, with units down 4.2%. Our average pricing increased ahead of the category, but at the cost of unit volume. As in the bread category, we reduced promotions relative to last year, and realized higher pricing though our volumes were down. I'll wrap up this category discussion by observing that while the marketplace remains competitive, our Flowers' team is focused on driving demand for our products and building our market share.

On slide 8, you can see examples of our efforts to increase brands exposure to key consumer audiences. For example, in the stores we have created themed product displays tied to upcoming summer family movies. These marketing partnerships allow distributers to generate additional display opportunities, increasing product visibility and driving sales.

Our largest brand, Nature's Own, has over $1 billion of sales at retail. Recently, we have refreshed the brand's image highlighting that Nature's Own is wholesome and free of artificial colors, flavors and preservatives with our new Good & Simple brand positioning. This message is being amplified in stores with special displays, as well as through targeted local advertising.

In addition to traditional media, our marketing teams have done an excellent job gaining exposure for our brands through blogs, e-mail marketing and earned media spots. To invigorate our snack cake sales, we recently introduced new products in packaging such as minis, limited time flavors, and single-serve packaging options. We also have a strong pipeline of new products that will be coming into the market over the remainder of the year.

Over the longer term, we will continue our strategy of growing share in both underdeveloped markets and category segments. Our strong brand portfolio continues to perform well in our expansion markets, as demonstrated by new markets contributing 60 basis points to our overall sales growth for the quarter.

Underdeveloped segments are also key. In the specialty premium segment, Flowers' organic brands, DKB and Alpine Valley are consistently gaining share. In addition to growing sales, our team understands how to improve the business to reduce cost and improve the bottom line.

Given the current business environment, we are focused on seeking out every efficiency in our bakeries. As we have said, we are increasing our focus on margin expansion to drive earnings growth, and I want to discuss the steps we took this quarter, that moved us closer towards our goals of long term margin expansion. Importantly, we made investments to support our commitment to the organic production.

Looking at the quarter, costs associated with converting Tuscaloosa to organic production, and increasing marketing expenses for both DKB and Alpine leading up to the nationwide rollout impacted EBITDA margins negatively by 20 to 30 basis points. We believe going forward, these investments not only support growing demand, but also lower our production cost.

Given the current business environment, we are focused on being efficient across our operations. We are leveraging new technology resources to better plan promotional programs and add incremental volume. To reduce stales, we have a project underway to improve order forecasting. To improve manufacturing efficiencies, we are reallocating production among our bakeries to maximize throughput and minimize downtime. To bring underperforming bakeries up to their potential, we have stepped up training of those bakeries, transferring best practices throughout the Company.

Flowers' brand portfolio is well-positioned going forward. With a track record of outperforming the category, our experienced team understands the marketplace, and I am confident that together we will drive profitable growth for Flowers.

With that, let's have Steve review the financials.

Thank you, Allen, and good morning, everyone. First quarter sales of $1.204 billion increased 5.1% versus last year, driven by the DKB and Alpine acquisitions, which increased sales by 5.3%. Excluding acquisitions, volume growth contributed 0.7% to the overall sales increase, driven by volume increases in the non-retail and store-branded categories, more than offsetting declines in the branded category. As Allen discussed, we had positive price mix overall in the branded retail category. On a consolidated basis, price mix declined by 0.9% due to increased sales of products from the non-retail channel, primarily in foodservice and vending.

Earnings per share for the quarter was $0.28 per share, down $0.01 from the year-ago quarter. Also as Allen mentioned, costs associated with the Tuscaloosa bakery conversion impacted the quarter by approximately $0.01 per share. Now that the initial cost of the conversion of the Tuscaloosa bakery and promotional spending for the launch are behind us, we expect costs to begin to moderate going forward.

Cash flow from operations remained strong, increasing 1.9% to approximately $121 million. Capital expenditures for the quarter were $23.9 million. We continue to focus on overall capital allocation, balancing operational investment with return to shareholders.

During the quarter, we used approximately $126 million to repurchase roughly 6 million shares, including shares under the accelerated share repurchase plan. We also returned $31 million of cash to investors through dividends. This is a per share increase of approximately 9.4% over Q1 2015.

Consolidated EBITDA for the quarter increased 1.7% to $138.6 million or 11.5% of sales, a year-over-year decline of 40 basis points as a percent of sales. On the gross margin line, lower input costs benefited margins by approximately 110 basis points, while higher workforce costs and increased outside purchases resulted in overall gross margins being down 50 basis points to 48.4% of sales.

As a percent of revenue, SD&A costs were down 10 basis points to 36.9% of sales, as higher marketing and legal costs were more than offset by lower distributer distribution fees as a percent of revenue. This was driven in part by DKB and Alpine being distributed primarily through warehouse distribution in the first quarter.

Quickly commenting on segment level results, the DSD segment sales increased 3.4%, with the DKB acquisition contributing 4.5%. The majority of our branded retail business in the DSD segment and during quarter was reduced promotions to improve prices on core-branded products. This action is reflected in the overall segment price mix being slightly positive, but this figure also includes the effect of price mix declines that incurred in the non-retail sales category. Overall, volumes were down 1.3%, driven by lower volumes of the core-branded items due to fuel promotions, partially offset by higher non-retail volumes primarily to foodservice outlets.

DSD segment EBITDA was down 4% to $129 million. EBITDA margins for this segment was 12.9%, of sales, down 100 basis points. The decline in margin was driven by softer sales from the core business, increased outside purchases of products due to capacity constraints for certain DKB products, partially offset by lower input costs. Also as we mentioned, a factor was the Tuscaloosa start up, increased legal expenses, and higher corporate overhead charges.

Warehouse segment sales increased 14.2%, with the Alpine acquisition contributing 9.8%. As in the DSD segment, we saw strong growth in volume excluding acquisitions from the non-retail categories: foodservice and vending. Volume growth more than offset negative price mix, and drove margin improvement during the quarter. Warehouse segment EBITDA increased by 18.7% to $25 million. EBITDA margin for the warehouse segment was 12.2%, up 50 basis points over the prior year. The increase in margin as a percent of sales was driven by lower input and workforce costs, offset partially by higher outside purchases and marketing expenses.

Corporate EBITDA in the quarter was a negative $15.4 million. This loss declined compared to the prior year because, last year certain unanticipated corporate costs were not allocated to this segment, but were instead [absorbed] at the corporate level. This year those costs have been allocated out to the segments, primarily the DSD group.

Carrying costs associated with the acquired Hostess bakeries continued to decrease as expected. In the first quarter, these costs were $3.9 million, down from $5.3 million a year ago. During the first quarter, we were able to sell two of the acquired facilities. In connection with one of the properties sold, we recognized the loss during the quarter of approximately $800,000. Currently, we have listed for sale three non-strategic facilities, with four remaining under a strategic review.

Depreciation and amortization charges for quarter were $43.5 million, an increase of $3.7 million primarily due to amortization charges associated with the acquisitions. Net interest expense in the quarter was $2.8 million, and we ended the quarter with net debt of approximately $1.053 billion. Our net debt to trailing 12 months EBITDA is 2.4 times.

As detailed in the release and on slide 12, we updated our guidance to include the accretion from the ASR. We continue to expect sales to be in the range of $3.986 billion to $4.080 billion. EPS, including approximately $0.02 accretion from the ASR, is now anticipated to be in the range of $1.00 to $1.06 per share. Our guidance reflects the continued success of the organic rollout, and our sales and cost initiatives that we have planned for the remainder of the year, as well as expectations for the competitive environment.

Thank you for your interest this morning, and now I'll turn the call back to Allen.

Thank you, Steve. Ellen, we'll now open the line for questions.

Thank you.

(Operator Instructions)

Our first question is from Farha Aslam with Stephens.

Hi, good morning.

Good morning, Farha.

I have a question on your organic rollout. Now that you've rolled it out, do you still feel confident on achieving your $165 million in sales for Dave's for this year, and $90 million for Alpine? I think those were the numbers you'd highlighted during those acquisitions.

So, Farha, we are still very confident in those numbers. There is tremendous excitement, both our sales team, our manufacturing teams, and our distributors about the Dave's Killer Bread introduction. We are excited that these brands are now part of our Company. And I think our retailers, our customers, are equally excited, because they see the growth opportunities in the category for organics. So we are -- we feel that the first several weeks' introduction has been very successful. We've done a great job getting [off right] displays in just about all the retailers. And we're just very bullish about what we're doing in the organic segment.

That's helpful. And your sales came in a little bit light on the DSD, versus our expectations and consensus. How should we think about the cadence of your volume trends, as you pull back promotional activity in that core business?

Farha, I'll comment, and then I'll let Steve help on that one. If you look at -- in your slides, you have a graph that really does a good picture of how pricing changed from quarter four to quarter one. If you'll notice that Flowers continues to sell at a branded premium of $0.25 in quarter four. Looking at quarter one, we increased that to $0.34. So, basically, what we're doing looking forward, is making sure that we've got, really, a better balance between promotional activity and our overall price increases. We'll continue to sell at a premium versus the market, but we're very optimistic of being able to get back on that growth program, as we move into quarter two and the rest of the year. Steve?

And, Farha, if -- when you look at the rest of the year, and you think about Q1 and the pressure we saw, we did mention there was a slight decrease due to weather from the prior year. And I don't want to over emphasize that, but that did impact it. And then, as Allen said, the lack of promotional activity in Q1 did impact overall branded volumes. And as you look at the remainder of the year, I think the changes we are making in our overall branded volume and promotional strategy, coupled with the fact you're coming into Q2 and Q3, which traditionally have been strong -- fairly strong volume quarters due to the kind of light seasonality of some of the bun and roll products, we feel like that we can come back in with kind of within a flat-to-positive volume lift on the overall core business.

Great. That's very helpful. Thank you.

Thank you, Farha.

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

Thank you. Good morning, everyone.

Good morning, Brett.

Steve, just to follow up on that last comment with Farha. When you talk about potentially getting volumes into a better place in coming quarters, does that require you giving up some of the price work that you have been looking to achieve? And, maybe asked another way -- or maybe on top of that -- assuming that you are able to continue to maintain the pricing that you want in coming quarters, what percentage of that did we see in Q1? Could you see more of a price benefit in Q2 and Q3, alongside potentially better volumes, or does it not work that way?

Yes, I think when you look at the impact in Q1 of the pricing actions -- again, as Allen said, it becomes kind of a balance of price mix versus overall volume. We're not -- when we talk about increasing promotional activity, we'll give -- it will be selective, it will be selected markets. Not to get into the overall pricing strategy on promotions, I do feel like -- from a balance perspective, while you may not see -- you'll see some pressure probably on price mix. But hopefully, we'll get the volume lift to offset that from a dollar perspective.

Okay. And you guys called out a number of things, in your release last night and your prepared comments this morning, about a focus on margin expansion and eliminating excess cost. And then, Allen, you went through some of those items in the prepared remarks. Can you just maybe give us some color? I assume you've done some work on what it can all mean for the bottom line, and I'm not really asking for those numbers directly, but can you give us some guidance on maybe when you can achieve some of those benefits? And it sounds like it's in your guidance, I think I heard you say, Steve, but just wanted to get further color on that.

Yes, Brett. We are -- it is incorporated in our guidance. Some of the activity that we're working on to enhance margins, a lot of work is being focused -- we mentioned pricing, but I'll expand that. It's really about promotional effectiveness, what is the everyday right price for items in a given marketplace, enabling us to get off right displays and grow the brand. So, we have a lot of work taking place on overall promotional effectiveness.

The cost structure, we're also evaluating individual bakeries, making sure that, from a manufacturing efficiency standpoint, that we are maximizing the opportunity that we have there. And also, we're focused on training. We've got a handful of operations that are below par in terms of efficiencies, and we're doubling efforts to correct situations through training, and continued investment in the appropriate equipment where needed. So, really, it's all hands on deck to make sure we address all of the opportunities to improve margin.

And, Allen, have you set a timeline on when you'd like to at least start seeing some benefits from these actions?

Each of the activity is -- the benefits show up at different times, but all of -- the timing is really baked into our projections for the year, and that's probably the best representation of when we expect things to start to improve.

Okay. And just one last quick one from me, if I may. Just on capital allocation, guys, you have some remaining share repurchase ability. And I just wanted to ask about how shareholders should properly understand your capital allocation desires at this particular point in time. We talked about priorities over a longer period but, at this point in time, your share price still offers an attractive valuation in our opinion, even after the ASR has been completed. And we've kind of understood the traditional M&A market within bread to be somewhat limited right now, but it also sounds like you guys are maybe pivoting a bit towards other adjacencies. You could also potentially look at a larger dividend yield down the road. And so, I just wanted to understand what the proper understanding would be from a shareholder perspective at this point in time.

Sure, Brett. This is Steve. When you look overall at capital allocation, I think, generally we've done a good job balancing internal initiatives and M&A with shareholder returns as well. The comment, specifically on our strategy for share repurchase, we do have some room left on our current authorization. So, again, we'll look and buy opportunistically. And we'll also be focused on debt reduction. We're -- from a leverage standpoint, we are slightly above where we would like to be. So, again, we'll have to balance overall capital between the shareholder initiatives, and between debt repayment and any internal investment through CapEx.

So, I know that doesn't give you specifics, but I would say, you can look at our current debt level and know that we'll be focused on debt repayment. But you can also know that, when you look at current stock valuation, current dividend, we'll continue to focus strongly on shareholder returns as well.

Okay. Thanks, guys.

Thank you, Brett.

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

Good morning, and thanks so much.

Good morning, Tim.

Just first a quick math question, the $126.3 million spent to repurchase shares, it doesn't quite -- if I only divide by 6 million shares, I get like an average price of $21.05. I assume that's not right. Can you give me a better number than that?

Yes, when you look at the ASR, Tim, was $120 million.

Yes.

So it's roughly -- the way an ASR works, it's over a period of time, so we initially took roughly a large percentage of the shares, and then we will settle that -- make the final settlement of that in -- at the end of the second quarter. But the cash outlay for the $120 million is always -- has already been made. So there's still roughly another 1 million shares to come in from the accelerated share repurchase from what we took initially. And then, the additional shares in the quarter that were repurchased, were early in the quarter due to the settlement of one of our stock-based comp awards. The accounting rules say that any shares turned back in to cover tax are treated as share repurchase. So that would be the difference in the number of shares from the accelerated share repurchase versus the total for the quarter.

Yes, I get the difference between the two. I just was trying to come up with a better number of shares as the denominator.

I mean, what it basically is, is the total outlay for the accelerated share repurchase has already been made, but we haven't picked up the total number of shares at this point.

Okay. All right. And I understand you're rolling out some new software for the hand-held into the DSD system relatively soon. Can you tell us anything about what that's designed to do, what functionality that might have for the distributors?

Yes, Tim, we're consistently improving whether it's hand-helds or other IT systems, we have improvements underway, really, all the time. I'm sure that anything happening with our hand-helds is designed to help our distributor partners improve their ordering process, but nothing out of the ordinary there to report.

Okay. And then, is there a total CapEx number for the year? If so, I missed it, I'm sorry.

Yes, we're still looking at $90 million to $100 million total CapEx for the year.

Okay, terrific. And if we think about that $0.34 price premium for the 1Q, I assume some of that was impacted by DKB, which is premium priced. How much should we think about mix impacting the average price per loaf?

Tim, really DKB would not have had a significant impact on that number, simply because it was introduced at the very end of the very first of quarter two.

That's right, okay. So we should expect that premium to perhaps expand a bit more just due to mix?

I think the comment was, we're evaluating pricing, as a market-by-market situation. It's very much of a balance between growing market share and maximizing pricing, and we're working hard to do exactly that. But, again, it's a market-by-market situation.

Okay. And just finally on the guidance, given that you're --

Hey, Tim. This J.T. Rieck.

Yes.

Let's go ahead and let others have a chance to ask questions. Thank you.

All right, fine. Sure, sorry.

The next question is from Akshay Jagdale with Jefferies.

Hey, good morning.

Good morning, Akshay.

Hey, so can I ask about the sales guidance in a different way? I know you have a lot of initiatives underway. And so, I'm just trying to understand, what is the goal, right? So if I think about what might be included in your guidance, as far as price versus -- price mix versus volume, I'm having a hard time understanding what you're expecting, what's the optimal outcome? Because this quarter, you're saying you had an improvement in price realization, which is a good thing, but that resulted in the premium expanding seems like more than you were expecting, which negatively impacted volumes, right?

So you have all these initiatives underway on promotions. Are we just not there yet, in terms of being able to implement those effectively? Or why hasn't -- because you've been talking about price promotion effectiveness now for several quarters, why haven't we seen it reflected effectively, if I may, in the results in 1Q? So can you just help me bridge that gap? Because you are saying, for the rest of the year, you expect to be more effective overall, and I'm trying to understand what's changed. Is it that the strategies are now implemented, and the tools are now in place, that they weren't before, or are you expecting something different to happen?

Akshay, I'll comment, and then I'll ask Steve to add. If you look at the past quarter, it's very obvious in the graph that it's a good picture of the pricing that we took system wide. We, basically -- in the categories where our brands are strong, we moved to a higher price point through a reduction in promotions.

When that happened, obviously the marketplace did not react. You can see competitive pricing basically stayed the same, and we lost unit volumes. Going forward, we're looking at a more balanced approach, again, looking very closely at our schedules from last year and what was very successful in quarter two and forward. So I think it will still be a market-by-market decision on pricing, but you'll see a more balanced approach to promotional activity than you did in quarter one.

So it's still a more trial-and-error process, because that's what I'm trying to understand, right? You seem -- your guidance seems to assume you will have -- you will be more effective.

Yes, I wouldn't say it is trial and error. I mean, we understand what it takes to grow the top line. We've got the strongest brands in the marketplace.

It's very important that you get those off right displays in retailers to support your branded growth, and we understand exactly what it takes to achieve that. And that's what we plan to do second quarter and forward. In the first quarter, because of the pricing that we took, there was a reduction in display support and that had an impact on our numbers, as we see. And so, as we look forward, we're going to return to more of a normalized promotional activity schedule.

Okay. And just on margins, I actually thought the sequential improvement in gross margins, especially in DSD, was encouraging, especially in light of some headwinds. So, one, can you tell me if you thought of it the same way? But, more importantly, what's going to be the overall margin impact of moving production in-house for DKB? Because it impacts various line items on the gross profit side and on the SG&A, so what's the rough -- when you bring this -- all of the production in-house, what is the rough impact on overall DSD margins? And, secondly, SG&A -- or SD&A to sales, especially in the DSD segment, moved in the other direction, so it was up year-over-year. And there was a comment about using less distributors this quarter, which -- can you just explain that? Thank you.

Sure. When you look at the overall impact, Akshay, on the moving production into our organic bakery -- and over time that will be roughly a 30-, 40-basis-point improvement to the DSD gross margin. But, again, that will take time, as we work through our production capacity needs with those products.

Looking primarily at SD&A, there was an increase in overall workforce costs from a distribution perspective. So that did drive some of the increase on the DSD business. Again, when you look at -- we talked about sales of the territories and the routes; again, that fluctuates from time to time. There are a lot of reasons why routes would be held for inventory or held for sale. And, primarily in Q1, as we looked at making enhancements to our overall distributor agreement, we did hold back some on certain routes. Now many of those routes are being offered for sale. And, as we move through Q2, I think you'll see the number of routes held in inventory will drop. And you will see us complete some of that activity, which in turn should help the overall SD&A as a percent of revenue, because you'll be able to leverage and drive stronger sales through that program and leverage the cost structure on SD&A line.

Okay. I'll get back in queue. Thank you.

Thank you, Akshay.

The next question is from Brian Holland with Consumer Edge Research.

Thanks, good morning.

Good morning.

A quick question, and I apologize if I didn't catch this at the top. Your top-line guidance for FY16 reiterated, but within Dave's and Alpine Valley, are your assumptions unchanged, or did they move higher based on anything you've seen, or is that all still in that [$245 million], [$265 million] range?

The assumptions on the organic business are unchanged.

Okay. So then, I guess, I'm going to try and understand, and maybe try to ask it a different way. I know it's been asked a few times already this morning. But so it looks like, at a high level, the competitive backdrop in your core markets were kind of unchanged from Q4, some pressure from the independents about the same level -- if you have pushback, I'm happy to hear that, but that was my interpretation at a high level.

Your branded sales, I think, were down 1.7% if you back out Dave's and Alpine contribution, and your comps are more challenging in the second and third quarters. So I guess I'm trying to understand, maybe first, what's embedded in your guidance over the balance of the year, or from a competitive standpoint? Do you assume it stays where it is, gets better, gets worse, and maybe how to think about the fact that you have more challenging comps? I know you mentioned stuff about promotion and pricing continuing to kick through, so maybe if you could address that?

Yes, our assumptions for the rest of the year, in terms of the competitive environment is that it basically remains the same. We did not see a dramatic change from quarter four to quarter one, at a time when we did take significant action on pricing. So our assumption based on the rest of the year, and our assumption on the adjustments that we're making in our promotional plans, assume that the competitive situation remains the same.

And if I could just ask, lastly, about the Nature's Own portfolio, we see in the track channels a fair amount of pressure there. Some of it, obviously, just the price volume that's been well explained here this morning, but also in some of the other maybe less core outside of the fresh bread product lines that essentially seems as though you're maybe phasing some stuff out. Can you maybe talk about the brand strategy there with Nature's Own? Maybe things that you're phasing out currently, when that may become less of a headwind, lapping stronger sales, the prior years, maybe you phase some stuff out, or realign the portfolio? Be curious your thoughts there.

Sure. Of course, as Nature's Own is the number one brand in the bakery category in the US, and has been for many years, we are really focused on simplifying the ingredients that are contained in Nature's Own. If you look at the ingredient legend, we'll be reducing, probably, the list of individual ingredients by half. And that really reflects current consumer desire for products that are simple in formulation and having the nutritional attributes that are so important. So we are very excited about the changes that are being made overall to the brand. I think it doesn't change the positioning. It really strengthens the positioning, based on current consumer desires.

In addition, we have many new items that are in the queue for Nature's Own. We're looking at other opportunities within the soft variety-bread segment that we feel that will be certainly in sync with consumer desires, and just a lot of activity from a brand-support standpoint. And the great thing about having such a mature team, from a distribution point of view, is that we're able to introduce new brands like Dave's Killer Bread and also, at the same time, continue support and activity for our other brands, with Nature's Own being one of the key brands in the future. So we're excited about all of the marketing activity planned for Nature's Own this -- for the rest of this year.

Understood. Thank you.

Thank you.

The next question is from Bill Chappell with SunTrust.

Thanks, good morning.

Good morning, Bill.

Two questions. One, there was something in the 10-Q -- just trying to understand -- that talked about a reduced number of independent distributors in the quarter versus prior, and it was a temporary decrease. Can you just help me understand that?

Yes, Bill, if you look, for the quarter, we did see a ramp-up in the routes held for sale in primarily -- some of that's in new markets, some of that's in core markets. What we did was, as we were making enhancements to our overall distributor agreement, we did pull back some on selling territories. But we've completed most of those enhancements, and now we're moving forward with offering many of those routes for sale now. So, in Q2, you'll see us selling some of those territories, and you'll see a reversal of the impact of some of that in Q1.

So, on that, can you give us an update on where you are on updating the agreements across the country?

I mean, really, not getting into any specific market or specifics about the agreement, I would say, generally -- again, we've put in some enhancements in how we're using that agreement as we sell new territories going forward.

Okay.

But as far as specific numbers, we would not want to disclose that.

Okay.

Bill, I would add that, from an operational standpoint, there's a lot of excitement in the markets, where we are actually now able to convert to independent distributors. Many of the prospective distributors have been on standby for too long, and lots of excitement about being able to go ahead and convert to the independent distributor model in these markets.

Okay. And then, second, I guess I'm a little confused. I think in the commentary you said there was a higher level of promotions by competitors in the market that impacted volumes. But then I think you just said that you didn't see much change in the competitive activity from fourth quarter to first quarter. So, just trying to understand like, is Bimbo or others coming back, or is it fairly stagnant?

Basically what has happened is, in the fourth quarter, we implemented price increases, really reflective of higher promotional prices, starting in the middle of the fourth quarter. That continued -- those price increases continued to be implemented on our side, moving through the first quarter. And the comment was, from a competitive standpoint, the pricing really did not change. And so, that is the reason -- if you look at the graph in the deck, that's the reason for the increase in the gap between our price and the market price reported by IRI.

Okay. But the promotional levels --?

The market stayed the same. We increased price, and the market stayed the same.

Okay. And expect it to stay that way as we move forward?

That's our assumption.

That's the hope. Perfect. Thanks so much.

Yes, thank you.

This concludes the question-and-answer session. I'd like to turn the call back to Allen Shiver for closing remarks.

Thank you, Ellen. At Flowers, we have the right team, the right products, and the right strategy to drive shareholder value. We operate both from a strong competitive and financial position that allows us to invest in the business while also returning capital to our stakeholders. We remain confident that we're taking the right strategic steps to keep the Company positioned for long-term profitable growth. Thank you for your time this morning, and this will conclude our call.

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