Flowers Foods Inc (FLO) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Flowers Foods third-quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to introduce your host, Marta Turner, Senior Vice President of Corporate Relations. Ma'am, you may begin.

Good morning, everyone. Participating in our call today will be George Deese, Flowers Foods President and Chief Executive Officer, and Jimmy Woodward, our Senior Vice President and Chief Financial Officer. They will discuss our results and then take your questions. Following the question period, Mr. Deese will make closing remarks.

But first I must remind you that our presentation may contain predictions, estimates or other forward-looking statements. Our use of the words expect, believe or similar expression 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 pleased to introduce Flowers Foods President and Chief Executive Officer, George Deese.

Thank you. Marta. Good morning and thank you for joining our conference call this morning and for your interest in Flowers Foods. We are pleased to report good results for the third quarter. Our performance continues to reflect our operating strength and to have been developed over the last several decades.

During the quarter, we completed the Sara Lee Texas acquisition and bedded down the additional volume that resulted from that acquisition. We increased production at our new bakery in Denton, Texas. We offered exceptional service to our market through several hurricanes. We grew sales in the new markets we have entered over the last 18 months. Our sales increased 11.5 percent during the quarter with 1 percent coming from the variable interest entity. Certainly our third quarter was both eventful and gratifying.

Looking at IRI (inaudible) data from the 12 weeks ending October 3 shows that Flowers continues to outperform the packaged bread category. I will tell you more about our products and how they performed in a few minutes, but first Jimmy will discuss our financial performance.

Thank you and good morning. Thank you for joining the call. If you have the press release, we will take a quick look at our third-quarter financials and then focus on the guidance for 2004 and 2005.

As George has mentioned, our sales increased in Q3 with 11.5 percent. The consolidation of the variable interest entity was 1 percent of the increase, so our core business accounts for an increase of 10.5 percent.

Looking at the growth, it was broken down 5.7 percent in volume and 4.5 percent in pricing and a slight favorable product mix shift contributed the .3 percent. If you look by sales channel, branded retail increased 10.5 percent on volume and pricing, and store brand or private-label increased 7.6 percent primarily on volume.

Foodservice is the channel we continue to grow in. It includes fast food, foodservice distributors and institutional outlets, and that channel increased about 14.9 percent this quarter.

By division Flowers Bakeries continues to perform well in our existing direct store delivery markets. We are very pleased with the growth this quarter, as well in our expansion markets with our new DSD territories. Our sales across all distribution channels increased. In the bakery side, branded retail continues to be driven by Nature's Own variety breads which increased almost 9 percent for the quarter with gains in volume and pricing. And store brand sales for the quarter increased 7.6 percent, primarily on volume. Foodservice sales were up almost 20 percent for the quarter, and I would attribute that growth in foodservice to the recent acquisition in Texas that George mentioned of certain foodservice customers from the Sara Lee acquisition.

The growth and contribution from acquisition is tracking. Sales continue to grow strong with customers coming on, some of them even earlier than expected. And the profit contribution is on plan as well.

Turning to the Specialty Group, branded sales were up significantly, about 33 percent for the quarter, and I attribute that result from our Mrs. Freshley's brand where we're seeing strong growth in both the mass merchandise channel and in the club channel. And that was due to both pricing and volume.

Store brand sales were up 15 percent on volume, and foodservice and other, which includes our contract reduction and sales to the vending channel, was up some 10 percent, primarily on volume. So the Specialty Group continues to make improvement as a result reflected by the sales growth in the third quarter.

The consolidated gross margin of 49.8 percent was essentially unchanged as a percentage of sales compared to a year ago. We did experience increases in ingredients, packaging and labor costs all related to increased usage and price increases, but those were offset by our sales gains.

The Company continued to experience some cost with the startup of the Denton bun line; however, this plan is showing significant improvement and should be contributing to our gross margin soon.

Our selling, marketing and administrative expenses were about 40.3 percent of sales, again relatively unchanged as a percent of sales from the prior year. We have and we are continuing to incur incremental costs related to our Sarbanes-Oxley compliance efforts, which are on track and on time. Additionally we had labor-related cost increases, particularly with health care costs, and as those costs have all continued to rise, again that has been offset by the higher sales base.

I would mention during the quarter that we announced an agreement to settle a class-action lawsuit related to pie shells produced by a former subsidiary. The cost has been recorded in prior quarters as discontinued operations and, therefore, had no effect on the current quarter. We are committed to controlling costs, and cost control with the sales growth has allowed us to maintain our good results. You'll notice in the corporate unallocated expenses we did have an increase, and much of that is due to our efforts to comply with section 404 and all the various new rules this year.

Depreciation and amortization expense was just slightly higher than the prior year, and most of that really is because of the consolidation of the variable interest entity because depreciation by our company-owned wholly-owned assets was relatively flat.

The source of our interest income continues to primarily be the distributor notes with some amount coming from the cash we had invested, and interest income was reflected net of the expense we incurred was essentially flat with the same quarter last year. The consolidated effective tax rate is pretty much unchanged. Again, it is being affected slightly by the consolidation of the variable interest entity which is an S Corporation and, therefore, has no tax.

We continue to make no federal tax cash payments due to the tax loss carryforwards, and except for alternative minimum tax if we should have any, we should not have any federal cash tax until 2005. There have been some changes with the recent tax law that will be effective next year, and we will comment on that when we look at our 2005 guidance.

The amount reported as the minority interest in the variable interest entity represents all of the income of that entity as we have never had and continue to not have any equity interest in the entity, but are required to consolidate as a result.

On a per-share fully diluted basis, income from continuing operations and net income was 33 cents per share for the quarter. If we look over at the balance sheet, you see our cash position was 35.6 million at the end of the quarter. We continued to show zero bank debt on the balance sheet, and we have not drawn on our $150 million credit line.

We did recently amend and restate our credit facility to provide for a five-year term, lower rates on future borrowings if any, and less restrictive covenants. The new facility and our operating cash flow obviously put us in a very strong cash position.

The cash flow statement for the quarter shows 37 million cash provided by operating activities. You see that we report we used 12.9 million for capital expenditures, and you should note this includes approximately 2 million for capital expenditures by the variable interest entity, which again must be consolidated. And the Texas acquisition is actually reported in the other line on cash flows from investing activities net of a small amount of other items.

We paid about $5.5 million in dividends during the quarter and used $14.6 million to purchase approximately 578,000 shares in the quarter. Our average price of the share repurchases was $25.28. We are announcing today the implementation of an odd-lot share repurchase program. As we look at our shareholder base, I want to give those odd-lot holders an opportunity to either increase their holdings or to sell their holdings as they see fit.

If you look at the press release, we have given 2004 guidance. The sales guidance, 1 billion 539 to 1 billion 547 includes approximately 12 million we estimate in sales from the variable interest entity, and I would remind you that that entity has the effect of increasing our sales number on a consolidated basis but has no effect on net income. So that our income from continuing operations as a percentage of that consolidated sales is expected to be 3.8 to 3.9 percent, and that will turn out to be somewhere in the $1.30 $1.34 range, which is slightly up. I think our prior guidance was a $1.28 to $1.32 cents, and that is a combination of continuing to have great results and the effects of our share repurchase program has also benefited us.

I would remind you the fourth quarter of this year will be a 12-week period versus a 13-week period last year. Last year that extra week we would estimate contributed about 25 million in sales and probably around 2 cents per share of the 28 cents that we reported last year.

Looking forward to 2005, we have attempted to lay out what our expectations are, 1.6 to 1.625 billion, again including sales of the variable interest entity. They are expected to be somewhere in the $12 million range, and we would expect to our income to be 3.75 to 4 percent of sales.

We have laid out several items that I believe are significant to understand the guidance for 2005. You will recall when we sold the pie business to the Schwan Food Company, included in that sale was the land and building of the Suwanee plant where we have two frozen bread production lines. And we have had a period of time under agreement with Schwan's with which we continue to utilize the facility, but there is a day certain where we must exit. So we plan to go ahead and relocate one of those lines out of the Suwanee facility next year, and certain amount of that cost, relocation costs, will have to be expensed as incurred next year.

We are changing what we had previously announced on our pension plan contribution. We had made about a $17 million contribution to the defined benefit plan this year. And as we looked at the cash available and the rate of return on that cash invested in the Company and we look at the expectation that we would need to make a $12 million or so contribution in both 2005 and 2006, we decided to go ahead and accelerate the pension plan contribution and make a $25 million contribution in January of 2005 is what our current expectations are. Again, that is a very good use of the Company's cash to invest those funds tax free in the pension plan.

The outstanding equity-based compensation under the FASB's proposed share-based payment rules, I think I had mentioned in Atlanta we thought that could be as much as 10 cents. We further analyzed that, and given the fact that they have delayed the guidance to the second half of next year and looking at the transition rules and the fact that certain of our equity-based comp will already be vested now that they have delayed the rules to the second half of next year, we would expect for outstanding awards that will probably be closer to about 2 cents per share expense next year.

We have also tried to estimate what the impact of the recently enacted American Jobs Creation Act will be on 2005. I believe there is even an article in today's journal referencing expected action by the FASB. Obviously we don't know what that will result in, but we expect to benefit from the deduction for manufacturers and would expect that to probably lower our effective tax rate about 1 percent is what we're estimating to arrive at this guidance.

So with those comments, I think that has discussed the financials, George, and I will turn it back to you.

Thanks, Jimmy. Those good results are possible because we have worked to make our bakeries and our distribution systems the most efficient in the industry, to be a brand that appealed to consumers, to develop products that meet consumers needs. We have embraced technology and manufacturing, distribution and information systems. We are determined the service to our customers will be truly exceptional, and we constantly focus on developing the talent and the motivation of our team.

Looking more closely at our sales and how our products performed, our local regional white bread brands increased in both volume and dollar sales against the industry's trends. Nature's Own, our soft variety brand, grew by double-digits in both units and dollars. Once again both our Nature's Own items and our Nature's Own health line items did very well. We are pleased with the performance of our Nature's Own products.

In the premium specialty category, our Cobblestone Mill premium loaf bread continued to grow. In the snack cakes category, our BlueBird and Mrs. Freshley's brand showed strong growth. Our Hispanic cake, as we have said previously, continues to grow slowly but steadily. Our foodservice sales experiments strong double-digit growth driven by new customers from the Texas acquisition.

As you have heard me say before, Flowers Foods likes the foodservice business. Our operating efficiencies and our distribution system advantages allow us to compete successfully in this very important segment of the marketplace.

The Texas acquisition, which we completed in late September, will bring between 35 and 40 million in additional sales on an annual basis, primarily in foodservice business. We are serving those new customers from existing routes, as well as the 60 or so new routes that were added in Houston, Dallas, Fort Worth and the San Antonio markets.

As we have discussed in prior calls, our new Denton, Texas bakeries began producing buns this past June. I'm happy to report that this line is on plan and meeting our expectations and supplying the capacity required to serve our new foodservice customers as a result of the Sara Lee acquisition.

In addition, we have begun construction of a new high-speed bread line that will be up and running in the June/July timeframe of '05. When complete, the Denton bakery will be one of the most efficient, state-of-the-art bakeries in the country. This bakery will serve the Dallas/Fort Worth, Texas and certain Oklahoma markets.

I'm pleased to report that our Bakeries Group is on plan at our new market expansion, serving an additional 7 plus million consumers, growing sales at about 1.5 percent on an annual basis. We're having good response from our customer base in gaining access to the market and good consumer acceptance of our products and brands. We will continue to grow steadily into the geographic areas that border our existing DSD routes as part of our strategy for future growth.

Now let's take a look at commodities. We have the majority and almost all of our needs for flour and other commodities covered through the remainder of this year and in 2005 the prices that will allow us to make our margins. As we mentioned in the press release, we continue to experience higher costs in a number of areas. We constantly monitor our costs and take direct action to improve our efficiencies and to (inaudible) price increases as needed to maintain and growth our margins.

As Jimmy indicated, we generated strong cash flow during the quarter. As I have said before, we have recognized the importance of investing for the cash to generate the best results for our shareholders. Over the long-term, we expect about half to be used for dividends and capital investment and the remaining for acquisitions of either flour stock our new businesses that fit our plan for growth.

The third-quarter results reflect Flowers Foods' strengths. Our exceptional service in the marketplace, our strong brands and the quality of our products make possible our continued growth along with great execution from our people. With these strengths, we expect a good fourth quarter as well.

Elsa, we will now open the call left to questions.

(OPERATOR INSTRUCTIONS). Bill Leach. Neuberger Berman.

Congratulations on a good quarter. I just had a question about your guidance. In the fourth quarter since there is only one quarter left, so your guidance works out to 26 cents to 30 cents -- it is a pretty wide range down 7 to up 7. Can you be any more specific? (multiple speakers)? (technical difficulty)

Last year was 28 cents, and again about 2 cents of that we attribute to the extra week that was in the quarter last year. So that would make 26 cents for a comparable last year. With the holidays and with continuing the transition to new business in Texas, you know we are just I guess cautiously optimistic and trying to lay out the guidance that we are comfortable with.

Okay. And then your guidance for next year, with the lower tax rate it is basically you are guiding to flat pretax earnings next year. I was just wondering if that is really what you meant?

Yes, I think, and that was the reason I put the various bullet points to explain what you could say would be nonrecurring type costs. Again the relocation of the frozen bread line is a significant cost. The additional equity-based compensation, the lower tax rate, benefits us about a percent on the tax rate, and then the 25 million we hope will help us on the pension expense. But when you put it altogether, you know this is our best guidance for 2005.

What is the cost to relocate the Suwanee facility?

We have not provided that. We are still working on estimates. I will tell you it is a significant cost, and we're looking at all of the alternatives on the cost to relocate, where to appropriately relocate and how to minimize the impact to next year.

You said that is one out of two lines?

Yes.

And so does that mean that next year you are going to have another line?

The latter part I think for the following year we will be relocating that line as well. So it will impact two years. And that's depending on a lot of different issues as we look at it.

The last question I had, Jimmy, you said you will start paying taxes next year. Will you have a full federal tax payment due next year or a smaller one?

Well, we are still working on -- we expect we will use virtually all of the federal operating loss carryforward this year. Obviously the $25 million pension plan contribution will create a tax deduction on the contribution. But we would expect cash tax payments probably starting in the second quarter next year I would say.

Tim Ramey. D.A. Davidson.

Congratulations. Also on the guidance for next year, your sales performance has been really terrific but certainly a piece of that has come from the commodity price increase. Can you tell us a little bit about as we think about your sales guidance what you were including in terms of sort of the year-over-year effect of price increases motivated by commodity changes?

I think we probably are anticipating some increase. As you well know, that will depend on market by market. But we do anticipate with added health care costs and energy costs, etc. that we should be looking at 2 percent or so from an overall standpoint.

Great. With regard to the sales rate of change in the third quarter, I think the one surprise for me was that your private-label business performed a bit better than I expected. Would you attribute any of that to the competitive landscape with interstate troubles, or how would you interpret that?

That is a good question. If you look at the South markets which we compete in on the fresh bakery side, private-label actually was down some 2.3 percent on units and up just a 8/10 of 1 percent on dollars. We did have an increase, but I cannot point to competition being weaker or stronger. The units just continue to increase and the dollars did increase for us, but I cannot point to any specific reason why that happened.

There was not anyone customer that you picked up, or an account that changed in anyway?

No, not in the third quarter.

And, Jimmy, just on the Texas bakery acquisition, if I understood your comment correctly, we should interpret the acquisition price there to be about 7.9 million?

Well, that number is netted with some other items. I think it will be specifically disclosed in the Q, and the amount I think was about 8.5 million.

You might also want to go back and talk about private-label is not only just in the bread category, it will also be coming through our snack group, which we did have some strong growth on the private-label side in snacks. It's not only the bread side that created that increase.

Eric Katzman. Deutsche Bank.

Good morning, everybody. I guess the question I have is on the snack cake side of the business. I think in the past you have mentioned that by early '05 Wal-Mart is requiring or requesting from all suppliers to be trans fat free. And where do you stand on that in terms of the snack cakes, and have you assumed somewhat higher costs in that business in terms of your '05 outlook in terms of the ingredient inputs?

On a majority of -- probably 50 percent of our products, we're working our sales out real fast, particularly on doughnuts, honey buns, exceptional on what we call our Fry (ph) line products.

On cake, we will be (inaudible) required by Wal-Mart more specifically, and hopefully the products can be more healthier perceived by the consumers. The question about cost, looking at it, we feel like our cost would be pretty well in line with our present product cost from an ingredient standpoint with the switch-off from soy oil. So we don't anticipate any big cost increase going to trans fat.

Okay. The sales growth in that area did particularly well. Is there any market or account wins in that side of things that propelled the growth this quarter? Because I think in the last few quarters, that side of the business has been trailing behind the bakery business.

Yes. We did have -- the quarter was very good. I would point to multiple challenge of distribution on the cake side, in particular the mass merchandisers. We had real strong growth -- Jimmy did mention the convenience store growth as well, and we had nice increases in our vending business. So we were real pleased.

And we have been saying for months now several quarters that the (inaudible) of brand does continue to generate good increases, and the consumers are finding out that this is a great product and the brand is being accepted in the marketplace. So we were pleased, very pleased with the third-quarter's results.

Okay. I am kind out of the office at the moment, so I don't have all the details in front of me. But with all of the I guess factors going on for '05 between the increased pension costs, I guess you're going to have somewhat less deferred tax benefits year-over-year. Where do you think cash flow, however you want to define it, is going to end up in terms of versus '04? Do you think free cash flow will be higher or flat or lower?

No, we would expect it to -- again, free cash flow before share repurchases -- (inaudible) how many shares we would repurchase -- should equal or be better than '04.

Let me clarify on the pension plan, the $25 million is a cash contribution. The actual expense hitting the income statement will actually be down slightly because of better investment results in the pension plan and because of the expected return on the 25 million.

Right but the 25 million is up from 17, right?

That is correct. We will use more cash for the pension contributions.

Okay. And then what is your assumption for CapEx year-over-year?

It is still 45 to 50 million would be our expectation for 2005.

Okay.

We're putting in a combination of leasing certain items where it still makes sense and the normal recurring capital expenditures.

Okay. Alright. It sounds like things are going well.

Mitch Pinheiro. Janney Montgomery.

Just back to the guidance question so I understand. The way I look at it the equity-based compensation, the 2 cents sort of offset the potential lower effective tax rate. It seemed like it posted about 2 cents a share.

And so it looks to me -- obviously you're putting out guidance that you think you can achieve -- but it looks to me that your range sort of on the low-end of $1.34 is how I -- the low-end of your sales and the low net income percentage, you have a $1.34. I hope I did the math correct is your high-end for today, you know for this year. So I just kind of wonder that leaves the relocation of two frozen bread lines -- or one line this year -- as sort of the primary impact from year-to-year. But I also calculate you think you will have 2 percent sales growth. So I'm just having trouble getting to the low-end of that range on a comparison. Can you just -- is there anything more you could shed --?

I think you said it right. It is a range, and you can do down to the 375 or the low-end of the sales, or I believe you said 4 percent at the high-end of the range. We do feel comfortable, and we expect a good year next year. We do feel comfortable, though, with the range, and Jimmy and I have spent a lot of time looking at the range, and if you remember last year about the same time as we put out the guidance, we feel like that is a very good range. And things can happen to be better or things, as you well know, could happen in the marketplace that could happen, but we feel very comfortable with the range on the low and up to high on both earnings and sales.

If I can comment further on the Suwanee, the relocation of the equipment, again it will be the cost incurred to physically remove, relocate and reinstall the equipment. And then we are also anticipating as you always have some startup costs in the new location to get the line back fully operational and up and running at its efficiencies. So that is why we have that amount at the low-end of the range, just trying to plan for the cost of the relocation of a very large line.

Okay and also when you relocate, you said it is expense. Is there anything capitalized at all?

We expect there probably to be an amount, you know, $1 million to $1.5 million maybe for building preparation where we would relocate the line, but we don't expect to occur a huge capital expenditure to actually build another building, though.

In terms of -- let's look at this on a sales growth -- George, I don't know if I heard you correctly, but it looks like sort of organic growth -- if you back out, let's say, $20 million from the incremental sales you get out of your new Texas routes, backing out some of your new market expansion, potential growth there, it looks like organic growth in your base business is 2 percent in the forecast on the low-end. Is that correct?

Yes, that is very reasonable. Given what is going on in the marketplace with the market being flat, we still think we can generate in our mature markets some additional share, and we do expect that to happen.

Okay and for next year do you still think new market expansion is about a 1.5 of growth?

Yes, we still do.

On the sales line, I might add a little color there, too. I know I hear the term folks use of tough comparisons. Early this year we had great results with Nature's Own with our new products, and again as we have all talked about how this reduced carbohydrate trend is stabilized, that we're continuing to sell a lot of those products. We're continuing to look for new products under Nature's Own, and I think we talked about double fiber and some other items we are looking at. But remember the first part of this year we had great success with new items under Nature's Own.

Okay and how -- are you seeing the low-carb Nature's Own products level out on a sequential basis?

Yes, it has leveled out, and I think the whole category, not only bread but other food categories in the low-carb product line, has peaked and certainly leveled out at this point. So there would be other products that we talked about on our last conference call. We are focusing on particular whole-grains. So we see some new items also the first quarter, which hopefully will make a contribution to our portfolio of products and brands.

Okay. Is the new market -- is it going to be -- will you be announcing new markets next year, or are you going to be sort of digesting where you have gone in '04?

No, we will have some future expansion. I did mention in my earlier comment that it would be steady and gradual from the present boundaries. The boundaries have moved during the past 18 months. As we look back 12 months from now, we will see the boundary pushed out a little more. Steady, gradual, deliberate planned growth.

Final question just involves acquisitions. I know that is half of your (inaudible) the cash flow, free cash flow that you were going to allocate these acquisition and share repurchase. I was just curious what the pipeline looks like in terms of acquisitions and your expectations for '05?

Well, as you look at '05, it is hard to say what can happen, what will happen. As always, there are things going on in the marketplace and we continue to look at different businesses. I will not speculate on what will happen. I always point back to the historical results of Flowers. When things become available, we are always looking, and when we find a fit that meets operationally and meets our financial hurdles, we always try to move forward to grow the earnings base and the sales base for shareholder value.

Heather Jones. BB&T.

Great quarter. I was wondering real quick how much did the Sara Lee business add during the quarter? Because I think at your analyst day, you had mentioned 10 million for the back half. And I was wondering had it exceeded your expectations, or was it about 5 million for the quarter?

I think what we repeated (inaudible) that it would about 35 to 40 million once all the business came in and specifically how much of it hit the third quarter. I know the customers have come on faster. I think it is more in terms of 7.5 million or so, and I could be off a little there and we can get a number and call you back. It is somewhere in that range.

Okay. So you don't expect the full year impact to have changed much from that 35 to 40? It is just more that customers have come on faster?

That is correct.

Okay. And you took a price increase in specialty during the quarter?

Yes, and it might even have occurred a little in the prior quarter because it seemed like we had some in the latter part of the previous quarter as well.

Okay and how much was that? I thought it was 4 percent, but my memory may be failing.

I think the (inaudible) was more like 3.5 percent on the specialty.

3.5 percent. And there has not been any pushback or anything there?

Well, it is always pushback to a certain extent, but in truth what we had to tell our customers that costs do go up. Healthcare. We had tremendous increases with corrugated, energy, fuel to get the product from our bakeries on the specialty side out to the end customer. So we are able to convince the customers that it was needed to -- it is not easy and there is always pushback, but you just have to make sure that we pass along the costs if at all possible.

And in your brand line, did you take pricing across the board or just in select brands and products?

I would say it's not on every product. But I would say each category did have some price increase in the bread and roll categories.

Okay. Now as far as the stock-based compensation, you talked about 10 cents since analyst day, and now I think, if understood you correctly on the call, talking about 2 cents for next year. And I may be misunderstanding how this works and all, but is 8 cents basically pushed into '06?

No, let me try to further explain. I think when we had the analyst day the expectation was that the new rules would require us to record an expense on all equity-based compensation that we had outstanding. Subsequent to that, the decision was made by the rulemakers to defer the required adoption of that standard to the back half of next year. I think it says periods beginning after June 15th of 2005.

So we have a pretty large grant of options and equity-based compensation that vest I believe in April of 2005. Those will already be vested, and in fact, we will not incur any expense now with the delay of the rules. (multiple speakers)

It is not a delayed expense? It is you're not going to have to because adoption has been delayed?

That is correct. Now what we have done is reanalyzed as best we can the rules that I believe are still in a proposed state, and we have tried to look at what awards, what equity-based compensation will remain outstanding and not vested at the required June 15, 2005 adoption date and applied the calculations, and our best estimate now is somewhere in the 2 cents range as far as an incremental cost next year because of that.

Okay. Now going back to the sales growth for next year, projected sales growth, I understand what you were saying regarding you are going to be confident again some good results for your lower carb products. But given the that trend has sort of stabilized, aren't you seeing better results from your core products that were not low-carb? I would have expected improvement in those product lines to sort of offset a pullback in your lower carb products? I was just wondering is that what you're seeing?

Yes, we did. Looking at the quarter's result, I mentioned earlier on even what local regional white bread brands did perform well for the quarter, and sales were actually up, units were actually up. Soft variety was up. You know I do think the whole low-carb issue we said has peaked and is flat as we speak. The question is, will the consumers ever go back to the full, eat as many carbs as they want bid, I don't know. But you can look at the marketplace. We look at the south where we compete perfectly on the fresh side. The market continues to be flat from a unit standpoint.

So when we gain, it is really having to come out of someone else because the market is not expanding. So we are cautious, but we are optimistic at the same time to say that we feel like we can continue to grow our units and dollars in the mature markets.

Okay and then relative to your EPS guidance, you have outlined the whole tax effect, the pension effect. For that range or even upside from the range, because it sounds like you've got all your commodities hedged and you have a pretty good handle on what your healthcare costs are, your pension expenses, so is essentially any upside or the upper end of that range -- Is it all going to be a function of one, how much it costs to relocate that line, and two, a function of what your actual sales performance is? Are there any other significant items that you anticipate to have much fluctuation from your projections at this point?

Yes. The question to us and you were pretty well right on everything you said. All of our commodity is not completely covered for next year, but a great part of it. We feel like we can make our margins based on where we think everything is headed.

You are right, and the big question remains the relocation costs of the Suwanee first-line. It could be better to use than we think it is, but we don't want to go out on a limb and promise better. We feel like we put our best guess forward on the cost of that, and hopefully it is better, but we don't want to promise at this point.

Thank you very much.

(OPERATOR INSTRUCTIONS). Justin Bosu (ph). Gates Capital Management.

This is Jack Valassis (ph). I have two questions. My first question is, I did not understand your answer to the question about interstate bakeries, whether you were benefiting from them? Their financial difficulties?

I would point to our results for the quarters. Our units and dollars were up in our mature markets. So I would say some of it did come out of -- possibly out of interstate.

Okay and what do you think your end markets are growing at currently?

I'm sorry. I did not quite get the question.

I was wondering just from an overall industry growth perspective what you thought the industry was growing at?

Well, I point to the South, and based on our internal data, the bread rolls segment is, in fact, pretty flat as we speak. IRI shows volume down like 3.8 percent, and panel data, of course, is up quite a bit. But we are still flat to down slightly from a total full consumption. But I think also it's a nationwide trend.

Understood. I am new to the company. Maybe you can tell me a little bit -- you were talking about utilization of free cash flow for acquisitions. But could you also speak to how much you would leverage up for an acquisition, maybe from a debt to EBITDA perspective?

Well, I would not want to really speculate on that. As you look at our numbers, you can see we are in -- our financial shape has never been better. Our balance sheet is pristine. We are not opposed to debt because over time that is how we have grown our company. But at the same time, we have got to make sure that whatever is required will really add value. It's one thing to grow; it's another thing to grow value in the organization for the company shareholders.

I understand, but usually companies would have some sort of -- give some sort of guidance as to how much they would be willing to leverage up from a maximum leverage perspective.

Well, I could point you to what -- our amended and restated credit agreement as a total debt to EBITDA of 2.75. So obviously we would have to address our debt structure to go any amount above that. We have been highly levered in the past. We don't have any expectations to do so anytime soon. But, as George said, we are not opposed to using debt as appropriate.

I would also point to our history. We acquired part owner in Keebler, which is a huge transaction. Ms. Smith was a pretty good-sized transaction. But what we said over the past two years specifically or since Flowers Foods spun out from Flowers industry was that we continue to look at both on acquisitions things close by from a geographic standpoint and we have talked in terms of an acquisition up to $100 million, but is more likely to be $10, $15, $25, $30 million acquisitions as bolt-ons which does strengthen the organization.

David Leibowitz. Burnham.

Let me add my congratulations for a great quarter. A few things about next year. First, is the Sara Lee acquisition accretive to earnings per share as reported in '05?

Yes, it is.

And for '04, it is a lost item as reported?

David, we did have as previously reported some startup costs putting on the new routes, getting ready to take on the customers. So up to this point, I would say probably breakeven. Maybe fourth quarter I think it would be safe to say that we think we will be accretive. For the year, it should be slight (multiple speakers) fourth quarter and for the year.

Okay. Next year when I look at the four quarters as reportable versus the four quarters reportable this year, do we have shifting of numbers of weeks in any given quarter vis-a-vis this year?

No. Next year will be a 52-week year as well.

(multiple speakers) pointed out. Last year was a 53 week. This year is 52 weeks, so the fourth quarter last year had 13 weeks, this year 12 weeks.

And 2005 will be the same as 2004.

Okay. So it's an apples-to-apples comparison each quarter in terms of number of shipping days as it were?

Yes.

Are there any changes in holidays next year that would move from one quarter to another that have an impact on white bread sales?

For next year?

Yes.

I don't think so.

Okay. Lastly, as we look at the four quarters then as they shape up next year against this year, where are you going to have your toughest comparisons as you view it?

Jimmy did indicate that the first quarter last year was extremely strong with the low-carb product introduction that we were basically by ourselves the first quarter. I think that could be somewhat tough dependent on how well our new products come on stream, the whole-grain products that I mentioned earlier.

Of course, on the other hand, we will have the Sara Lee volume first two quarters, which we did not have last year, which is certainly a plus for the first two quarters. And then I think third and fourth quarter compared to this third quarter we just concluded and fourth quarter next year without any additional product breakthroughs and/or acquisitions that would help, I think the third and fourth quarter will and -- third quarter next year might depend on do we have hurricanes again. Not being facetious, but the third quarter we just had our best third quarter ever quite honestly.

Okay and lastly speaking to the third quarter, we had the worst hurricane season in Florida according to what I read in the popular press in at least 40 years. Normally that has a deleterious effect on white bread sales because of the gaps in delivery, etc.. Was that in fact the case this year, and how much might it have cost you?

I'm so pleased to report -- and thank you for that question. That is a jewel that I would like to expand on. I would like to brag on our people and plants in the Florida market. And by the way, it affected -- because it did affect Florida, the rippling effect into the Thomasville bakery; Opa Locka, Alabama; Villa Rica, because the plants were so busy in Florida, those plants in the Northern part of Florida or Alabama, etc. actually transferred and produced product for the Florida market.

Our distributors were really in the market taking care of the customers. In fact, we had numerous letters and calls from not only small customers but major customers who were ecstatic of the service that we provided in the marketplace.

Specifically what happens when you go into -- we call it hurricane mode -- you change systems a little. Because the marketplace is excited, sort of like a snowstorm I guess in New York, people go in and buy all the products on the rack. So our bakeries start running their "what we need to do the fastest," "what can you produce the most units with?" And normally for us that is white bread.

So we did sell a lot of additional white bread in the marketplace in Florida. At the same time, because all of the attention given to white bread and Nature's Own, our premium breads like Cobblestone Mill, which have reduced outside of Florida, were impacted and we did not enjoy those sales.

But the main thing I would like to emphasize is we were not impacted negatively. We were not impacted negatively because of the outstanding job that was accomplished by our people. And I do not know how many times you can say that, but we're gratified in that we can say that today.

Tim Ramey. D.A. Davidson.

I'm just wondering did you take any -- set up any reserves for the relocation of the frozen breadline when you did the sale of the business, or were you not able to reserve for that since it was too far the line?

Right. We did consider it, but because we're continuing in the business of frozen bread and rolls, we were not able and we did not take any and create any reserves at the time of the sale of the frozen dessert business.

Okay. Thanks for the clarification.

Thank you. At this time, I would like to turn the call back to George Deese for his closing comments.

Thank you. Let me thank you for your continued interest in Flowers Foods. We look forward to concluding the fourth quarter, and we feel confident that 2004 will be written in history as a year of solid performance. As we look at 2005 and beyond, we remain focused on our strategy of investment, innovation, growth and increasing shareholder value.

In closing, I would also want to thank all of our people who in the Flowers spirit performed their duties so well on a daily basis. We look forward to our fourth-quarter conference call, and thank you for joining us this morning. Good day.

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

+++++++++++++++++++ The cost has been recorded in prior quarters as discontinued operations and, therefore, had no effect on the current quarter. We are committed to controlling costs, and cost control with the sales growth has allowed us to maintain our good results. You'll notice in the corporate unallocated expenses we did have an increase, and much of that is due to our efforts to comply with section 404 and all the various new rules this year.

Depreciation and amortization expense was just slightly higher than the prior year, and most of that really is because of the consolidation of the variable interest entity because depreciation by our company-owned wholly-owned assets was relatively flat.

The source of our interest income continues to primarily be the distributor notes with some amount coming from the cash we had invested, and interest income was reflected net of the expense we incurred was essentially flat with the same quarter last year. The consolidated effective tax rate is pretty much unchanged. Again, it is being affected slightly by the consolidation of the variable interest entity which is an S Corporation and, therefore, has no tax.

We continue to make no federal tax cash payments due to the tax loss carryforwards, and except for alternative minimum tax if we should have any, we should not have any federal cash tax until 2005. There have been some changes with the recent tax law that will be effective next year, and we will comment on that when we look at our 2005 guidance.

The amount reported as the minority interest in the variable interest entity represents all of the income of that entity as we have never had and continue to not have any equity interest in the entity, but are required to consolidate as a result.

On a per-share fully diluted basis, income from continuing operations and net income was 33 cents per share for the quarter. If we look over at the balance sheet, you see our cash position was 35.6 million at the end of the quarter. We continued to show zero bank debt on the balance sheet, and we have not drawn on our $150 million credit line.

We did recently amend and restate our credit facility to provide for a five-year term, lower rates on future borrowings if any, and less restrictive covenants. The new facility and our operating cash flow obviously put us in a very strong cash position.

The cash flow statement for the quarter shows 37 million cash provided by operating activities. You see that we report we used 12.9 million for capital expenditures, and you should note this includes approximately 2 million for capital expenditures by the variable interest entity, which again must be consolidated. And the Texas acquisition is actually reported in the other line on cash flows from investing activities net of a small amount of other items.

We paid about $5.5 million in dividends during the quarter and used $14.6 million to purchase approximately 578,000 shares in the quarter. Our average price of the share repurchases was $25.28. We are announcing today the implementation of an odd-lot share repurchase program. As we look at our shareholder base, I want to give those odd-lot holders an opportunity to either increase their holdings or to sell their holdings as they see fit.

If you look at the press release, we have given 2004 guidance. The sales guidance, 1 billion 539 to 1 billion 547 includes approximately 12 million we estimate in sales from the variable interest entity, and I would remind you that that entity has the effect of increasing our sales number on a consolidated basis but has no effect on net income. So that our income from continuing operations as a percentage of that consolidated sales is expected to be 3.8 to 3.9 percent, and that will turn out to be somewhere in the $1.30 $1.34 range, which is slightly up. I think our prior guidance was a $1.28 to $1.32 cents, and that is a combination of continuing to have great results and the effects of our share repurchase program has also benefited us.

I would remind you the fourth quarter of this year will be a 12-week period versus a 13-week period last year. Last year that extra week we would estimate contributed about 25 million in sales and probably around 2 cents per share of the 28 cents that we reported last year.

Looking forward to 2005, we have attempted to lay out what our expectations are, 1.6 to 1.625 billion, again including sales of the variable interest entity. They are expected to be somewhere in the $12 million range, and we would expect to our income to be 3.75 to 4 percent of sales.

We have laid out several items that I believe are significant to understand the guidance for 2005. You will recall when we sold the pie business to the Schwan Food Company, included in that sale was the land and building of the Suwanee plant where we have two frozen bread production lines. And we have had a period of time under agreement with Schwan's with which we continue to utilize the facility, but there is a day certain where we must exit. So we plan to go ahead and relocate one of those lines out of the Suwanee facility next year, and certain amount of that cost, relocation costs, will have to be expensed as incurred next year.

We are changing what we had previously announced on our pension plan contribution. We had made about a $17 million contribution to the defined benefit plan this year. And as we looked at the cash available and the rate of return on that cash invested in the Company and we look at the expectation that we would need to make a $12 million or so contribution in both 2005 and 2006, we decided to go ahead and accelerate the pension plan contribution and make a $25 million contribution in January of 2005 is what our current expectations are. Again, that is a very good use of the Company's cash to invest those funds tax free in the pension plan.

The outstanding equity-based compensation under the FASB's proposed share-based payment rules, I think I had mentioned in Atlanta we thought that could be as much as 10 cents. We further analyzed that, and given the fact that they have delayed the guidance to the second half of next year and looking at the transition rules and the fact that certain of our equity-based comp will already be vested now that they have delayed the rules to the second half of next year, we would expect for outstanding awards that will probably be closer to about 2 cents per share expense next year.

We have also tried to estimate what the impact of the recently enacted American Jobs Creation Act will be on 2005. I believe there is even an article in today's journal referencing expected action by the FASB. Obviously we don't know what that will result in, but we expect to benefit from the deduction for manufacturers and would expect that to probably lower our effective tax rate about 1 percent is what we're estimating to arrive at this guidance.

So with those comments, I think that has discussed the financials, George, and I will turn it back to you.

Thanks, Jimmy. Those good results are possible because we have worked to make our bakeries and our distribution systems the most efficient in the industry.