Flowers Foods Inc (FLO) 2006 Q3 法說會逐字稿

Good morning. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Flowers Foods conference call. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Ms. Marta Turner. Ma'am, you may begin your conference.

Thanks, Kathleen, and good morning, everyone. We appreciate you joining us.

Jimmy Woodward, our CFO, is not available for our call. His son is undergoing surgery this morning. Participating with us this morning, we do have George Deese, Flowers Foods Chairman, Chief Executive Officer, and President; and [Steve Kinsey], our Vice President and Controller. George and Steve will offer prepared remarks and then respond to your questions.

First, I must remind you that our presentation may contain predictions, estimates, or forward-looking statements. We may use words such as expect, believe, or other such expressions to identify 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 Flowers Foods' SEC filings.

Now I'm pleased to introduce Flowers Foods Chairman, CEO, and President, George Deese.

Thank you, Marta, and thank you for joining our call this morning and your continued interest in Flowers Food.

Our third quarter results were very solid. We're grateful to have these quarterly and year-to-date results, given the tough environment for commodities, energy, and fuel this year. Let me share a few highlights. Overall, our sales grew at 8.1%. Our Bakeries sales are up 9.9%, reflecting the strength of our DSD business, our brands, and our execution in the marketplace. You may recall that in earlier quarters, the sales increase from Bakeries was higher. The difference reflects that we have cycled most of the sales we gained last year as a result of changes in the competitive landscape. As you recall, we had several competitive bakeries that were closed in the first half of '05, and we gained considerable amount of volume due to that result. As I repeat, we have cycled that as of the third quarter. Specialty sales increased 1.3%, even with the loss of contract packaging and snack cakes, as we have discussed previously. Just comment without the loss of contract sales, Specialty sales would have grown by 5.5%, so even a solid quarter there. Income from continuing operations was $17 million, and earnings per share came in at $0.28, or 27.3% over last year.

Looking closer at sales using our internal sales data, branded retail sales were up a solid 8%. Our white bread brands led by Nature's Own Whitewheat and local white bread brands had double-digit growth. Sales of Nature's Own [soft variety] bread achieved high single digit growth. Late in the quarter, we introduced six new Nature's Own specialty breads. The new breads are all natural, and two are made with organic flour. We're pleased with the consumer response to these new Nature's Own product. Our strategy is to grow sales of these new products on a steady basis. We've also supported these new products with cable advertising.

Our buns and roll sales had double-digit growth during the quarter, led by our new Nature's Own Whitewheat items that were introduced in the spring. In our multipack snack cakes, where Mrs. Freshley's is our brand, we had slower growth [in the previous three] quarters due to large price promotions last year. In light of the our price increases that were effective the last week in the quarter, we chose not to promote during the third quarter as we did the previous year. Store brand, or private label, also increased by double digits as we gained new accounts year-over-year. In addition, our food service business increased by double digits, led by quick serve restaurants. According to IRI, our market share was flat for the third quarter, but it is important to remember this is trend information only, and does not capture sales for a significant part of the market.

Our integration of Derst Baking Company, which was acquired in February, continues to go according to plan. During the quarter, we cycled the Royal Cake acquisition, which we made in September of '05. In a quarter-to-quarter comparison, the Bakeries Group added roughly 1% to our DSD sales base with our expansion into new territories. We announced in 2003 our growth initiative to expand into markets adjacent to Flowers' core DSD territories. The markets added since that time continues to add roughly 1 to 1.5% to our annual sales. On our last call, we mentioned that we were taking pricing to offset higher costs for ingredients, energy, fuel, and other items. On average, that action took pricing up about 5%. Of course, there are variances in some channels which were more -- where more was needed. Most of the pricing was effective October 1st, so only the last week of our third quarter benefited from the price increases.

With three quarters of 2006 completed, I can tell you that I am pleased and confident about our performance. It has been an eventful year. In February, we acquired Derst, and our team has worked very hard to integrate successfully that business with ours. Number 2, we centralized our cake distribution center incurring additional costs in the first quarter, and that is working out very well. We added a second bread line in our Villa Rica bakery, opened a bun line at our new bakery in [new -- North Carolina], and reopened the bun line in Houston. For the full year, we have absorbed about $0.06 of additional cost for our equity-based compensation, and we expanded our geographic territory, as we already discussed further into northern Kentucky, Cincinnati, and further into -- we made inroads into Maryland. With all that, as we outlined in the evenings release, we expect 2006 sales to be up over 10% and earnings per share to increase 17 to 21%, which I think is a remarkable job.

As Marta mentioned, I would like to just comment to say that our thoughts and prayers are with our CFO Jimmy Woodward and his family. Jimmy's son, Blake, is scheduled for surgery this morning. We appreciate our Vice President and Controller, Steve Kinsey stepping in for Jimmy this morning. Steve, I will now turn the program over to you for our financial performance.

Thank you, George, and good morning.

As George stated, consolidated sales grew 8.1% compared to the same quarter last year to approximately 441 million. The sales increase for the third quarter was the result of favorable pricing of 6.2%, and a positive mix shift of 2.6%, offset by slight volume decline of roughly 0.7%. The volume decline, as discussed, was primarily in the snack cake business of the Specialty division. The Bakeries Group sales increase of 9.9% came from favorable pricing of 5.4%, a volume increase of 4.4%, and a slight mix shift of approximately 0.1%. The Derst acquisition did add sales in the quarter of approximately 12.1 million and is annualizing on the previously disclosed 45 to 50 million. Flowers Specialty Group sales increase of 1.3% was driven by favorable pricing of 6.8%, a positive mix shift of 4.2%, offset by a volume decline, as George discussed, of approximately 9.7%. Net income for the quarter was 22.6 million, or roughly $0.37 per share. The $0.37 per share was up significantly compared to the prior year; however, it does include a one-time tax benefit of approximately $0.09 per share from discontinued operations.

During the quarter, the Company settled ongoing Internal Revenue Service audits, and reversed tax reserves related to the deductibility of certain transaction costs incurred in the Keebler divestiture. The reversal of these tax reserves, reported as discontinued operations, affected net income by about 6 million. This benefit was partially offset by a charge of $0.5 million related to other adjustments in the audit that related to the divestitures throughout the period. The net benefit from discontinued operations was 5.5 million, or approximately $0.09 per share.

Income from continuing operations for the quarter was 17.1 million, an increase of approximately 26.6% compared to the same quarter a year ago. Income per share from continuing operations for the quarter was $0.28, an increase of 27.3% over the $0.22 per share reported for the same quarter last year. During the quarter, however, we did receive 2.5 million of insurance proceeds, which I will discuss in a moment. Our gross margin for the quarter of 49.5% was constant compared to the third quarter a year ago. Increases in ingredient and energy costs negatively impacted pricing and mix improvements in the quarter. We also continued to experience costs related to the start up of a new production line in the Villa Rica Georgia and Newton, North Carolina bakeries. The overall effect of these start-up costs in the quarter was approximately $0.5 million.

Selling and marketing, admin expenses during the third quarter as a percentage of sales were approximately 40.1% compared to 41% in the same quarter of the prior year. This decrease as a percent of sales was due to the increased sales, decreases in pension costs, and the effect of the [costs] and the insurance proceeds related to Hurricane Katrina. These positive items, however, were slightly offset by increased distribution and selling expenses in the Specialty division as we continue to focus on the snack cake business.

Now turning to the insurance proceeds. During the quarter, as stated, we did receive 2.5 million of insurance proceeds. 2 million of the proceeds related to the recovery of costs associated with Hurricane Katrina, and approximately 0.5 million was from the recovery of business interruption related to the equipment fire at the Montgomery, Alabama, plant we discussed earlier in the year in the first quarter. The $0.5 million related to the Montgomery fire is recorded in material supplies, labor, and other production costs on our income statement. 0.4 million of the Katrina recover is recorded in selling, marketing and admin expenses, and 1.6 million of these proceeds is recorded as a gain on insurance recovery as they related to the recovery of property damage. We would like to say that the Montgomery claim is closed, and the Company has approximately $1 million of claims still outstanding with regard to the hurricane.

Depreciation and amortization expense for the quarter remained relatively flat as a percentage of sales, and net interest income of 1.1 million was basically flat year-over-year, as well. Tax expense for the quarter was 10.4 million, or an effective rate of 35.6%. You will note the rate is lower as a percentage, due to a downward adjustment in the third quarter of an estimated annual effective rate by approximately 0.5% from the 37% previously estimated to 36.5%. During the quarter, we acquired about 485,000 shares of our common stock for $13 million, or an average price of $26.84. During the third quarter, we have acquired 11.4 million shares of our stock of the 15.3 million shares authorized for repurchase. The total cost of the share repurchase is approximately 236 million, for an average cost per share of $20.82. Cash flows continue to be strong, with net cash provided from operations in the quarter of 32.5 million.

As we approach the end of the year, as George stated, we have increased our 2006 earnings guidance slightly. We now estimate the sales increase for the year will be 10% to 10.4%, which would mean sales of 1.888 billion [sic--see Press Release] to 1.895 billion. Earnings from continuing operations before the effects of accounting change for the year should be 72 million to 74.5 million, or 1 -- $1.16 to $1.20 per share, which represents 3.8% to 3.9% of sales. The earnings projection is based on approximately 62 million share -- average shares of our stock outstanding, and reflects a 17 to 21% increase in earnings over 2005.

Looking ahead to next year, we are providing preliminary guidance. We expect sales growth to be in the 5 to 8% range as previously stated in our long term strategy, excluding future acquisitions, if any. Sales are projected to be 1.982 billion to 2.047 billion. We expect income from continuing operations to be approximately 81 million to 87 million, or $1.33 to $1.43 per share, which represents approximately 4% to 4.4% of sales. We estimate approximately 61 million shares -- average shares be to outstanding at the end of '07. This equals an 11 to 23% growth over our 2006 projected earnings. Capital spending for 2007 is expected to be 60 to 65 million, and we're confident that this level of spending, coupled with equipment leasing, when appropriate, will allow us to meet our annual maintenance needs and provide for expansion of our production capacity. Again, the Board of Directors will consider the dividend at the next regularly scheduled meeting and will make an announcement on that as appropriate at that time.

So with that, George, I will turn it back to you.

Thank you, Steve.

It has been a good year, and we have continued to execute our strategies to build value over the long term. Looking to 2007, we look forward to the new start-up of the Newton bread line in the first quarter. The Newton bread line is the next step in our efforts to put our bakeries where the growth markets are, as we have mentioned before. We will continue to expand into new geographic territories and increase our business in our core markets. As we have previously discussed, in 2007, we will incur steep cost increases. Our flour needs are covered through our hedging program for most of the first half. But year-over-year, our flour costs are higher. We also have higher costs in other ingredients, packaging, and other items; however, our visibility into what our costs are will be -- helps us -- allow to reduce -- helps us to reduce our costs before the year starts, and allows us to take pricing action in a timely manner. We believe the pricing action we have taken this fall and some more in December, will, for the most part, offset our cost increases through the first half. If costs continue to escalate, we may take further pricing action in mid-2007.

Steve gave you our preliminary guidance for 2007. Our long-term goal is to grow sales 5 to 8%, so our forecast for 2007 is in line with that. We expect increased earnings 16 to 19% in 2007. I have confidence in our team's ability to deliver in accordance with our guidance. Of course, we are constantly seeking acquisitions that can help enhance our return to shareholders as we have throughout Flowers' history. Any new acquisition will be an add-on to the guidance we have provided. Our cash flow remains strong, and we continue to use cash to make capital investments, pay dividends to our shareholders, consider strategic acquisitions, and to continue our share repurchase program.

In summary, our performance in the third quarter and the year-to-date has been solid. We expect to report record results for the full 2006 year, and we look forward to another record year in 2007. This management team is focused on growing our business, on driving our costs, on improving our margins, and on creating value for shareholders over the long term.

Now Steve and I will take your questions. Kathleen, if you will open up the phones, please.

[OPERATOR INSTRUCTIONS]. Eric [Katz], Deutsche Bank.

Hi. Good morning, George. Good morning, Steve. Good morning, Marta.

Good morning, Eric.

I wish Jimmy all the best.

Thank you so much.

I guess first question, and probably the most -- hopefully, maybe the most important, given the cost pressures, is you're showing that you have the ability to raise prices. At what point do you think price increases may have an impact on demand elasticity, and/or a mix shift away from branded towards private label?

Eric, that's a wonderful question. So far this year, even though prices are up some compared to last year, private label continues to be down. Private label units are down 1 to 2% nationwide. Dollars are up some 3 to 4%. So private label does not take the advantage, in my opinion, of any price increasing on brand so far. As we go through the first quarter of next year -- the last part of this year and next -- first quarter next year, we'll just have to be cautious and make sure we stay aware to the consumer. Ultimately, they are the one who decides. So far, though, we have not seen any erosion on the branded side.

Okay. And can you talk a little bit more about the -- how the independent operators are kind of feeling out there in terms of the volatility of the fuel costs that they have to manage versus the kind of the price increases that you're putting through and kind of how they manage that at retail?

Eric, I'll go back to previous comments, and they're still very true today. The good news is fuel is down for distributors. We have seen a decrease in the past quarter, as prices have abated on gasoline at the pumps -- retail price. The good news is, as we continue to grow our sales, and I believe I -- we commented that bakeries, the DSD program is up some 9.9% in sales for the quarter, that's wonderful news for our distributor. As we grow the market, their margins are based on that, and as long as we can continue to grow the market, that is not a concern for our distributors or for the Company, because it more than -- more than offsets in a big way the gasoline price.

Okay. Another follow up. How much of the -- because obviously, excluding the hurricane proceeds, margins were a bit light in the third quarter. How much of the hit was due to the timing of the price increase versus the -- still kind of flowing through higher input costs? Is there a way to kind of break that out? I mean, obviously you're more comfortable with things going forward with the price increase, which is why you increased the outlook for the year.

That's correct.

But how much of that -- how much of a negative hit was that during the quarter?

I would -- I was -- price increase, by the way, only came into effect the very last week in the quarter, and we've said repeatedly, and our customers understood, we were looking at October 1st. I think we said that numerous times. For the quarter, I think the number from ingredients and energy and diesel, et cetera, was probably $0.03 for the quarter.

I see. $0.03. Okay. I'll pass it on. If I have another one, I'll queue back up. Thank you.

Thank you, Eric.

Farha Aslam, Stephens, Inc.

Hi. Good morning.

Good morning, Farha.

Hey, could you just remind us what your wheat costs are going to be for next year, and how that compares to this year?

Let me give you a range. We're looking at roughly 160 to 165 million in new flour -- or total buy for next year, and that'll be roughly 15 to 17% price increase over prior year.

And with --

That's just -- [bottom part of] -- that's just flour. If you look at the other ingredients, that -- the other ingredients -- historically, a lot of times when you see flour up, some other items might be down. This is probably the first time we're seeing where all commodities are up at the same time, which is unusual, but we're coping with that, and our customers have understood that, and are helping us offset it.

So with the pricing you've taken 5% in October, and then you have another price increase in December. How much would the price increase be in December?

I think when you start at January, if you look at --

Okay.

-- What we've -- we're probably looking between the 5 and 6% neighborhood.

Okay. And that's just the different portions of your portfolio as to when the pricing comes into play?

That's correct. By January 1st, we'll all be in, unless there's other price increases needed beyond that.

So the full portfolio will have the price increases in, and that's what gives you confidence in your numbers for next year?

That is correct.

And that should offset the higher wheat buy that you have?

Yes.

Okay. That's helpful. And your guidance for this year, does it include all of the various insurance proceeds that you've gotten? And year-to-date, how much have those been?

I think the question is -- let me repeat it. The question is how much has insurance gone into the year's profits?

Yes.

I'm trying to say $1 million in the second quarter -- let me get that number for sure.

This is Steve, Farha. The guidance does include the insurance proceeds. And year-to-date we've had roughly 5-point -- roughly 5 million, 5.3 million.

Okay. And for next year does it include any insurance proceeds?

No, there's no insurance proceeds next year. As we stated, the one small claim was closed, and we have approximately $1 million left remaining on the claim with regards to the hurricane.

Okay. That's it for me. Thank you.

Thanks a lot.

[Dana] Geissler, Merrill Lynch.

Hi. Good morning.

Good morning, Diane.

Can you hear me okay?

Yes.

I wasn't actually sure if that was me there. Anyway, just one further clarification on the insurance proceeds. I remember from the second quarter conference call you had discussed that some of the proceeds you were actually receiving on the Katrina piece this year were from items that had been incurred at the beginning of 2006, so that there was -- the net impact of the expenses versus the proceeds, at that time, was neutral -- earnings neutral. So are there expenses in 2006 that have run through the P&L that you're now collecting?

This is Steve. That's correct, Diane. Through the first half of the year, we had estimated some business interruptions still in the early part of the year, and the insurance proceeds we've collected through the second quarter were basically earnings neutral.

Okay.

The 2.5 million -- the 2.5 million -- or the 2 million related to Katrina in the second half is primarily the recover of -- property damage.

Okay.

There's really no earnings effect in the second half so -- the net effect on the year for Hurricane Katrina is $2 million.

Is 2 million. Okay. And then, of course, there's the fire piece, which was a separate claim?

The fire piece was separate, but we did have costs in the first half related to that, so that's really an offset of --

Yes, but the fire, I'm just -- I'm not even going there, because I didn't need -- I didn't run it through the expenses, so the recovery is just -- is an add back. Anyway, I guess, then, the other question I had was on -- you had talked about some of the -- the footprint expansion and the impact to your -- I believe your sales line from the increased footprint expansion. Could you talk about how your entrance to the market has been proceeding, and kind of what we should look for as we move into 2007, since this is the -- one of your sort of growth strategies longer term?

Thank you, Diane. If you take a look at, say, northern Virginia, where we've been going on two years, year-over-year, we're continuing to get stronger in those new markets. If you look at a place like northern Kentucky, and Cincinnati, that is a new entry, so it takes a good year to have the build up that we're comfortable with. And I've been asked this question several times, how long does it take to, quote, break even in those markets. We think it takes a good 12 months, but we're not -- we're not unhappy with that. We're happy with the way we're growing in those markets. It just takes a little time for the consumer to find out you're there, and get to know Nature's Own as well as they should.

Who are your major competitors in those markets that you've entered?

Up in northern Virginia and Maryland, Weston is certainly there. Interstate, several independents -- smaller independents.

Okay. Do you see anything on the competitive landscape that would suggest -- I mean, I think obviously you've been taking share, et cetera, because you've had some players that have either been distract by other -- business realignment, or other issues. Is there -- how is the competitive landscape sort of shaping up here for the rest of '06 and as you move into '07? Is there anything we should be aware of?

I think it is quite normal. This has always been a competitive business. I think all of us know the industry is not doing as well as it should as a total. We've talked about Sara Lee before, good marketing company, a good brand. We're watching that very carefully. All our competitors continue to be tough. Some of them have been unfocused a little the past year, probably, because of issues; but out in the street, the salesmen are very competitive. They don't seem to know it's an issue that's going on in their company. So -- but I don't see anything drastic that I would -- that I'm alarmed about from a competitive standpoint.

Okay. All right. Well, just wanted some clarity on that.

Sure.

Thank you.

Thank you, Diane.

Heather Jones, [BT&T] Capital Markets.

Good morning.

Good morning Heather.

Please let Jimmy know my prayers are with him as well.

Thank you.

I was wondering, your start-up costs for the Newton line and all, as well as other lines, I was wondering if you could give us an idea what the year-to-date costs for those have been?

Year-to-date, it was approximately 3 million.

3 million? Okay. And your flour, I was wondering, your bread flour, what is that running up on a spot basis? Because it sounds like you've -- with the 15 to 17% increase projected for '07, that that's pretty favorable compared to what it is on spot basis, so I was just wondering if you could give us some more color on that.

I'd be happy to. And that is a great question. I think the competitive advantage that this company has had because of the experience that we've had in this industry in buying flour. You're right, if we was buying spot today, it would be considerably more than that, but our hedging program does work. You can have a competitive advantage for certain times [off ever], because sooner or later it all catches up, I guess. But we hedged some time ago for the time frame that I mentioned for the last half of this year, and first half of the next year -- majority of the first half of next year. So those prices are -- that we've got solid are -- are good, and looking at the new crop next year, that's why we have not covered the last half. Usually higher wheat prices bring on more wheat, more acreage, and it's reported that probably as many as 5 million new acres will be planted for new wheat, and we'll hear more about that from the U.S. government I think in late January --

Right.

but, you never know what the last half brings, but we think it will be favorable to what we've got in first half.

The 5 million new acres. Is that what you all are expecting, or you've heard that?

We've heard that through several sources.

Okay. And is that going to be all hard red winter, or is that just a mix of the wheat?

I'd say that'd be a mix.

Okay. And wondering, are you taking similar pricing on your private label products, or more branded, less private label? Just wondered if you could give us more color?

I will -- I can't give specifics --

Okay.

-- but I can tell you that private label and food service was the first to go up. Most of our brand is going in now in December.

Okay.

And no, it had to be -- just too much -- too much new costs with all these ingredients, not to have price increases in all the areas.

Correct. And then finally -- well, two questions. First, now that you -- I think you -- I apologize if I misunderstood, but I think you said that you've now cycled the big gains that you received from IBC last year, their realignments?

That is correct, Heather.

Okay. And was wondering if, now that we're in Q4, have you seen a pick up in your -- in your core volume growth now that you've finished cycling those difficult comps?

It's always good to see October come. We call it dog days down in this area. Hot August and hot September. Good to see October come with a little cooler weather, it seems like business picks up. You probably know we've seen four weeks of our sales for Q4, and that's why we're confident in giving the sales and the earnings guidance that we've given you for the year.

Okay. Good. And then my final question is, Grupo Bimbo, I have never seen -- or just never seen any of their product up here in Virginia, and was just -- but recently, saw some standalone displays in the local Wal-Mart supercenter, and I was just wondering if -- what's going on with that? I mean, is that a part of a big push of theirs into this part of the country, or is that, like -- I'm just -- wondered if you could give us some more color of that, because I hadn't seen really anything of [them] here.

Well, I was about to say I'm proud you had not seen any.

Okay. Well, maybe I'm just totally oblivious, but I hadn't noticed before.

Let me ask you this question, was it bread and cake, or just bread?

It was just bread, and it was using the Bimbo label, and I want to say the labeling was in Spanish. I mean, it definitely seemed like it was geared to try to target a Hispanic customer, but I had never noticed it before.

Heather, I can't speak for them, but they -- of course, they're big in Texas. They, too, have expanded their market somewhat. I would say that would probably be an isolated situation that you did see in Virginia.

Okay.

I have not had many reports of wider distribution in our, quote, northern territory, which is North Carolina and Virginia.

Okay. All right. Well, thank you for that color.

Thank you.

[OPERATOR INSTRUCTIONS]. David Leibowitz, Burnham.

Good morning.

Good morning, David.

Good morning, David.

A few brief ones if I may, totally unrelated as usual. What is the date of the Director's meeting coming up when the dividend will be discussed?

When the dividend's discussed?

Yes. There was an earlier statement made that the dividend will be discussed at the next Board meeting and the results would be --

It's discussed at every Board meeting, and that would be next Friday, and, of course, I can't speak for the Board.

Understood. Next question. The earlier point about your hedging your wheat or flour going forward, do you believe you have hedged at a lower rate than some of your competitors?

We're happy with our number. I really cannot speak to what our competitors have booked on their hedging program, if they have one. We really don't know that information.

Okay. And in terms of Cincinnati -- the Cincinnati-Kentucky market, you said it would be 12 months. That comes out to, I believe, the second quarter of next fiscal -- of the fiscal year?

That's correct.

And thereafter, is there any reason to believe that this market has any greater potential than any of the other markets you've recently entered?

David, I wouldn't call it greater, because all of them are competitive. There's not a shortage of bread in those markets. So what our job is to have great quality on our branded products, give great service at a fair price, and win over the consumer. But it is -- it's a fight on the street every day with our distributors doing that. But I don't see any greater or less.

And the last question. As we look into '07, do you believe that you'll see more growth by entering new markets on your own, or from the acquisition arena?

You always ask tough questions, David.

But you always have the answers.

David, I can't speculate on the acquisition side. We will continue to look for every opportunity in the world, though, for acquisitions that will add to the base of this Company, that will make us stronger, and hopefully those acquisitions would meet our financial terms, and this is great for our shareholders. We're always trying to find that next one that will make a difference. We continue to work on that. And we're continuing to look at those boundary lines where we presently are, and across the next market that we'll push out into, and there will be others in '07. I just can't say because of competitive situations.

Okay. Then let me try and rephrase the question, if I may. If we take the guidance you've given us for '07, how much of the revenue increase are you projecting will come from entering new marketing territories directly?

Well, what we basically said, year-over-year, we anticipate 1 to 1.5%, not brand-new markets, but the markets we've been in to -- on top of our base sales.

Okay. Thank you very much.

Thank you, David.

Eric Katzman, Deutsche Bank.

Thank you. Just a follow-up question on cash flow usage. I noticed that you obviously bought back a fair amount of stock in the quarter at a decent price, and your projection for '07 assumes a roughly 61 million share base. Obviously, you have a wide range, so it may not matter in the scheme of things, but how would you kind of prioritize the cash flow usage, because, once again, you should be free cash flow positive. How are you going to -- how do you say that should be balanced, George, between additional share repurchases versus a dividend increase? I guess there really isn't much debt pay down. How would you kind of prioritize it for shareholders?

Well, for shareholders, I would start out by saying probably the biggest part would go to capital expenditures, because we believe in the long term that we have to have very efficient plants, low cost producer, to compete and stay ahead of our competitor. Dividends, naturally, historically, that has been reviewed, even though we look at dividend rate every quarter, normally that is looked at real hard at our second quarter meeting, or the annual -- our annual shareholders day. Based on our cash flow, we just have to wait and see what that decision is. We will be opportunistic as far as share for repurchase. We believe it's a great buy, and as those opportunities present themselves, we'd certainly be trying to take advantage of that. In acquisitions, we do see and believe that there will be some acquisitions coming. But as far as telling you it's 25, 25, 25, and 25, it's based on what's going on at the time with the Company in the marketplace. I'll start out by saying I think the number one priority that will give the shareholder the long-term benefit is through keeping our plants modern and efficient so that we can stay in business for the long term. So that is the number one priority.

Okay. Understood, but obviously we kind of look at it beyond CapEx, because your CapEx isn't really out of whack versus depreciation and amortization, so there's still a fair amount of free cash flow even beyond that, and you could always -- if you had to make an acquisition, you could always actually do a little bit of leverage. But -- okay. I'll leave it there, and thank you.

Thank you, Eric.

There appear to be no further questions at this time.

Kathleen, thank you, and let me thank all of you who joined in on our conference call today. We are sprinting toward the end of the fourth quarter. We know business is a marathon, we're in it for the long pull. We'll continue to do everything possible to be a long term shareholder value for our shareholders. Thanks for joining us today.

This concludes today's Flowers Foods conference call. You may now disconnect.