Flowers Foods Inc (FLO) 2016 Q3 法說會逐字稿

Welcome to the Flowers Foods third-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 third-quarter results were released yesterday evening and we filed our 10-Q then as well. You will find the earnings release on the Flowers Foods website. You can find the slide presentation that supports our discussion for 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 will discuss during the call, important factors relating to 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 will open the call to your questions following our prepared remarks. Now, Allen, I will turn the call over to you.

Thank you, J.T., and good morning, everyone. During our call today I will comment on the factors driving our sales and earnings, I will report on category trends and provide an update on Project Centennial. Then I will turn the call over to Steve Kinsey, our CFO, who will review our financial performance and discuss our outlook for the remainder of the year. After our prepared remarks we will take your questions.

Turning to the summary results on slide 3. On the top line we grew sales by 3.8%. This increase was driven by Dave's Killer Bread as we continue to gain share in the organic bread segment, offsetting the continued softness in the total category. Overall the competitive environment varies market by market. And during the quarter we increased promotional activity to better align with the marketplace.

On a comparable basis EBITDA and EPS were down year-over-year due to disappointing sales in our core markets as well as higher marketing and legal costs. The higher marketing costs are primarily to support the rollout of Dave's Killer Bread across the DSD network that began in the second quarter.

I want to be clear, our results do not reflect the underlying strength of Flowers Foods, and our team is committed to delivering better results. We have already begun to reinforce the mindset of ownership and accountability to the team. Over the longer term we expect to realize substantial benefits as we implement Project Centennial. Now more than ever our entire Flowers team is driven to resume our long track record of steady growth and value creation.

Let's turn now to the category trends on slide 4. The overall fresh packaged breads market declined 0.5% in dollars with pricing and mix shifts offsetting unit declines of 1.2%. Continuing recent trends, category unit volumes have been under pressure with store brands in particular losing both dollar and unit share.

While it is important to monitor the overall category trends, we continue to believe Flowers has the opportunity to outperform the category by gaining share in our expansion markets and investing in brands that are in growing segments of the category.

Consumer demand for organic bread is growing and Flowers is well positioned to benefit as demand continues to increase. Our entry into the organic bread segment is a great example of how we have been able to drive growth even as the category overall has been soft.

As you can see on slide 5, not only is the overall market for organic fresh packaged breads growing, but our brands are gaining share as well. The consumer and retailer response following the nationwide rollout of DKB has been overwhelmingly positive, and our team is driving hard to execute on the growth opportunities available with DKB.

Our warehouse delivered organic brand, or Alpine Valley, started off the year slower than we had expected. However, we continue to have confidence in our strategy for the brand and believe we are taking the right steps to expand distribution and grow sales.

On the production side our organic bakeries continue to improve. The Tuscaloosa bakery we converted to organics in the second quarter is hitting its stride. And the process enhancements we've made at the DKB bakery in Oregon and the Alpine bakery in Arizona have both demonstrated solid improvements in quality, consistency and productivity.

We are on schedule to produce substantially all of our organic breads in our own bakeries in early 2017 and the progress we have made on that initiative so far has significantly improved the probability of our organic business.

Overall we are pleased with the progress we have made integrating our new organic brands and positioning them for growth going forward. However, performance of our core brands has been mixed. Led by Wonder and Nature's Own Butter Bread we are gaining share in the white loaf segment and that segment overall is growing.

Our organic brands, along with Cobblestone Bread Company, are driving share gains in specialty premium and we also gain share in the sandwich bun and roll segment. That being said, in the soft variety segment we lost share. And since that is the primary segment for our largest brand, Nature's Own, it is our team's top priority to correct course and those course corrections are underway.

As I have mentioned, we've returned to a more normal feature activity to be competitive in the marketplace. And we are keeping the brand fresh with new better-for-you varieties like those recently introduced under the redesigned Nature's Own Life brand.

Snack cake is the other segment where we lost share, primarily in the C-store channel due to a competitive marketplace. Our focus for the Tastykake and Mrs. Freshley's brands is to win over consumers and our cake marketing team has a strong pipeline of new flavors and products to bring innovation and creativity to the cake category.

Turning now to an update on Project Centennial, which is a comprehensive enterprise-wide business and operational review we launched in the second quarter. We have completed the first phase of the project, which included a diagnostic evaluation of opportunities for Flowers to drive growth, reduce cost and make investments to sustain long-term value creation.

We are pleased with the progress we have made in Phase 1 and the opportunities we have identified are compelling. Phase 2, which involves developing and executing new strategies for growth and initiating improvements to efficiency and profitability, is underway.

While most of the savings and strategic investments will come in 2017 and beyond, my message to the team today is that it is not business as usual at Flowers. We are re-examining every detail of our business to find new ways to operate more efficiently while never sacrificing quality or service.

With both growth and cost reduction components that complement each other, Project Centennial builds on our strong culture in order to strengthen our unique competitive advantages. Our end goal is to deliver sustainable long-term growth on the top and the bottom line, enhancing value for all our stakeholders.

Project Centennial will enable us to be more productive and more efficient. It will enable us to reinvest in our brands to fund growth while continuing to be disciplined with our capital.

As I mentioned, we are now deep in the process of finalizing our implementation plan and we expect to be at a position to provide additional details on Project Centennial when we report our fiscal 2016 results in early February. Now let's have Steve review the financials.

Thank you, Allen, and good morning, everyone. Our third-quarter sales of $918.8 million increased 3.8% versus last year driven by acquisitions until cycled that increased sales by 4.4%. As a reminder we did cycle the DKB acquisition during the third quarter on September 12.

Excluding acquisitions volume declines offset sales growth by 0.9% as declines in the branded category were not fully offset by increases in the nonretail and store branded categories.

On a consolidated basis and excluding acquisitions, price mix increased by 0.3% due to a positive price mix in branded retail that more than offset declining price mix in the non-retail channel.

EPS for the quarter was $0.19, down $0.02 from the year ago quarter. Adjusted for the settlement cost associated with our pension de-risking strategy, the write-off of the loss on the extinguishment of debt, the legal settlement charge recorded in the current quarter and the facility closure and acquisition-related costs last year, EPS decreased 8.7% or $0.02 per share to $0.21.

Net income for the quarter decreased 8.2% to $40.2 million while adjusted net income decreased 10%. Consolidated adjusted EBITDA for the quarter decreased 3% to $101.7 million. The adjusted EBITDA margin was 11.1% of sales, a decrease of 70 basis points when compared to the third quarter a year ago.

As a percentage of sales overall gross margins increased 50 basis points to 48.1%. Lower input cost, notably the cost of ingredients, packaging and utilities, benefited margins by approximately 90 basis points, an increase that was partially offset by higher workforce costs.

As a percent of revenue SD&A costs were up 80 basis points to 37.2% of sales. As higher workforce-related costs -- higher workforce-related marketing and legal costs were more than offset -- lower distributor distribution fees as a percent of revenue.

Included in SD&A expenses for the third quarter is a legal settlement charge for $1.25 million which was the result of an agreement reached to settle a lawsuit seeking class action in Connecticut. The agreement also includes certain non-economic terms which are intended to strengthen and enhance the independent contractor model. The settlement which includes 49 territories is subject to court approval.

Moving on, cash flow from operations was $91.2 million compared to $64.6 million in the prior year quarter. The increase primarily due to changes in working capital. Capital expenditures were $25.7 million. During the quarter we returned $33.2 million of cash to investors through dividends, a per share increase of 10.3% over Q3 2015.

On the balance sheet during the quarter we issued 400 million of 10-year senior notes with a fixed rate of 3.5% per year. We used the net proceeds from the issuance to pay off the term loans as well as reduce the balance on our AR securitization facility. As a result of this issuance and with the repayment of the term loans we have extended our debt maturities as well as reduced our exposure to rising interest rates.

Now commenting on segment level results. Our DSD segment sales increased 3% with the DKB acquisition contributing 4% until cycled on September 12. Relative to Q3 2015 the promotional activity in the current quarter was reduced, which drove overall segment price mix up 1.1%. Volumes were down 2.1% driven by lower volumes of core branded items due to the competitive environment.

Operating income from the DSD segment was $66.3 million, a decrease of 10.1% compared to the prior year third quarter. Operating margin for the DSD segment was 8.6%, down 50 basis points from a year ago. Included in the DSD segment operating income is the legal settlement charge of $1.25 million.

DSD segment adjusted EBITDA was down at 5% over the prior year to $95.4 million. Adjusted EBITDA margin for the segment was 12.4%, down 110 basis points. The decline in margin was driven by softer sales for the core business partially offset by lower input costs as well as increased marketing and legal expenses and higher corporate overhead charges.

Warehouse segment sales increased 7.8% with the Alpine acquisition contributing 6.3%. We saw strong growth in volume, excluding acquisitions, from branded retail bakery deli, as well as contract manufacturing in food service. Volume growth along with the acquisition more than offset negative price mix.

Operating income for the warehouse segment was $12.3 million, an increase of 8.1% compared to the prior year third quarter. Operating margin for the warehouse segment was 8.2% or flat compared to a year ago. Warehouse segment adjusted EBITDA increased by 13.1% to $16.9 million. EBITDA margin for the warehouse segment was 11.3%, up 60 basis points primarily due to sales increases and higher intercompany sales.

Corporate unallocated cost in the third quarter, excluding the pension settlement loss of $1.8 million, were $10.7 million as compared to prior year unallocated cost of $10.5 million excluding prior year acquisition-related costs. Keep in mind that the prior your corporate unallocated costs included certain unanticipated costs that in the current year have been allocated to the segments.

Carrying costs associated with the acquired Hostess Bakeries continues to decrease as expected. In the third quarter these costs were $1.9 million, down from $2.5 million a year ago. Currently we have listed for sale four nonstrategic facilities with three remaining under review.

Depreciation and amortization charges for the quarter were $32.5 million, an increase of $3.1 million, primarily due to amortization charges associated with recent acquisitions. Net interest expense was $4.7 million for the quarter including $1.9 million of additional interest expense resulting from the payoff of the term loans.

We ended the quarter with debt of $984.3 million. Our net debt to trailing 12-month EBITDA is 2.2 times.

As detailed in the release, on slide 9 we continue to expect our full-year 2016 sales to be in the range of $3.93 billion to $3.986 billion and adjusted EPS, including approximately $0.02 of accretion from the accelerated share repurchase, to be in the range of $0.90 to $0.95.

As Allen mentioned, we have adjusted our promotional strategies to be more in line with the marketplace. However, we continue to navigate a difficult competitive environment. The trend is toward the lower end of our guidance range so we remain cautious in our outlook. And with that I will turn the call back over to Allen.

Thank you, Steve. Before we go to Q&A I would like to leave you with three key takeaways for the quarter. First, we are not satisfied with our results, but we are confident that we are taking the right steps to build on our strong foundation and deliver shareholder value over the long term.

In the near term we are continuing to manage through the challenging competitive environment. We have taken action to protect our market share by bringing promotional activity more in line with the marketplace.

Second, we are continuing to generate growth from the rollout of Dave's Killer Bread across our DSD network. Organic breads are driving growth for the entire category and DKB is driving the growth of organic breads.

Finally, I want to recognize our entire team that works tirelessly to drive our success. Thank you for all you do every day. As we continue with Project Centennial I am reminded of the spirit and determination that is the Flowers way. And at the end of the day it is our team that gives me confidence in our success.

Thank you and now we will turn the call over to Ellen for a Q&A.

(Operator Instructions). Farha Aslam, Stephens.

Allen, could you share with us kind of the current retail dynamics in the bread category? Are you seeing here in the fourth quarter as we go into the holidays increased promotional efforts to respond to your new increased promotions on your key brands? Could you give us sort of on the ground level information?

Farha, really the promotional activity in the bakery category really has not changed significantly. If you will recall, last year we announced going into -- I guess into the summer that we were adjusting our pricing to be more competitive. And it takes some time to get price changes into the marketplace.

And now that we have done that we are competitive with the conditions in different markets. And once again, each market, each geography is different, but what we have done is made sure that from a promotional standpoint that we are competitive with the market leaders in each one.

And so, if you could share with us kind of what that does to pricing expectations and volume expectations for your key brands. Perhaps you could share with us Nature's Own and Wonder, DKB -- kind of how should we think about growth in those brands?

Yes I think, Farha, really at the end of the day the consumer sets the price and we are very encouraged about the growth of especially the organic categories and Cobblestone Bread Company doing really well. We are also enjoying growth in underdeveloped markets. We have mentioned markets, New York, Connecticut, on and on.

But as far as pricing, those conditions are really pretty stable with the story that we have given you in prior quarters. I think the emphasis now is that we have made adjustments and those adjustments had found their way into the marketplace pretty much system wide.

But do not anticipate any further deterioration of pricing in this category. In fact, we are optimistic that with time pricing will improve. And if you look at our history, we have always been the price leader, especially in those markets where our brands are strongest.

That is helpful. And then, Steve, perhaps a question on commodities. Could you share with us kind of forward positions and some early look into next year on how much commodity inflation we could anticipate?

And so far this year commodities have been offsetting that higher workforce expense. As we kind of think about next year generally could you give us some color on how much workforce inflation we should see and how much commodity (technical difficulty) we should expect?

Sure. I mean obviously we haven't given guidance for 2017, but as you look at our overall thoughts on the commodity and input cost basket, obviously 2016 there was a nice tailwind of commodities and all input costs have seemed to stabilize somewhat now as we progress through the year.

So as we move into 2017, while we are expecting some minimal benefit we are not expecting tremendous cost tailwinds like we saw in 2016. With respect to workforce, I think you can anticipate to see the traditional low-single-digit increase in overall workforce costs for 2017.

Okay, great. Thank you so much.

Akshay Jagdale, Jefferies.

A couple of questions. First just related to the legal costs. Do you consider those as -- I mean the level at which you are experiencing legal costs right now, do you consider that level to be unusually high?

When you look at legal costs year over year, Akshay, obviously they are up fairly significantly. It is hard to project how they'd turn out as we continue with the litigation that is before us. So to sit here today and try to say if they are more elevated than they will be in the future or -- it is hard to predict. All I can say is they are elevated compared to the prior year.

Right, I mean there is significant -- in my estimate I mean they are a double-digit drag on your EPS growth, so it is a significant number. Can you -- I know you mentioned the settlement in Connecticut and you gave us the number on the settlement. Are there any balance sheet implications?

I mean I wasn't able to access the actual settlement on the (inaudible) website. But is there -- can you talk -- was there any balance sheet implications? You mentioned there was some changes made to the structure in addition to the settlement. Can you provide any color on that?

Yes, when you look at the Connecticut case the settlement was for $1.25 million, still subject to court approval. So we did record a reserve for that amount. When you look at the litigation in general, if you're asking that question, from that perspective each case continues to have its own fact pattern by being filed in different states so the laws do vary there.

We continue to monitor each case and at this point [we have] not taken any further reserves -- any more reserves than what we recorded for the Connecticut case. But we do continue to monitor each situation and will act accordingly when we think it is necessary.

Okay and just two more. So one on the guidance. So you are saying you are trending towards the low end. Does that basically mean you are going to be -- we should consider the low end as sort of your expectations both on sales and EPS?

When you look kind of at where we ended up the quarter and year to date and you kind of see how we are several weeks into the fourth quarter now, we feel like we want to be conscious. So it appears that we are more -- we are toward the lower end. I am not willing to say we are at the lower end but we are trending toward that direction.

Okay. And then just on Project Centennial, I mean we appreciate the color on sort of where you are in the process. But can you -- I know you are not willing or ready to quantify any of that yet. But at least can you give us generally sort of the buckets or the areas of focus or sort of what has changed?

I mean where I am coming from your -- Flowers has always been considered one of the better operators within the bread industry. You have operated like a local type of model where your plants were producing maybe on size basis are a little bit smaller than some of your competitors.

But can you just give us a sense as to what is the big takeaways that are going to come out of this? I mean are they going to be some pretty significant changes in your COGS, they are going to be significant changes in SG&A? Or just some color on what the buckets are, some sort of magnitude and the process.

Yes, when you look at the -- kind of where we are focused coming out of the diagnostic space, there is going to be a big focus on leveraging our shared service concept. Currently we are looking at benefits we think in the purchase goods and services area of the Company.

We have done a good job from a shared service perspective on direct cost, so we are going to look at the buckets of indirect costs. I think you can expect to see some savings potential there in the future.

Another big area of focus coming out of the diagnostics is network optimization. I mean it is obvious from a production standpoint we need to make sure we have the right production and the right marketplace. And from an SKU perspective we want to make sure we have the SKUs that are moving which also will lead, again, to our focus on stale improvement.

So I would say the key focus right now in the diagnostics space will be leveraging more shared service -- the shared service concept and taking that into other areas of the organization where we have not done that in the past. And there's going to be some focus on strategic growth as we look at opportunities to grow the top line over the next 18 to 24 months as well.

As far as quantifying and giving a dollar amount today, we are really being cautious not to get the cart ahead of the horse here. We don't want to promise something we don't think we can deliver. But we are still very excited about the project.

I don't want you to go away today thinking because we are not quantifying amounts today we are not excited. But I do think when we talk about it again in January there will be some meaningful savings there.

And, Akshay, just to add to that, the team is really engaged and excited about the opportunities. I mentioned last quarter that our Company has grown significantly in the past five to six years and with that growth we know that we have got some excessive cost from an overall standpoint.

So there are really two buckets, one is focused on cost reduction and, as Steve mentioned, the other is what are the opportunities to grow sales in our existing categories as well as adjacent categories. So a lot of work underway and the team is very engaged and we'll look forward to giving you more specifics on the fourth-quarter call.

Okay, great, I will pass it on.

Amit Sharma, BMO Capital Markets.

Allen, just wanted to go back to your comments about the category and promotional activity. I mean why do we think promotional environment will not get worse? I mean we have seen that historically you are the price leader, but in the last 12 to 18 months we've seen the competition probably stay a little bit ahead of you. So now as you ramp up your promotions why shouldn't we expect a similar response from your main competition?

Amit, again, I don't want to speculate looking forward, but if you look at what has taken place, we basically have adjusted pricing to be competitive with pricing that was already in the individual market. So in most of the markets where we compete our pricing is still above the marketplace. So really don't have any reason to believe that pricing should deteriorate further than this, but again I don't want to speculate.

The growth story is very different from one segment of the category to the other. I mentioned that we are encouraged with the growth in the white bread segment, we've talked a lot about organics today, sandwich buns and roles are showing growth. Our real focus is on our Nature's Own brand in the soft variety category to make sure that we maintain a growth structure there.

But if you look at the trend on pricing going back the last two to three years, it has really been very consistent. And I think the only news today is that the pricing that we mentioned last quarter, most of that is now in the marketplace and we are competitive with the competitors.

And then on a similar topic on Project Centennial, granted you are not giving details and we can certainly wait until the next quarter. But as we think about the contribution from that and its impact on your margin structure, isn't there a real risk that whatever savings that do come out of that will probably have to be reinvested into the business to regain competition or maybe even regain market share?

When you look at the project, obviously we will want to be able to take some of the savings and reinvest back into the business. But we are also very mindful of driving margin improvement. So what we are seeing today gives us I think some confidence we will be able to do both. But there will be some need to invest back into the business based on the changes that will come out of Project Centennial as well.

All right, and then just two more for me. One on the legal issue, legal settlement actually. Granted you can't say much about it and all cases are different. But could you talk about like what non-economic changes that you are proposing as part of the settlement? And how does that impact your cost of operation going forward?

We are not going to get into specifics today on the non-economics because the court is still -- it still requires court approval. But generally the non-economic changes will not impact the overall financial structure and there will be no financial cost -- no significant financial cost with implementing those. They are primarily structured around the program itself and the contract.

Okay, I thought you stopped midsentence, sorry about that. Then just on that, and this settlement only applies to 49 different [routes], it doesn't extend to other routes for in that market, right?

Yes the settlement only applies to the 49 routes that are -- territories that are part of the this lawsuit. It doesn't extend to any other territories.

Got it. Thank you very much.

Tim Ramey, Pivotal Research Group.

Just was interested in the price mix calculation. I am sure that DKB had a positive impact on mix. Can you say more about just price in isolation from mix and what your expectations are say for the next couple of quarters if possible?

Yes, when you look at the price mix, Tim, on a consolidated basis I think we are up basically 30 basis points. It is driven primarily by price. DKB, as we said, we have cycled that about midway in the third quarter. So there was some contribution from DKB from that perspective. But looking ahead I don't want to speculate because we have seen the marketplace be competitive. So we are not giving any guidance beyond for the quarter or next year yet as far as price mix or the sales growth.

Brett Andress, KeyBanc Capital.

So in the past you guys have given us the price gaps of you versus the other brands in the traditional [both] category. So I guess could you give us those numbers for this quarter? And then maybe more broadly, have you seen any changes in the pricing environment right now in the category versus 90 days ago?

Brett, we will be happy to provide that information off-line, we will follow up after the call. Again pricing in the marketplace that we have seen this past quarter is consistent with what we have seen from prior quarters. So it has not deteriorated, it has not improved, it is basically a continuation of what we have seen in past quarters. We can get you the specifics as far as the price gap, we will do that taking it off-line after this.

Okay. And then I guess when you say non-economic cost in the settlement it seems to be positive from your point of view because you said it enhances the independent contractor model. But I guess are these new changes or -- because I know you guys have kind of redone the agreements in the past? Or are these just kind of implementing some of those same old agreements?

Brett, I can appreciate the need to want to know more at this point, but until the court approves it we feel like we need to be -- we are not prepared to discuss it until the court approves the final changes.

Okay, fair enough. And then I just wanted your thoughts on hurricane Matthew. I think that was the first major storm in the last few years and it fell really right at the start of the fourth quarter. So did you guys see any disruption or was it more of a benefit to your volumes?

Our team did a wonderful job taking care of the marketplace during the hurricane, but if you look year-over-year there were hurricanes in prior years as well. But really my hat's off to the entire team and our distributor partners for taking care of the marketplace.

And we received a lot of thank you's from our trade customers after the storm. And as far as any significant damage, we were able to keep most of our plants online and no real damage associated with the storm.

Thank you.

Bill Chappell, SunTrust.

Hi, good morning, this is actually Stephanie on for Bill. Could you just provide us an update on the Alpine business and kind of the expansion for that brand and has there been any improvement from some of the issues that creeped up in the second quarter? Thanks.

Yes, Stephanie, we are still very bullish about the growth of Alpine Valley. I mentioned the activities in the organic channel. Alpine is primarily sold both refrigerated and frozen, so it is a little bit of a new distribution channel for our team. But even though we kind of came out of the blocks a little slower than expected, we are starting to see momentum build with Alpine Valley.

Also very happy with the progress in our manufacturing plants where we are producing both Alpine and Dave's. Great quality and very much getting our cost structure in line for that type of product. So we are confident that Alpine will continue to grow. The delay is more a function of just timing and really getting in place with some new channels from a distribution standpoint being frozen and refrigerated. But Alpine will be just fine.

Got it. Thanks so much.

Mario Contreras, Deutsche Bank.

So with respect to margins, focusing in on the SG&A, is there any way to rank or quantify some of the factors that led to the year-over-year increase in cost and subsequent decrease and margins? You mentioned higher legal costs, higher marketing, so is there any additional detail you can provide there? And then looking forward the next couple quarters, should we see any change in those amounts? Thanks.

When you look there were three buckets, there was elevated workforce costs, you had the marketing and the legal. We didn't quantify specifically by bucket. But generally speaking, the legal and marketing were the primary drivers of the increase year over year.

Should we expect to see elevated marketing costs for the next couple quarters as DKB continues to build momentum?

I think you could expect to see us as we try to continue to integrate DKB, Alpine as well as continue to focus on our core brands and getting those back on track. You should expect to see continued marketing spend there.

Okay. And then just one additional one from me staying on the topic of margins. Are you seeing any negative margin mix impact to the extent that you are losing share in some of your core markets but perhaps gaining share in some of these expansion markets that may or may not require additional investment?

When you look at -- kind of sequentially at the quarters, price mix has been flat to slightly up with some negative mix shifts. We did see some mix improvement in the third quarter even though it was slightly negative. Part of that mix improvement was driven by the organic business. And I think you are right in your assessment, the downward volume on our core business is causing some negative mix when you look at the overall price mix number.

And with respect to margins, is that -- I guess that would also hold true as well?

Yes, I mean with the core business being down and the Nature's Own volume being down that is impacting overall margin as well.

Okay, thank you very much.

Eric Gottlieb, D.A. Davidson.

I know details on Project Centennial are kind of limited at this point, but you did cite that costs were included in guidance. Could we find out how much costs were included in guidance and have those changed at all from previous guidance levels?

You are talking about the cost of the consulting project?

You tell me, you just said it was included.

Yes, I mean we do have the costs associated with Accenture in the third quarter and fourth quarter in our guidance, but we have not quantified that. I mean I would say it is not that significant, but there is cost associated with it.

Okay, so that is not moving guidance down at any point. In snack a competitor we all know is not really back in the market, but recently became public and kind of announced strategies to better their business. I am wondering if you have any plans in place to change your strategy to counter those or [grow/defend] your own market position?

We feel very confident in our current structure with our Tastykake brand being distributed DSD and our Mrs. Freshley's brand going through warehouse delivery. Snack cakes are all about product quality and unique items and good packaging and seasonal flavors. And we have a lot of marketing activity geared around our cake business to get us back on the right track there. We have had a competitor kind of reintroduce to the marketplace, but again that is not new. And we will continue to grow our cake business.

Okay, great. And then in the beginning of the call you said results were disappointing; however, guidance wasn't really changed and pretty much in line with what everyone else was thinking. I am wondering can we highlight -- forget what was strong and what was weak, but what was underperforming and outperforming your own internal estimates?

I mean generally when you look at our internal expectations I would say we continue to see downward pressure on our core business and that is the -- that is the primary driver of where we want to perform better and we think we should be performing better, we just continue to see overall pressure on our core brands.

We are very pleased with our nonretail segment, we are very pleased with warehouse and what we are seeing there. But we -- and cake has been slightly down on the branded side as well. So it is really a focus on our core brands at retail.

Okay.

We have always set our internal goals aggressive and that is the nature of our leadership team. And the purpose of the comment is to let you know that that leadership team has not changed; we continue to set the high internal goal for ourselves. And we are not satisfied until we reach those goals.

Okay, thank you. And then the last question is, is there any whitespace that the Company plans on entering in the near-term?

Nothing to report at this time. We did mention as part of Project Centennial we will look at adjacent product categories for opportunities for growth. But again, it would be premature to mention anything at this time.

Okay, great. Thank you.

Very good.

I would now like to turn the call back over to Allen Shiver for closing remarks.

Thank you so much for your time and your interest in our Company. We look forward to visiting again as we close out the year and talk in February. Thank you very much.

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