Flowers Foods Inc (FLO) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Flowers Foods third quarter 2002 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Marta Turner. Ma'am, you may begin

Thanks, Dan. Good morning, everyone. Thank you for joining our call today. Participating in our discussion will be Amos McMullian, Flowers Foods' Chairman of the Board and Chief Executive Officer; George Deese, our President and Chief Operating Officer; and Jimmy Woodward, Senior Vice President and Chief Financial Officer. George is first on the agenda, followed by Jimmy with the financial review, then Amos will comment before we open the call to your questions. But first our lawyers instructed that I must remind you that our presentation may contain predictions, estimates or other forward-looking statements. Our use of the words expect, estimate, believe and other such expressions will identify those forward-looking statements. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause actual results to differ materially. In addition to some matters we'll discuss during the call, important factors relating to our business are described in Flowers Foods' filings with the Securities and Exchange Commission. Now I'm happy to turn our call to our President and Chief Operating Officer, George Deese.

Thank you, Marta, very much. Good morning each of you, and let me thank each of you for the interest that you have in our company. I'm happy to say this morning that our third quarter results reflect the progress we're making with the restructuring program we announced in July of this year. As expected, we're seeing two advantages from that program which formed three business units: Flowers Bakeries, Mrs. Smith's Bakeries, and Flowers Snack, with a shared service administrative unit. First, our administrative costs are reduced, and we see opportunities to reduce those costs even further. Second, our customers see us more as one company. That offers advantages to our customers and certainly to Flowers Foods. Now, turning to commodities. I know that's on your mind. We are largely covered for our flour needs in 2003, and we also have coverage for some of 2004. Of course, that flour is booked at higher cost, but it is a price level that we feel comfortable with. All companies are faced with cost increases. Flowers certainly is. Increased costs are coming in health care, labor, pension costs. The baking industry is also facing new commodity costs. Typically, when we're faced with increased commodity cost, we see pricing opportunities in the marketplace that help offset these increases in commodity costs, as well as the others I mentioned. This is already happening. We've implemented some increases, and see opportunities going forward for others. Now, let's look at our different business units and sales groups. First, Flowers Bakeries sales increased $2.5 million, or one percent, during the third quarter. Some of that increase is a result of last year's acquisition of a Virginia bakery. But we also experienced growth in same-store sales over last year. Our brand in Nature's Own soft variety breads continued its strong growth, and our Cobblestone Mill specialty bread experienced double-digit growth in the marketplace. Flowers Bakeries sales breaks down with about 70 percent retail, which includes groceries, mass merchandisers and convenience stores, 17 percent food service and 13 percent private label. Going forward, we expect sales growth of three to four percent at Flowers Bakeries. We've recently introduced a new product, Cobblestone Mill waffles. That helps us round out Cobblestone Mill breakfast offerings. That new product is doing well, and has allowed us to obtain new, off-rank (ph) displays for our Cobblestone Mill breakfast line, which include English muffins, breakfast swirl breads, bagels and now waffles. We're also pleased that our approach to extended shelf life continues to bring benefits to Flowers Bakeries on the cost side, and we see more in the future. Just last week, we announced that Ideal Baking Company in Batesville, Arkansas has joined Flowers Bakeries. This is a small operation with about $15 million in sales. But it is a good, strategic fit of Flowers Bakeries. Batesville gives us production capacity that we needed in that geographic area. It also will reduce our transportation costs, strengthen our market position in that area, and add some new markets in southern Missouri to the Flowers family. The bakery has recently been upgraded with new equipment and new technologies that allows it to be a very efficient facility. This is a classic Flowers acquisition. Flowers Bakeries growth through many decades has been largely due to similar acquisition. It's an area that we can help them and they can help us. Flowers Bakeries strength is in daily execution, and we expect to see strong performance in the fourth quarter, and of course, in 2003. Now, at Mrs. Smith's, sales are up $900,000, or about one percent, during the third quarter. The increase was due in increases in food service and bakery deli. Mrs. Smith's retail business was down quarter over quarter due to customers' just-in-time approach to inventories. Although customer orders for frozen desserts for the holiday season are on plan, customers are delaying shipments into the fourth quarter. Mrs. Smith's brand frozen desserts continue as the pie choice for most of our major customers, and we expect solid sales increases over last year in the fourth quarter. Mrs. Smith is testing a new product called flip-it - flip-it cake. It is a new microwaveable cake product that is sold in the food, frozen food case now at Wal-Mart, and will be rolling out across the nation in the near future. Preliminary results are very good. You might ask, what is flip-it cake? Flip-it cake is an upside-down product that will go from the microwave or the freezer, to the table in less than five minutes. It's a very good, delicious product. Mrs. Smith's sales breakdown is roughly 35 percent branded retail, 40 percent food service and 25 percent in-store bakeries. Sales growth in Mrs. Smith is expected to be four to six percent going forward. We've also introduced Mrs. Smith's branded premium pie shells at retail, and have plans for more thaw-and-serve products that meet consumer's need for ready-to-eat desserts. From an operational standpoint, efficiencies are improving at Mrs. Smith's frozen dessert bakeries in Stillwell, Oklahoma and Spartanburg, South Carolina. We see definite improvements in those bakeries, as we continue to work diligently to improve the performance at those operations. Mrs. Smith's two frozen bread and roll bakeries are operating at peak performance with good efficiencies, helping us to meet our food service and bakery deli customers' needs for frozen bread and rolls. We expect continued improvement in Mrs. Smith's. Indications are that the fourth quarter will be strong for Mrs. Smith's, in particular in quarter-to-quarter comparison with last year. Now, the Flowers Snack sales were better by $724,000, or two percent compared to the same quarter last year. This increase was due to increases in our co-pack and grocery convenience business, partially offset by lower vending sales. Flowers Snack sales are roughly 32 percent retail, 39 percent co-pack, 29 percent in vending. Not included in those sales are the products that Flowers Snack produces for Flowers Bakeries. Flowers Snack has about $150 million in annual sales. However, we see tremendous opportunities for strong growth of about four to five percent per year for Flowers Snack, as we focus on adding business with our existing customers, as well as new customers. Our competitive advantages are that Flowers Snack operates very efficient bakeries that are quick to market, with new products our customers need, and that Flowers Snack products are of excellent quality. We expect Flowers Snack performance to be good in the fourth quarter. Looking to the remainder of 2002, we expect good performance of Flowers Bakeries and Flowers Snack, and continued improvement at Mrs. Smith's. We will continue our work to improve our cost structure throughout the company. Flowers Foods is a strong company and we're getting stronger all the time, both operationally and financially. We have excellent bakeries, excellent brands, good access to the market, and the most dedicated and talented work force in our industry. I am confident that Flowers Foods is positioned for further improved performance in the future. Now, I'll turn the call to Jimmy Woodward, Flowers' Senior Vice President and Chief Financial Officer - Jimmy.

Thank you, George, and thank you for joining our call this morning. We'll look quickly at the third quarter financial results that were with the release. Our consolidated sales increased 1.1 percent. As George mentioned, Flowers Bakeries' one percent sales increase is due primarily to our acquisition in the Virginia market last August. We did experience volume growth of about two percent in our base business. That was driven by Nature's Own soft variety breads and Cobblestone Mill premium specialty breads. However, these increases were offset somewhat by our price promotional activity. By sales class for Flowers Bakeries, our branded sales increased about 2.5 percent on about three percent higher volume. Our store brand sales were essentially flat, with about three percent higher volume, as well. And in Flowers Bakeries, our food service sales, particularly in the quick-serve area, we're down about 3.5 percent on flat volume. Mrs. Smith's sales increased about one percent for the quarter, as we saw food service sales increase almost eight percent, measured in cases. And our retail in-store bakery sales increased almost 11 percent in cases and dollars. These increases were offset by lower retail branded sales, where cases were down and dollars were down. We did have some increased promotional activity in that area, and our expectations are that the shipments to the retail branded channel have been delayed into the fourth quarter this year, because of a later Thanksgiving, and because of lower early buying programs by the retailers. So we expect the trend to improve in the fourth quarter in that retail branded channel. As George mentioned, this is the first time we've broken out the Flowers Snack business. Again, the sales that are in the segment data represents sales to external customers only, although Flowers Snack does produce product that is ultimately sold on the Flowers Bakeries routes. Flower Snack goes to market essentially through three channels, in retail, vending and then has contract production for other food companies. And these are the products such as our snack cakes, donuts, honey buns and other family pack items. The 2.2 percent growth reported by Flowers Snack for the quarter is due to volume increases in our contract production. We did obtain new customers, and we had growth, too, with existing customers. And volume accounted for about half the increase and some favorable pricing moves for about half of the increase. If you look at our consolidated gross margin, it is down as a percent of sales by about one point. Flowers Bakeries and Flowers Snack maintained a stable gross margin, while Mrs. Smith's margin did decrease somewhat, as costs at Spartanburg, although improving, continue to be higher than plan. Mrs. Smith's also experienced some unfavorable product and channel mix during the quarter that further depressed their margin. Consolidated selling, marketing and admin expenses were down almost a point and a half as a percent of sales. Flowers Bakeries improved as we began to see the benefits of our now complete system implementation, and the benefits of our shared administrative services. Mrs. Smith's and Flowers Snack also had lower costs, as we benefited from our previously announced headcount reduction at the Mrs. Smith's unit. Depreciation and amortization increased, as you see, about $2 million year-over-year, which was then offset by about $900,000 in lower amortization from the effects of FAS 142 on goodwill amortization. We have previously announced that of the 122.9 million shown on the balance sheet is costs in excess of net tangible assets, that we do expect to have a FAS 142 transitional impairment charge of somewhere between $20 and $30 million this year. In addition, we are, now that our multi-year, multi-plant production facility changes at Mrs. Smith's are complete, where we had plant closings and significant capital spending, we are reviewing all of those assets and making sure we have the appropriate carrying value there, as well. Our interest expense was about $1 million lower than last year on lower debt outstanding for the year. The expectations are the interest expense will be about $17 million, as the further debt reduction we expect from our strong cash flow as we end the year, that will occur later in the fourth quarter. The effective tax rate, as you can see, our earnings before tax this year were higher than last year, but we do have a higher effective rate this year at 38.5 percent. That is the effective rate we expect for the year. And you'll note last year's rate was the result - we have tax losses that lowered our rate last year. We do have about $140 million of federal tax, net operating losses, and even higher state net operating losses, so that, as we've stated before, our cash tax actually paid this year should be very minor if any. The shares outstanding of 30.2 million for the third quarter will increase slightly in the fourth quarter, as we did use less than 200,000 shares for the Batesville acquisition that was announced last week. Our third quarter capital spending of about $7.7 million brings our year-to-date total to just over $40 million. The expectations for the year is that we will finish somewhere around $48 million in capital spending. There were really no unusual balance sheet changes in the quarter. As George mentioned, our flour hedge positions are in place, and we did have timely decisions, and feel good about those positions. I know in the press there's been a renewed focus on defined benefit plans, so I felt that I should note that we do have - we have very limited exposure to multi-employer defined benefit plans. We do sponsor our own defined benefit plan that covers about 3,500 of our active employees, and has assets of about 150 million. Our actuarial assumptions there, we believe are conservative. You know, we do expect higher costs next year, as we have a lower discount rate, and like many plans, lower returns on our invested assets. But our actuarial assumptions are very conservative and we're very comfortable with our position in the defined benefit plan. With those comments on the quarter, I'll turn it over to Amos.

Thank you, Jimmy. Well, as you can see, we continue to make progress, particularly at Mrs. Smith. They are behind last June the third quarter, but they are not as far behind last year as they were in the first and second quarter. They are closing the gap as each quarter goes by, and I expect next quarter, Mrs. Smith to be ahead of the prior year - same quarter prior year. And this is the sixth quarter since we had our spin-off and sold Keebler and spun off Flowers Foods into a new company. We continue to make operating improvements in our business. We continue to increase our gross cash flow. We will continue to pay down debt. We paid down a lot debt last December. We expect to do the same this December. That will reduce our debt and increase our financial flexibility. We expect a good 2003. We expect 2003 to be better than 2002, and generate something in excess of $100 million in pre-cash flow. As we go forward, this increased financial flexibility will allow us to continue to grow and strengthen our company, similar to the way we built the company prior to the investment in Keebler. So, if Dan the operator will help us make the transition, we will now open up for questions and hopefully some answers.

Thank you. The floor is now open for questions. If you do have a question, you may press one followed by four on your touch-tone phone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received. We do ask that while posing your question that you please pick up your handset to provide optimum sound quality. Once again, that's one followed by four on your touch-tone phone at this time. Our first question is coming from Mitch Pinheiro of Janney Montgomery Scott.

Hey, good morning.

Good morning, Mitch.

A couple of questions here, first with regard to Mrs. Smith's. Was it a surprise to you at all that the retailers had delayed, you know, their shipments due to Thanksgiving? Or was this something that sort of cropped up towards the end of the quarter?

Mitch, this is George. No, we were not surprised. I think all of us know that retailers are doing everything they possibly can do to hold down their inventories.

We're probably a couple of weeks off from what you're talking you're about. Wish it could happen third quarter, but we do see it coming in the fourth quarter. So, all retailers are doing everything they can do to hold down their inventories and get it just in time for the season.

So, retail, I mean, yet extraordinarily, you know, strong results that food service and the bakery, in-store bakery. That means retail, it looks like that was down in the, oh, maybe 15 percent area?

No, it wasn't much.

Not that much?

No. No.

But, Mitch, you will remember that last year some sales migrated from the fourth quarter into the third.

Right.

And it looks like this year they went back to the historical pattern.

OK. In terms of - so you're looking - what are the expectations for retail pie in the fourth quarter?

Very good.

Very good?

We are very good. We expect Mrs. Smith's to have a very good quarter in the fourth quarter.

What is pricing doing in retail pies? I mean, net pricing after promotion. Is it up, flat, down?

It's about consistent where it has been, and probably neither up or down on the retail level.

And so, and when sales migrate from - well, in this case, where you have a stronger in-store bakery, that pressures margins a bit? I mean on a product mix, is that what you're referring to?

Yes. Right.

OK. In terms of, on the bread side, you said one percent growth. Most of that was from I guess, coterities (ph)? Is that ...

We did have - Mitch, when you look at the bakery side, some of it was from - even though we've caught up with that now. We had a few weeks that it did not.

But let me say that on branded side, Flowers Bakeries has never been better. We had good growth in our branded products at retail. I think Jimmy indicated that we were down in food service, and that's why we ended up with just one percent. But I was real pleased on the branded side.

So, and you expect to get some pricing in branded?

Yes, we do.

Does ...

As these costs do hit, those opportunities usually do exist.

OK. And in terms of, I mean, last quarter you, it looks like there was, let's say a half a percent of negative pricing in the branded side. Is that - it was - so the pricing really didn't go into effect in Q3?

No, it did not. There was also quite a few promotions going on in the third quarter.

OK. In terms of Mrs. Smith's, is - can you quantify the higher costs at Spartanburg? Or, you know, what that ...

You know, Mitch, as reported, last quarter and I think the quarter prior to that, we did talk about the consolidation of Pembroke into Spartanburg. Wish we'd had better results, but it was a lot of moving and shaking, a lot of putting in new equipment. And those costs did hurt the first half quite a bit. It did hurt some in the third quarter. But to quantify, we are almost a standard now. Week by week we've seen tremendous improvement, and - and I'm not saying we're exactly there yet. But it's not a - going forward, Spartanburg is not an issue of ours.

OK. Good to know.

What about when it comes to the - in terms of the product mix relative to your, to the three bakeries you have, in the fourth quarter? Is it going to be like a Stillwell dominated quarter? In other words, is Spartanburg going to have the same type of impact in the fourth quarter as it would have in the summer months?

The season will impact Spartanburg and still (ph) well (ph) both.

So, I guess - so Spartanburg is getting better, but I just - I thought it had most of the cream pies - the summer type of ...

But they also make pecan pies and pumpkin pies.

OK.

How about in terms of - looks like it paid down about 13 million in debt in the quarter. Is that right?

Yes.

And next year with the free cash flow estimated of a hundred million, that looks - and you assume kind of flat cap ex - that looks like you're going to have, you know, sort of EBITDA of, oh gees, maybe 170 million. Is that the right way to look at it?

Well ...

I mean up from 130 plus million. I mean a gain of nearly 30 percent.

We haven't publicly stated what our EBITDA goal is for next year. Let me say I expect it to be north of 150.

OK. OK. Yes, you've had pretty good improvement here, and it looks like your fourth quarter is going to have - might be your best quarter in quite a while. Is that fair to say?

I am - I fully expect to use Marta's (ph) words about we believe and we expect. I fully expect to have a significantly improved fourth quarter compared to same quarter last year.

And does the improvement at all in Mrs. Smith's - does it change your attitude towards where the strategic fit of the frozen dessert line of business is in terms of relative importance to Flowers? I mean is it still - would you consider divesting that part of your business going forward here?

Everything changes my attitude. Good or bad - it changes several times a day about different things. It does not change our philosophy, however. Our philosophy is consistent. What we are trying to do is strengthen our company and grow it and create value for our shareholders. Now we did that by buying cookie companies. We did that by selling cookie companies. We did that by buying bakeries - and fresh-bread bakeries - and operating fresh-bread. It will depend on what the circumstances are and these things. Obviously, if a division or plant or unit is not performing well, our first choice is to correct it. If for whatever reason circumstances - external or internal - we don't feel like we are going to be able to see at some point down the road we're able to generate the returns that we need to do, then we will divest it. If we think that it can, we will keep it and operate it, but that's true of everything, not just Mrs. Smith.

OK. Al right, well, thank you.

Thanks Mitch.

Our next question is coming from Leonard Talibaum (ph) of Merrill Lynch.

Leonard Talibaum (ph): Good morning.

Good morning.

Good morning.

Leonard Talibaum (ph): I just want to make sure I've got these right George. I think you said Flower's bakery should grow at 3 to 4 percent a year, Mrs. Smith's 4 to 6 percent, and Snack (ph) 4 to 5 percent. Is that - was that what you had said earlier on?

Yes. That's correct. We feel comfortable with that.

Leonard Talibaum (ph): I believe there's been a - you know, you had mentioned you had gotten some pricing relief initially, and I'm hearing that there may be another price increase coming just before Thanksgiving. Would you be part of that if one did occur at the industry level?

We always take advantage of opportunities as they come about.

Leonard Talibaum (ph): Well, I would have expected nothing different. OK. Actually, Barb (ph) has got a couple of questions here I think that Mitch didn't ask.

Sure.

Barb (ph): Hi. Good morning.

Good morning.

Good morning.

Barb (ph): If you could share with us some details about your ESL (ph) program - how widely is it used throughout your breadlines, what kind of savings you anticipate from it, and what you think will offset those savings?

Let me respond to this, and George you can finish up in whatever detail you would like to add.

The - our entire Flower's bakeries is in extended (ph) shelf life - but we have been more cautious than some of the other players in the industry because we are always, always focused on quality. We have not announced publicly what those savings are, and that is - those savings are projected to come in nice and slow and easy over a period of time - but it is beneficial to us. It has already reduced our costs, and we expect that to continue to improve.

George, anything you'd like to add.

I think you hit it just right.

We are pleased, but it is slow and cautious.

Barb (ph): Are you able to reduce any routes (ph) because of this?

No. We didn't go in it. We did not go into the problem thinking about reducing routes (ph). We'd like more routes not less because we think more routes we've got on the street the more product we're going to sell. So, you know, we are more efficient in our plant structure. The routes are - have more time to sell and merchandise rather than picking up product. So, we're very pleased with where we are, but we'll be slow and cautious.

Barb (ph): OK (ph).

Or there's (ph) - that's a great insightful question, and let me elaborate a little more on that.

George's outlook (ph) is (ph) exactly right. We're not looking for ways to take routes off the street. We're looking for ways to put routes on the street, and the more routes you have, the more you're going to sell - the better service you can give. The better service you can give, the more you going to sell.

We have a competitive advantage, and the route salesmen are not employees for us. They are independent distributors. Their revenue is a function of what they sell so if our sales do not increase our costs do not increase - and so that is a terrific competitive advantage.

Barb (ph): Yes - very, very true.

And on the other side of expenses, your pension expense, Amos could you just detail to us what your discount rate assumptions are going into next year - what your return expectations are going to be?

Well, I think Barb (ph) for 2002 we had used a discount rate of 7-1/2 percent. You know we're looking for next year that to be as low as like 6.75 as rates have come down as well all know.

Barb (ph): OK.

You know our salary increase assumption has been about 4-1/2 percent. Our long-term investment return target is - has been and remains 9 percent for the - you know, over the long term - over the life of the pension plan.

Barb (ph): Great. Thank you very much.

Yes. Thank you.

Our next question is coming from Bill Leech (ph) from Bank of America.

Bill Leech (ph), Bank of America: Good morning.

Good morning Bill.

Morning.

Bill Leech (ph): First, I want to ask you on your segment reporting - have you put that on your website or something so we can get historical quarterly data?

I'm not sure if it's there yet. The release I know will be on the website ...

Bill Leech (ph): Pardon me.

Yes. The release is on the website. There's not any other information posted yet.

Bill Leech (ph): So we don't know what the fourth quarter was last year on the new segment?

Not yet - no.

Bill Leech (ph): OK. In terms of the EPS (ph) guidance - it's at 80 to 90 cents. Is that excluding the three-cent charge you took on the second quarter or a reported (ph) number?

That would include that.

Bill Leech (ph): So that gives us a fourth quarter range of 30 - 28 to 38. That's a pretty broad range for one quarter. Could you be a little bit more specific?

Well, I think you know we're more comfortable with a lower end of the range. I think the fourth quarter will be comparable to the third quarter.

Bill Leech (ph): So around 28 cents?

Right.

Bill Leech (ph): And the - has the 142 (ph) - added what 3 cents this year to the quarter?

Yes - but I think it was like 900,000 in this third quarter. Yes - which is you know 2 cents.

Bill Leech (ph): Two cents?

Yes.

Bill Leech (ph): OK, and how much total debt did you have at the end of the quarter?

You know, our credit facility was a 180 million, and then we had about 58 million of capital leases.

Bill Leech (ph): And no short-term debt?

No.

Bill Leech (ph): And you said the - expense will be about 17 million this year. What would you guess it might be next year?

You know it will be substantially lower as we - it'll (ph) depend on the timing and the total debt pay-down we make in this fourth quarter. You know - so I've not actually announced an estimate of value (ph) at this point.

Bill Leech (ph): But it should be down substantially?

Yes.

Bill Leech (ph): So, like below 15 (ph) million?

Yes.

Bill Leech (ph): And lastly, can you quantify the flour (ph) cost increase at all? If you look at bought (ph) flour (ph) prices, their up about 30 percent. Can you give us some rough idea as to what - you know what your bookings (ph) for 2003 will look at versus 2002?

Not specifically - but from a general standpoint - George had mentioned earlier our - we do have an edging (ph) program, and we have been successful in booking (ph) our flour (ph) out for a period of time. The cost will be hire than this year's cost, but considerably below market.

Bill Leech (ph): You can't quantify at all for me?

No. I wouldn't for competitive reasons.

Bill Leech (ph): OK. Great - thanks a lot.

Sure - thanks Bill.

Our next question is coming from John MacMillian (ph) of Prudential Securities.

John MacMillan (ph): Good morning.

Good morning John.

Good morning John.

John MacMillan (ph): I think Bill hit on a lot of good points. To the extent we can get historical segments to get segments under the old reporting for this quarter, do you simply add - I mean snacks was part - partly part of bakeries - partly part of Mrs. Smith's?

No, you would just add snack and Smith.

John MacMillan (ph): OK. So then we can have historical numbers - Amos on that free-cash flow projection of 150 million - was that after capital spending?

No, the free-cash flow was 100 million not a 150 million.

John MacMillan (ph): OK - but is it - oh, it's a 100 million.

Yes - after capital spending.

John MacMillan (ph): A 100 million after cap spending - what are you assuming for cap spending?

Well, it'll be comparable to what we've been running - somewhere between 40 and 50.

John MacMillan (ph): That is a pretty good pickup - and what are you using for D&A (ph)?

Jim (ph) may have to answer that.

Our D&A (ph) is - you know, somewhere around 74 million.

John MacMillan (ph): And then to the comment regarding Mrs. Smith's net pricing being consistent - on IRI (ph) data, which I know lacks Wal-Mart (ph), but you know I'm showing for the 12 weeks ending October 6th Mrs. Smith's retail pie volume is relatively flat, and its sales down 7 percent - talking about some 7 percent sales realization in a category where basically prices are flat.

George that just doesn't seem - and I know you didn't say it - but it just doesn't seem like it's consistent pricing to me.

Well, pricing - wholesale price is (ph) one thing. Promotions are another so the net - net would be - to be consistent with what you're saying.

John MacMillan (ph): Yes, that price isn't (ph) down. You're trying to fill up plant (ph). So, it is consistent - pricing is down. Now, these sales goals are relatively new. Is this the first time you've kind of unveiled these sales goals Amos?

No, we've been doing that for some time now - yes.

John MacMillan (ph): For each of the three areas ...

Right.

John MacMillan (ph): Did they include acquisitions because they seem a little high?

Yes, they do. They do include acquisitions, and we have not been as aggressive in acquisitions these six (ph) quarters that we've been a new company because our primary focus was on reducing our debt and increasing our financial flexibility - but we have mad two acquisitions during that time - Cortoricas (ph) Baking Company up in Norfolk, Virginia - and now Ideal (ph) Baking Company in Basewall (ph), Arkansas - and there are other acquisition opportunities available. Now whether we are successful or chose to participate in - remains to be seen, but they would include acquisitions.

John MacMillan (ph): Well, they almost have to given, you know, the high numbers relative to and industry that is not growing nearly as fast, and you know, you've made some projections in the past - and I don't want to relive them because I've made some projections in the past that haven't come true either - but you know, like Mrs. Smiths margins growing - you know, getting to 12 percent - and you know - in the past. I just kind of wonder what's the point of kind of having these stretched targets as opposed to kind of more realistic sales and bottom line targets?

Well, that's what we thought we gave in this thing - was a realistic situation. This is what we expect out of each one of these divisions.

John MacMillan (ph): You know, I've been sitting on the other side of the phone for awhile here Amos so, you know, I - you know I think different companies go about it different ways. I think, you know, increasingly food companies are trying to get targets that they can hit rather than stretch to, and it just seems to me that not only these targets but many in the past have been ones that stretch the organization - and I ...

Stretching the organization is what we've been doing for the 40 years that I've been here - always stretching on (ph) - always reaching out - always pushing - and yes. You need realistic goals, but you need goals where people are going to have to hustle to accomplish them not just sitting in the office and drinking coffee and things automatically happen. We expect our division presidents and their teams to hit these goals. Now they will have to hustle to get there, but that's our philosophy. Others may be different. We don't set goals where everybody, you know, is just going - it's going to be automatically go hit them, and nobody has to do anything. A 3 to 4 percent goal in fresh bread is a challenge because you've got some categories that are running behind - we (ph) service restaurants - private label. So, if you're going to beat that goal, you've got to be than 3 or 4 percent in other categories.

John MacMillan (ph): Yes (ph). I do see your point. It's kind of like this fourth quarter. You've got a target of 28 to 38 cents. Then when you ask a question, you say well it's going to be comparable with this quarter, which is 27 cents. Why have it 28 to 38 target for the fourth quarter - official target - when you're going to be fighting to get to the low end? I mean why not just realistically set the target to where you think you're going to come in?

Amos McMullian (?): Well John (ph), when you sit in this chair, you can set it the way you please.

John MacMillan (ph): OK. Thank you.

Our next question is coming from Bob Cummins (ph) of Shields and Company (ph).

Bob Cummins (ph): Good morning. I just wanted to - we've heard a lot from Sarah Lee (ph) about their national rollout of branded bread through the earth (ph) grain (ph) system. In fact, at their last analyst meeting here in New York, every analyst went home with five loaves of bread. So, we are eating a lot of bread up this way, but I just - I was curious what impact you've seen so far in the introduction of those Sarah Lee (ph) brand products in your regions, and whether you have any specific strategies in mind to cope with any impact there might be?

Amos McMullian (?): Well, if I had a strategy, I wouldn't announce it on this conference call, but you're right. They do have a national rollout on a program. It's always best not to comment on competitive business. It's better to comment on ours, but I will say this. You know it's a competitive world out there. It (ph) has been. That is not new. The (ph) baking business has always been very competitive, and - competitors are always introducing new products and always hustling to get business - and so you have to compete with that. So, this is - it's not - it's new, but it's not new - if I'm making the point.

Bob Cummins (ph): Would you say that they are now basically in all the markets that you service or are they still phasing it in?

Amos McMullian (?): As far as I know, they are in all our - all the markets that where we compete.

George Deese (?): That's true Bob.

Bob Cummins (ph): OK. Thank you.

George Deese (?): Yes sir.

Amos McMullian (?): It's really, really too early to tell what the impact will be.

Bob Cummins (ph): Sure. Thank you.

Amos McMullian (?): Yes.

Our next question is coming from Jerry Divens (ph) of Bear Stearns.

Jerry Divens (ph): Good morning everyone.

Amos McMullian (?): Good morning.

George Deese (?): Good (ph) morning Jerry (ph).

Jerry Divens (ph): Most of mine have been answered. I do have two remaining. Obviously, flour is higher this year. If you look at that sales target that you guys laid out - 3 to 4 percent - do you have a - give us a rough idea how much of that might be price, and how much might be volume?

George Deese (?): I'll answer that. Jerry (ph), we do anticipate an increase due to pricing probably in the 2-percent range overall.

Jerry Divens (ph): OK. So, you'd see it kind of breaking down even ...

George Deese (?): And that goes back to the earlier question of - you know, 3 to 4 percent seems high - when the baking business might be flat. So that does take into consideration 1 - 1-1/2 percent volume increases and price increases and acquisitions that Amos (ph) mentioned early - involved.

Jerry Divens (ph): OK. You wouldn't get more pricing than that because I was thinking maybe it might be a bit higher, but I guess you're saying, you know, look for somewhere in the 2-percent range.

George Deese (?): What (ph) those (ph) opportunities are we will exploit.

Jerry Divens (ph): OK - and, you know, on the acquisition question, I know you've been doing some things on the baking side. What do you think about your snack business now that you've broken that out? Is that an area that you would like to grow aggressively? Should we begin thinking about maybe that getting bigger in one fell swoop?

Well, we like the snack business. We have - we have been in the snack business forever. It's not new to us. Breaking it out into a separate segment is new to us. There are opportunities there. I have renewed enthusiasm for the opportunities there. Extended shelf life will help capture some of those opportunities.

But finding ways to sell snack cake other than route distribution also helps my enthusiasm. And we've done that and others in the industry have also done that, though, finding ways to sell snack cake other than off of bread routes - a combination bread routes from that standpoint. So yes, we expect to grow. If snack division does well, it generates a lot of profits and cash flow for us. We like that business. We expect it to grow. One fell swoop? Well, we can take it in several small bites or we can take it in one fell swoop. It all depends on opportunities that present itself. The company would investigate and evaluate any opportunity to present itself to us. It makes sense operationally and it has to make sense operationally first. Then we would evaluate it from a financial standpoint. And it also has to make sense from a financial standpoint. But yes, if it's a chance to strengthen our company and increase our competitive advantages, improve our profits and cash flows and the price is attractive enough to allow us to get an adequate return and still satisfy the selling principles, then yes. Big, middle size or small, we would be interested.

Jerry Divens (ph): OK. Thank you.

Thank you.

Our next question is a follow up from Leonard Talibaum (ph) of Merrill Lynch.

Leonard Talibaum (ph): Thank you. Jimmy, maybe you can help me out. I'm just a poor city boy here amongst all you guys. So I'm going to need some help. You're telling me that we're going to have a fourth quarter that's going to report an awful lot like this quarter. And now, Amos is telling us that Mrs. Smith's is going to have a major turnaround. So let's assume that's profitable. We've got our price increase. We have a second increase in, in November. And unless you're going to tell me there's one hell of a mix shift going on from variety stone (ph) to, you know, plain old pan bread, I'm having trouble seeing why we wouldn't walk through 27, 28 cents pretty easily. Now, what am I missing here?

Well, Lenny (ph), just, you know, be aware first of all, I'm the - I'm the conservative country accountant, I guess, if you're the city accountant. So I'm just trying to be conservative and cautious, you know. And I think George's comments on pricing, he's looking forward to 2003 and, you know, those are general comments.

And it depends on the season, Lenny (ph). You know, it depends on what the economy is going to be doing and how people are. And, you know, we are early into this quarter. And if we have a gangbuster season, you know, you might be right.

Leonard Talibaum (ph): You know (ph), I don't happen that often. You know, you used to have a pretty good track on the economy when you watched mix between variety breads to - down to pan breads. And Marta used to - you know, we used to talk about that quite a bit.

Marta Turner (?): That's right.

Leonard Talibaum (ph): Are you seeing (ph) any dramatic shift going on that might give us more insight into at least the economy down in your primary trading areas or are we trying to be too theoretical here?

George Deese (?): No. You're not. And we - since we - on the fresh bread and roll side at Flowers Bakeries, we're not producing - and door (ph). We're producing for ourselves and next (ph) day (ph). We do have a pretty good sense of the poll for what's going on in the economy. And September was a pretty slow month. Our customers are telling us things slowed down. Now, we'll see what October brings and what Thanksgiving brings and what Christmas brings. I don't - I don't see a lot of retailers expecting a gangbusters Christmas season. I really don't. So that tempers it some. We are making progress. Operationally, we're better. We're going to be prepared to do business if the business is there. If it is, we may have a higher number like you were talking about. If it's not, then we may be scratching around trying to get the low end. I just - it's too early for me to call that.

Leonard Talibaum (ph): OK. Well, let's hope for all it's the same firms (ph) at the next conference call. Thank you very much.

George Deese (?): All right.

As a reminder, ladies and gentlemen, if you do have a question, you may press one, followed by four on your touch-tone phone at this time. Our next question is coming from Eric Catsman (ph) of Deutsche Banc.

Eric Catsman (ph): Hi. Good morning, everybody.

Good morning, Eric (ph).

Eric Catsman (ph): There's been a lot of questions asked. But I'll try to throw in a few here. I guess first up, on the free cash flow estimate for next year of 100 million, are you including deferred taxes in that, as well?

I'm talking about money. We're not paying cash taxes.

Eric Catsman (ph): Right. So that would be an add back to your cash flow of like 15 million. Are you including that in the free cash flow number?

I'm counting - I'm counting - my earnings per share is a number written down on a piece of paper. Cash in the bank is what you pay down debt with. And I'm talking about just from a cash flow standpoint. Jimmy, you'll have to...

We'll (ph) have to answer with a yes, Eric (ph).

Eric Catsman (ph): OK. Thanks. Second, what we're hearing Wal-Mart and some of the other major retailers are not allowing private label to pass through higher commodity costs. So can you tell me is that not true in bread or baked goods and is that why you think you're going to pass on a price increase if - and is that only depending on private label following you?

Well, I don't - I don't want to discuss specific customers. But I will say that we have some and expect more price increases on branded food service and private label.

Eric Catsman (ph): So you are seeing, in general, private label raise prices in the face of higher raw material costs?

Correct.

Eric Catsman (ph): OK. And then, third, how much was you advertising and promotional budget up or spending up in the quarter?

I don't know the answer to that. Jimmy ...

I don't have a specific number here - it was - you know, the mix changed from, you know, I guess customer promotional activity versus some consumer advertising we did last year, particularly at Mrs. Smith's. But the dollars were pretty flat.

Eric Catsman (ph): OK. So a slight decline versus sales group. As a percentage of sales, you're saying?

Right.

Eric Catsman (ph): OK. And then, for next year - I'm not sure if you answered this - but what tax rate are you looking for next year?

I think the 38-and-a-half percent will - for financial reporting, will consistently be our tax rate, you know, even next year.

Eric Catsman (ph): That's 2002 (ph). OK. Thanks.

Thank you.

Our next question is a follow up from Bill Leech (ph), of Bank of America.

Bill Leech (ph): Hello.

Hey, Bill.

Yes, Bill.

Bill Leech (ph): I was wondering if you could give us any guidance for the bakery business in the fourth quarter? You earned 20 - a little over $20 million of EBIT this quarter. And I know there's some seasonality. But I'm looking back here.

You made a little over 12 million last year in the fourth quarter. Do you see that $20 million run rate continuing or is that seasonally higher than ones (ph) you'd expect in the fourth quarter?

Bill, I mean (ph), it's comparing what to what now?

Bill Leech (ph): Well, last year, your Flowers Bakeries segment made 12.4 million of EBIT. And this quarter, you did a little over 20 million. And I was just wondering, is that 20 million, kind of, a run rate we can put into the fourth quarter this year or is there some seasonality that would cause...

Yes, there is seasonality. And the fourth quarter is lower at Flowers Bakeries than the third quarter.

Bill Leech (ph): So you wouldn't expect it to do $20 million in the fourth quarter?

No.

Bill Leech (ph): OK. Thanks.

Thank you. Our time is up for questions today. I'll turn the floor back over to Amos McMullian for his closing comments.

Thank you very much. I wanted to elaborate a little bit to help understanding what we're talking about with the added routes and the competitive advantages of being an independent distributor - in some markets, it costs some bakers over $100,000 a year to put a man in a truck on the street. And our cost, we don't have salaries or fringes or truck costs. That's paid for by the distributor. And he gets an allowance off of the wholesale cost to pay for that. But that's why I say that our cost is a function of sale. There is no cost if there's no sales. So we add a distributor, he's got sales. His cost is a function of whatever he sells. And that's the beauty of this system. It's a wonderful incentive program that have (ph) you have a more highly motivated salesman because his income is a function of how much he sells. And so, we don't care how much money they make as long as they make it by selling more product because that helps the distributor and the company. Just a little to elaborate. And that's why we are as high on the independent distributor program as we are because it's good for everybody. It's good for the - for the merchants because they got a more highly motivated service program. It's better for the salesman because he can make more money doing it this way. And it's better from the company's standpoint. And that's what you have to have to have long-term, good permanent arrangements. It's got to be good for everybody. And it works that way. Well, you can see from the answers, we do feel better about our company. We have made progress. We expect the fourth quarter to be much better than the fourth quarter of last year. We expect next year to be better than this year. We expect our debt to go down and our financial flexibility to improve. And there are opportunities to grow our company out there. So we're excited. And we thank everybody for their interest in the company. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.