Flowers Foods Inc (FLO) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Flowers Foods' Fourth Quarter and Fiscal Yearend Conference Call. At this time all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. It is now my pleasure to introduce our host Ms. Marta Turner, Vice President of Communications, Investor Relations.

Thank you, Enrique (ph.) and good morning everyone. Participating in our call today will George Deese, Flowers Foods' President and Chief Executive Officer; and Jimmy Woodward, our Senior Vice President and Chief Financial Officer. George and Jimmy will first deliver prepared remarks and then take your question.

But before we start I want to remind you that we are hosting a luncheon in New York on March 10 and we hope that you are planning to be there. If you have questions about that event please just let me know. I also must remind you that our presentation today may contain predictions, estimates, or other forward-looking statements. Our use of the words "expect," "believe," or 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 of the matters we 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' President and Chief Executive Officer, George Desse.

Thank you Marta. Good morning and thank you all for joining us this morning. 2003 was an eventful year for our company. On the first day of the year, we announced the acquisition of Bishop that allowed us to extend our snack product line. On January 30, we announced that Schwan will [buy] Frozen Desert business and we accomplished that sale on April 24. We chose to keep the frozen bread and roll business as being a part of Mrs. Smith's Bakeries. We added this business with our snack business to create the specialty group. Although this group has been in transition our margins continued to improve.

New products were [inaudible] formed during the year. In February we introduced our new Nature's Own Wheat 'n Fiber loaf with fewer grams of carbohydrates. In fall, we introduced the Healthline banner for Nature's Own products such as Wheat 'n Fiber, Sugarless and other products that addressed the need of more health conscious consumers. Nature's Own products both core items and the new products are doing very well.

In December we introduced several new Cobblestone Mill items such as Crunchy Oatmeal and Sugar-Free wheat. Cobblestone Mill is our brand for super premium products. During the year this brand continued to grow at a steady double-digit pace. In late October we introduced our Hispanic Cake line. We are pleased with the progress we are making with Mi Casa and Tesoritos Hispanic Cakes. Those are new brands and as you know brands develop overtime; however, the indications are that Hispanic Cake can be not add-on for us and represents incremental sales to consumers who may not otherwise purchase our products.

Another high point during the year was our acquisition in September of a building and property in Denton, Texas. [inaudible] it basically could to better serve the Dallas and Fort Worth markets. With all that happened in 2003, we are particularly pleased to report good results for the year and for the quarter. Our team continues to outperform and this year was no effect. Our strategies have been developed overtime and they are strategies that work. Now let's get to Jim for discussion on the financials. Jim.

Thank you George and George your comment about the team continuing to perform is a -- makes this great call and we appreciate the interest of shareholders and analysts.

Let's look briefly at the Q4 highlights and the financial statement that were with the press release. Our consolidated Q4 sales of $348.1m represent a 14.7% increase over the same quarter last year. As a reminder, the current quarter consisted of 13 weeks versus last year's fourth quarter with 12 weeks. The extra week contributed 8.2% of the 14.7% increase. Acquisitions and primarily the Bishop Baking acquisition George mentioned represent 2.5% of the sales increase. And volume increase primarily of branded bread products created the balance of the sales increase, much of this, as George has stated, is due to increase sales of Nature's Own health plan, our group of fresh bread products of light, sugar free, and of Wheat 'n Fiber, reduced carbohydrate product.

On a GAAP basis, income from continuing operations for Q4 was $12.7m or $0.28 per share versus $5.8m or $0.13 per share for the same period last year. There was no asset impairment recorded in the fourth quarter of fiscal 2003. The $2.1m asset impairment charge shown in Q4 of fiscal 2002 related to assets of the Bakery's Group and in accordance with GAAP, it is included in the calculation of the $0.13 per share. The $0.13 per share would be $0.16 per share if the $2.1m charge were removed from the calculation.

You will note that our gross margin improved year-over-year due to increased sales of higher margin branded products. This was somewhat offset by cost increases for ingredients packaging, utilities, and labor during the quarter when compared to last year. Our selling, marketing, and administrative expenses remain flat as a percent of sales compared to the same period last year, again primarily benefiting from the higher sales base of branded products that was offset by higher workforce related cost.

Depreciation and amortization expense, we reported, is down some $1.3m for the quarter year-over-year and simply a function of certain assets becoming fully depreciated. The source of interest income is primarily the distributor notes with the balance coming from the cash that we have invested and interest income was essentially the same as last year's fourth quarter. The effective tax rate for the quarter and the year was 38.5%, and we would expect that to be the rate going forward still in fiscal '04. We are not making federal cash tax payments due to tax loss carry forwards and we expect that to be the case until fiscal 2005. We have mentioned that based on the fiscal 2003 tax provision that we completed in doing this financial statement, the estimated federal net operating loss carry forward to fiscal 2004 is now approximately $85m, which being, you know, will be used to offset income in 2004. The $4.5m of income reported as discontinued operations is in fact an adjustment of the State tax valuation reserve. We finalize our State tax returns for fiscal 2002 and work to develop plans to utilize the State net operating losses created by the Mrs. Smith's frozen dessert business. So we adjusted and recorded the benefit -- adjusted that State tax valuation reserve in the quarter to benefit in this quarter. Substantially, all of the cost associated with recurring matters related to the frozen dessert business, that we sold has been reported.

On the per share basis, discontinued operations were $0.09 of income and income from operations was $0.28 or net income per share of $0.37. The diluted weighted average shares outstanding did increase slightly since the same quarter a year ago. During the quarter you will see that we purchased approximately 634,000 shares of common stock under our $7.5m of share repurchase authorization. The total for the year was approximately 875,000 shares. Also during the year as we discussed in our last call, we granted approximately 1.4m of nonqualified stock options, which explains the slight increase in the average shares outstanding for this quarter versus the year ago. The balance sheet reflects 42.4m in cash and [inaudible] bank debt. Our unsecured $150m three-year credit agreement has not been drawn upon. The current liabilities I'll mention to you on, of a 157.8m does now included 17m for the defined benefit kitchen plan contribution that we planned to make during fiscal 2004. This is more than the required contribution and somewhat more than the amount I had stated previously as for 2004. There are numerous benefits of this additional funding and we plan to make these contributions quarterly in the amount of 4.25m per quarter. The cash flow statement for the quarter shows 41.7m of cash provided by operating activities in the quarter. As you know, we use 12.5m for capital expenditures, which brought a total of 43.6m for the year in capital expenditures. We paid a $4.5m dividend and brought the total to 15m, again the rate was increased during the year so the annual rate now is approximately $18m, and we used 16.8m to purchase the 634,000 shares of common stock at an average price of $26.46 in the quarter and the total for the year was some 22m.

At this point in the new fiscal year, which will be a 52-week fiscal year, as opposed to last year which was 53-week, we will reiterate our previous guidance for sales and net income. For the year, we expect sales to be 1.45-1.5b and net income to be 3.75-4% of sales. We expect the quarterly pattern of fiscal 2004 to be very much like fiscal 2003, and the average shares outstanding at the beginning of fiscal 2004 were approximately 45.5m as that calculation restarts each year and so with those comments, George, I'll turn it over to Enrique (ph.) for questions or to, George.

Okay. Thank you, Jimmy. And I will [inaudible]. Lately the question we hear most often is, how can Flowers performance be so different from others in the industry? The baked food industry [inaudible] recently, with that said, by [solving] the value of breads. The capital consumption of Flowers are down from earlier years, consolidation, and changing demographics.

Let me say first, that we at Flowers Foods like being in the baked food business. It's the business that we know, and the business in which we continue to do well. Grain based foods are part of a healthy diet. Baked food products are nutritious, and have been the [staff] of life for centuries. We believe that the industry as a whole will overtime improve. Our business did well in 2003. Our sales across all channels, except food services, were up significantly. Looking at our data for the first two weeks ending December 28, 2003 fresh and packaged breads were up eight-tenth and 1% in dollars and down six-tenth and 1% in volume. During the [inaudible] periods Flowers sales were up 3.9% in dollars, and 2.4% in volume. But back to the question, how is Flowers performing so well, while the industry as a whole is not? Our company continues to try and give results in spite of industry's difficulties, because of operating strategies we have in place that help Flowers Foods to compete more effectively. Those strategies have been developed over several decades and we continue to refine them as the marketplace and business environment change. Although, we faced the same issues as others in our industry, we've had the strategies in place that helped us to quickly respond to consumer's needs for new products, to keep our cost down, our quality up and our service to customers at outstanding levels.

So just how did we accomplish that? First, we have invested in our bakeries. We believe our bakeries are the most cost efficient in the industry. That strategy continues as we begin 2004. We expect our capital spending to be about $4 to 5m, as we maintain and operate our bakeries. Second, our performance reflects the strength of our brands Nature's Own, Cobblestone Mill, Mrs. Freshley's, and our local White Bread brands. We offer delicious bakery products at a good value for our consumers. We are developing new products that meet the changing needs of our consumers. For instance, our Nature's Own Wheat 'n Fiber is the most successful new product introduction in our history.

Just a quick comment on the low carbohydrate trend. Our timing was great. We were the first commercial bakeries to introduce a bread with fewer carbs. Our Wheat 'n Fiber hit the market in February of last year. Although, others have more recently introduced low carb breads our Wheat 'n Fiber continues to grow. Wheat 'n Fiber and other Nature's Own Healthline products continues to help drive increase in our sales volume. We will introduce other new Nature's Own Healthline products this year as well as new Cobblestone Mill and Mrs. Freshley's, and we will continue to develop our Hispanic snack cake brands, Mi Casa and Tesoritos.

The third strategy that helps us maintain our competitive advantage is technology. We continue to provide the Information Technology to help our customers succeed. Today, we have over 4100 stores on scan-based trading. These stores represent nearly third of our DSD sales. As we discussed before our technology platform makes scan-based trading possible and it's a win-and-win situation for our company and for our customers. We are also in early stages of rolling out our third generational hand-held computers this far for our independent distributors. The new technology will help to better serve our customers needs providing the information they require and helping us to give even better service.

The fourth strategy that helps to keep us an ahead is our innovative approach to distribution systems. Our Bakeries Group DSD independent distributor network offers a more motivated sales force that is all about giving the best service everyday. We continue to expand our geographic territory for the Bakeries Group. We entered new markets in Missouri, Northern Virginia and Kentucky last year. We expect to continue stretching our boundaries for DSD into new territories [led] by our Nature's Own and Cobblestone Mill brands.

I know you would like to know where we are going next. But for competitive reasons we cannot give these specifics; however, we will keep you informed about our new market activity at 2004 unfolds. Our approach to distribution for our Specialties group broadens the reach for Flowers Foods significantly. We are able to deliver snack cakes and frozen bread rolls to customers across the country by going direct to customers' warehouses. Although specialty makes up a small portion of our business overall we in fact continue to see strong growth as we grow our base for that business.

Finally our strategy depends on the talent and dedication of our team. Our top management team and our teams throughout the Company have worked, you know, to create our operating strategies that have resulted in our competitive advantages. Our top management team, division operating staff, and [inaudible] that's 82 people, who have an average of 25 years with the company and their average age of 48 years. We are a committed team with best experienced and yet we are definitely -- our team is definitely at an advantage. As a result of our strategies, we continue to generate strong cash flow as Jimmy reported. I know you would like to have an exact formula of how we will use our cash, I can tell you that as we said before, we expect to pay dividends to our shareholders, to buyback Flowers stock when appropriate, to spend the capital necessary to grow internally, and to make acquisitions when both the price and the period are right. Over the long term we expect half of our cash to be used for dividends and capital investments and the remaining half to be used for acquisitions of either Flowers stock or new business that fit into our plans for growth. Of course as we up tick cash, we are always monitoring that our purpose is to use cash where we would generate the best results for our shareholders.

Flowers Foods is in excellent shape. We have efficient and cost-effective bakeries, great products, strong brands, extraordinary customer service, and an extraordinary team. We expect our 2004 performance to continue to outpace the industry. I can assure you we will be doing everything we can to make that happen. Now, Jimmy and I will take your questions.

Thank you. The floor is now open for questions. If you do have a question, you may press "1" followed by "4" on your touchtone phones. If you are on a speakerphone, we do ask that you please pick-up your handset to minimize any background noise and if at any point your question has been answered, you may remove yourself from the queue by pressing the "#" key. Our first question is coming from Bill Leach of Neuberger.

Good morning everyone.

Good morning, Bill.

Congratulations on a great quarter. I have two questions, and obviously, the surprise in the quarter was your big increase in your segment margin which I guess came out to be about 8% before corporate. Do you think that margin is sustainable, going forward?

Gene, I will take the first part and then you follow it up. You know, I feel good about, last year it was 53-weeks as Jimmy indicated, this coming year it will be 52-weeks.

Right.

We feel that, you know, I think, the economy is getting somewhat stronger. You know, we never know what the future brings, but we feel very comfortable with the guidance that Jimmy indicated during his presentation that we will be able to be within those guidance ranges.

So, you basically feel this level of margins is sustainable?

Yes. That's because you know, we have to sustain those margins to meet our 2004, you know, where we laid out this sales and net income expectations. So, we basically, reiterated that guidance, and believe we will continue to perform more.

Okay. And can I ask you about, your allocated corporate expense number was fairly large last year, get me in the first part when you were spinning off Mrs. Smith's. Do you have any guidance for that number, I guess, it was 32m last year?

We are up there and that is a total of direct cost than any unallocated cost, you know, I would still expect that to be somewhere in the 25-30m range for fiscal 2004.

So, it should be down versus last year?

Yeah, I think, I mean there was obviously some transition cost, you know, as you mentioned in particular in the first quarter and we hope that will be flat to down, yeah.

And what is your guidance for depreciation this year?

I think it will be basically the same as it was in 2004, you know, for the year.

Okay and capital spending have 45m, you said, right?

Right.

Okay. Great. Thank you very much.

Okay. See you. Thank you very much.

Thank you. Our next question is coming from Eric Katzman of Deutsche Bank.

Hi good morning everybody. Congratulations.

Thank you, Eric.

Let me kind of follow up on Bill there with a question about CapEx. I would have thought that $45m number that you are looking for would be higher given the expansion into Dallas and Fort Worth and may be some other areas, am I missing something?

Eric, I didn't -- we certainly didn't mean to mislead, we are 4m or 5m is roughly the right cash flow number. About 5m of that 45 will go to the projects to Fort Worth -- Dallas. In addition we will have leases for equipment at that facility, which should not be capital expenditure.

Okay. So, that 45 includes the expansion?

Yeah. And what we are looking at Eric is, of the 45, about 5 of that is the debt and expansion and then we are looking at equipment leases for the Denton facility with certain dangers of the equipment if that makes financial sense, which would appears and may in fact do that, so our [expansible] capital expenditures will still be around the 45 level.

Okay. Good and then I think you had mentioned that the, of the core sales growth of four, volume was the bulk of that, but in the past, I guess, you had some contribution from pricing mix. Why did that kind of, is that right why did that go away this quarter?

Well I think, what we saw was -- and I didn't use the word mix but in fact, you know, we had increase sales of branded products, primarily you know with volume. There was some mix involved because it was heavier or more volume of branded products and that was the great contributor to the quarter. We did not, specifically mention, pricing, because it was essentially flat versus last quarter and was not a contributor to the increased sale.

Okay. And then the last question, I know that you are not going to comment specifically on hedging and raw materials, but obviously raw material costs have been going up for everybody in the industry. I assume that your projection for '04 assumes that one, that you are -- higher cost or two that your hedges are in pretty good shape that you can work through any higher cost?

Yes. We, again as we always try to do in particular on certain major ingredients. We are very comfortable with the hedges we have in place for 2004 and you do have some natural gas usage that's due to the regulated industry, its is not necessarily hedgeable but overall our all of our ingredients we feel very comfortable with our hedge positions and where it will be for 2004.

Okay. Congratulations.

Hey, thank you Eric.

Thank you. Our next question is coming from Mitch Pinheiro of Janney Montgomery Scott.

Hey. Good morning.

Hey Mitch.

Just follow up on Eric's question and actually Bill's as well, the -- so raw materials -- you are comfortable with your hedge position but does this mean that they will be up or down or basically neutral versus 2003?

We'll have it, I believe a slight increase in Flowers [inaudible], it is all in our projections, it is all in our plan.

Right.

It is up there, but ever so slightly, I feel like our group is certainly doing a good job in protecting our operations by getting out front of the three unknown rates increase we have been seeing.

Okay, so --?

In absolute prices, I mean yeah, -- as George is saying there are some increases but we feel comfortable with our guidance in this -- you know our improved mix in volume and pricing etcetera will offset any increases there.

Okay. What about the work force related cost, healthcare, property and casualty, things like that? What's the outlook for 2004?

Well, as you all know that healthcare continues to rise and we do expect it to rise but you know, indeed we [inaudible] we set in our overall plan and we projected that knowing it was coming.

So you have visibility on it and it is in your guidance?

Yes, it is. And again when we say work force related you know we have things like stock appreciation rights that as our price has appreciated have been large charges which is good news and so we've tried to forecast and plan all that into our guidance.

When you look at the sales growth for next year of within your guidance range, what's the composition of that as far as volume? Are there any -- is there any acquisition growth in those numbers?

No, there is no acquisition growth. What we said and Gene has repeated it time-to-time again we believe year in and year out over the long pool unless inflation or something really kicks up we are looking at 2 to 4% guidance I think year-after-year, Mitch.

Okay, if you back out, I mean how -- if you back out, I know, your new products, you Healthline products from the fourth quarter numbers, what was the -- for the -- what did the core brand do excluding new products?

Mitch, I don't have that specific number, you know I would tell you that all, you know all the branded products you know, we specifically mentioned the new products, the Nature's Own, and Cobblestone Mill but we saw improvements in all of our categories even you know, absent new products our white bread and all the soft variety breads under the Nature's Own banner. Cobblestone Mill, Mrs. Freshley's we saw improvements across the board.

What are you seeing -- what are you hearing from your customers in terms of you know, sort of their view of the low carb awareness and what they may or may not be doing to the bread isle?

It is certainly on the radar screen with all the retailers, food-service as well, food-service you know, the restaurant trade is really trying to be on the trend with the consumers on what people are wanting and certainly the retailers now are well aware because they have seen evidence of low carb sales of our product as well as others. So they are trying to in mind set up different sections really again advertise low-carb type products to meet the needs of the consumers. So it is a lot more active then it was a year ago.

Are you seeing any shelf space you know, declines shrinkage in the bread isle, are you seeing or does it actually expand a little bit as they put our low-carb breads, and things may be in a new section, what's the --?

Mitch, I would say the bread section is say in probably status quote. You will see more display activity, which is more space for the bakery department, it's not in shelf, but beyond shelf. Which would be more linear, [inaudible], and probably this time last year, these all activity on low-carb bread and [roll] products.

Okay. What about in the snack cake area? You are seeing any changes in, you know, shelf space in the way and the products that they want, is there -- are you seeing any thing?

No. I think, it's a little early on the cake side, as far as display and amount of space allocated to the cake department, I think, that is also pretty status quote.

Okay.

And so, yeah, I think, we will have to wait, see, what happens on the cake arena, as far as new products are concerned to meet the need.

And the new Hispanic, the Tesoritos, and Mi Casa, I believe are they, you said your, you know, your, I guess, I forget your adjective, but you're encouraged or are you, by what you are doing, but it is sort of, it sounded like it was a slow start. Can you be more specific, I mean, are you in -- so -- how many stores are you in, what's the outlook for '04, any thing?

Mitch, I remember, in the seven days, when we put our [inaudible] on. I -- I was in Atlanta this time in April, for the first few months we got the business, because [inaudible] who is bringing back more than we set up.

Okay.

The same with Cobblestone Mill, brands are slow wheel, people are used to their brands that they are buying today. But I am encouraged because I think; the consumers that will be purchasing these two product lines are not buying our products today. So, you know, I am not discouraged, it is a slow wheel and we prefer to be a slow wheel. There, it takes time to get distribution and with [ordinary] supermarkets because, I don't think this particular cake line appeals to every consumer.

Right.

So, we are trying to cheer up a [relevant] shot gun and what supermarkets, convenient stores win enough operators that we want to serve and really going after that arena rather than everywhere. But we are pleased with the rollout. [inaudible], you know, when we introduced, thank you we came long -- Christmas came along that slows things, then we are back on track now and distributors getting back in very a positive mood.

Okay, now that just a couple of things. One on the, I guess, it was the IRI data that you gave for December 28. Was that 52-week number?

Yes it is.

And was that for your territory only?

That is correct.

Okay.

I believe it in fact is the south market [inaudible], Mitch.

Okay and in terms of, Jimmy, you said transition costs in the first quarter and you unallocated pump that up last year. But I went through, are there sort of operating, some other operating transition costs that you incurred in Q2 and Q3 as well? And let's see will there be any of these costs in '04?

Well, again we now retaining the frozen bread and roll business which was you know a 100m plus of revenue. We've incurred transition cost, you know, again primarily in the IT area as we move from what would the Mrs. Smith's SAP platform to our core Flower Foods, Flowers bakeries platform and that transition was underway throughout the year. But I would still expect that the corporate calls next year you know, have 25-30m range, which could be what I would expect.

Okay, and one more just broad question. The -- could -- have you seen or do you get any sense that the low-carb awareness sort of -- and trends could perhaps may be a catalyst for further consolidation particularly among the smaller bakers that you have historically targeted. Are you seeing any sort of increased activity there?

Mitch, I have not. You know, we want to speculate that on that cause, we don't know the Flowers usage throughout the industry is down and that's all some of those trends, hopefully we will be able to participate in.

Okay. Thank you.

Thank you, Mitch.

Thank you. Our next question is coming from Leonard Teitelbaum of Merrill Lynch.

Good morning.

Hey, good morning.

If you can just -- a couple of things, Jimmy. If I take a look at my accounting and decided that you guys have put out a lot of options. If you have to account for options differently under the purposed guidelines, have you done any feel or any assimilations or what it might cost you in terms of impact on earnings?

We have -- we obviously look at that when we grant the options. I know Lendy, in our public disclosure we under, I believe the FAS 123, we disclosed what EPS would be if the options were expensed, and I don't recall right now that disclosure would be in the K when we file it. And I don't remember the number off the top of my head Lendy, to tell you. We -- it's not a significant dilution, I think; we are very aware of that and very cautious.

I appreciate, now you know, I guess we -- the question has been asked in a maybe a more subtle way, let me ask you directly, are you gaining share on Interstate in your territory? I know you compete with them in several markets.

Mitch, I mean, Lenny (ph.) our share has been going up ever so slightly, you know it is a big market out there and each market is separate. We gain some on occasions but I wouldn't classify as taking a lot of share away from Interstate.

I guess, what I -- you know, and I hear your explanation and I certainly buy into it to be honest with you that you execute better than a lot of your competitors out there, I think that helps account for the margin. I think there is other things too, but I guess I am just trying to figure out how you can do so much better than the industry even adjusting for the fact that your wage rates because you are non-union might be in there, but that still doesn't account for the margin differentiation and only I guess -- and may be I am wrong I just thought that you were taking share but may be I am going down the wrong road here?

Well let me come back on the -- you know I hit on, I felt pretty hard on what I thought our competitors advantages was in the marketplace.

Right.

That is fresh bakeries and we pay our people well and we continue to innovate on new products, which do -- does in fact give high margins like sugar free, like Wheat 'n Fiber. So we are -- I think this company is really innovative on what we are trying to accomplish on those products that didn't drive added margin and we continue to work for that because we think there is a competitive advantage. If food sales [inaudible] just white bread we can say it is [related] to us. We felt three years ago and that's when Nature's Own was introduced. That's when Cobblestone Mill was introduced because we also recognized the trend in super premium products, that's also why we have introduced the Hispanic Cake Line because watching the trends and the demographics changing so much in our part of the world and the United States, overall United States, we are trying to be innovative and meet the needs of our consumer which does improve our margins.

Well I think that's a good example or a good explanation, excuse me now, just one more quantitative question and I'll get off the line here. You had a 14% increase in revenue and if my notes are right, 8.8 or 8% was due to the 13th week, Bishop was 2.5 percentage points, that left about 3.5% growth on the existing line, is that math correct

Yes.

Thank you very much.

Okay thank you Lenny.

Thank your next question is coming from Heather Jones of BB&T Capital Markets.

Thank you. Was -- I had a question about the mix shift in pricing, I don't know if I am just missing something but this -- I think there is about 3.5% to 4% that is attributable to core growth in the quarter and you sold more of unbranded products which I'll assume would bring the high price, was there negative pricing on other areas that caused pricing mix shift to be flat or whatever for the quarter?

Heather we did promote some products in the fourth quarter which really gave us no lower -- lower [inaudible] on some items.

Okay.

That is not a downshift in pricing that's probably more promotional activity for the fourth quarter.

Okay so there was no -- so basically that's 3.5 to 4% was all volume because there was some promotional activity to offset positive mix shift?

Right.

Okay. Now the specialty foods improvement, I think, it's like 400 basis points in the quarter, what would you attribute that to?

Good management.

[inaudible].

You know, if you go back and look, we have always feel that our cake business was a good business, and when we formed the Mr. Smith bakery group, the snack business [inaudible] five business along with frozen breads, rolls to make that group stronger and better. Year and year and half year ago, when we recognized maybe we were not getting full attention on the snack business, we pulled that business out of our business, and started a new group called Snack Vision. What we found out which was actually true with more attention and more focus we could improve the sales and the margins, and quite honestly with bread and roll, [inaudible] and I have said upon the sale of our five business, we created the specialty group which included Frozen bread and rolls, and we have also found out there the exact same which focus, good management team, we have -- we already improving our margins, we are up -- more -- are more efficient and more effective than we were prior. So we like that trend, we like the business.

I am just looking at prior quarter, and there has generally been a trend of like up 200 basis points then, is it fair to assume, that the launch of the Tesoritos and the Mi Casa lines had been a drag on profitability, I am just, wondering what happened in the fourth quarter that just want to lent this out to such -- a much greater increase?

No. I wouldn't give credit or discredit for the fourth quarter on Tesoritos, don't [inaudible] small this year.

Okay.

I think Jimmy, best I remember, third quarter when we have the product, that's all.

And I think some of that Heather is mix, you know, the bread and roll business has foodservice business and when we look back at 2002, we had a national chaining with specialty sandwich and we have like a limited one time -- limited time offer. You know, we are achieving these sales without that national account for one time offer product. But we are having, it's an effective better mix of sales. You know, we are growing to sales in broad line distributors and other national accounts in the bread and roll business without, you know, what specific limited one time offer type situation.

The higher margin channel?

Yeah. You are growing better quality sales, and I think, George has got our specialty group and the snack area focused on our brands, Mrs. Freshley's, in particular and so we are just improving the mix of those sales overall.

Okay. And finally, I was, and I made a mistake on, [inaudible] followed prior CapEx guidance for '04 was higher. I wanted sales like 60-65m. Have you -- has anything changed from last quarter that you've decided to lease some equipments, that has brought us down or is just going to -- it's going to be less costly to build out this new Denton facility than you have previously estimated or?

Heather, may be we mis-communicated prior, but we've been in that 45 range all the time. I think the difference would not be as the Denton equipment that will be on lease versus you might have thought we headed in CAPEX, but we are going to lease a major part of that equipment.

If, I think, back to the San Antonio comments I made, Heather.

Right.

You know, if we've said about 35m in maintenance stand and about 10m in efficiencies and capacity, etcetera, would get us to about 45, and then if we add a 10 of Denton, you know, that could be about 55.

Okay.

Again, to go back though some of -- the Denton purchase of land and building was actually in fiscal '03. So, now when we are looking fiscal '04 and finalized our plans, we feel like 45 is the number and since we are actually leasing some of the equipment in Denton. So it is a combination of better spending, tighter controls in fiscal '03, and being able to in fact purchase the land and building in Denton in fiscal '03 and still keep it under, you know, we were at 43.6m with the Denton spend, and now when we look at '04. I feel like will be, you know, I am tightening it up, and I think we are going to be in that 45 range, a combination of better tighter spending and leasing some of that Denton equipment.

Okay. I have two follow-up questions. Is this low-carb wheat fiber bread, is that currently your sole offering of, I guess, what you recall low carb bread?

Yes, it is.

Do you have any plans to introduce other products along that same concept in '04?

We are looking, and we think that certainly with the [turbulence] so strong this direction, we will meet on the retail side a burn out. And on the foodservice side, we are developed and are -- we'll be meeting our customers' needs on the foodservice side of the low-carb --

Okay.

Bread and roll category.

And finally, you just had mentioned you moved into the Northern Virginia, Missouri, and Kentucky, just wondering how those are going and I know you are not going to say where you are headed in '04, but just I mean do you target another three markets or another four or just an idea along those lines?

Heather, when you look at the market expects is, it is kind of like building brands. And I mentioned that building brands take years. And going into new markets is not -- you can get there but then you have to have on [trade] with the market through customers and that will take time. But we are pleased in Northern -- in all these markets we are pleased but it is not a fast deal, it is a slow gradual deal, but we there for long ago and just like any of our new markets. If you remember that now; 1983 where we just scattered across the Southeast and we [failed], and now all of those markets are very viable and doing well. I think, hope 10 years from now we look back at the market today, and see for those new markets -- our core markets and are doing quite well for us, but it is not an overnight success. But we are pleased with the results. And then probably -- then you question, where we are going next I think? We do have a couple of other markets; our [inaudible] own it, but we just turn out we cannot say where those markets are.

And are you going to do all of this on your own or I mean would you consider like fold-in acquisitions or whatever to help you penetrate these new markets?

We always are looking. If something makes sense internally or joining our territories that will help us get there faster and it does fit operationally and financially, we certainly would.

Okay. Thank you so much.

Thank you.

Thank you.

Thank you. Our next question is coming from Tim Ramey of D.A. Davidson.

Good morning.

Good morning Tim.

Good morning Tim.

You mentioned the third generation of handheld computers being rolled out now, can you talk a little about what functionality that gives your system, you're out system?

This is third generation. We have on test in one particular bakery as I speak with [inaudible] based on capital and capital manpower and everything else involved, it's a probably a two year project to complete that. The -- you know with scan-based trading we have a great deal of help and I mentioned 4100 stores now, nothing paperwork, we will automatic signing of -- to get rid of paperwork, you can actually sign the handheld set which will really eliminate a lot of work, but software's more importantly. We are really looking at -- nothing we have in the bakery hopefully has been able to get the right product in the right store on the right day. I think this will even tighten that more with a process and the software that has been developed. I think it will just be one more competitive advantage that will give us a better job, so our distributors which outperformed the industries can even be better and even serve us in the right product in the right places.

But it essentially focuses on the scan-based trading opportunity, is that fair to say or is it more broad than that?

No it is more -- a lot more broader than that. I just mentioned -- this is just one more advantage I think that we have. Scan-based trading is certainly advantage but the handheld is.

Yeah, for every account Tim, whether its national account with scan based trading, or you know, a local retailer or whatever, the handheld systems is meant to help, to assist the distributor with order, you know, the ordering process, the forecasting process, using sales history and forecasting whether the holiday or depending on what day of the week, as George, mentioned to try to make sure we don't have out of stocks and that we have the right product, you know, on the right shelf, at the right time.

And, you know, you growth there has just been terrific but I assume it will be somewhat chunky going forward, as you get new chains to commit to scan-based trading. And I know, you are not going to say who, but are there other kind of significant opportunities opening up in ''04?

Tim, I missed that first comment, you made ...

Just the idea that, you know, perhaps the growth in your ability to roll out scan-based trading would be limited by the willingness of new chains to adopt the scan-based trading methodology? Is that, that a fair statement, number one, and number two, are there other big, you know, chunks of scan-based trading opportunity that will open up in '04 based on say another chain committing to get on the program?

Tim, that's, most of our major customers are already there. I think it will be slower, but I didn't think like I remember, groups talking about, did they say like, we could get to 40-50% level of the DSD because of new additional resellers looking at this process, because they do know that its good for them, its good for us. But to be able to exactly say, Tim, I couldn't give an exact answer on that.

Okay.

It we will continue but probably not at the speed that, [inaudible] because we have penetrated you know, we have partnered and penetrated the national account and pretty much accomplished that with the 4100 stores, now its just a matter of expanding our territory and as they opened new stores as we gained distribution where they are we will be adding to that and then I think as the technology you know, gets more affordable and available you will see more of the regional and maybe even some of the local retailers adopt that as a technology. But we could see at least the third of the sales and could even be up to 50% at some point on scan-based trading.

And you really emphasized the branded growth in the quarter but can you talk a little bit about the private label environment? You know, there was these comments from Interstate that suggested that some of the large retailers were decoupling the shelf allocation decision for core brands from the allocation or the you know, awarding of private label business. Are you seeing that and what is the overall trend in the private label side of the business?

Our private label is up ever so slightly. I think -- I think the advantages of great brands will always get you space in the long run. I think historically the bakers didn't want to get that private label accounts so that they could get more of the share of the bakery department. That has changed somewhat from their old historical way because everybody is looking at setting space allocation based on terms. And if you have the private label account and you have a brand that's not turning well then retailer will not continue to let your brands sit there and not generate dollars. That's what Tim as you know is so crucial, that you have brands like Nature's Own and Cobblestone Mill and local White Bread brands that bring the cash rates for the retailer and that's why we are working so hard on our brands and making sure that we have items that the consumers want to purchase.

Well, terrific, it was amazing quarter. Thanks.

Thank you, Tim.

Thank you. Our next question is coming from David Liverwood (ph.) of Birmingham.

Congratulations, and let me add my good wishes to the continuing prosperity.

Thank you.

Briefly, a few questions. One, the new territories you are looking to go into, what percentage of your current market might just represent?

David we -- I think the question has come back from the population standpoint.

Right, or potential marketing standpoint. Correct.

I think today we say DSD model, that we are serving roughly 40% of the U.S. population and that 100-150 mile radius, I think, we talked about would give us an additional 50m consumers and, of course that you know, that's when we grateful. I don't mean this -- and we said 3-5 years, we thought we could get there. So we don't have the new 50m today.

Understood. Second one and looking at your 2004 revenue potential increase how much of that do you automatically pick up by just including the 12 months versus, whatever number of months the acquisitions of last year, and, then on the balance how much comes from snack food growth and how much comes from the basic baking group growth?

David that's a level of retail we have chosen not to disclose at this point. Again we are comfortable with the sales range, you know that we're providing. That sales range does not include any acquisition numbers on it. So if there were in acquisition to materialize, it would be over and above the 1.45-1.5b.

You may have misunderstood, I apologize, I speak a foreign language called [Brooklyn], and I translated to [inaudible] today and that's an individual in deep trouble. Now what I know was, you had some acquisitions in '04. They did not contribute for the full 12 months. They will continue for the full 12 months in '04 so how much of the revenue gain is just coming along based on that single factor.

David, I think, being true to say that all the acquisitions now have --.

Relapsed.

Relapsed, great. So there is $90 in this year and [inaudible] in last year.

Okay.

Yeah. The 2004 numbers the Bishop acquisition was, I think, day one of fiscal 2003, so these 2004 numbers there -- are no acquisition amount to factor out of there.

Okay. And lastly on the non-bread business or the non-core baking business, is there any desire or need to push for low-carb product or is that going to be limited to the core bread business.

David, we will, I mentioned earlier the food service business, the food service arena, are now really they have been trying to meet the consumer needs with this low-carb type products. So I think you will see menus across the nation introduced low-carb products. So we are involved in that through our foodservice arena.

And the very last question, on the two brands that are aimed at the Hispanic market or Latin American market, is there any reason to want to put out a bread product to them as well?

That's always under study, but at this point no desire to do so. Our local white bread brands seem to be working real well in those Hispanic markets. Cake, I think, the another issue, but on the bread side we are very happy with our present brands in each one of those markets.

Thank you very much to continue the good work.

Thank you, Dave.

Thank you. As a reminder, if you do have a question you may press "1" followed by "4" on your touchtone phones at this time. Our next question is a follow up from Eric Katzman of Deutsche Bank.

Hi thanks, actually it's Pen Jones on behalf of Eric.

Hi Pen.

How are you?

Great.

Alright, just a couple of quick follow ups, if I may, you had mentioned that you are going to make pension contributions in 2004, I apologize I missed it.

Yes.

Can you go over that again including what the pension cash cost will be this year? And also I was just wondering if you expect to take any more write-offs going forward and what the potential cash impact might be of those?

Okay on the first question; I will answer your last question first.

Okay.

We don't have any expected write-offs in 2004 at this point, cash or non-cash. So, there shouldn't be any of that. On the pension, we did contribute, I believe it was 11m in fiscal 2003, and I had earlier said we would be in the 10-12m range for fiscal 2004, after further review with our actuaries, we've decided to make a contribution of 17m in fiscal 2004, and there are a number of benefits by making that higher contribution level. And so, and what we are going to do is put in 4.25m each quarter -- each calendar quarter.

Fine.

And so that 17m is recorded in current liabilities on the balance sheet with the press release.

Okay. Great, and that's all I had. Thank you very much.

Thank you.

Thank you. And our final question will be coming from Heather Jones of BB&T Capital Market.

Thanks. I just had a quick follow-up. On the scan-based trading, at this point is it, how -- or what kind of benefits are you seeing, is it more of a benefit in the sense of your -- you are just able at offer greater service to your customers, or are you seeing actual profit benefit at this point, and increased efficiencies etcetera?

Heather we feel that, it's been a real advantage to our independent distributors. If you go to retail supermarket, and look at the long lines of vendors waiting at the front and the back door to get into be checked in properly, to account for the product. Scan-based trading bypasses that. So we feel that, it's a real fair advantage, which does turn into more profit for the company, and more sales and profit for our distributor, and it cuts out lot of administrative work for our customers, and labor involved in having employees standing, checking out personal, when they could be busy doing something else. So I think it's a sales advantage and profit advantage, due to the administrative work, that's involved. We are real pleased with it and we would like to keep moving forward.

Okay. Thanks.

Thank you.

Thanks, Heather.

Thank you. I will now turn the call back over to George Deese for his closing comments.

Thank you so much and thank you again for joining our call today and certainly for your interest in our company. We will see you all in New York on March 10th. Thank you and good-bye.

Thank you and thank you callers. This does conclude today's conference. You may disconnect your line at this time and have a pleasant day.