Flowers Foods Inc (FLO) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Flowers Foods fourth quarter and fiscal 2002 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation.

I would now like to turn the floor over to your host, Miss Martha Turner. Ma’am, you may begin.

Thanks, Emma. Good morning, everyone. Thank you for joining our call this morning.

Participating in our discussion today will be Amos McMullian, Flowers Foods Chairman of the Board and Chief Executive Officer, and Jimmy Woodward, Senior Vice President and Chief Financial Officer. George Deese, our President and Chief Operating Officer who would normally be with us on the call is dealing with matters relating to the Mrs. Smith’s, Schwan’s agreement that we announced this morning. We know that your anxious to get to the Q&A, but Amos and Jimmy will first briefly discuss our fourth quarter and 2002 results, as well as the agreement with Schwan 's.

Our lawyers insist that I remind you that our presentation may contain predictions, estimates, or other forward-looking statements. Our use of the words ‘expect,’ ‘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, some management will discuss during the call important factors relating to our business are described in Flowers Foods’ filings with the SEC.

Now I am very pleased to introduce Flowers Foods’ Chairman and Chief Executive Officer, Amos McMullian.

Thank you, Margaret.

Well, times change. The world’s changed, the marketplace changes, and our company constantly has to critique and evaluate where we are. Where our – the trend lines are going, and are we in position to take advantage of those trends when they fully develop. What are our competitive advantages, and how do we position the company to take advantage of them, or which direction do we move the company in to take advantage of the competitive advantages that we do have.

So that brings us to Mrs. Smith’s. We have entered into a transaction to sell the assets of the Frozen Dessert portion of Mrs. Smith’s to Schwan's. Mrs. Smith’s is operating successfully from an operational point of view, but was not yet successful from a financial point of view, as you all were very well aware of.

This transaction will allow us to pay-off our debt, get rid of the restrictive covenants, giving us more financial flexibility that we need to take advantage of the opportunities that go-forward in the front – in front of us. And to buy-in our company’s stock.

The company has been through this many times before. In the early 80’s we sold our Douglas Food’s Poultry business, and then in the late 80’s we sold the Jack’s Cookie business, and in the early 90’s we sold the vegetable business out in Stillwell and [McAllen] [ph]. And then, just a couple of years ago we sold our investment in Keebler Cookies.

So as things change and circumstances change then we make our adjustments accordingly. Schwan's is an amazing company. It is a great company. And this transaction will allow them to be even a better company, I think. The case was made that these assets of Mrs. Smith’s Food & Dessert would be better served to be a part of Schwan’s other businesses. That it would be more valuable to them than it was – would be to us. And equally the case was made that those assets re-deployed and other things where Flowers Foods has it strengths would do more for our shareholders. And do more faster than maintaining a status quo.

So like so many transactions we’ve talked about in the past, it was good for both companies. It was a win, win situation. And I think the shareholders of both companies will be rewarded as a result of it.

I will now turn the meeting over to Jimmy Woodward, our Chief Financial Officer, who will talk to you about the operational results of the fourth quarter, and the impact this transaction has on the fourth quarter.

Jimmy.

Thank you, Amos. Good morning, and thank you for joining our call this morning.

Today we are reporting a net loss including non-cash charges of $9.9m or 33 cents per share for the fourth quarter. And net loss including non-cash charges of 17m or 56 cents per share for the full year.

The results for the full year include as expected a non-cash charge net of tax of approximately 23m or 76 cents per share for the change in accounting method related to the adoption of FAS 142, goodwill and other intangibles. And then, we also are reporting a non-cash charge of some $16.3m net of tax or 53 cents a share in the fourth quarter for an asset impairment under FAS144, accounting for the impairment or disposal of long-lived assets. Both of these charges relate almost entirely to the Mrs. Smith’s Bakery business unit.

Before all of these unusual items net income for the fourth quarter was 6.3m or 21 cents per share, and for the fiscal year it would have before the unusual items would have been some 23.1m or 75 cents a share. I would comment that given certain reclassifications on the income statement during the fourth quarter this 21 cents is consistent with our prior guidance range. We just had to reclass certain items into these non-recurring charges.

EBITDA for the fourth quarter was 31.9m or 20.5 percent higher than the $26.5m we reported last year for the same quarter. And for the year our EBITDA of 128.8m is an 11 percent improvement.

One of the strengths of our company is the cash flow. Our net cash flow provided by operating activities for this year was 122.8m, which was a 54 percent increase over the prior year’s net cash flow. We have included with this press release a balance sheet that does show that we retain cash on-hand at the end of the fiscal year of some almost $70m. And we had previously commented our intent to repay, to use that cash to pay debt, and at the end of the year to maintain our flexibility under our credit agreements we made the decision to retain that cash at fiscal year-end.

Sales for the fourth quarter increased just over three percent to some $420.4m, and for the year increased about a percent-and-a-half to $1.65b. If we look at the segments in terms of sales, Flowers Bakeries 2.9 percent sales increase is due, in part, to our acquisition earlier in the year. And we did experience volume growth of about 2.5 percent in our base business. As had been the case in the recent past, this increase was drive by Our Nature’s Own soft variety of brands of breads and our Cobblestone Mill Premium specialty breads. And then, these increases were somewhat offset by pricing activity.

By sales class for Flowers Bakery, our branded sales increased almost three percent on about a three-and-a-half percent higher volume. And our store brand sales were essentially flat with about a three percent higher volume, as well. In Flowers Bakeries our food service sales, particularly again in the quick serve area were down about three percent on some two percent lower volume in that quick serve category. The Snack Group’s sales were up two percent due to volume increases in the vending channel, which we serve primarily with the [Mrs. Freshly’s] [ph] brand, and then also, we had increases in certain contract production that we handle. Mrs. Smith’s sales increased about 4.4 percent for the quarter, as we saw, again, strong performance in our frozen bread and roll categories, and then we saw overall sales increases in the in-store bakery and food service channels.

Flowers Bakeries EBITDA improved from 11 percent as we continued to see the benefits of our information systems, our various technologies that we’ve implemented over the past several years, and the benefits of our shared administrative services. Flowers snacks has shown slightly lower EBITDA year-over-year. It’s not a large number, and it was due to costs incurred in the transition of that Division from the Mrs. Smith’s Group.

Again, our balance sheet, we do show the cash at the end of the year that we did maintain for flexibility. And I would comment, I think we’ve covered the two unusual items. Those, the goodwill and asset impairment do adjust down, obviously, the basis of the assets of Mrs. Smith’s. We will have as a result of this transaction costs in the first quarter of 2003, which is when we actually expect the transaction with Schwan’s to close. And it is a cash transaction in exchange for certain assets of Mrs. Smith’s related solely to the Frozen Dessert business. Again, we are retaining the frozen bread and roll business. The piece of business that we’re selling represents about $350m in sales of Mrs. Smith’s. And then the frozen bread and roll piece that we’re retaining is about $125m in annual sales.

So with those comments I think I will stop there, and turn it over to Amos. And Operator, we’ll open the floor for questions, should there be any.

Thank you. The floor is open for questions. (Caller Instructions.)

Our first question is coming from Bill Leach of Banc of America. Please go ahead with your questions.

Good morning, everyone.

Good morning, Bill.

Good morning.

Congratulations on a great transaction.

Thank you.

I have a couple of questions. Is this a tax-free transaction where you don’t have to pay anything to the Government on what proceeds you’re getting from Mrs. Smith’s?

Bill, it is a taxable sale of assets. We will have a gain, however, that gain will be offset. We have some 140m of Federal operating loss carry forwards, and then we also have substantial State operating loss carry forwards so that those will be utilized to offset the gain that we do have.

So you’ll be able to apply the total proceeds to pay-down debt?

That’s correct.

So you’ll essentially have no debt?

We’ll have no bank debt. That is correct. We will have certain equipment leases that will remain on the books, but the bank debt will go to zero.

Well, what was your total debt at year-end, Jimmy?

Bill, the balance sheet, the bank debt is shown separately on the balance sheet as $180m.

Right.

That’s the current and the long-term piece. Then we show almost $57m of obligations under the equipment leases, there again, capital equipment leases, and then some $13m in just other debt.

So the total is 250?

Uh-hum.

Another question I have is when you look at the new company your corporate charge seems totally out of whack with the what the rest of the business is earning. Your corporate charge was $24m. Is there any thought of rationalizing that, and getting that more in-line with the smaller company?

Yes, it is high, and a lot of that has been legal and accounting costs that, hopefully, won’t be ongoing.

So could you give us some guidance for that number this year?

No.

But it should be down?

Should be down.

And can you give us guidance for the D&A this year for the new company? Mrs. Smith’s?

Bill, we’re really not prepared on this call to begin giving guidance for 2003. As you can imagine, we’ve been focused on the transaction at-hand, and we’ve got to work through all the consequences of the transaction and then the assets remaining. I think you’ll be able to look at the segment data, and essentially eliminate the Mrs. Smith’s, you know, a substantial amount of the Mrs. Smith’s depreciation will be eliminated. Certainly not all of it because we’re retaining the bread and roll piece. And then it’ll be, you know, approximately flat to that. You know, we’ll have capital spending, of course, that’ll increase it some, but then other assets rolling off. And I am just not prepared right now to give firm estimates on our 2003 numbers.

And the portion of Mrs. Smith’s you’re retaining is profitable? On an EBIT basis?

That is correct. That is correct.

So that might make what? $5m or $10, something like that?

All of the remaining portion of Flowers Foods is now profitable. Flowers Bakeries, Flowers Snacks, and the bread and roll portion, the frozen bread and roll portion of Mrs. Smith’s.

Can you give us any guidance on the margins for that business?

Not yet, because we’ll have to go-through taking it out of one and putting it into the other, and those costs are only estimated at this point.

Okay, let me ask one last question on your core bakery business. A number of your competitors, in fact, it seems all of your competitors have been reporting very disappointing results recently. How are you able to do so much better than they are? And is there any risk to your margins in the new year with the higher commodity costs?

Well, there are always risks to margins. We’re in a highly competitive business. There should be no risk to margins due to commodity costs because of our hedging, or nominal risks due to our hedging program. And you know, why are we performing better is, you know, we have maintained for some time that we have great strengths in Flowers Bakeries, and we’ve worked hard to find permanent competitive advantages, and build them into our organization.

Our Flowers Bakeries has been overshadowed by the fact that we had this huge shareholder benefit that grew in Keebler. And then we had our operational difficulties at Mrs. Smith’s. And both of those detracted from the investments community’s ability to see what really is an outstanding cash-flow generating company called Flowers Bakeries.

But your bakery margin last year was 8.2, up from 6.9. I mean it was really very good on an absolute sense. You don’t think there’s any tough comparisons coming up for that segment?

Well, as a matter of fact, George Deese, who is not with us today, and I spent a big part of the last month identifying opportunities to improve margins in Flowers Bakeries. As well as we are doing there are opportunities to do better. Now, there are always competitive forces, and there are always changes in commodities. And that’s not a straight line, those things have float. But we think there’s an opportunity to do even better than we are doing at Flowers Bakeries.

So you would expect them to have earnings progress this year?

I would expect to have earnings progress this year, that’s correct.

Okay, great. Thanks a lot.

Thank you, Bill.

Thank you. Our next question is coming from Mitch Pinheiro of Janney Montgomery Scott. Please go ahead with your question.

Yeah, you guys got to pinch me here.

Good morning, Mitch.

Good morning. I – it’s been an obvious source of frustration for everyone, and I congratulate you on accomplishing what does appear to be a great transaction. I – a couple of things. One, I was unclear as to you’re keeping the frozen bread, but are you selling [Swanee] [ph] as part of the asset transaction? Or are you going to – how are you dealing with frozen bread now?

That is a good question. And it shows some insight into the business. I am sure the release confuses the issue. We are retaining the bread and roll business. We will retain, and that product is produced in Montgomery, Alabama, and Swanee, Georgia. Schwan’s Company is getting the real estate, the land and the buildings at Swanee, the administrative office, and the [freight], and all that, but not the business. We will have to move that business into another facility somewhere else, so that equipment will come-out, and that sales comes-out, and all that stays with Flowers. But the actual physical manufacturing building and the land goes to Schwan’s.

Okay, and how easy is it to move this equipment? I mean …

Well, it takes time and money, but all that was factored into the process. We have three years to move.

Oh, okay.

So we will have to relocate that into other areas.

Okay. What – does – is it reasonable to assume that the frozen bread business has, or can generate similar margins to your fresh, or better perhaps?

It is reasonable to assume that it can do equally as well, and perhaps better. That end of the business is growing faster than the fresh end of the business is.

Does – so is it operating, is it operating at sort of normalized margins now? Or would you anticipate once you move the business to, you know, a new facility, the operations, does that – are you at a run rate of sort of a normalized run rate there? Or is it operating sort of below optimal?

No, it is not operating below optimum, but we’ve only done estimates of what our costs would be as we remove debt from the Swanee complex and put it into other places, and that’s why we have not given any guidance on what that will be. But I expect great things in that business.

Okay, how about in terms of transaction costs? Any estimate for what this is going to be in the first quarter?

Mitch, I would say, you know, we don’t have specific estimates on transaction costs. The biggest costs we’re looking at, frankly, are non-cash items related to capitalized loan costs on the debt that we have. And as we restructure that debt, whether that debt has to, you know, that loan cost has to be written-off.

And then the related interest rate swap, if you read, you know, our public financials carefully you’ll see we have a $150m interest rate swap that was put on when rates were substantially higher. We’ve got to work-through the analysis of that and determine, we may have to take a D&L charge in the first quarter for that, but we may, in fact, you know, not settle the swap. And we’ve got to, you know, work with our advisors and determine what’s our best approach there.

And really those are the two biggest components of what, you know, what may, in fact, hit the P&L in the first quarter.

Okay. Assuming the transaction closes, you know, sort of schedule – you – your first priority is paying down debt, will you be paying down the entire – I mean, will you be paying down the entire 180m bank line?

That is correct.

Okay. And so that would leave roughly about $60m in cash, $180m, 240 minus 180? So is that – so you have 600 – you have $60m plus $69m that’s in the bank right now? Is that accurate?

Well, we will certainly, there, you know, the other debt of some 13m on the balance sheet, we will probably repay, you know, and then we’ve got the transaction – certain transaction costs to pay. You know, so we’ll have a substantial amount of cash, obviously.

Right. We have not projected publicly what that number will be, because it is a fluid situation. But bank debt we’ll pay-down, which means our depreciation will be less as a result of this. Our interest costs will be less as a result of this. We will wind-up with money, cash money in the bank, and we will have a great cash flow business going forward.

Mitch, to come-back to your earlier question about the bread and rolls, I think it’s helpful to know that we have had people inquire about buying that business. But not the Swan’s business, so this was different. But we don’t want to sell that business. We like that business. We are profitable in that business, and it is growing faster than the fresh business. That was part of the original strategy, and we will go-froward with the bread and roll part of it.

Yeah, well, it seems to have – it’s complementary with your fresh breads.

Right.

And so yeah, that makes sense. Last, just a couple of other things. One is when it comes to sort of the current fresh Flowers Bakeries – oh, by the way, on Mrs. Smith’s, what happens to management?

Management will go with the transaction.

Okay.

It’ll got to Schwan’s.

Okay. What about in Flowers Bakeries, the only thing that caught me – I was a little surprise is pricing, it was like, it looks like, you know, it’s down. You know, net pricing. What’s driving that? I mean with flour costs up I thought there’d be some, you know, pressure to the up side there.

Well, we, the only thing I can tell you is competitive forces in the marketplace is always a fluid thing. There are always promotions, and campaigns to sell bread by us and by our competitors. And so there are actions and reactions. And that part of it is always ongoing.

Are there – so are there any plans to raise prices in ’03?

Well, we have certain products and certain markets that will go-up if the marketplace provides an opportunity.

Okay. All right, well, I’ll yield the floor. Thank you.

Thank you, Mitch.

Thank you. Our next question is coming from Leonard Teitelbaum of Merrill Lynch. Please go ahead with your question.

Good morning.

Good morning, Len.

Way to stand-up, Amos. I know it wasn’t easy.

Thank you.

My questions are really along the lines that Mitch had started to ask there, and I just want to finish-up on one thing here. What was the average cost of the bank – I mean, with $5m of interest, and let’s hold the swaps transaction out for a moment. Is it fair to say that we’re going to eliminate probably about 80 percent of that interest cost? Because I’ve got to guess you’re capitalizing on your leases, that the discounting or whatever you were going to use on your leases are going to stay about the same, is that right?

Yes.

That’s correct.

Right.

Okay, so the $5m that you incurred this year on your interest costs how much of that is associated with the bank debt?

Yeah, there again, Lennie, that is a number also that is net of the interest income that we earn on the distributor note.

Right, that’s fine.

And …

All I want to know is what your interest rate is on the …

Yeah, the effective rate on the bank debt is about 715.

Okay, is that a pegged rate, or is that a fixed rate?

Well, the swap line [is fixing it].

Oh, the swap, okay. And you do have an exit on the swaps? Or that’s, or you’re not prepared to comment on that now?

Well, there again, you can – we can’t hedge that – there would be a, you know, cash cost to actually settle the swap. Which is there, again, where we’ve got to complete our analysis, and make decisions on – well, even if we take the P&L charge should we retain the swap although we may be faced with an equation where it’s not a hedge any longer.

Okay.

The debt is paid-off.

But because this is a pending transaction I can’t make it effective on 12/31, I’ve got to carry it through to next year’s taxes? I can’t accrue it this year?

That’s correct.

31, okay. The second thing, of the $350m that represents the sold portion of the business, if I assumed, if I heard that correctly – we showed in Mrs. Smith’s Bakeries the annual of $435m this year -- is 350m of that the sold business?

Yes, approximately 350, yes.

Okay, we won’t hold you to the exact amount. But so, Mrs. Smith’s Bakeries going forward then is going to be the 435 minus the 350?

Right. That represents the bread and roll piece.

That is retained?

That is retained, and the number we stated on the bread and roll piece, in affect, gives an expectation of some growth we’re expecting in the future.

Okay. How much of the price reduction, you mentioned specifically some, you know, some competition. Now, Amos, we know that Interstate tried to invade your territory, and you taught them maybe a lesson that they don’t want. Is that over with now? Prices moved back-up in the Southeast Region on Nature’s Own and that type of product?

Lennie, you’re mighty kind, but let me tell you what my Grandfather told me. He said most of his education had come about trying to teach the other fellow a lesson. We’re not trying to teach anybody any lessons, we’re trying to run our business and grow. There’s pushing and shoving in the marketplace. That always happen. Excuse me. From competitors everywhere, and going on from that standpoint. You know, Interstate hadn’t invaded the marketplace, they’ve been here forever. They, you know, are one of our biggest competitors in the part of the world that we're in.

They’re going through some changes. They have – gone through an extended shelf life program, and they’ve changed and put some private label on their routes that used to go through the warehouse. And they, I think, the public atomically said they took about 1,000 routes off the street. And so it’s hard to take a thousand routes off the street and not have your service levels decrease, and not have your units decrease. You know, if I did that, I would be shocked if my units didn’t decrease.

And so, you know, they’re going through changing their company, and we’re going through changing our company. And we both meet in the marketplace. And sometimes there’s pushing and shoving.

My Grandfather told me to ask the question one more time, if you don’t get an answer the first time.

Okay!

Okay, is it over?

Is what over?

Well, let’s take the, you know, the premium price specialty breads down the Southeast to where you and Interstate were having a bit of a tussle. Their prices came back-up. You delayed in yours, as I understand it. Are prices now back to where they’re at least comfortable?

Well, you must be reading different numbers than I am. The – you can look at the 15 markets where we compete with Interstate. They are under us in 14 out of the 15 markets. We’re not under them, if I heard you correctly. Their prices are lower than ours. So if you say ‘is it over?’ You’d have to ask them.

I’ll follow-up offline. I thank you very much, and again, [Cara] [ph], do you have any?

Yes, Amos?

Yes.

Good morning. Quick strategic question, on the Mrs. Smith’s line that you sold. You were marketing to food service customers under Mrs. Smith’s using the Mrs. Smith’s brand umbrella. Are you still focusing on national accounts? Are you still targeting the national accounts with your frozen breads and rolls?

Yes, we are, but it will not be under the Mrs. Smith’s brand. The Mrs. Smith’s brand goes to the Schwan’s Food Company. We will continue to market. We serve people like Outback, and Arby’s, and Denny’s, and others that – but, and that will continue, absolutely. But not under the Mrs. Smith’s brand.

Thank you.

Good job, guys.

Thank you.

Thank you.

Thank you. Our next question is coming from John McMillin of Prudential Securities. Please go ahead with your question.

Good morning, everybody.

Good morning, John.

Amos, thanks for changing with the times. If you can get 10 times EBITDA for your bread and roll business like Earth Grain’s almost got, I think that might be another good move.

You, Jim, you gave EBITDA guidance in the past for 2003, and obviously, there was a Mrs. Smith’s assumption. Has anything changed in that past guidance, in terms of, you know, the core baking business?

No, I don’t think so, John, not with the core business. I think with 2003 the hesitation right now is with changes in accounting literature my understanding is we will report Mrs. Smith’s as a discontinued operation in the first quarter of ’03 for the balance of our ownership period. Then we will have costs incurred to do the transaction, and then, I’ve got to work-through what costs and when we incur the costs for things such as, you know, relocating this equipment on the line in Swanee, the changes in logistics that that may bring about. But fundamentally, the base business, no, we don’t see substantial changes in what we commented on before.

Okay. Now, you’re selling it for $240m cash. There’s no – you’re not, are you selling them any of your tax loss carry forwards?

No, this is purely an asset transaction, and so, we retain all of the tax attributes including the operating loss carry forward.

Okay. And, you know, if – have you, you know, if you used this – what’s the timetable in terms of this $5m share buyback?

I think, and I’ll let Amos address it further, I think, again, the Board has approved the buyback to be determined at times and at prices that are being beneficial to the company.

But is it going to take you ten years, or ten months?

We don’t have a specific time limit on it, John. And Amos, do you want to comment further on that?

No. Except to say that we’ll try to make the right decision at the right time, and that’s a function of a lot of different things. And one of them will include, of course, the price. If it goes to $100 a share it might take 10 years. If it’s $17 a share it’ll come a lot sooner.

You know, I guess the only negative to this, Amos, is you have – you’re a small cap stock already, and to the extent the stock, the float goes down even more just the level of investor interest, you know, might decline.

That is correct. But I have to solve one problem at a time.

Yeah, I certainly see that. You know, you can do some back-of-the-envelope accretion, Jimmy. Just from this transaction, you know, depending on, you know, if three-quarters of the money is used to pay-down debt, if a quarter of it is paid to interest. And you can get just some kind of accretion levels that are significant, you know. Have you done it, can you give any guidance in terms of the level of accretion from this move?

Well, certainly. We have, you know, various models where we’re looking at the consequences of the transaction. Obviously, our Board had to consider that in deciding whether to accept the transaction as presented. It is absolutely accretive, and is substantial.

You know, right now, I am not giving the guidance. I don’t know specifically when the transaction will close. We do expect it to be in the first quarter. So it’s a matter of when the closing occurs. There is, you know, there are a number of issues in the transaction, in transaction costs, that can affect 2003 EPS. And so, that’s just why I am not prepared today to give those specific estimates. But it is absolutely accretive.

And I care less about the year 2003 than let’s say the annual benefit at the time of the closing, if you follow me. Would it be closer to 50 cents than 25 cents?

No, I think it’d be, you know, it’d be at the lower end of your range.

Okay, thank you. Congratulations.

Thank you.

Thank you. Our next question is coming from [Michael Ochester] [ph], Mentor Partners. Please go ahead with your question.

Congratulations. Just a couple of questions about the transaction. The Mrs. Smith’s is that a direct store model, as well?

No, it is not, that product is distributed frozen, and is not a direct store nor delivery.

Those go through the supermarket warehouse.

Okay, and so it’ll stay that way?

Right. Well, I don’t know what it’ll be in the future. That’ll be up to Schwan’s, of course.

How many people are going over to Schwan’s?

You know, when you count the Stillwell, the Spartanburg Facility, and the administrative and freezer people at Swanee, it’s approximately 1,000 people.

Okay. And just looking at the balance sheet, the capital leases, is that an offset to the distributor notes?

No, the capital leases are on specific pieces of production equipment, and are not related in any way to the distributor notes.

Okay. Any thought of monetizing those distributor notes?

You know, it is a consideration. We had done it once, several years ago. You know, that’s a function of the bank market, and finding a willing financial institution that’ll work with us at favorable terms and conditions.

What’s the yield on those notes?

The notes, I think we disclosed they are fixed rate notes. And I believe it’s in the footnotes at a 12 percent rate.

And just, you know, just looking at the remaining businesses, you know, your balance sheet is going to be basically cash positive. You know, is your goal to return cash to shareholders, or is it to go out and expand the business?

Well, we’ll do all of the above. There will be an opportunity to increase the dividends, and that might be particularly attractive if the President’s proposal goes through. It will be an opportunity to make acquisitions, and there are acquisitions out there that we are taking a look at, and it will be an opportunity to buy-in our stock. And so it will depend on what looks most attractive at the time. But we will have money in the bank, we will have big cash flows, and big for our company. And we will use that cash flow to do what’s in the best interests of creating shareholder value. And that’ll be all of the above.

How big a transaction could you handle at this point, given the reshaping of the balance sheet?

Well, I – the latest conversation I had with a particular bank group would be very sizable. Comparable to what we did with Keebler.

And in selling Mrs. Smith’s were their multiple parties interested, or was it a unique transaction with Schwan’s?

It would be inappropriate to respond to that.

Okay, thank you. And congratulations.

Thank you.

Thank you. Our next question is coming from David Lieberwitz of [Thernum] [ph]. Please go ahead with your question.

Congratulations, and let me add mine to everybody else’s. Briefly, if I may, the one-time charges in other non-recurring items that are anticipated this year, can we quantify those costs?

In the – in 2003?

Correct.

There, again, I don’t have a, you know, a specific amount yet, David.

Could you give us a ballpark, a mini max type of thing?

Well, I would expect it to be, you know, probably if we include the – if interest rates stay the same, and if we have to record a non-cash charge on the interest rate swap, mark-to-market if you will?

Right.

If we write-off the loan costs, and if I add-up all the other transaction costs, you know, it could be in the $20m range.

That would be it?

Yes, uh-huh.

Okay.

And there, again, some of that is, you know, just like the loan cost is obviously non-cash.

Uh-hum. Getting with cash, Amos, you just mentioned cash flow, and how it’s going to obviously move northward, thanks to the transaction. If we look at the core Flowers as it will exist post Mrs. Smith’s what is your annual cash flow capability?

Well, we – if you look at our growth in EBITDA from 77m to 116m, to 128m, I would expect that trend line to continue. We have not issued publicly any projection of what that would be next year, but I would expect continued improvement on the trend line of the growth in our EBITDA.

And lastly, in terms of acquisitions, if you are out of the banks with the pay-down there will be no more restrictive covenants on what you may or may not be allowed to do, size or otherwise?

That is correct. Now, depending on what organization, what acquisition you wanted to make there might be some limits on who was going to loan you the money to do that, in the future! But this would, right now, we are restricted on several fronts, and this will end those restrictions. And so, dividends or acquisitions, or stock buybacks, all of that would be undistributed.

But I might also add in thinking about the answer the answer on the previous question, we don’t contemplate making an acquisition the size of Keebler. There are some acquisition opportunities available to us, but they’re not of that magnitude.

Uh-hum. And the last question is given all the changes at the company coupled with a buyback are there any restrictions or any thoughts of family members unloading shares as a consequence to the buyback and selling their shares into the buyback?

I can’t speak for the family members, but I am not aware of any family member who wants to sell. I am aware of some family members who are anxious to buy but they have been blacked-out for some time in this process.

Very fine. Thank you so much.

Thank you. Our next question is coming from Ryan Watson of Stanfield Capital. Please go ahead with your question.

Hi, guys. I was wondering if you might be able to tell me what the EBITDA generation of the frozen desert business was?

We have not specifically disclosed that part of the business mix segment that you see in the public data. We have not separately, you know, disclosed the dessert number, specifically.

Okay, would you be able to tell me if it was positive, at least? Versus negative?

What was the aggregate last quarter?

The Mrs. Smith’s was right at, you know, $8.9m EBITDA.

Okay, I understand. I am just trying to figure-out the break-out between the bread and roll, and then the frozen desert in EBITDA.

We haven’t separated that, and shouldn’t.

Okay. Also, going forward now that the banks are out of the way, would you consider re-levering the company up in the future, with a future acquisition? Or are you going to stay away from leverage for the time being?

Well, we would do what’s appropriate. At times, we have used leverage judiciously over the years to advance the company, and we would do so again if it was the appropriate acquisition, and if it was priced right, and if it was structured right. Our problem with restricted covenants is going to be when we spun-off on our [foods] to take advantage of selling Keebler, we did it at a time when the banks were not anxious to loan money and we wound-up with only one bank that wanted to participate, and the restricted covenants were tougher than we would like to live under. But we didn’t have any choice, we had to take them. But you wouldn’t get back the leverage with those kind of covenants in the future.

Okay, that’s it. Thank you. Congratulations.

Thank you.

Thank you. As a reminder, the floor is still open for questions. (Caller Instructions.)

Our next question is a follow-up coming from Mitch Penhiero of Janney Montgomery Scott. Please go ahead with your question.

Yes, Jimmy, what would the capex be for the remaining businesses?

I think, Mitch, you know, that it would be comparable to last year, we had some 49m. Obviously, that included some spending at Mrs. Smith’s, and so it will be lower than that.

At a maintenance level, Mitch, it would be the 35m to 40m level. Now, if we build new plants or special projects, and there will be some of those in the year’s coming forward, then it will be higher than that. But on a maintenance level, 35 to 40.

Okay. And let me just understand, in ’03 assuming – we have a couple of things, what we’re going to have, we’re going to have transaction costs relative to closing this deal. You’re going to have potentially when you, if you pay-off your long-term debt you will have – Jimmy, you had mentioned about $20m or so, just a rough estimate of the non-cash, you know, below costs, the interest rate swap. That’s about 20m, there, is that correct?

That’s probably high. That 20m would include even some of the transaction costs.

Okay. And in most, or say, half of that would be cash, and maybe half non-cash?

Yeah, it’ll be something . Probably, you know, more non-cash than cash.

And sort of on a run rate basis, I mean the essentially you’re able to pay-down, and if you could pay-down all your debt you’ll be net cash positive. So I could in coming up with sort of a pro forma, actually have interest income as a result?

Yeah, we have – well, you know, obviously, we have the interest income on the distributor notes. And then, Flowers Bakeries, Flowers Snacks, and the frozen bread, roll businesses, you know, are unlike the Frozen Dessert business. They are not extremely working capital intensive, so, yeah, we should have strong cash flow and potentially have that interest income.

Okay. And so, when you, I guess, were just sort of talking to, I guess John’s question about sort of what this does like on a run rate basis, and saying it may be closer to the 25 than the 50 cents a share. I come-up a lot higher. I mean I come-up way north of 50 cents as a sort of an accretion, or sort of what happens after this deal, assuming there’s no deterioration in any of your other businesses. I’m not sure why it would be closer to 25 than to maybe 80? I mean I really don’t. What’s driving that, is it just …

Well, what’s driving that, Mitch, is you’re an analyst, and Jimmy is concerned! I think we’ll leave it with Jimmy’s question, it’s clearly accretive. You can look at it and tell roughly what the depreciation reduction will be. You can look at it and tell roughly what the interest reduction will be, and you can rough that out on the back-of-the-envelope.

Okay.

And get you a number.

When do you think you will have a better handle on the, you know, the exact costs that you could share with us? When does that happen?

After it closes!

Okay.

And that date is set for March the 19th.

The earliest would be March 19th. There, again, we do have regulatory approval. We don’t expect that to be an issue. So we expect it to be during March, probably mid-March.

Okay. And okay, that’s it. Thank you.

Thank you, Mitch.

Thank you. I will now turn the conference back to Amos McMillian, for his closing comments.

Thank you very much, Emma. And thank you to all of you for your interest in our company and your participation in the call this morning.

This is a significant move for our company. We think it will make us a stronger company and allow us to move-on with our mission of increasing shareholder value faster than we would have done had we not engaged in this transaction.

The remaining company is – all the units of the remaining company are profitable, and we have a good cash flow. I expect cash flow to be a record level this year, as it was last year, as it was the year before that. And most of this cash flow will be free cash flow because our capital spending will be even less now than before. And so that money will be devoted to making acquisitions, buying back stock, and paying dividends.

There are growth opportunities for the company from an acquisition standpoint. It’s just a matter of selecting the right one, and doing it at a price that’s attractive for the seller and the buyer.

Thank you for your continued interest in our company, and have a good day.

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