Flowers Foods Inc (FLO) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Flowers Foods 4th quarter and fiscal year 2004 conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. If at any point during the presentation you would like to register your question, please press star, one on your touch tone phone. It is now my pleasure to turn the floor over to Marta Turner, Senior Vice President of Corporate Relations. Ma'am, you may begin.

Thank you, Jackie. 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. George and Jimmy will discuss our results and then take your questions. You know I must remind you that our presentation today my may contain predictions, estimates and other forward-looking statements. Our use of the words expect, believe or similar expressions will identify those forward-looking statements. While we believe those 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 factors we'll discuss during the call, important factors relating to our business are described in Flowers Foods's filings with the SEC. Now I am pleased to introduce Flowers Foods President and Chief Executive Officer, George Deese.

Thank you, Marta. And good morning. Thank you for joining our conference call this morning and for your interest in Flowers Foods. We're pleased to report our results for the 4th quarter and for the full fiscal year. Our performance continues to reflect the competitive advantages that we have developed over time. Jimmy will be discussing our numbers in detail, but I would like to say I'm pleased with our overall results. Comparing this year's 12-week 4th quarter to last year's 13 and 52 weeks this year versus 53 last year, we did have solid performance in sales and earnings. Our stock price is up over 20 percent in the 4th quarter. Which caused a negative impact on earnings due to the stock-based compensation program which we have in place. The continued confidence investors show in our stock is surely gratifying, not only in the 4th quarter but over the longer term. Since Flowers Foods spin-off in 2001, our market count has grown from about 410 million to its current level of over $1.3 billion.

As many of you have commented it is difficult to be disappointed about a higher stock price, even with higher than expected costs in the most recent quarter. During the quarter, we continue to bid down the Sara Lee Texas acquisition which brought us new food service customers and the need for additional volume to serve these accounts. The bun line at our new Denton, Texas facility is running at full capacity with great efficiency and outstanding quality. Sales continue to grow at a new markets that we have entered over the last 20 months, adding about 1 percent to our DSB sales as we expected and annualizing at about 1.5 percent. Sales numbers from IRI, panel data and our internal numbers reflect good growth in our local white bread brands. Nature's Own and Cobblestone premium brand continue to perform well. BlueBird and Mrs. Freshley Cake sales increases are up nicely and food service sales were outstanding. Jimmy will now update you on our financial performance.

Good morning and thank you for joining the call as George said. Let's review or consolidated statement of income first. Q4 sales of 361.4 million represent a 3.8 percent increase over the same quarter last year. The consolidation of the variable interest entities this year created approximately 1 percent of that increase so the core business accounts were an increase of 2.8 percent. There was a 6.4 percent increase due to pricing in mix and volume of in fact a decrease of 3.5 percent due to the 12-week period versus the 13-week period last year. We estimate the extra week in last year's 4th quarter represents approximately 25 million in sales. If you make the justment to compare both periods on a 12-week basis, sales increased approximately 12 percent with pricing and mix representing approximately 7 percent and volume approximately 5 percent. And again, that's only 12-week to 12-week comparison. Using that same 12-week period, branded retail sales increased approximately 5 percent on pricing and volume and store brand label increased just under1 percent on both volume and pricing. Our food service which includes fast food, food service institutional type businesses and other sales increased approximately 6 1/2 percent this quarter. And this reflects the additional sales due to our acquisition in Texas that we reviewed in detail previously. The gross margin, 49.4 percent was down 700 basis points compared to a year ago. Increases in ingredients, labor and energy costs related to the usage due to higher sales offset the sales gains. We previously commented on coverage through hedges of certain ingredient costs.

We primarily use wheat contracts to hedge flour costs. While effective, the hedges are not perfect. In addition during the quarter, the basis component which represents the difference in the cash price and the hedge price increased to levels significantly higher than historical averages. Industry analysts attribute the increase to rail car transportation issues, wheat quality issues and other factors. Since the basis component remains at a price significantly above the historical average as we start fiscal 2005, we are taking action through pricing and we are considering methods to minimize this basis risk. Our selling marketing and administrative expenses of 153.2 million were 42.4 percent of sales, an increase of 1 percent of sales from the prior year. We encourage significant incremental costs related to our Sarbanes Oxley compliance effort. In addition, due to the more than 20 percent stock price increase in the last two months of the year, we incurred compensation expense for stock appreciation rights and the January 10th release presented a chart with a good bit of detail on that expense. The increased ingredient compliance and compensation cost impacted both reportable segments and the unallocated amount shown as Flowers Food in our segment data. We continue to incur costs related to our ongoing assessment of internal controls as part of our continuing compliance with Sarbanes Oxley, but we are expecting compliance costs to moderate in 2005. Prior reported segment data you will note has been changed slightly to reflect the transfer of a plant from the specialty group to the bakery group and as we previously disclosed in our form 10-K, all of the distributor interest income is now reported on the line as interest income with no amount offsetting the selling, delivery and admin expense.

Depreciation and amortization expense of 13.9 million is slightly higher than the prior year and is just simply a function of the capital spending. The source of our interest income continues to be primarily the distributor notes with the balance coming from the cash we had invested. Interest income is reflected net of the interest expense we incurred which was essentially flat with the same quarter of last year. Commenting on the consolidated effective tax rate for the year was 38.5 percent. For Q4, the effective rate is higher on a percentage basis but is only about $500,000 in absolute amount and is due to state tax considerations and again, our effective rate for the year was as expected around the 38.5 percent. We continue to make no federal cash tax payments due to the laws carry forward that we have had except for some alternative minimum tax should we have any. And we do not expect to make any federal tax payments until either the 2nd or 3rd quarter of fiscal 2005. Part of that is as we finalize the utilization of the net operating losses and then as we previously announced, we have made a $25 million cash contribution to our pension plans of which will be a tax deduction in 2005 and affects the timing of our estimated tax payments. In addition, with the benefit of the new manufacturing credit and the recent legislation, we expect a reduction of the 2005 tax rate probably by about 1 percent from 38 1/2 to about 37 1/2 percent as that benefit is phased in. The minority interest is the variable interest entity and represents all of the income of that entity and we continue to have no equity ownership interest in the variable interest entity. On a per share fully diluted basis, income from continuing operations was $0.17 per share. You will note the diluted shares outstanding decreased.

That's the same quarter a year ago due to our ongoing company stock repurchases. The balance sheet reflects cash of 47.5 million at the end of the quarter and we continue to show zero bank debt and have not drawn any amounts under the $150 million unsecured line of credit. The cash flow statement for the quarter shows 44.4 million in cash provided by operating activity and we used 6 million for capital spending. We paid 5.4 million in dividends for the quarter and used 4.4 million to purchase shares. We did note in the press release that we have extended the lease on the , Swanee, Georgia facility that houses the two frozen bread and roll lines. We've extended that lease until 2010. So that will add stability to our operations in 2005 and we are reaffirming our guidance today for 2005 of sales of 1.6 to 1.625 billion and net income somewhere between 3.75 and 4 percent of sales. So with that, George, I'll turn it back to you.

Thanks, Jimmy. As I said in our last call, we expected 2004 would be a year of solid performance. In spite of continued problems in the industry, our 2004 performance did prove to be solid. But 2004 is history. Now all of our teams are focused on making 2005 another record year for Flowers Foods. You may ask how will you do that? We'll use our powerful bakeries and continue to make investments to make them more powerful. The new bread line in our Denton bakery will be producing about early June, making that bakery among the most productive in the country. We will use our brands to leverage growth. Nature's Own, Cobblestone Mill and our local white bread brand continue to excel in the bread and roll category. Mrs. Freshly and BlueBird brands continue to grow and gain share in the cake market. We will continue to develop new products that do meet the changing needs of consumers. Adding new whole grain items to our Nature's Own and Cobblestone lineup in March and April. We will continue to use our technology platform to help our distributors and our customer as well as Flowers Foods. We will continue to build on our strength and distribution, expanding our boundaries for DSD and growing our frozen bread and roll and snack cake business. Finally, our ability to succeed depends on the talents and dedication of our team. Our team's throughout the company will continue to work together to define the strategies that maintain our competitive advantages. Our strong cash flow will allow us to pay dividends, buy back Flowers stocks when appropriate, fund capital expenditures and make acquisitions when both the price and the fit are right. Flowers Foods is in excellent shape. We have an efficient and cost-effective bakery, great products, strong brands, extraordinary customer service and a great team of people. We expect our 2005 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. Jackie?

Thank you. The floor is now open for questions. If you do have a question, please press star, then one on your touch tone telephone. If at any point your question has been answered, you may remove yourself from the queue by using the pound key. We do ask that if you are on a speaker phone, please pick up your handset to provide optimum sound quality. Once again, for any questions at this time, please press star, then one on your touch tone telephone. Your first question coming from Eric Katzman of Deutsche Banc Asset Management.

I'm still with the bank, not Asset Management but whatever. I guess the first question I had is Jimmy, perhaps you could describe kind of the impact of the higher costs in terms of being, like, one time or not. I mean, I guess you, like George said, you start out 2005 clean so the stock compensation assumptions for '05, are you expecting those to go up dramatically? Is that built into your numbers? And same thing for Sarbanes Oxley. And then just kind of maybe talk a little bit about how the hedging costs will impact the gross margins as we kind of go through the year.

Okay. On the Sarbanes Oxley cost, we incur certain internal costs that's fairly fixed for compensation for auditors and that type thing. The cost for third parties we incurred fees with our external auditor. And then this past year we also had a significant consulting cost to help us achieve all the documentation required in the initial year of compliance. That cost wound up being roughly twice what we had budgeted. We thought we would spend probably 1.5 million and probably wound up spending about 3. So we're planning in 2005 for that to come back down to roughly what 2004's budget was. We don't expect it to be zero, obviously, but our goal is to maintain documentation and compliance with the rules now hopefully at a cost more in line with 2004's plan originally was. Your question on the stock compensation, again, with respect to the stock appreciation rights at each balance sheet date, we adjusted liability to reflect the price of the stock on the balance sheet date. And that taken in conjunction with the vesting period, so that cost us between $0.065 and $0.07 in Q4, and we adjusted the price, I believe it was $31.58. So as we start off 2005, we do have in our plan an increase in the stock price.

We usually set a plan with about a 10 percent increase in the price plan and so we have that to the extent the price goes above 31.58, it is a charge. To the extent the price were to -- we were to end any period below 31.58, we would, in fact, reverse some of the accrual. And again, it's -- there's a -- there is the impact of the vesting so that has to be determined as well. It's not purely the stock price movement it's the vesting one will vest in April 2005 and so it will absolutely be wound up in the 1st quarter. And then the other, the only other outstanding award will mature in 2007. So there will be some continued effect from that. I think Eric, your third question was about the commodities again primarily and the Flower costs. We are continuing to see the basis which is not a component of the costs we have hedged. We continue to see that to be higher than historical amounts. And we're, you know, George may want to comment more. We've known that going into the fiscal year. We're taking appropriate pricing action, and we're looking for every way possible to minimize and stabilize that particular component of the cost.

I will comment. Looking at, I think it was December in particular of this past year, the basis was at a 25-year high on the basis. Jimmy said it is in our plan for the year and we have taken appropriate action. We feel like our gross margin, that's management's job to make sure we maintain an increase in gross margins. Regardless of what happens with those issue. And it is in our plan, and we feel comfortable that we, as long as the competitive fight to save as we see it today, the gross margins should be fine.

Okay and then just one follow-up real quickly. The numbers you gave branded up five, food service up 6.5. That was the as reported?

No, Eric. That was a what I tried to do was do a 12-week to 12-week comparison.

Okay. All right. All right. Thank you. Good luck.

Thank you.

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

Good morning. Congratulations.

Good morning.

Just a follow-up on the private label question. We've seen a trend of the grocery stores sort of shifting more to the branded strategy. Would you say that that played out again in the 4th quarter? Can you comment on sort of the mix between private label and branded?

Tim, as I look at the quarter end for the year looking at the private label issue, looking at panel data as well as IRI, dollars are up for the 4th quarter, like 4.7 percent. For the calendar year, though it's up 1.4. And on units, flat to down slightly. So I think you are right. I feel that emphasis from the retailers even though all of them feel like they need it to compete, there seems to be less emphasis than we historically have seen. I think that's because the whole grain process is going on. People are trying to upgrade their eating pattern somewhat, so that means higher value products, I think.

Okay. Then also, would you mind commenting, George, on the expansion of your sort of distribution area and how that went and whether that was a significant contributor to the quarter?

We were pleased. I commented, I think in my opening remarks we were up by 1 percent for the year. We're annualizing about 1.5 percent in those same markets. We are pleased. As you know, breaking new markets and going to new markets is not the easiest thing in the world, but due to our relationship with the retailers and strong brands like Nature's Own, Cobblestone Mill, we are finding that we can enter these markets. I think you know we're pushing through northern Virginia and the Washington market as we've already talked about through Lexington, Kentucky area in our northern midwest market, and throughout basically Oklahoma out of our Texas and Arkansas markets. So we're pleased. It's not easy, but we'll see more of the same going forward.

Thanks much.

Thanks, Tim.

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

Good morning.

Good morning, Lenny.

Let me ask a couple of accounting questions here so everybody else can go to sleep except Jimmy and me.

Okay.

You accrual federal tax rate in your reported numbers, correct?

Correct.

Should I see that on my adjustment -- on my noncash adjustments and my cash flow?

Yes. It would be, again, we're charging in effect deferred tax and increasing that deferred tax liability.

So you're not putting it up into the adjustment column then? I'm just trying to figure out where you're showing the noncash payment? Maybe I'd better follow up offline.

Yeah, I think --

I guess --

It would be in that changes in asset and liabilities on the cash flow because we're charging the tax expense.

Okay. All right. Because I was looking at it -- what I'm really -- because that leads me to two things. Number one is you start paying obviously the cash flow's going to start going down because it's going to be real cash.

Right.

Okay. And I must have asked the question poorly or you got it somewhat against us northerners up here because I sure didn't have my tax rate right in the quarter and I missed it and missed it by a lot. I just want to make sure that as we start to go forward here I've got it right. Now, you had said that you thought your tax rate for the full year was -- excuse me, was going to be 37.5.

For 2005.

And that's going to be the same for each quarter?

As best we can estimate at this time.

Okay. Second of all, will there be any unusual charges, for example, in what you're calling your minority interest, the VIE, would that be a stable item as it goes through this 2005?

We expect it to be, yes.

What would you estimate that to be a quarter?

Again, it has no effect on income from -- it's all eliminated in that minority interest.

Yep.

So it's in effect grossing up the income statement, and it's probably about I think it's about 12 million in revenue a quarter that we consolidate in revenue.

Right.

Then it flows down to be as you see in this quarter they made $264,000.

How much was it? Oh, got it.

Yeah, the 264 in the 4th quarter.

Okay, fine now. Just a couple more. Just bear with me. Your share repurchase program, Jimmy or George, either one who wants to answer this, can you quantify how much is left on your authorization?

We had 7.5 million that we've purchased 2.3 million.

And when does the authorization run out?

I think five more years.

Okay. Well, I would encourage you to consider that this not be a five-year plan. Now if we started, Jimmy, in this quarter or George, in this quarter, did you see your compliance issues and let's call it other types of administrative charges like that where they fell about a million and a half short? Did you know that -- did that come up just as you were closing the books or did you know it early in the quarter that it was going to be basically "overbudget?"

Lenny, I'll answer that. Again, we went into the quarter thinking we knew what we had spent through the 3rd quarter.

Right.

We continue to think we could stay on plan or slightly above plan. I think we're not unlike many companies.

I agree with that.

Our external audit fee, we had an estimate, and we wound up having that twice what we thought it would be.

We can all go back into accounting now, couldn't we?

That really, you know, all that arose late in the quarter as everyone got more focused on the time line and all that was going to be required in terms of documentation and testing to be in compliance, and truthfully in the last four weeks of the quarter, we kind of pulled out all of the stops. I mean, I assembled a S.W.A.T. team, if you will, of about, I think it was about 20 internal people and we engaged consultants and really put the pedal to the metal to finish our testing by the end of the year so that we could be in compliance.

Every half a million bucks is a penny a share. And that's the difference really I guess between the high end of your range and what you reported, right?

Yeah.

Okay.

And again, as we were required, we've accrued the costs, the estimated cost of the audit fees and all of that, that was incurred to be in compliance for '04.

Now, and final question on the basis. Have you -- are you comfortable with your hedge positions now and the basis protection with some price increase or tradebacks? Does that mean to say that the gross margin in the 1st quarter should be a pretty good product for what you're going to get for the full year if everything goes right?

Lenny, we -- that hedge -- the basis can go up or down depending on when's going on in the marketplace. It is in our plan, but you can only look out so far on the basis.

Yep.

And we feel comfortable where it is and we do feel fine on the margin.

Because the basis has calmed down here in the last --

Yes it has. The expectation in the industry is such that the pressure is still on the 1st half of the year.

Yep.

With the expectation that the basis pressure will -- it'll get back more to normal levels mid year for the rest of the calendar year.

All right. We'll see you in a couple weeks at Kagan. Thank you.

Thank you, Lenny.

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

How are you, Mitch?

Couple things. In terms of I think one of the challenges you have in '05 is that you're coming up some pretty nice new product launch or health line performance in '04, and as well as the attendant positives by having us switch from white bread to these higher value-added breads. What's the plan for '05 and how are you going to -- is low carb bread still growing? Is it waning? Are there other health line breads that you're going to be announcing to sort of go strength for strength versus last year? And my second part to that question is while white bread private label units might be flatish, is this a pause perhaps before the storm, the calm before the storm, I should say, and we're going to see increased, higher value add premium grain products coming out of the store brands?

Thank you, Mitch, that's a good question. Low carb, as you've probably seen, has waned. We did have a very good 1st half the year on low carb. In fact, we introduced several new items, I think it was the 2nd quarter. We still have two good core items in the low-carb category. Those have not gone away. They're still viable in our product line, but I certainly do not see any growth going forward on the low carb products. As always, though, from year to year, we're always trying to find what is the consumer looking for now? And the whole grains is certainly the buzz word and we will be introducing new items in March and April under our regular Nature's Own line, health line and Cobblestone Mill that we fill feel like will be a plus part of the category. It never goes away. Year after year, we have grown Nature's Own double digits for many, many years. And we feel like this, we've got to do the same thing again this year. Back to the question on white bread.

You know, many in the industry feel like white bread is dead. We still don't feel that way. If you look at the new guidelines, white enriched bread are still a part of that even though whole grains is also in that category. But white bread is still important in our company. We still put a lot of focus on it, even though the white bread branded is down in the United States. I'm happy to say that ours is up. So we do continue to focus on that. And hopefully it's not going to fall off the cliff because we don't pay a lot of special attention to it and try to make sure that we keep that market share.

I just read, I think, somewhere, you're going to be advertising in the super bowl in the local southeast region advertising the white and the wheat?

We have spot markets in some markets. Yeah.

What we do is important to us.

That's obviously pretty big expenditure, correct?

Well, spot is not anything close to national and it's not a major truthfully at this point it's not a major expenditure for us.

It's not, okay. Because I was going to say, to have your spot on super bowl with the white/wheat might be --

You might question my intelligence, wouldn't you?

Okay. So my question is, are the private label, are you talking to -- are you hearing about customers wanting private label, whole grain offerings, more wheat bread, more premium products?

I'd say from an overall standpoint of the question, the answer would be no. You would have a specific customer here or there that may be a higher end retailer who has some thought processes, I think, on some higher quality items.

Okay. So there's no trend?

No, I don't see a major trend there for private label.

My last question just relates to your new markets. Are they -- do new markets contribute all profitability in '04 or were they a drag?

At the beginning of the year, a little drag as we went further through the year, last quarter I'd say zero drag. And as you take that first year to get bedded down, that's what happened.

Okay. So obviously, you're expecting to contribute in '05 excluding the impact of --

That is correct.

Okay.

Yes.

All right. Thank you very much.

Thank you, Mitch.

Thank you. Your next question is from Heather Jones of BB&T Capital.

Thank you and good morning.

Good morning, Heather.

How are y'all doing?

Fine.

Good. Your sales growth was really strong. I have to admit that I'm sort of confused. When you were talking about on a 12-week basis, you said sales were up 12 percent?

Yeah. What I did, Heather was simply said if that one week counted for 25 million in sales, so if I took $25 million off of Q4 of 2003 sales and then compared Q4 of '04 to Q4 of '03 and that basis is how I got. It was 11.something percent, about 12 percent.

Okay. So when you were talking about branded retail up five, private label up one and food service up 6.5, is that how much they contributed of that total?

Yes. What I did was looked at it by sales category using our internal data to say what accounted -- if I took that 25 million off, tried to compare it 12 weeks to 12 weeks, what accounted for that 12 percent growth?

Right.

And then that's where I got those numbers from, yes.

Now, as far as deciding to extend the lease of the Swanee facility, I remember a conversation we had and y'all had said about the cost of that was going to be closer to about 5 million than say 2 million. I was trying to get some idea of how much it cost. I was wondering when y'all reaffirmed your guidance on January 10, did you know that you were going to extend that lease or is that something you determined -- decided afterwards?

Well, we certainly knew we were -- we were in discussions to extend the lease.

Mm-hmm.

But we did not know that we had the extension, and so again today, we're reaffirming the guidance, recognizing that the cost to move the equipment will not be incurred in 2005, but we're reaffirming the guidance given our view as we've talked about the higher basis costs early in the year.

Right.

You know, that's why we're not raising our guidance, although we feel better about the operational stability of not having to move those production lines, et cetera.

Okay. So basically extending that lease and not having those costs is giving you a greater sense of comfort with your guidance?

I would say certainly any time you have to move large production lines, they're obviously not only the cost to move it, but then the cost to get it back into production, the start-up costs if you will and the operational risk that goes with that. By not having to move the line 2005 and the second line in 2006, it certainly gives us the opportunity to focus on growing sales and execution and not have the risk of something happening when you relocate the equipment and start it back up.

Heather, we knew that was the biggest risk to our plan. Jimmy could point that out several times as we was going through the planning process. We felt good with the guidance but we knew that was our biggest risk. Now that's been eliminated.

Now, besides the basis with the cost of flour, has there been any other costs that have sort of surprised you in how they're trending since the beginning of the year?

I don't know of anything that has surprised us. Certainly there's other areas where costs have increased. Corrugated is one I could think of in the packaging side.

Anything to do with resin has really been high not only since the beginning of the year but the latter part of say the last quarter of the year.

Right. Now, I was wondering if after that one stock appreciation right rolls off in April '05, will the one penny per dollar moving your stock, will that still be a good proxy or will it go down after that?

Well there's a couple of things happening in stock-based compensation. You know, you have the -- that will leave the one restrictive stock award outstanding that was vested in '07 but it in the back half of fiscal '05 under the new accounting rules for options, we will begin have to expense a certain amount of the options which are not vested. So I still think it would probably be about that penny, yes.

Okay. And finally, I was wondering, depreciation, understand that you have greater Cap Ex. Does it seem to jump more from last year than it did in prior quarters this year? And I was just wondering, what we should use for next year as far as for the whole year?

As far as the amount of the annual --

Right because I've got it that it went to 13.9 for Q4 and it was only 11.7 in Q4 last year.

Round out the year at 56.7.

Right, right.

Again that includes any depreciation and amortization of the variable interest entity.

You said includes?

Yes, it does include that. I would still expect next year's to be around the $57 million.

Okay.

You know, as we do things as you implement let's say hand held computer technology and other things, it may come on at a slightly shorter useful life than some of the assets that are rolling off, but overall, I don't expect a significant change in the depreciation and amortization.

Okay. I know I said that was my final question but actually my final one is how much does Sarah Lee add to sales in the quarter?

I believe roughly 12 million.

12 million?

Yes.

So would food service sales have been up excluding that?

I don't have that here in front of me. I think it would have been --

It would have been. Yea. We can get back to you. I'm sure it would have been.

I know I've looked at numbers. Food service sales, again, Sarah Lee, that was primarily the Texas market.

Right.

We had increases in food service sales outside of Texas. So I know it would have been up. I don't have a percentage for you, but I know it would have been up.

Okay. Thank you very much.

Thank you, Heather.

Thank you. Your next question is coming from Justin Boitel of Gates Capital Management.

Most of my questions have been answered but I did notice it looked like you all -- it expanded your revolver in the most recent quarter. Was that done with an eye towards acquisitions and if so, what sorts of acquisitions are you seeing out there?

I'll let Jimmy speak to the revolver, but, we've commented on acquisitions numerous times. We're always on the lookout for anything that fits the company and the right fit and affordable. We don't speculate on those that we're looking at, but I guess to answer Jimmy back to the revolver.

Yeah, when we revive the revolver, we left the 150 million in place. We did put a feature in it that it is expandable. And we did that simply because it was a good time in the bank market to make sure the company had financial flexibility. You know, no immediate plans but making sure we had capital available to grow the company both with internal growth, acquisition growth and to make sure we had capital available for share repurchases where appropriate.

Okay. And without being specific about the acquisitions, when you all think about them, are you thinking about smaller tuck-in type acquisitions or would you also consider larger ones? What sorts of acquisitions generally do you all think about?

Historically it's been good bolt on acquisitions. Something that would be an easy reach from a territorial standpoint that adds to our existing DSD territory. Historically, we bought a cake plant here or there. Anything that meets our -- would be an addition to our present product line as well as geographically would be an advantage for the company. As far as the huge acquisition, the company historically has not had huge acquisitions. Except our investment in Keebler and of course the Mrs. Smith acquisition back in '96. I'd classify the rest of them as add on and continuing to give us better geographic reach.

Okay. I was also wondering if you could talk a little about the competitive environment and maybe specifically what you're seeing out of interstate bakeries, how they're performing in the marketplace?

You know, I don't want to create rumors. We focus on our business. You know, all of us obviously know they're going through problems with their bankruptcy, they feel a tough competitor in our part of the world and continue to serve the market and that's about all I can say. Tough competitor and always have been and always will be probably.

Would you say you're taking share from them, though, now or generally in the marketplace?

I think we did on last quart are's meeting that we probably taken a small share but nothing major.

Okay. I think -- oh, do you have any thoughts on Cap Ex next year? Should it be about the same as this year?

I think we're looking at roughly 45 to 47 million.

Yep, okay. And any thoughts about cash flow from operations? Should it also be similar to this year?

Yeah.

Okay.

Again, the only thing we see next year is in Q2 possibly Q3 we will have to begin to make some estimated federal income tax payments. But other than that, everything is as expected.

Very good. That's all I have. Thanks.

Thank you.

Thank you. Your next question is a follow up from Tim Ramey of D.A. Davidson.

Good morning, again. Just on the sales trend. You know, you certainly had an accelerating sales trend particularly if we normalize for the 13th week. Part of that probably relates to this early acquisition, but part of it ought to be sustainable, I would think, as well, and yet if we look at your guidance, it's about 4 percent sales growth, which would be a deceleration certainly from the recent trends. Can you kind of comment on that? Is that just conservatism on your part or do you see something that would cause a deceleration?

Tim, we are conservative by nature. We don't see anything out there that's alarming. We see business as continuing to be strong. You know, depending on what happens with competitors, we mentioned the interstate issue a while ago. Also, I'm happy that you comment about total volume. I'm happy to see the grain food foundation. I don't know if you guys have had a chance -- we've been talking about that a couple years. We finally got that off track this week with the campaign that started in New York and Washington, D.C. this week. To really begin to promote all of the attributes of grain-based foods. We have not defended ourselves very well in a lot of years. So not only will I'm sure companies continue to do brand advertising but this is an overall campaign to defend bread. Bread is essential, and that's sort of the thing to campaign.

I congratulate our company and all of the people in the baking industry as well as people in the milling business and all the allied people for supporting this campaign to really get back on the positive side of talking about bread. So I think that could have some effect. And I think it's going to be positive, not negative. But of course, that takes time. We didn't lose business in a short period of time from the whole industry and it takes some time I think to get it back. That's why we're all pledging and thinking about three to five-year campaign. That's a long story. You didn't exactly ask that. I wanted to throw that out because I just thought of it. We know that and feel very comfortable with the 4 percent depending on will people go back and start eating more bread hopefully can be better than that. We're conservatives and we feel like we can live up to the 4 percent.

Just one other thing, please. I saw Wegman's introduced a new Omega three-based bread product last week. I know that there's been some push that's been used in Canada, it's been used in Australia. You mentioned whole grains as one marketing opportunity, but have you looked at the idea of using Omega threes in bread products?

Yes, we have. In fact I believe not last conference call but the previous one I did mention that. We feel like that will be in our product line.

Okay, thank you.

Thank you. Your next question is a follow-up coming from Leonard Teitelbaum of Merrill Lynch.

I think this has been answered. I've got to get clear on it. Look, I know you guys are basically conservative but look, at the end of the day, I just can't see why market share from interstate you seem to be very reticent about talking about it. I know you don't want to talk about a competitor and all that, but George, it just seems to me that with their markets in disarray, whether Sarah Lee should go after them or not, I'm more concerned about what you guys are doing in your territory. Are they trying to do it on price? Interstate I'm talking about now or why wouldn't you be more aggressive on gaining share, at least verbally?

Well, you know, item three, we are aggressive. And back to the sales number, though, we didn't want to be overaggressive there until we got further through the year. We think there's still a lot of opportunity to continue to grow our share in the southeast/southwest. You mentioned -- if you look at IRI, I think there have been some aggressive pricing on interstate side.

Right.

Anybody can see it that looks at it. And we try to make sure we protect and grow our share regardless of what they're doing.

All right. Let's just leave that for a minute. Jimmy, do you have an estimate for your shares outstanding for next year?

Lenny, I think it will be -- we roughly again either not having a specific number of shares as far as a repurchase in '05. I would expect it to be somewhere around the number where we ended up the year.

Around 45? A little below 45?

Yeah, probably around 44. We ended at 44 million 407. So probably around 44 million roughly.

I guess what I'm on obviously trying to get to. If I take the high end of your range, okay, you're talking roughly around $65 million. Okay, in terms of net income.

Right.

That's the numbers you gave us.

Right.

Okay. So we're talking roughly here about $65 million of net income.

Right. As a percentage of sales, yes.

All right. I mean, you're talking about better than 16 percent or 17 percent gain year-over-year. I don't have a problem with that. I just want to make sure you thought about it in terms of gain year-over-year. Is that what you want us to -- I mean, those are what the numbers are.

Yea, Lenny, I'll speak to that. We did have a lot of one-time -- we did mention special for the 4th quarter --

Understand I'm not complaining. I just want to make sure.

We do understand and that is being aggressive.

Okay. I just want to make sure my math is right. Thank you.

Yes.

Thank you. Your next question is from David Lebowitz of Burnham.

Good morning. Frankly, I didn't hear much mention about food service. Do you want to talk about that for a few moments?

Yeah, Dave, we love food service. Obviously, and we've looked at it week before last and we continue to talk about it on a weekly basis practically. We know that over 50 percent of the people are now eating -- consuming away from home or purchasing food away and bringing it home to consume. So we know we have to play in that arena. We feel great with our platform fresh to the people who want fresh products and we feel wonderful about our frozen bread and roll business because we can go farther in reach going frozen. So we are growing that business. We want to grow it more because we feel like we have a competitive edge there with our very efficient bakery and two wonderful distribution systems, one DSD and one frozen. We think this business will continue to grow.

And second of all, how much did this sale of roots contribute to your earnings this past year?

I don't have the number here in front of me. Typically, it's not a significant amount. Again, you have the interest income from the distributor notes and then you only have income to the extent you buy a territory and then resell it for a price higher than what you buy. And we amortize any of those gains over the 10 year life of the note and so there was very -- it's not a significant number. I don't have it here in front of me, David.

Okay.

Because many years ago when we had actually sold the distributor notes, the gain was reported then. So with the bulk of the notes, there's not gain being reported right now. It's purely the interest income and so I'd say it's less than a million dollars. I don't remember the number, but it's not a huge number.

How many roots do we still have left for sale this year?

David, we normally based on new territories and new areas that we put on additional distributors, year in and year out, that will run from 7.5 to 10 percent which is in the 250 to 300 neighborhood based on new markets, new territories.

Right. And that includes the Sara Lee acquisition?

Yes, it does.

Okay, excellent. And lastly, we had started a line of foods for the Hispanic market, Teroritos and Mi Casa. How have they been doing?

David, I wish I could report that it was gangbusters. It's been tougher than I wish it had been. I think we said last year we thought we would be generating 5 to $7 million on those new Hispanic products. We're probably in the 4 to 5 million neighborhood. Still, I think it's a great product line. We still need to focus on it more and get better. Accept what's in the marketplace.

How much are you losing on that line at the moment?

Losing?

Well, I presume with the start-up costs and all of the advertising and everything else, $4 million is not a profitmaker for you unless you're just relabeling a different line and it doesn't appear to be the case.

No, it doesn't. But we did not put a lot of advertising dollars behind it. We wanted to get out and test it, make sure that we had a product that would be acceptable, so we did run through our normal manufacturing facilities even though it is different item so yeah, they would be some additional costs there, but we don't feel like it hurt us from a P&L standpoint.

Okay. Thank you very much.

Thank you, David.

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

Thank you, Jackie. I thank you for again for joining our call today and for your continued interest in our company. We certainly hope that we'll be able to see you at Cagney and Scottsdale on February 22nd. So take care.

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