Flowers Foods Inc (FLO) 2017 Q2 法說會逐字稿

Welcome to the Flowers Foods Second Quarter 2017 Earnings 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 and Treasurer. Mr. Rieck, you may begin.

Thank you, Ellen, and good morning, everyone. Our second quarter results were released yesterday evening, and you'll 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. Our 10-Q was filed with the SEC yesterday evening as well.

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 Flowers Foods business are fully detailed in our SEC filings.

I also want to let you know we will host an investor briefing for sell-side analysts and institutional investors on Wednesday, September 27 at the New York Stock Exchange. We will detail our strategic priorities and an update on Project Centennial. We'll send out the particulars for the event soon.

Now let's get started. Participating on the call today, we have Allen Shiver, Flowers Foods' President and Chief Executive Officer; and Steve Kinsey, our Executive Vice President and Chief Financial Officer.

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

Thank you, J.T., and good morning, everyone. Thank you for joining the call. We have had a busy quarter. Flowers is a company in transition, and change is taking place. It's an exciting time, and we see opportunities in all areas of the business. I am proud of the way that the team is tackling challenges head-on and finding creative ways to improve our business and drive growth in the future. I am confident the actions that we're taking today will make us a better and a stronger company tomorrow.

So let's get started. In the second quarter, we continued to execute on our strategic priorities. We're taking actions to lower our cost structure, reinvigorate our core business and enhance the long-term growth trajectory of our brand portfolio. Our team is driving hard to deliver on these priorities with the goal of creating greater value for shareholders.

Summarizing the results for the second quarter, excluding the divestiture, sales were down 40 basis points, and adjusted earnings per share were $0.24. Early wins from our cost savings initiatives, along with improvements in manufacturing efficiencies, helped us overcome the margin impact of softer-than-expected sales growth. As for category trends, the fresh package breads category was down 70 basis points in dollars and 1.5% in units for the quarter. Our competitive position in the category improved, and we gained share in both dollars and in units. In the second quarter, our market share for the category was 15.4%, which is a record for Flowers.

It's important to point out that we operate in a big market. Across the grocery store segment, fresh bread is the third largest category. Many of our brands already have a strong competitive position. We're focused on opportunities to grow in segments of the category where we are underdeveloped with new products and strategic acquisitions.

Dave's Killer Bread is driving our share gains in the specialty premium segment and breakfast segment. While Wonder and Nature's Own grew share in white and soft variety loaf segments. Our cake share has been under pressure for the past several quarters. This is due in part to competitiveness in the market, but we've also seen losses in commodity-type products and products that lack brand strength. We're addressing these issues by improving the manufacturing efficiency of our cake operations and developing products with clear points of difference and consumer appeal.

For example, to rightsize our cake production capacity, we are closing our Winston-Salem facility in early October. This was a difficult decision because of the impact it will have on our team members. We're doing all we can to support them during this transition and are committed to treating all the affected employees with dignity and respect. However, this decision was absolutely necessary to protect our long-term competitive position and improve efficiency across our cake operations.

With Tastykake, we're putting more support behind our brand with marketing partnerships and new varieties to grow sales, keeping the brand fresh and exciting. Consumer interest in fresh, organic breads is strong, and DKB is a growth driver in our portfolio. It's been a year since we introduced DKB to our Direct-Store-Delivery network, and we continue to see growing units per store and steady distribution gains.

During the quarter, we launched 4 new organic breakfast items under DKB. With this introduction, we're focused on growing our share of the almost $2 billion breakfast segment, which for us, is an undeveloped area of the category. This underlines the potential to expand into other segments of the category with the DKB brand. Still, we're realistic about the current marketplace as we're seeing across the packaged foods category, overall consumption in the bakery category is down. This is putting pressure on volumes, and our revised guidance reflects this reality. As a result, we are increasing the urgency of our cost-cutting efforts and our focus on product innovation.

Which leads me to Project Centennial. We're reducing costs and simplifying the business to generate savings to invest in our brands and create a platform for growth. As we've said, our target is to deliver net EBITDA margin expansion of at least 250 basis points by 2021. On our 2016 sales base of just under $3.9 billion, that translates to approximately $100 million of annualized savings.

These savings are net of investments back into the business to enhance and strengthen our operations, our brands and marketing. To capture these savings, our team is addressing cost throughout the company, including purchased goods and services, organizational structure and operations. For purchased goods and services, we've targeted annualized savings of at least $45 million on our indirect spend. We're on track and expect to achieve our target by mid-2018. Our new organizational structure is in the process of being implemented, and we will begin to realize savings starting early in 2018. Last month, we put into place a voluntary separation program that'll be completed late in the third quarter.

We're also gaining momentum with a number of initiatives designed to simplify operations and improve efficiencies. This includes continuous improvement in supply chain optimization. Closing the Winston-Salem facility is an example of streamlining the supply chain. Beyond cost savings, we're making progress with other initiatives under Project Centennial. We've successfully contracted with third parties to expand the distribution of products in the Midwest and other areas where our distribution is limited. We're also developing a more streamlined brand assortment that will eliminate lower-margin SKUs. We expect to implement the new product assortment by the end of this year.

I'm encouraged by the transformation that is underway here at Flowers at all levels of our company. The world is rapidly changing, and Flowers is changing as well. We're implementing new processes and actions daily, and momentum is building. You'll be hearing more about Project Centennial at our investor briefing in New York on September 27.

Now I'll ask Steve to review our financials.

Thank you, Allen, and good morning, everyone. Since the detailed financials for the quarter are available in the release, and the 10-Q was filed last night, I'll focus my comments today on the key highlights, cash flows and our outlook for the remainder of fiscal 2017.

On the top line, consolidated sales decreased 90 basis points. The mix business we divested early this year accounted for 50 basis points of the decline. Our DSD segment increased consolidated sales by 80 basis points, and the warehouse segment decreased overall sales by 120 basis points, excluding the impact of the mix business.

The warehouse segment, which makes up roughly 14% of our sales, was down 7.4% in the second quarter, excluding the mix business. The majority of the decline was driven by lower sales in our warehouse cake business, including the Mrs. Freshley's brand and store-branded snack cake.

The DSD segment was up 90 basis points in the second quarter. Strong sales of Dave's Killer Bread drove the segment top line, partially offset by lower sales of conventional bread due to primarily a softer-than-expected bun season and lower sales of Tastykake. For both DSD and warehouse, volumes in our cake business have been pressured for several quarters. And as Allen mentioned, as a result, we are closing the Winston-Salem cake facility in early October to lower costs. In today's environment, it's imperative that we produce our products in the most efficient bakeries.

Our organic business overall is performing very well. As the leading organic bread brand, Dave's Killer Bread, sales continued to grow, benefiting from the full support of our DSD network. While we've had challenges growing the Alpine brand, Alpine fills an important long-term portfolio role in allowing Flowers to reach consumers seeking organic bread outside the traditional bread aisle: on the perimeter the in-store bakery and the freezer case. At the bottom line, our organic business is performing above expectations. The investments we've made to add organic bread production capacity has yielded very strong returns.

Operating margin in our DSD segment were down slightly, 20 basis points, with 10 basis points due to higher amortization expense. Lower production costs were offset primarily by higher selling expenses. The warehouse operating margins were down significantly, 180 basis points, impacted primarily by lower-than-expected cake sales.

Looking at our consolidated results. Production costs as a percentage of sales declined 60 basis points, resulting in higher gross margins. Relative to the prior year quarter, we produced the vast majority of our organic items in-house, which reduced outside purchases significantly. Improved manufacturing efficiencies also contributed to the reduction in production costs as a percent of sales, as we have been very focused on maximizing productivity in the bakery to counter the lower sales volumes.

Adjusted for items affecting comparability, selling, distribution and administrative expenses, as a percent of sales, increased 110 basis points, the main driver being distributor distribution fees. This was anticipated due to more sales going through the DSD network as a result of the rollout of Dave's Killer Bread, which began in the second quarter of fiscal 2016. Reflecting the net of higher gross margin and higher SD&A as a percentage of sales, adjusted EBITDA decreased 50 basis points to 12.3% of sales.

GAAP earnings per share for the quarter was $0.21, down $0.03 from a year ago, due primarily to Project Centennial costs of $0.03 per share. Adjusted EPS in the quarter, as Allen said, was $0.24, down $0.02 per share compared to the prior year. In addition to the decrease in sales and adjusted EBITDA margin, adjusted earnings per share were impacted by higher depreciation and amortization, offset by a lower tax rate. The lower tax rate in the second quarter was primarily due to higher discrete state tax benefits as a result of certain state tax credits compared to the prior year.

Turning now to cash flow. Operating cash flow during the quarter was $84.9 million, up $8.3 million from the prior year. Operating cash flows during the quarter were reduced by $9.4 million on Project Centennial costs. Capital expenditures were $14.5 million in the quarter as compared to $17.8 million a year ago. During the quarter, we paid down debt of approximately $44 million, ending the quarter with $840 million in net debt. Our net debt to trailing 12-month adjusted EBITDA declined to 1.9x.

Moving on to our outlook for the balance of fiscal 2017. Given category headwinds, a softer-than-expected bun season and a more conservative outlook on the back half, we now see ourselves in the range of flat to down 1%. We also tightened the range of our earnings guidance. We now expect adjusted EPS to fall in the range of $0.85 to $0.90 per share. Our guidance does include approximately 50 basis point impact to sales from the divestiture of the mix business. Our adjusted EPS for the full year excludes the gain on the sale of the mix business in the first quarter of $0.09 per share, Project Centennial costs of approximately $0.11 to $0.12 per share, and the costs associated with the closing of the Winston-Salem bakery of $0.01 to $0.02 per share.

We are also adjusting our expected costs related to our strategic priorities under Project Centennial. We now expect 2017 costs to be in the range of $35 million to $40 million as compared to our previous range of $25 million to $30 million. As we enter the implementation phase of several work streams, we now have greater visibility into what is required to move forward. The higher costs are primarily attributable to investments in overall capability, including technology investments for several initiatives. We expect the level of support to drop as we move to the back half of 2017 and fall off substantially in 2018. Year-to-date, we have spent approximately $25 million with regard to the project.

In summary, we continue to generate solid cash flows as we work to reduce our cost structure and position the company for enhanced returns in the future. Now I'll pass the call back to Allen.

Thank you, Steve. I'm confident the efforts that we're making, both to improve our operating performance and also enhance the growth of our brand portfolio, is the right way for Flowers to drive shareholder value. Our team is energized. They're engaged and excited about what lies ahead. We all see the potential for Flowers Foods, and we have the confidence and the courage to make the right decisions to improve both sales and increase earnings.

We're excited about the long-term prospects for Flowers. As the marketplace changes, we're working to leverage our competitive advantages, which are our brands; our customer relationships; our manufacturing; and distribution capabilities; and most importantly, our dedicated team. These advantages will allow us to profitably grow our market share in a huge $30 billion category.

Thank you. And with that, I'll open it up for questions.

(Operator Instructions) The first question is from Fraha Aslam with Stephens.

A question about your top line. Your new guidance still implies an improvement in the back half compared to the first half on sales. Could you just provide us some color on what's going to allow the second half sales to turn around compared to the first half?

Sure. When you look at the back half, we do have some business wins that are coming on, Farha. And then, traditionally, summer is a tougher business for cakes. So we do expect our cake comps to improve slightly in the back half as well.

Okay. And then in terms of commodity input costs, you've seen wheat costs and others go up recently. Will that effect Flowers this year or next year? And how should we model those commodity inflation?

When you look at it overall, as you know, we traditionally hedge our flour costs using wheat futures, and we're on 4 to 7 months and traditionally on the long end of that. So 2017 costs are pretty much set. So I don't anticipate any impact on the overall 2017 cost from the recent run in wheat prices. But 2018 is too early to say. I would -- you're still working through the drought situation. Obviously, there'll be a new crop planted. So from that perspective, other than saying, we're going to stick to our current hedging strategy, I can't fully comment on the impact for '18 at this point.

That's helpful. And my final question is on Project Centennial. You talked about $100 million in cost savings out in 2021. And I think today, you said that net. Is that net of investments that will be invested back into innovation, cost savings, et cetera? Is that what we should expect for the bottom line? Is that what net means? I just want to clarify that.

Yes. The net $100 million of savings is -- that take into consideration reinvestment back into the business. So obviously, the gross number is larger. And then, we'll -- as we've talked about, things like investing back in our marketing spend, those will come out of the gross savings. So the 250 basis point improvement is a net number.

Farha, also I'd add -- I would add on sales, we had some exciting new items that are in the queue for introduction in the back half. We'll be talking more about those at our Analyst Day in September. And from an investment standpoint, it's exciting to be able to really support our brands in a manner that they need to be supported to take them to the next level, and are really focusing on products that have a point of difference and brands that can carry the type of pricing and margin that we all want. So we're excited that a real byproduct of Project Centennial is being able to have sufficient marketing funds to invest back into the brands and business.

But we're still going to get $100 million in 2021 on the (inaudible) line?

Right, right. That is the net number.

The next question is from Brett Hundley with the Vertical Group.

Allen, I just wanted to finish on that line of questioning related to brand support, and whether or not you felt like you had the ability to really support the brands the way that you've wanted to maybe over the last year or so. And this kind of plays into a longer question that I have about the brand assortment comment that you guys made. I thought that was a very interesting comment as well, and I really wanted to tie all this back to your cake business. Because with Tastykake, I think you have a really high-quality product there, and I'm not just saying that because I'm a Philly guy. But I think it's a really high-quality product that you can seemingly organize your cake effort around, if you want to, while simultaneously reducing SKU count, simplifying options on the shelf for the consumer, maybe trading up from a margin standpoint internally because of your DST effort. So it seems like there's a real opportunity present in that regard. And then secondly, you have this high-quality product that you don't really seem to be attacking at all from an innovation or a marketing perspective, or you really haven't to this point. In fact, you're getting attacked by a company that has come back into the marketplace and that knows the consumer really well. And they're doing a great job, I think, of innovating and blocking and tackling around the marketing perspective. And so I'm curious kind of where we go from here in your cake business. And as a competitor in the space, why you guys have seemed to be more defensive over time with your posture? And how you can start attacking going forward?

Brett, I'll take a shot at that, and Steve can add to it. One of the exciting things about Project Centennial, and I mentioned earlier, is having the marketing funds to reinvest back into the business and our focus with our Tastykake brand as well as our other brands. And Dave's Killer Bread is a very good example. Dave's is an exciting brand. It's well positioned. It is absolutely on top of the trend on organics and growth in that area. And being able to support that brand at a high level through whatever media is appropriate for that brand is very important. And if I look at -- in the rearview mirror, we have not been positioned to invest in those brands at levels that we needed to. And that is one of the exciting things about Project Centennial is that the -- in addition to the savings that'll be reinvested back in the business, we're also going to be able to invest in our primary brands, and Tastykake is one of our primary brands, at a much higher level than we've ever done in the past and through all different forms of media. In addition, I think the bar has been raised in terms of new product development. And again, really understanding the consumer and where today's aging millennials, as they have families of their own, project differentiation that is really tied in to those consumer changes is critical. So not only are we investing more from a dollar standpoint in marketing support, we're also going to be investing in additional marketing talent that you'll be hearing more about in September. So again, we are not happy with where we're at. And if you look at our cake business and -- the decision in Winston-Salem was a difficult decision. Any time you close a facility, it is a difficult decision. But we've got to focus our product line, and cake is a great example on products that have a meaningful point of difference to the consumer. And many of the products that'll be discontinued in our SKU rationalization, quite frankly, are [mid-SKU] products that have little, if any, pricing opportunity. Our focus is develop products and brands that do have the ability to provide a meaningful point of difference to our consumers. Steve?

I think Allen touched primarily on the brand investment. What I would say also with regard to Project Centennial, if you look today, the way our cake -- the way we go to market with cake, we're basically aligned by distribution method, warehouse and DSD. I think one important aspect of the new structure is, moving to the business unit structure, it will allow us to combine how we look at our cake business. So that focus will change dramatically, and we'll talk more about that in September at the Investor Day. But that is a purpose -- one of the purposes of moving to the business unit structure is to allow that focus on cake to be really combined and more aligned.

That's really helpful commentary from both of you. I just have one other question. Steve, I wanted to follow up on a question of Farha's related to commodity somewhat. So your price/mix in DSD was up 0.7%, and that was actually on what we considered a pretty tough comp. It was actually a little bit surprising to us to see that number. And I wanted to dissect it a little bit just because of all the concern that's out there across package food related to pricing power. You've seen that concern develop as some of the hard discounters have come in on the retail side, and then also the Amazon announcement related to Whole Foods. And generally, we are seeing prices kind of decline sequentially. But with packaged bread, it feels like it's hung in there a little bit. And with the backdrop of raws potentially moving higher into 2018, I think a lot of us are questioning what can happen from a pricing standpoint in the fresh bread category. So I would just be curious to kind of get your comments on what you think this evolving environment means for pricing in your category specifically, especially against the backdrop of raw materials turning inflationary.

Sure, Brett. Just a couple of things there. I'd say when you look at the category, a lot has been very promotional. It's still very much a market-by-market category. So even though I'd say overall pricing has been impacted and down slightly, as Allen said, it's a large category, and so it's relatively stable to slightly down from an overall price perspective. When you look specifically for us at the quarter, I think what you're seeing is the fact we're on trend with organics. DKB is driving a lot of the price/mix improvement. So that really shows where the consumer's trending to and really shows the power of that brand. We've moved it into breakfast. We're happy with that launch. So again, I think it shows within the category, there's still opportunity to find a niche where you can actually grow your business. And then finally, when you look at kind of the current condition around the wheat crop and the recent spike in wheat from a pricing perspective, historically, the category had been able to price when you see movements in overall commodity cost. I don't want to speculate on the future. But we have been able to see that historically, yes.

And Steve, would you be okay sharing the current growth rate that DKB is experiencing or giving us a rough approximation?

When you look at IRI data and you look at overall organics, I'd say DKB is in line with that growth rate. They are the #1 brand in the category. So obviously, it's driving the growth. So it's a strong growth trajectory.

The next question is from Akshay Jagdale with Jefferies.

Thanks for all the additional color on your long-term targets. I just wanted to go back to the gross versus net conversation. We've done some analysis recently that shows food companies have been dropping down around 50% to 60% of gross savings to the net line, but the range is very wide. So some companies aren't able to drop anything to the bottom line, and others are doing 100%. So can you give us some sense as to what the gross to net sort of conversion is that you're assuming in your plan? And I understand that there is a clear sort of marketing bucket there that's going to go up. But I'm just wondering if you have other offsets that you plan for as well, including category softness and things of that sort.

Sure. When you look at the overall from a cost perspective, Akshay, I would say I don't think we're ready to give the percentage of gross versus net to date. The goal would be to talk about that more fully in about a month when we meet in September. But from an investment perspective, well, we do have the flexibility of doing it. We started investing back in brands, and we're not getting the return. We will have the ability to come back and take the cost savings and shift that to the bottom line. I think there's going to be a balance, and we have to really measure that and make sure we getting the return on our investments probably better and stronger than what we have in the past. So while we're talking a lot about investing back in marketing, we're going to want those returns going forward as well, so we'll be very mindful of that. I mean, if you look year-to-date, we -- for 2017, we have about $11 million of cost savings we've benefited from so far this year. And we're just really starting to push on a lot of the initiatives. So from that perspective, we're still very confident in the 250 basis points of net savings over time. So I don't want to -- we're still in the middle of some of the initiatives, like the VSIP, which affects the org savings. So in total, we have little more clarity and visibility on some of the savings. We're kind of holding back on giving an exact percentage or a range of what we think we're going to move to the bottom line from the gross savings.

Akshay, just said a little different way, if you think about Project Centennial, it's really 2 sides: The first side is cost reduction, and the other side is reinvesting in our brands and the business. Today, at this point in time, our team has a laser focus on cost reduction. That is absolutely first. That is our priority, and we are going to make sure that we do a great job there and accomplish the targets that we have set forth. The other side is, again, just as important. But from a timing standpoint, will be slightly later is marketing reinvestment that we've been talking about. But there's no -- make no doubt that the priority right now is cost reduction.

And just on a broader subject of pricing and price realization. Obviously, there's been a lot of consolidation in the industry, yet we haven't really seen a meaningful improvement in price. And then when I think about Flowers specifically, it seems like you're still in the early stages of really improving visibility and effectiveness on your trade promotions and just pricing in general. So can you just comment more broadly on to what the category dynamics are, especially given some of the new entrants that we're seeing with Aldi and Lidl. If at all, that has -- how has that impacted -- or how does that impact your outlook over the next 12 to 24 months on pricing for the category? And then just maybe talk a little bit more specifically about the initiatives that you are pursuing to get more effective on price realization and sort of where you are in that journey.

Steve, if you would comment on the pricing components of Project Centennial, and then I'll add to kind of the current conditions.

Sure. Akshay, when you -- I think we've talked about this a couple of quarters now. We do have internally a project underway, a trade promotion, management spend project where we're actually implementing new technologies to help us manage trade spend better within the category. The goal is to have that up and running for 2018. So we're all working pretty diligently on that. And the project is moving forward, and so far, I haven't seen anything that would derail the ultimate top line.

If you look at current conditions, and I think we said it earlier, that the pricing environment is really very consistent with what we've seen in -- on past quarters. And really, if you can go back for 2 or 3 years, the focus for us is, in those markets where our brands are strong, we continue to be the price leader. But at the same time, we understand that we must be competitive, certainly in those markets that are expansion in nature. So our pricing continues to be very important. We're focused on pricing. But to me, the long-term solution in this category is, again, developing brands, like Dave's Killer Bread, that has a meaningful point of difference with the consumer, that can generate and demand a better price. That's exactly what we're focused on with other segments.

The next question is from Bill Chappell with Sun (sic) [SunTrust].

First, just looking -- and I'm not sure this is possible. As you look at kind of the growth in the quarter and the overall business, if you take out Dave's Killer Bread, I mean, are you holding share there? Are you seeing the core business getting more or less competitive? Just trying to understand. I mean, certainly Dave's continues to outperform, but just trying to understand the base business. And if all of the growth is coming from Dave's or if there's any additional struggles from the base business?

Again, Dave's is doing well. We had a pretty good quarter as far as our other brands. The conditions in the marketplace, I think, we just talked about. They continue to be pretty much price active. But again, pricing is not down. It's not up. It's the same. We are focused on our major brands, Wonder, Nature's Own, Dave's Killer Bread, Tastykake, and making sure that we continue to grow those brands. And we had a pretty good quarter. Again, I'm not going to be happy until we see significant growth in all of our major brands. That's really our priority. Steve?

But when you look at the, I guess, the expectation for some distribution gains in the second half to drive your top line goals, is that all Dave's Killer Bread? Or are there other areas where you're still regaining some share?

When you look -- I'll take. When you look at, like, white bread, buns and -- in soft variety bread, we actually are maintaining our dollar share, maybe up slightly. So from a share perspective, we're holding in there. The dollar growth is on the organic side. But overall, share is maintaining.

Even without Dave's?

Even without Dave's, yes.

Okay. And then Allen, just -- we've come to this a couple of times. But in terms of the sense of urgency, certainly, I understand trying to go and cut and -- but when you hear things of the reorganization won't really benefit until next year, and the SKU rationalization won't benefit until next year, and voluntary headcount reduction won't benefit until next year, for a program that was announced now, almost 18 months ago, I mean, do you feel the need to accelerate some of these issues with the market slowing down? Or do you feel this is as fast as the company can go?

Well, again, I'm also very impatient. But I also realize the magnitude and the scope of the changes that we're about to implement. This company is almost 100 years old. We've had a regional structure in place for a long time. And for example, the organizational changes that we're making, they affect many individuals. And we've got to make sure that we make the right decisions and that we don't get in a hurry with really important decisions, like organizational structure as well as many others. But at the same time, I do feel an urgency with the soft market place. I do feel a significant urgency to accelerate our cost-reduction schedule. And again, we're not in a position today to talk about time lines, but we will talk more about that in September. But from an overall focus standpoint, everything that we can accelerate without jeopardizing the decisions that would impact this company for the long term, we're focused on accelerating those decisions. There's a tremendous deal of urgency and -- but at the same time, we want to make decisions that prepare this company for the next hundred years.

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

I'm aware that at least in Jamestown, you put independent distributors. I noticed that after August 30, you wouldn't be buying back -- the company would no longer be buying back distribution rights. And I've heard that from some other territories as well. It doesn't seem like it's very broad-based yet. But as you pointed out a moment ago, you operate regionally. Is this kind of one of the initiatives that will come into play to sort of remove the contingent liability that the company has to buyback routes?

Yes, Tim. This is Steve. When you look kind of on the distributor model and what's going on now from a legal perspective, I think we said won't discuss anything around legal matters. But as you know, under our project, we do have a work stream for distributor enablement. And we're looking at many things with regard to being able to strengthen the partnership with our distributors. And we'll continue to work on that as the project moves forward.

Yes. I mean, I don't think of this as a legal matter. I think of this as an operational matter. One of the strengths of the company historically has been that it gave up opportunity to distributors to have a franchise that they could sort of build wealth in and then potentially sell back to the company. Is that changing? Can you say?

Tim, no, that is not changing. You're exactly right. One of the real strength of our independent distributor model is ability to build equity in your business. And I don't want to comment specifically on an area of the company, but that has not changed. And in fact, Steve mentioned that one of the components of Project Centennial is a work stream that is really designed to strengthen the relationship between the company and independent distributors, to make their business more successful and to work closer together. And we're having significant support and a lot of excitement in that partnership between the company and independent distributors to make their business even better. So we're very excited about the addition of brands, like Dave's Killer Bread, to their product mix. So we have a lot of really exciting things happening with our distributorship model, and can't really comment on a particular market.

And could you elaborate at all on what you did in the Midwest with third-party distribution there?

That was a market where we did not have independent distributors or company routes. And basically, we're working through a third party to handle distribution, and they will be licensed to sell our brands in selected markets and selected accounts. And it's just another way to get our branded products into markets that we currently don't serve.

Our next question is from Amit Sharma with BMO.

Steve, just a few modeling questions, and I have one for Allen as well. On the SD&A costs, 100-plus basis point inflation lapping the distribution exchange for DKB. As we look at the back half, should we expect that it'll stabilize at these levels, or you still have some inflation left there?

Since we've lapped the rollout, I think you will begin to see that stabilize. As you recall, DKB has a higher price point, so there is a higher discount associated with that.

Okay. And then can you talk about price/mix for just DSD? How much of that was price versus mix?

Sure. We wouldn't give the specifics, but I would say the majority of the overall price/mix for the company was driven by mix, which again, we're seeing good -- as we talked about, the strength of the organic brands and the growth there. So a lot -- same thing would be true for DSD.

Got it. And then Project Centennial costs were increased. Is that just you are accelerating those costs? Or are those costs actually increasing in dollars versus your previous estimates?

Yes, when we look at the work stream, some of the things in acceleration moving a few work streams up. And then as we've moved into the kind of the implementation phase of some the work streams, we realized that maybe we needed some more dollars for -- as ramp capabilities. So it's both -- it's a mix of some acceleration as well as some just increase in overall dollars.

Got it. And then, Allen, one for you. A lot of discussion about gross net savings or investment behind the brand. Now if you look at your long-term target for sales, it's still up 3% to 4% top line growth. And the category, if you look at even your core business, it's maybe down, excluding DKB. Now do you think that's still an appropriate target and that might still dictate how much of those savings you may be more willing to invest to chase that target, which may be difficult to get in this environment?

Now I do feel like that the -- our long-term sales targets are reasonable and achievable. And the reason for that is, obviously, we're dealing with a current category that is soft to down. So there's significant opportunities for this company as we look at adjacent categories. The perimeter of the supermarket is where a lot of the sales action is taking place. We have the opportunity, both on the cake side and on the fresh bread bun and roll side to expand into different product segments that may come through an acquisition. It may come developing internally, but there are significant opportunities looking at adjacent categories to continue to grow this company. And that gives us confidence with the sales guidance that we've got out there.

So just so that we are clear, on that 3% to 4% top line growth longer term, what's the underlying category, or fresh bread category growth that you're modeling for?

Currently, the category is basically flat to slightly down. So we're assuming no improvement in that.

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

So I wanted to ask again about -- so it sounds like the Centennial costs on the -- well, I guess, maybe as a point of clarification. You have investment cost tied to Centennial, and you have also fees that you're paying to Accenture. Just to confirm, the consulting -- or the Centennial consulting cost that you're pulling out, that is just tied to what you're paying for the consulting. And everything else as far as investment in realizing those deficiencies are in the P&L in the operating results? Is that correct?

What we're pulling out is any cost on investment into the project. So if there's other -- it's not just the Accenture cost. There were other -- there's recruiting, there's other consultants and other projects. So the cost that can't be capitalized and get expensed are being pulled out. It's not just Accenture.

Okay. And then I guess most of my questions to this point have been answered. But what gives you, the -- I mean, so -- because clearly, I think you stated, if I'm not mistaken, that some of this stuff is -- some of the investments are being pulled forward. But also, it sounds like some of the investments are increasing maybe relative to original expectations, as you either move in and see what you've got in front of you, or you're also maybe operating with a little bit of urgency with what's going on in the category. But what gives you the confidence at this point that you can -- that these cost savings won't be further diminished by -- again, we're going in, and we're seeing that we need to invest more dollars to get -- it sounds like you're investing more dollars to get the cost savings that you're planning out for. So that seems to be diluted, I mean, talking about the incremental marketing spend that's needed. So how do you get that confidence looking out?

I mean, when you look at the overall project costs, I mean we -- obviously, we monitor that pretty closely. Even though we've had to ramp up the cost, we still feel good about the guidance as far as the 250 basis points of improvement. It's not only cost. There's not only cost initiatives going on. There are initiatives around top line growth and brand expansion as well. So it's just not costs. So again, we feel confident in the cost targets that we've established, and that you won't see leakage back into investments back into the project.

So the -- no, I was just going to add. The cost -- the project cost is in line with expectations. And what we're looking at is, can we improve upon those expectations? So we're in line with -- as far as the Accenture cost and the other related Centennial cost, they're in line with what we were -- had projected and expected.

They're in -- so then you would -- so you're saying those Centennial costs are in line with what you projected maybe over the course of the project. So the fact that, that charge went up or the callout that you had from the $0.07 to $0.09 to the $0.11 to $0.12, whatever that was. That is just the pull forward of those longer-term investments? And not just an increased cost that is on top of what you originally anticipated? Do I understand that correct?

I think that -- I mean, there is some pull forward. But as I said earlier, there's a mix of pulling some investments forward as well as increasing some on the investments. But overall, the net goal has not changed. We're still targeting the 250 basis point margin improvement from an EBITDA perspective.

Okay. And then just last one on the pricing side. Wheat has been deflationary for the category, it seems, since before Hostess left the market. So clearly, that challenged your ability and your key competitors at the top of the market to implement pricing. And I think you talked about that being an issue last year, and I think Bimbo acknowledged it as well. So clearly with this inflection point, which historically, I think, inflationary wheat's been a positive because the independents, which comprise about 1/4 of the market, probably don't have the hedging abilities or infrastructure that you do. So they probably have to take pricing quicker and more sharply than you would, thereby narrowing price gaps, and then ultimately allowing you to take your pricing as well and still hold onto the share. Are you seeing from -- I understand how the setup is for you guys from a cost standpoint and how you're hedged out. Are you seeing activity from the independents that suggest that upwards pricing pressure, that creates that cushion for you to then price along with the underlying commodity as we look out to '18?

When you look at the overall markets, I mean, I couldn't really comment on competition and how they're able to manage their business. But generally, when you had commodity spikes, historically, you have -- seeing some ability to price. But overall, we're not seeing much change in the market at this point.

But I would add that, if you look at our history, Flowers has been the price leader. And in markets where our brands are strong and we have the right to price, we will continue to be the price leader. And again, we talked earlier about brands with a real meaningful point of difference. And that also helps you get the overall pricing and margins where they need to be.

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

Thank you very much for your time this morning. I think you have heard that this is not business as usual at Flowers. We have a lot of exciting things that are taking place to take this company to the next level. Thank you for your time, and we look forward to seeing many of you in September. Thank you.

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