Flowers Foods Inc (FLO) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Markita. I will be your conference facilitator today. At this time, I'd like to welcome everyone to the Flowers Foods third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [ OPERATOR INSTRUCTIONS ]

It is now my pleasure to turn the floor over to your host, Marta Turner, Senior Vice President of Corporate Relations. Ma'am, you may begin your conference.

Thank you, Markita, and 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 first discuss our results and then open the floor to your questions.

Before we get started, I must remind you that our presentation today may contain predictions, estimates or other forward-looking statements. Our use of the words expect, believe or such expressions will identify those forward-looking statements. While we believe them to be reasonable, these statements are subject to risks and uncertainties that could cause actual results to differ materially. In addition to the matters we will discuss during the call, important factors relating to our business are described in our filings with the SEC.

Now I'm very pleased to introduce Flowers Foods' President and Chief Executive Officer, George Deese.

Thank you, Marta. Good morning. Thank you for joining our call today and for your interest in Flowers Foods. Without the effect of Hurricane Katrina, our third quarter performance would have been right on track. The cost increases we've experienced, both directly as a result of the storm and indirectly as energy and ingredient prices soared, impacted our third quarter results by $4.2 million or $0.04 per share. I want to address what happened but more importantly, what are we doing about it to correct it.

Our New Orleans bakery has been out of operation since late August when Katrina hit and New Orleans flooded. Even today, at least 250,000 people remain displaced and this continues to impact New Orleans and the Gulf Coast marketplace. We temporarily re-opened a closed bakery in Houston that was part of our 2004 acquisition from Sara Lee. We are supplying the New Orleans and Gulf Coast market from that bakery as well as from others in the state of Louisiana and other states.

Shipping product in from other bakeries adds quite a bit of cost. The cost of diesel is up, adding even further cost to our contract haulers. Oven fuel has increased, as well, up 17% through the first three quarters; following the storms some [dealings] for oven fuel were up as much as 48%. As you know, sugar costs were impacted as well. With major sugar refineries down, following the storm, sugar was scarce and expensive. Our additional costs for the quarter were about $600,000.

What are we doing? We're working to get our New Orleans bakery back in operation as soon as possible, which will help get our costs back in line. Once we have city-provided services, water and sewage service in particular, we will be able to complete the clean-up and repairs and get the bakery running. We hope to have the bakery open by the first of December. We're working with our insurance providers to recover the cost of property damage as well as business interruption.

To help address higher costs of energy, packaging and ingredients, we've implemented price increases across all channels in October and November and then in early 2006, additional price increases will be in place.

As we told you in the second quarter call, and also in the New York presentation, since mid-year, we've added roughly $50 million in annualized sales as the competitive landscape has changed in our market. We now have a new business baited down but in the short-term, our production capacity has been strained and we have incurred higher transportation and shipping costs to get the product to our customers. We're adding production capacity that will be strategically located to better serve our new customers. New production came online earlier this year in Miami, Crossville and Denton.

Our plans to add additional capacity are well underway. In the second quarter of '06, we expect to open a new bread line at our Villa Rica, Georgia bakery and a new line in our Newton, North Carolina facility. In Newton, much like our Denton, Texas project, we acquired an existing building so production can be brought on faster than if we had to build from scratch.

So, to sum up, these are short-term difficulties that we are working to address. Our business is strong, continuing to grow and we're investing in strategically-located new production capacity that will help us reduce our distribution cost. We are implementing price increases to address our higher costs for energy, ingredients, packaging and other major items. And we are aggressively working with our insurance provider to recover the costs of the hurricane.

Now let's turn to our sales. We are pleased the sales showed a strong 9.9% increase in the quarter. In the quarter, branded retail sales were up 10.2%. The growth was driven by double-digit increases in three primary retail classes. Those included our soft variety bread, where our number one brand, Nature's Own, continued to sell very well; white bread, where our white, wheat and local white bread brands continued to outperform the category; in multi-pack snack cake, where our Mrs. Freshley's cake brand also grew by double-digits, primarily through increased distribution in the mass merchandiser channel.

Also in the retail channel, store brand of Private Label increased, as well. This increase was a result of acquiring new customers. Private Label is, in fact, flat to down throughout the market. We took this business on as a result of that -- you will see that our white bread and Nature's Own did increase because of new space and access to the market through these customers.

Bread and snack cake sales in foodservice and vending channels also were up by double-digits, more than offsetting the decrease in sales of contract production of snack cakes, which we told you last year we would be putting less emphasis on. Our market share continues to grow in both retail and foodservice and we expect these trends to continue.

Flowers Bakeries continues to add 1% to 1.5% to our DSB sales base as a result of expansion into new territories over the last two years. Now, it is my pleasure to ask Jimmy Woodward to go through the numbers in more detail. Jimmy?

Okay, George. I think -- again, sales, $408 million up $36.7 million to 9.9%, George gave you an overview of how those occurred. I would add our volume was up 1.8%. Mix improved 5.1% and pricing was 3%; to flesh out the sales number. The consolidated gross margin, $202.1 million, was 49.5% compared to 49.8% last year. The higher sales were offset by increases due to the hurricane-related costs and higher labor, packaging and energy.

If you look at our SG&A expenses, consolidated for the quarter were 41% of sales compared to 40.4% in the prior year. Again, our hurricane-related costs primarily related to product transportation that George mentioned, really impacted that line. We did have higher expense for our stock appreciation rights in the quarter and we marked those rights to $27.45, which was the price at the end of the quarter.

The EBITDA on a consolidated basis, at $34.9 million, is 8.6% of sales, which is flat in dollar terms but down from last year's 9.4% of sales. And again, it was primarily the hurricane and energy costs that impacted the EBITDA line. The bakeries line in the segment data shows 34.7 million, which is 10.8% of sales and specialty shows 6.6 million, 7.7% of sales. You will notice the corporate loss was down somewhat; part of that is allocation of additional cost to the division that we've been doing throughout this year and the fact that we think we have our compliance efforts under tighter control this year and incurring slightly lower costs there for compliance efforts.

The depreciation and amortization line is relatively flat. The net interest income, again, is $8.50, is slightly down. The interest on the distributor notes of $2.2 million was essentially flat. And the interest expense of $700,000 was up from last year as we did have some significant share repurchases earlier in the year and had drawn on our line of credit. So, we incurred interest expense during the quarter.

The tax rate of 36.1% in the quarter, again, Flowers Foods' stand alone is at 38%, but then when you work through the consequences of the variable interest entity, which has no corporate tax because it's an [ASK] Corporation, that lowered the effective rate because their earnings were up in the quarter. And on a consolidated basis, when we get to the end of the fiscal year, the consolidated effective rate we still expect to be about 37%. And we do, again, eliminate all of the income from the variable interest entity as a minority interest because we own no equity of that entity.

So, that gets you to the income from continuing operations of $13.5 million. You see in the quarter we did report, in discontinued operations, $1.6 million net of tax, as we have made final settlements with all the issues surrounding our sale of the Mrs. Smith's frozen dessert business. The years of the sale is still under audit and we still have reserves in our tax on the balance sheet -- tax reserves. And that will come into play as we finalize the Internal Revenue Service audit, hopefully within the next few months.

The diluted shares, 62.4 million. Again, on an EPS continuing operation basis, the $0.22 compares with the $0.22 of same quarter last year. As George mentioned and we referenced in the press release, we did have $0.04 from the quarter in hurricane-related costs. On a pretax basis that was some $5.7 million. And then as we mentioned in the press release, we got -- we did receive during the quarter $1.5 million of insurance reimbursement, so that left the $4.2 million or roughly $0.04 per share of unreimbursed costs we incurred in the third quarter. Again, we continue to aggressively work with our insurance providers and we'll recover, hopefully, additional amounts in the future.

The cash flows, we commented on in the press release, we made $14.6 million in capital investments and we did acquire the Royal Cake Company for some $9.8 million during the quarter. The share repurchase you see there was very low in the quarter, just over 100,000 shares for $2.76 million. Again, to date, we've acquired some 8.9 million shares, roughly $169 million at an average of $19 per share.

I think importantly, if we can look at the guidance that we've tried to clarify, our sales performance continues to be very strong. And it appears on a consolidated basis, we will be in the 1.710 billion to 1.715 range, which is an increase of 10.3% to 10.6% over last year. Our net income guidance, we had used a percentage of sales and that would have given you 62.8 to 68 million or $0.99 to $1.07. We incurred the hurricane-related expenses in the third quarter and did get partial reimbursement from the insurance. And we continue to incur incremental costs in the fourth quarter.

So the guidance we're giving here for the year, 59.5 million to 61.5 million or $0.94 to $0.97 per share does not include any additional insurance reimbursement that we will hopefully receive during the year. The timing and the amount of that insurance reimbursement is uncertain and, therefore, the guidance does not take that into consideration. It does include, obviously, the 1.5 million that we did receive in the third quarter, but does not include any additional insurance proceeds that will be reported upon receipt.

Our 2006 guidance is preliminary at this point. We believe our sales will grow somewhere 6.7% to 8.2%, which would put us at 1.830 billion to 1.850 billion. I believe our net income next year, again excluding any insurance proceeds that may fall over into next year -- exclusive of that, I think our net income would be 3.75% to 4% of sales or in the range of 68.6 to 74 million. With the share repurchases that we had earlier in the year, our average shares outstanding next year will come down to 62.3 million shares. So, you'd have an earnings per share next year somewhere between $1.10 and $1.19, which is a 13% to 27% increase over the guidance that we have for this year. I would reiterate that if you look at the incremental expense that we expect from adopting FAS 123(R), beginning with the next fiscal year, that incremental expense we would expect to be somewhere in the $0.05 to $0.06 range.

Again, we are already reporting costs related to stock appreciation rights and we have one grant that remains outstanding that matures in 2007. But that cost has already been reported each quarter. So, the incremental cost will only be related to one grant of options that are not vested, that are currently outstanding and then an expected grant in early 2006. So this $0.05 to $0.06 per share includes the costs we expect to cover, both the existing award that's outstanding and the expected award early next year. And so the guidance we're giving includes the impact of that $0.05 to $0.06.

Capital spending next year would look to be $58 million to $63 million. We've previously announced, as George referenced, the addition of a line in Villa Rica and the addition of a line in the newly acquired facility in Newton. And as George mentioned, we expect those would come on in the second quarter. So you will see the capital spend a little earlier in the year next year in the first and second quarter because we need to get that capacity on as soon as possible. So, George with those comments, I will turn it back to you.

Thank you, Jimmy. We're pleased to close the book on Mrs. Smith's with a charge to discontinued operations of $0.03 in the third quarter, as Jimmy mentioned. We believe that represents the final settlement of issues related to the frozen dessert business.

Our increased sales guidance for the remainder of 2005 reflects opportunities we continue to see as a result of changes in the competitive landscape. However, our costs will remain high through the remainder of the year, as we transport product further than usual, as we absorb higher energy, ingredient and packaging costs.

Now looking over 2006, I have confidence in the sales guidance that Jimmy mentioned in 1.830 billion to 1.850 billion for 2006, and the earnings expectations, as Jimmy outlined. We look forward to the beginning of 2006, when we see the benefit of our New Orleans bakery being back in operation and we hope to see further recovery in that marketplace. At the beginning of the year, we also will have the benefit of additional price increases. And in the second quarter, new production capacity will come online, which allows us to begin to drive down costs as we produce closer to our growth markets. We anticipated our second half '06 results will show the benefit of the added production capacity and the lower transportation costs, assuming, of course, the start-ups of our new lines goes according to plan.

With new capacity in place, we think three things will happen. First, we will be in position to take on new business as the marketplace continues to change. Secondly, we also will introduce new products that already are in the pipeline and ready to go. Thirdly, we will begin again to increase our DSD footprint that we've talked about numerous times before.

Our cash flow continues to be strong, allowing us to make capital investments, pay dividends to our shareholders, consider strategic acquisitions and to continue our share repurchase program.

Looking back to the third quarter, the natural disaster and the flooding of New Orleans certainly gave us challenges that are unprecedented in our history. In spite of incredible challenges, our team continued to outperform, to serve our customers in the face of what seemed like impossible conditions. When our New Orleans bakery could no longer operate, our other bakeries in Louisiana, Texas and several other states rallied to support the sales teams in New Orleans and Baton Rouge. The Flowers spirit has never been more evident than during those recent challenges. The determination and effort of our team members made me very proud to be a part of this wonderful Company.

Going forward, all of us recognize that as managers, our most important job is to create value for our shareholders. We remain focused on growing our business, driving out cost and on creating value. Now, Jimmy and I will take your questions. Markita, we'll turn it to you, please.

[ OPERATOR INSTRUCTIONS ] Our first question comes from Farah Aslam of Stephens.

Hi, good morning.

Good morning, Farah.

I just wanted to get a clarification on your guidance. Does that $0.03 of Mrs. Smith's, is that included in the $0.94 to $0.97?

No.

Okay. And the $0.04 is also excluded. So we can add that back, as well?

That's correct.

Great. And then what do you anticipate your hurricane costs are going to be in the fiscal fourth quarter?

Farah, there again, we incurred almost $6 million in the third quarter and received the $1.5 million insurance, I would just call it like a prepayment. I don't think it's any indication of what they will eventually reimburse.

Right.

So, that netted to the 4.2. At this time, I would tell you that it looks like the cost in the fourth quarter is -- is probably $4 to $5 million, about the same as the third quarter. Because a big part of that, as George stated in his comments, we expect the New Orleans bakery to re-open -- that is subject to city utility services. And so some of it -- some of that cost will be impacted by the timing of that actual re-opening.

But then you're going to try and get insurance to cover some of that 4 to 5 million as well?

Absolutely. Yes.

This is more of, just simply, a timing issue rather than -- ?

Yes.

Okay. Great. And then, your new capacity is coming online in the second quarter. Do you anticipate the margins on that new facility to be in line with corporate average? Or be ahead of that?

This is George --

Hi, George.

How you doing? As soon as we get up and running and have the, quote bugs, worked out of the system -- you always have a few issues starting up. We feel like as soon as this -- particularly in Villa Rica we should -- because it's a new line, a lot of overhead is already there. I would predict possibly the line, once we get bedded down, should even have better margins because it's got a lot of overhead coverage -- will be built in already. Newton, we are putting a high speed bun line there, just like we put in Denton. And we feel we will have better margins from that particular line than normal bun lines in the system because of the added speeds that we can produce so much faster.

And that's what gives you confidence in your back half '06 numbers?

That's correct.

Okay. Great.

And in addition, all the transportation that we've been going through and logistic issues to get the product to the market -- once we have those facilities in place, we'll eliminate a lot of costs that we're now absorbing and have absorbed since probably mid-year when we took on the -- roughly $50 million in business. Jimmy, like he said -- I think it's a true statement, we want our bakeries where the people are and where the business is. That's why we're working hard to make sure we ensure.

And in terms of pricing, have competitors followed your pricing actions that you've taken so far in this fall? And then what do you anticipate to take at the beginning of the year?

Farah, I said we have had price increases based in all channels and a lot of times it takes -- I can't specifically say what competition has done. If I had to get out in the marketplace and look at retails, it depends on where specials are going on or not. But I would anticipate -- they're facing the same tremendous costs we are, whether it's natural gas or sugar or resin or diesel, due to the energy. I would suspect that they would.

Okay. And just could you quantify your price increases that you've taken thus far this fall? And what you're looking for in the beginning of the year?

Let me just say for looking, we did -- and we said in New York, we had already announced some price increases, it was more specific probably to channel. We made the comment then, it was more related at that point in time to foodservice and Private Label because that's where our margins were not what we want them to be. And that, quite honestly, is in effect. And we will have more of that come January. So, if you look at next year, we anticipate we will have -- and from an annual standpoint, some 3.5% to 5% price increase next year.

Great, that's very helpful. Thank you very much. I will pass it on.

Thank you, Farah.

Our next question comes from Tim Ramey of Davidson.

Good morning.

Good morning, Tim.

On -- on the impact in the hurricane-affected areas, what are you really seeing in the underlying markets? We understand about the dislocation and the production and the transportation side, but is there a piece of the market that just will not be as robust? And how should we think about that for a go-forward?

Tim, thanks for that question. Let me address maybe -- we've had four hurricanes so far this year; Denis, Katrina, Rita right behind that, and now Wilma. All except Katrina was sort of the normal hurricane we faced last year and the year prior. It was maybe a major impact to a small segment of the marketplace and a small part of the population.

As we said before, Katrina was different from any we've seen in our history. So, I did say that some 250,000 people -- to the best we can tell, in the metropolitan New Orleans market, are dislocated. And that does affect that market where those people did live. Now, hopefully they are somewhere in our market and some of them are not. But I'd say some of the markets that are most devastated -- in fact, I was there three weeks ago and television does a good job but it really doesn't do justice to when you really get into those markets and see what has happened -- the water lines and the devastation. So, I think it will be -- people will come back, some will not come back. I can't predict what that might be.

I can tell you that I feel like we were probably impacted a couple of million dollars in sales in the third quarter. Things are getting better each week. People are coming back. I think that will be a gradual process. They're still consuming, hopefully, our bread wherever they are. But as I look specifically at Louisiana. You can see where those people have been dislocated and that business is not there and will not return until supermarkets and business gets back up and going again.

So, we're not -- in our guidance for next year on sales, New Orleans team is taking that in consideration. We are projecting down in New Orleans. We have recouped in New Orleans about 90% of that volume that we did have prior. That gives you some idea -- we're 90% where we were prior to the hurricane. I think that is remarkable. But it will be a year or two years. Eventually, you think most of them will come back, but that's yet to be known.

Yes. And if I could just skip to the expansion of the DSD system, you've really historically done that on an incremental basis, except way back when when you jumped into Texas. As you know, Interstate is exiting the northwest, my home territory, and leaving what I think is a competitive vacuum here. Is there any chance that you would consider sort of leaping into a noncontiguous area with either an acquisition of a facility or an acquisition of a stand-alone entity?

Tim, truthfully, when something becomes available, from an acquisition standpoint, we always look -- regardless of where it is in the United States. But candidly, on the other side, it's been our business model to push out from our existing boundaries on acquisitions and the footprint of the DSD. I think from an acquisition standpoint, if that became available in the Northwest, you'd have to look. But if it's attractive enough, it could work. I think it will be very difficult to go out and plan a brand-new plant, though, without any sales and start off from scratch in that part of the world.

But there is a Lakewood, Washington facility, as you know, that's being closed. So. Okay. I will yield. Thank you.

Thank you, Tim.

Our next question comes from Bill Leach of Neuberger Berman.

Good morning.

Good morning, Bill!

In terms of the $0.04 cost, is there any way to segregate that between truly nonrecurring costs and things like higher energy costs which may be with us for a while?

Yes, Bill. I would tell you that if I look at the breakdown of it, 5.7 was the total and then the 1.5 million reimbursement, which was just a general upfront payment that the insurer gave us. But if you look at the 5.7, I would say at least half of it was -- what I would call non recurring; that would be inventory, accounts receivable that are just uncollectible from customers, payroll that we continued to pay to the New Orleans-based employees. But they weren't producing product, obviously. Then we obviously had some distributor territories in that area that we hope over time, as George said, the business will come back. But certainly in the near-term, the note receivable and the value of those territories we had to write-off.

So, when you look at that, those items alone were at least $3 million of the $5.7 million. And then the balance, you had the start-up of the Houston facility. That's about $0.5 million just to get that line up and running on a temporary basis. So, you would think that would not recur. And then the balance is, there again, your incremental energy, sugar and then just general business interruption. Again, a lot of transportation getting the product into the marketplace.

So, what changed? When you were in New York not long ago after the hurricane, you reaffirmed your guidance. What proved to be different than you expected?

Well, I think -- again, the cost of the hurricane, we think, is still going to be roughly in the range we had expected. The city services to re-open the New Orleans plant have obviously not come back as quickly as we had hoped. And, therefore, we're continuing to incur the transportation costs and the uncovered overhead of that New Orleans facility until it re-opens.

Bill, if you recall, we did say in New York, we thought we'd be back up by November 1st. And that keeps sliding now, week by week. And we're ready to re-open. Unfortunately, the city can't give us water on a consistent basis that is drinkable and usable and portable and the sewage system in that part of town has not been restored. So, that's why it really makes a huge difference.

And just to clarify your guidance again, you're taking out the $0.03 loss from Mrs. Smith's but you're leaving in the hurricane charges -- so the fourth quarter guidance, as I calculate, is $0.14 to $0.17, is that right?

Yes.

Okay. And how many shares are you assuming in that guidance? Are you assuming continued buybacks or not?

No, we're not.

Okay. Last question. Did you have any acquisitions that helped the sales gain year-to-year in the quarter?

Well, we did have the acquisition of the business in Houston was, I believe, in September of '04. So, it did impact some of the third quarter this year. The Royal Cake acquisition was very late in the quarter this year. It was only a matter of a week or so. So, I would say that you combine that Texas business and Royal, that was, at most, about 1.5%.

Okay. Thanks very much.

Okay. Thank you.

Our next question comes from Leonard Teitelbaum of Merrill Lynch.

Good morning.

Good morning, Lenny.

Let me just get a couple of household things here -- your accounting for Katrina that you're leaving in your numbers here, how is that split between cost of goods sold and SG&A?

Lenny, most of the incremental ongoing costs -- a lot of it is in SG&A because it's related to transportation of product -- and then like the distributor matters. The only thing in cost of goods sold -- or the primary thing there would be the oven fuel -- the natural gas costs have increased substantially.

And the start-up -- ?

The start-up of the Houston plant.

Sure. If I were to presume that the only costs that would not ongoing would be those that would be covered by insurance -- because clearly fuel, et cetera, are just the costs of doing business.

Right.

If we just try to isolate into that, you've got a $1 million down payment. Is there a rough feel as to what you would be getting back? Because I'm inclined to take it out of this year but I don't want to put it into next year. I'd like to try and get as good a balance as I can here.

Yes. Well, again, we're trying to clearly indicate on a GAAP basis what our guidance is.

Yes.

And with the uncertainty of the amount and the timing of the insurance. And also, as you know, the insurance is in negotiation. So, our position is all 5.7 of what we incurred in the third quarter, we ought to be reimbursed. And whatever we incur in the fourth quarter, we should be reimbursed. Now, all we can tell you is that we in fact received 1.5 million of what I would call an advanced payment. And we are aggressively working to get as much as we can as quickly as we can reimbursed from the insurance. And since it's a negotiation, we're not able to estimate that.

All right, going back a little bit -- I think it was Tim's question. Playing within yourself, if you will, and just stretching out your expansion routes, Charlotte obviously was a target market when you were in New York and apparently you've started to enter that market. Can you give us some idea of how big you see that piece of business?

Lenny, I am sorry, I missed the market you talked about?

Charlotte, North Carolina. Isn't that the market you want to go into?

No, we've been in Charlotte for a number of years. What we did say -- the new bakery we're building is in Hickory, North Carolina, which is near Charlotte. But I would -- let me reiterate and add to that, though. What this does is relieve a lot of pressure on our -- as we go down the road on our most northern plants, like Louisville, like Lynchburg, Norfolk. That will free those plants up to push further north -- the footprint we talked about.

But Charlotte, we have a great position. We acquired a lot of new business due to several plant closings in the Carolinas. I mentioned that we had acquired roughly $50 million in business and a lot of that, the majority of that did come in that Carolina market because of plant closings, from buyer competitors.

Okay. Thanks.

Yes, sir.

Now, look --

Thank you. Our next question comes from Heather Jones of BB&T Capital Markets.

Thanks and good morning.

Good morning, Heather.

I want to go back to the September analyst meeting -- I don't know if I'm misunderstanding, but the way I had understood it is, in September you confirmed guidance, but I believe you had assumed that you would get a fair amount of the hurricane -- the insurance proceeds in '06 -- I mean in '05. So, the costs would heavily impact Q3, but Q4 you would have a significant slug of insurance proceeds. I was wondering -- has your estimate of how much you're going to recoup and the timing, has that changed since September?

Heather, this is Jimmy. I will answer that. Again, the costs we're incurring, it's consistent with -- except for -- we continue to experience delays in re-opening New Orleans, purely related to city services being available. But in general, our cost is roughly about what we thought it was.

Now, what I expressed was, I felt like we would be at the low end of our guidance without any insurance. And if we were able to recoup insurance in this fiscal year, we may be above that low end and more towards the middle -- the mid-range in the guidance. Again, we're aggressively working with the insurance company. It's just that without knowing the amount or the timing of the guidance and trying to be very clear, this guidance is without any additional insurance proceeds -- here's what we see and with the further delay we've experienced in opening the New Orleans bakery.

Okay.

That's what this current information provides. And then any insurance -- we fully expect -- we were pressing to get recovery of some insurance this year but that is uncertain.

Okay. So, understanding that it's an ongoing negotiation, there hasn't been anything that's made you change your assessment of how much you will get in insurance proceeds at this time?

I would say not, no.

Heather, I'd like to reiterate that, as well. Nothing has been said or done that changes our mind about what we think we are due from the insurance companies. That's why we pay to have insurance. When things do happen.

Right.

So, we expect -- it's all in time in our minds. But we don't know -- Jimmy said it is negotiations.

Right.

But we fully expect to recover what we think is owed to us.

Okay. Now, the 1.5 million in proceeds for the quarter, was that a contra to the SG&A expense? Or is that somewhere else in the P&L?

Yes, it was recorded as an offset in the SG&A.

Okay. And I wanted to go back to the pricing. When you said next year pricing will be up about 3.5% to 5%, is that the price increase you plan to take in January? Or combined with the one you just took -- pricing should be up 3.5% to 5%?

I'm looking at it on an annualized basis. As we've said, we got a little bit in October. More in November and some in December. So, I'm -- I'm looking at the total aggregate for next year in the 3.5% to 5% range.

Is that both on branded and Private Label?

I would say all the channels. We've been focused quite a bit on our foodservice and Private Label business because of lower margins, but in addition there will be some retail price increases. And, as you know, the baking industry spends quite a bit of money on featuring and promoting. So all of that will take some work to make sure that 3.5% to 5% sticks. And we know that the consumer is ultimately the person in charge of our price increases.

Right. And so far -- it doesn't seem like it, but I will ask it anyway. Have you seen really any pushback in the markets where you've taken pricing -- not from the retail customer, but from the consumer? I mean it seems like your volumes have held up very nicely, but -- .

We're very pleased with our volume, which says -- anybody you talk to realizes that storms do cost money and I'm not just talking about bread right now, but the gas pumps and everywhere – anything that we're purchasing is being called up now. I think I said that early on, probably a few months ago, that the economy has not yet caught up with the storm, but I think you will see that. We're beginning to see it.

And my final question is on natural gas.

Yes.

I believe you all had a fair amount hedged for next year, but I just wanted to double check on that because it has shot up to $13 and then it's back down to $8 or -- $8 to $9. I wonder what your hedge position is, currently?

We are -- we do have hedging positions, certainly through the winter through March. We have some through April and May and June. And we're taking covers now because the prices are down, even they're a lot higher than last year. But our -- we don't want to get caught when it goes the other direction either.

Right.

So, as you know, we can cover about 80% of our usage. And we're aggressively trying to get that accomplished. But just to tell you, we do have the winter covered.

Through March?

Yes.

And you're adding a little through January. So, do I remember correctly that this year is running you in total about $13 to $15 million, so, we should expect '06 to be up from that?

Well, initially, when we started 2005, I had said our natural gas spin on the annualized basis was about $13 million. Throughout 2005, as the prices increased, that number went up to about $18 million. And, again, we're forecasting increases over and above that for 2006. So our spend will be north of $20 million for natural gas next year.

Okay.

So, in our guidance, we have looked at what coverage we have and tried to plan accordingly for higher natural gas prices.

Right. Okay. Well, thank you and great job on the sales line.

Thank you.

Our next question comes from David Leibowitz of Burnham.

Good morning.

Good morning, David.

A brief question, totally unrelated. Number one, do we have additional one-time charges in '06 as long as you're not being paid the insurance money? Or are there any other one-time charges in the first half of '06 that you can think of right now?

David, I don't know of any others. All the costs related to tangible asset damage like inventory, et cetera – we've taken all the write-offs, from expected uncollectible accounts receivable, the distributor notes, et cetera. So, I believe we've written off now all of the -- all of the asset values that would create a one-time event. And now it's just a matter of continuing to incur primarily higher costs related to transportation, natural gas, packaging, et cetera.

In terms of the natural gas component, how have you hedged the costs?

Again, that would be exchange-traded contracts. Certain of our plants are with municipal utilities and we just take what they pass on to us. Of that percentage that we can hedge, we just try to take coverage on the exchange.

Okay. And last question, then I will go back in queue. In terms of the outlook for acquisitions, do you find that the sellers are a bit more motivated? Or do you find that sellers still expect an outrageous sum?

David, let me take that. I think, as a general rule, I think it's not quite as zealous as it was five or six years ago. But it depends on the situation, it depends on how well the seller is doing versus if they're not doing well. But general comment, I don't think it is as strong as it was when we saw some of the multiples a few years ago.

Thank you very much.

Thank you, David.

[ OPERATOR INSTRUCTIONS ] Our next question comes from Eric Katzman of Deutsche Bank.

Good morning, everybody.

Hey, Eric.

I don't want to believe in this point too much because in the scheme of things, I think it's irrelevant -- but you basically are getting hit by roughly $0.10 due to Hurricane Katrina. And you've gotten about $0.01 or $0.02 back so far. And the question is, just how much you get back either in the fourth quarter or next year?

Correct.

Why the market is freaking out about that, God knows. Next question is in regards to the tax rate for next year. I think -- it came in a little bit lower than we thought because it's a variable interest entity. Maybe there are some -- I don't know, tax issues with the insurance proceeds there. But what are you looking for for next year?

I would say, Eric, again, on a consolidated income basis, it would still be about 37%. The variable interest entity, again, because it's an [ASCOR], we don't provide taxes. And so as their income went up in the third quarter, it creates an unusual situation where it flows through the income statement and then is nontaxable, so it drives down your effective rate. But then you turn around and take all of the income out as a minority interest. Long story short, the net income next year will be at an effective rate, we think, of about 37%.

Okay. And the -- back at the analyst meeting in September, I think you said long-term target of 5% to 8% on the top-line. And George, you signaled now roughly 7% to 8% for '06.

Right.

Have you assumed -- and maybe this follows up, I think it was on Heather's question -- but have you assumed much in terms of price elasticity and consumer backlash, even though you haven't seen a wit of it yet?

No, Eric, we have not predicted that in our guidance. That could happen, but that's not -- we're not anticipating that.

Okay.

We've anticipated the pricing, but not the consumer reaction.

That's correct.

Okay. And there has been some concern out there, I guess about the flour costs rising. I know you hedge, but in the past we've had to look at basis. Is that an issue here, as well? Or is that, you think, fairly covered in your outlook?

We think it's fairly valued in the outlook. I will tell you that we're -- we are covered on our flour usage, probably, Jimmy, 60%, 65% for the year -- ?

For '06.

For '06 -- basis we're in good shape for the first quarter, a little for the second quarter. And usually that's closer -- you deal with that closer as you get closer to the timeframe but that is taking into consideration our total guidance.

And last question and I will pass it on. George, I think you mentioned at the analyst meeting, again in September, that you were starting to see, because of whole grain product introduction, some improvement in category consumption. Is that still true? And how does the 1 point -- I think it was 8% volume growth that you reported this quarter, which I assume was somewhat hampered by the situation in New Orleans. How much does that compare to what you think the category may have grown in the quarter?

In fact, I'm looking at it now. When you look at [IRI] plus the panel data -- for the total of the U.S., it grew about 2% for our third quarter. Unit was just about flat but that's better than it has been in days gone by. What I do see is a shift in the product, in the mix, even though this is better than it has been, historically, the past few years. What we're seeing is because of all that activity on new products -- you see in Private Label is flat to down and we're seeing soft variety super premium and in our case, white bread, growing more than historically. So, I think it's good to use. I think consumers are coming back to the category. And I think Flowers and other baking companies are doing a good job of introducing value-added products at a price a lot better than Private Label, which is all good news.

Okay, thank you.

Thank you.

Thank you. Our next question comes from Alton Stump of Longbow Research.

Thanks. Hi, guys.

Good morning, Alton.

I guess looking at your market share position -- obviously you guys have done a great job and received a pretty big benefit over the last, I guess, two quarters here. Would you say that that market share gain has gotten even better for you guys over the last one to two quarters? And also looking out to the next year, do you think we will still continue to see pretty significant market share gains for you guys in the out year?

Well, we certainly hope so. We're at -- I did mention in my comments early on that our capacity has been strained. We did not introduce some of the products this past six months that we had intended to because of capacity constraints. And we will see that, also, up until we get the new capacity on in Villa Rica as well as Newton. Once that takes place, we think market share will grow because we will have the flexibility to introduce some of these items -- I think will drive our market share. And as some of our competitors maybe leave some markets in the southeast/southwest, hopefully we'll -- we've seen some of that in local situations, not massive. But that does help our market share because we're entrenched in southeast and southwest in every account, basically.

Okay, thanks. And then just one more question. I know that, of course, this has been asked quite I few times already -- but just to make sure that I'm clear on the upcoming proceeds, of course you guys can't estimate what that's going to come in at yet. But is it my understanding that you want to get the full, what looks to be about $9, $10 million or so back if you can. Is that the goal, anyway?

That's certainly the goal, yes.

Okay, thanks, guys.

Thank you.

Thank you. Our next question comes from Margo Murtaugh of Snyder Capital.

Thank you very much.

Good morning, Margo.

Good morning, how are you?

Fine.

Good. Just in the sales and the Bakery up 10.6% and Specialty up 8.3% -- you talked about acquisitions being 1.5% in, I guess, the Bakery. Can you talk about price and mix and volume in each category in the quarter?

Margo, I can -- again, on the consolidated basis, the way we break it down, the volume was about 1.8%, mix was 5.1% and price was 3%. If you look -- I don't have it specifically by segment. Again, I think George commented on branded retail, which in the Bakery Group, that's Nature's Own, Cobblestone Mill, our branded white bread, those were up just over double-digits.

10% -- 10.2%.

Yes. And the store brand was also up. On the Specialty side, as we've said I think throughout this year, the performance of Mrs. Freshley's primarily in the mass merchandiser channel is continuing to do well. But we've been against the headwind of the contract manufacturing that's been moving out of the plants, particularly in the snack cake items. So, that's been offsetting the growth that we've seen primarily in Mrs. Freshley's and in the frozen bread and rolls to foodservice.

Okay, thanks.

Thank you, Margo.

Our next question comes from [David Bowles] of Paradigm.

Hi.

Hello, David.

Hi. The insurance proceeds -- is that included in SG&A?

Yes, it is.

Okay. And then the other question was, your revenue guidance for next year -- how much volume are you including in that? I guess what part of that?

We haven't really specifically stated what the volume is. Obviously, I think George mentioned he expected pricing somewhere 3.5% to 5% year-over-year. And we're saying it would be somewhere between 6.7 and 8.2. So, there is obviously volume assumed in that difference.

Okay. And then part of that is mix, as well?

Some of it -- we hopefully would continue to improve mix, as well. Yes.

Okay, thank you.

Thank you.

Our next question comes from Mitch Pinheiro of Janney Montgomery.

Hey, good morning.

Good morning, Mitch.

Most of the questions -- my questions have been answered. But just getting back to Private Label. You said the category is flat to down?

Yes.

Okay. And one of the things that -- that keeps pricing down on your white and let's say wheat bread would be the Private Label anchor. And I just am curious whether there's any chance that there's going to be Private Label products in the Premium and Specialty area that may begin to anchor prices down on the faster-growing areas? Is there any indication from customers that they're interested in Private Label Premium or Super Premium?

Mitch, I think it's been slower in that segment in the Southeast -- I can't speak for the Northeast or out West, where a lot more of the Super Premium is sold at this point in time. Some of the customers have talked about it but it's not a ground swell or going to be a huge event. I certainly don't see that happening next year. Somewhere down the road, as that segment grows more -- that could happen. But what I feel on Private Label right now, white bread, [bake-type] buns is where the majority of the business is. Even though they have soft variety wheat bread. It's not a huge factor.

Okay.

Like I say, I think the white bread will be where the growth is from Private Label, if there is any growth.

Okay. In terms of -- we saw Tasty Baking increase the percentage allowance to their owner-operators and -- slightly, perhaps to compensate a little bit for some of their increased costs and perhaps, maybe, minimal sales growth. Does -- do you have any -- is there any intention to do that in your distributor network?

Not at this time, Mitch. And the reason -- we study it every quarter, in fact, every period we look at it and see, based on our average distributor, with our increased sales, what is the net effect. I'd say as long as we continue to have great sales increases in growth, that is not necessary. Because as sales go up, there is an automatic margin built in to distributor and they come out better -- the good news is, fuel is down compared to a month ago or two months ago. I think $0.50 a gallon or so. I think there's more pressure 60 to 90 days ago than today. But we feel very comfortable, as long as we continue to grow with our distributors that it's not necessary to change.

Okay. And I guess last question is, looking at next year -- and in terms of product mix, in the sales growth there, Specialty versus Bakery -- I may have missed this. Is there any breakdown of the guidance between those two growth rates -- top-line growth rates?

Mitch, we have not broken down the growth. This is our preliminary guidance, at this point. Obviously, with the production of the new lines in Villa Rica and Newton will both be part of the Bakeries Group. Obviously, we would expect growth to be strong there to fill up those production lines.

Okay. All right.

Thanks, Mitch.

Thank you.

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

Yes, I got cut off before.

Lenny, I thought you got cut off.

[Expletive] no. It probably wasn't that important anyway.

We're sorry.

The thing that we're taking a look at -- this reaction in the market. How long is it going to -- do you know where your checkbook is?

Jimmy has got it in his left pocket.

How much stock do you have left to buy?

There again, our authorization is for roughly 11 million shares and we've purchased 8.9 million versus 11.3 authorized. So, we still have that difference authorized. And we have made purchases. In this current quarter, the average price was $27.12. Although it was, there again, just only about 100,000 shares.

With the overreaction in the market today, why wouldn't you guys step up and buy stock aggressively here?

There again, we're here to create long-term value and not react to short-term market swings. And we'll work with the board and do what's appropriate.

Well, I would have to suggest that, from where I sit, that it would be appropriate if you guys stepped up here. Thank you.

Thanks, Lenny.

Thank you. Our next question is a follow-up from Tim Ramey of Davidson.

Hi again.

Hi, Tim.

Jimmy, I think you addressed this briefly, but it zoomed right by me. The increase in stock compensation costs – 123(R), was certainly less than I thought it might be and it was less than what you had in your 10-K. Is it because that we don't have the incremental -- or as much costs from the SARs in '06 versus '05? And have you changed your compensation scheme in any way that would be less reliant on options?

Let me address that a couple of ways. The SARs have been and continued to be expensed and adjusted to the market price at the end of each quarter, which does create some volatility, obviously. The final grant of the SARs will mature in 2007 and that will go away.

That's another April vesting, as I recall?

I believe it's in the summer. I think it's a little later. And then we had an option grant in 2001 that is fully vested and, therefore, has no 123R impact. So the only options outstanding that we are taking a charge for are the 2003 grant, that also vests in the summer of 2007. And as we address what we are going to do for equity-based compensation going forward -- yes, our plans right now are to, again, use options probably. And again, this is a subject to the compensation committee and has not been approved. But as all companies, though, we're looking at using options maybe for only half of the long-term equity-based compensation and performance driven equity-based compensation for half. So, as we continue to move toward finalizing the effect for 2006, that's how we firmed up our guidance of $0.05 to $0.06 per share and will use fewer options.

Thank you.

Thank you, Tim.

Thank you. Our next question is a follow-up from David Leibowitz of Burnham.

Thank you very much. Recently in looking at '06 -- when you get New Orleans back, how much of a market is there going to be to serve?

It's a great market, David. I can't bring to memory right off the -- excess of 1 million to a 1.3 million in the metropolitan market. We're talking about -- New Orleans will be up a significant part of our business -- has been, will be. These 250,000 people will -- some of them will be back, some will not. New Orleans is still a significant part of our business.

I'm just talking now for '06, and your projections or guidance for the year. And I was wondering when we factor New Orleans into it, what percentage of what New Orleans was, let's say in '04, are you projecting for '06?

I'll still come back and say we're about 90% there now.

Okay. And you have full staff?

Yes, we polled our people, we met with them three weeks ago. Even though some of them -- many of them did lose their homes. They're ready to go back to work, living with relatives. And, of course, FEMA has set up some trailers on the property to house some people. And we're ready to go as soon as the city services will an available to us.

And your distributors are all there with equipment?

Yes, they are.

Excellent. Thank you very much.

Yes, sir.

Thank you. Our final question is a follow-up from Margo Murtaugh of Snyder Capital.

Yes, I will just make it brief. I just wondered what your D&A is for next year, what you project for 2006? And also, do you --you had tax laws carry forward, I believe, in 2005. Are they all gone? Is the cash tax rate pretty much -- ?

Yes. Thank you, Margo, the net operating losses we fully utilized and began to pay cash taxes this year, I think our first was in the second quarter was about $11 million and we will make estimated payments for this year. And 2006 will be fully -- cash tax paid for 2006 and beyond.

Okay.

If you look at the depreciation for next year, I'd say it's going to be somewhere -- $60 to $62 million. Something like that. Some of it will be -- with the new assets coming online, precisely the timing, we're projecting that in the second quarter. So, it will probably be around $62 million, I would say.

Okay, thanks a lot.

Thanks.

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

Thank you, let me close by saying I believe that Flowers has never been stronger. We have been through a quarter of difficult times in the marketplace. We agree with most of the analysts on the call today that we think this is a one-time event. Hopefully we will never see the event in my lifetime again. The Company is doing very well. We see the growth on the top-line. And the costs will be taken care of as we go through next year.

We appreciate your confidence in the Flowers' team and we look forward for our next call. Thank you very much.

Thank you. This concludes today's Flowers Foods conference call. [OPERATOR INSTRUCTIONS]