Flowers Foods Inc (FLO) 2007 Q3 法說會逐字稿

Good morning. My name is Jerleen and I will be your conference operator today.

At this time I would like to welcome everyone to the Flowers Foods third quarter 2007 earnings 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. Thank you.

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, Jerleen. And good morning everyone. We appreciate your joining us today. Participating with us this morning we have George Deese, Flowers Foods Chairman, Chief Executive Officer, and President; and Steve Kinsey, our Senior Vice President and Chief Financial Officer. George and Steve will review our third quarter earnings, our updated guidance for 2007, and our preliminary guidance for 2008. And then we will open the call for your questions.

Of course, it is important that I remind you before we get started that our discussion today may contain forward-looking statements. Words such as expect, believe, or similar expressions will identify -- will identify those statements. While we believe our statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters we will discuss during the call, important factors relating to Flowers Foods business are detailed fully in our filing with the SEC. Now, I am pleased to turn the call over to Flowers Foods Chairman, CEO, and President, George Deese.

Thank you, Marta. Good morning. And thank you for joining our call today and for your continued interest in Flowers Foods. We achieved outstanding results in the third quarter and for the year-to-date. But before we talk about the quarter, I know you have questions about commodity prices.

As you know, we are facing historic prices for flour. Wheat is at record levels and even with our hedging programs, our costs will be significantly higher in 2008. However, our team has proven our ability to deliver good results even in the face of such challenges. This current year is the most recent example. I believe we will deliver in 2008 in spite of higher costs. Steve and I will talk more about that later in the call on our guidance for '08.

Now looking at the results we reported this morning for the third quarter. I am pleased to report sales of 475 million or 7.7% increase over the third quarter of last year. Income from continuing operations came in at 22.5 million, which gave us earnings per share of $0.24 dollars per diluted share versus $0.18 for last year. I am also pleased to report that we continue to see a positive mix-shift as sales of our branded products continue to increase. That is particularly encouraging with the pricing actions we took in late '06 and earlier this year to offset higher costs for wheat and other ingredients. The positive mix-shift indicates that consumers are not trading down and demonstrates the power of our brands such as Nature's Own and Whitewheat.

Now, let's look more closely at our operating groups. For the quarter, sales for bakeries grew -- increased 8.9% and EBITDA for bakeries was up 13.9% with an EBITDA margin of 12.2% of sales. Looking more closely at sales for the bakeries group, branded retail sales were up 10.9% in the quarter. Our brands out performed the category, which grew at roughly 6%. Our white bread brands led by Whitewheat and local white bread brands grew by 8.2%, which was ahead of the category. Sales of Nature's Own variety breads continued to be very strong with double digit growth, well ahead of the soft variety bread category. Nature's Own remains the best selling soft variety bread in the country. Our newest brand extension, Nature's Own all natural premium bread continued to experience strong growth.

Sales grew in strong double digits in the quarter well ahead of the category. Our branded buns and rolls are also up double digits for the quarter. Our solid growth across our branded bread, buns, and rolls is evidence of the strength of our brands and of our execution in the marketplace. Once again, according to IRI, our brands gained share in both dollars and units. In addition, at retail, our sales of store brand, our private label bread, rolls, and buns are up some 8.2%. Just a comment one more time, I know there's a lot of concern about private label growth. Private label bread, buns, and rolls actually lost unit share and dollar share compared to the overall category. Our DSC food service business also grew -- grew nicely with increases in fast food as well as other food service business.

Turning to our specialty foods group, sales grew point -- grew by 2.9%. And EBITDA by 24.2%. The EBIT -- the EBITDA margin was 10.2% of sales. I am especially pleased to see the improvements being made on margins for the specialty group. Our Mrs. Freshley's cake brand is doing well. You will remember our efforts to grow Mrs. Freshly branded cake as we exit lower margin contract production, snack-cake business. In October we introduced several 100-calorie BlueBird and Mrs. Freshley snack cake, although it is early to report on these items, we expect to have good consumer acceptance of the 100-calorie snacks. Our frozen food service business continues to grow its business and customer base. The focus here is on value-added bread, buns, and rolls.

Our capital investment strategies are paying off. The benefit of our newest bakery in Newton, North Carolina; our new bread line in Villa Rica, Georgia; our new cake distribution center in their strategic locations, near our growth market was evident again in our selling, delivery and administrative expense for the quarter. Our sanction markets continue to perform well as we work to gain new customers and build market share in those markets. Now, it is my pleasure to turn the program over to our Senior Vice President, Chief Financial Officer, Steve Kinsey.

Thank you. Good morning. As George said we are very pleased with our resort -- results for the third quarter. Despite the commodity head winds, we remain steadfast in our strategies and this enabled us to continue to show strong gains year-over-year. Net income for the quarter was $22.5 million, or $0.24 per diulted share, compared to the 22.6 million, or $0.24 per diluted share, third quarter of fiscal '06. I would like to remind you, however, that net income reported for the third quarter of '06 did include a $5.5 million or $0.06 per share tax benefit reported in discontinued operations. This tax benefit was due primarily to the reversal of tax reserves, resulting from the completion of prior-year audits in that year.

Focusing on continuing operations, income for the quarter grew approximately 32% to $22.5 million or $0.24 per diluted share, compared to $0.18 per diluted share in '06 as George mentioned earlier. Our operating margin for the quarter was strong at 7.3% of sales, compared to 6.4% in the third quarter of '06. This growth is contributable -- attributable to the strong performance by our brands, as George mentioned, continued efficiency gain, our pricing strategy, and most of all great execution by our team. Our EBITDA for the quarter was 49.9 million, or 10.5% of sales, compared to 43 million, or 9.8% of sales in fiscal 2006. Again, this is a 16% growth year-over-year and very positive in light of the circumstances in our industry.

Turning to the details, sales growth for the quarter was 7.7%, which is within our guidance for the year. Pricing contributed 5.7% of the growth, coupled with the positive mix-shift of 2.1%. Volume was down slightly due primarily to our planned-unit losses in our cake category. However, I would like to point out our core bakery business continued to post volume increases through both gains in market share and territory expansion. The bakeries group sales grew 8.9% and the specialty group was up some 2.9% for the quarter. We did continue to experience downward pressure on our gross margin year-over-year. Gross margin decreased approximately 100 basis points to 48.6% in the quarter compared to the same quarter in '06, primarily, however as a result of higher commodity and input costs. However, selling, marketing, and admin expense, as George alluded to earlier, as a percent of sales, decreased to approximately 38% which is just slightly under a 200 basis-point improvement year-over-year.

The quarter as well as the year-to-date improvement as a percent of sales is the result of higher sales and of benefits of our distribution rationalization brought about by new production capacity, being located closer to market in the bakeries group, as well as the efficiency gains from the consolidation of certain specialty distribution facilities. Also in the quarter administrative costs improved year-over-year as a percent of sales as well as well as we did see a decline in absolute dollars in that category. Depreciation and amortization as a percent of sales in the quarter remain relatively stable year-over-year. You will notice the slight increase in net interest income and this is due to our lower debt service for the quarter, and an increase in interest income on distributor notes, as a result of our conversion of the (inaudible) territories earlier in the year to our independent distributor program.

I would also like to point out in the quarter we did have -- we recognize a gain on insurance recovery of 700,000 dollars. Earlier in the year, we had two fires, one that affected certain manufacturing equipment at our (inaudible) plant, and another one at one of our Lynchburg plants distribution facilities. Neither one of these fires caused significant business interruptions during the year and the effect other than the insurance proceeds on the year is basically, was basically nothing. You also note in the third quarter of 2006, we had a gain on insurance of 1.6 million related to insurance proceeds from Katrina losses.

I'd also -- I would like to point out that in the third quarter of 26 -- 2006, in total, we recovered approximately $2.5 million of insurance proceeds from Katrina with the addition -- with the difference between the 1.6 and the 2.5 being reported in the cost to get sold and SD&A. If you were to exclude the insurance proceeds and gains from both years, from '07 and '06, you would actually see another penny positive effect on our earnings growth for the year. The effective tax rate of 35% is down slightly from the comparable quarter the prior year. This is primarily the resort -- result of several favorable discrete items recognized during the quarter. Considering these items and the effect of the variable interest ending on the tax rate, we have adjusted our full-year tax rate down to a range of 35% to 35.5% from the 36% previously estimated.

Taking a quick look at our balance sheet and capital structure, we continue to have virtually no debt, which provides us with financial flexibility to take advantage of opportunities as they arise. Our cash flow for the quarter was strong. It allowed us to fund CapEx of approximately $14 million, dividend of just over 11 million. And in the quarter we did have stock repurchases of 12.8 million or just over 600,000 shares without any net borrowings on our credit line at the end of the quarter. The third quarter share repurchase was our first repurchase of the year and it brought our total shares repurchased of company stock year-to-date of 18.2 million. Or we have invested approximately $260 million back into the company. I would like to remind you that we have 4.7 million shares still available for repurchase under the plan as it currently stands.

Moving to our guidance for '07 and '08, we did revise our 2007 guidance upward to reflect anticipated sales of $2.027 billion to 2.034 billion, or 7.3% to 7.7% in growth. Income from continuing operations should be approximately 90.2 to 93.5 million, or 4.4% to 4.6% of sales for the year. This equates to and E -- an expected EPS for the year of $0.98 to $1.02 per diluted share, which is a significant increase at 21% to 26% over fiscal '06. We do only have eight weeks or so left in the year so we are very confident in the guidance for '07.

Now moving to 2008, as George mentioned input costs are rising in 2008 not just for our business but across the sector. Our preliminary guidance for 2008, which is a 53-week year, anticipates a sale increase of 8.5% to 11%, excluding acquisitions. This equates to sales in the range of 2.2 billion to 2.258 billion for the year. This guidance also reflects pricing actions scheduled for December of '07 and early in January 2008. We anticipate the 2,000 sales growth to be pricing in mix of approximately 7 to 8%, volume of 1%, and the extra week for 2008 will add about 2,000% to the sales line.

We continue to have strong growth in our Nature's Own brand and we expect similar results going forward. George will provide more color on 2008 as we move through call. Though we are fore -- forecasting 8.5% to 11% sales growth in 2008, at this time we do not see any need to adjust our long-term sales goal of 5 to 8% annually without acquisitions. We feel this is a more sustainable in the long haul and 2008 is being significantly impacted by the cost increases.

Our 2008 goal is to minimize and eliminate margin erosion. We estimate net income to be 99 million to 108.4 million or 4.5% to 4.8% of sales. We project 2000 EPS of $1.07 to $1.17 per diluted share, which is the forecasted increase of 9% to 15% over our 2007 projections. Let me assure you our team is very focused on driving out controllable costs in 2008 and delivering these results. Our capital spend for 2008 is estimated to be 95 million to $100 million. This is up significantly over 2007 and prior years, based on plans for the construction of new production capacity in 2008. Adding the new capacity is in keeping with what we have told you over -- told you for several years. As we expand our regions in new territories and as we grow in our core markets, we will need to add production capacity to support that growth. Our capital spend in 2008 also includes our normal maintenance spend to ensure our existing bakeries continue to operate efficiently.

To sum up the financial results -- the third quarter results were outstanding and 2007 should be a good year. As we face challenges with higher costs for 2008, we will work to offset those costs by improving our efficiency, reducing our costs, and continue our pricing strategies. By doing so our team expects to deliver good growth in 2008. Now with that I will turn the call back to George.

Thank you, Steve. It is -- it is important to remember as you look at our third quarter, and year-to-date results, that about this time last year, we told you that 2007 would bring on about $75 million in additional costs. Our team worked to take off out of our business and we took pricing actions to offset higher commodity costs. With three-quarters of the year behind us you can see that we are delivering at the top end of what we told you to expect last year. We have confidence in our 2007 guidance.

We also have confidence in our plan for the year ahead. It should be no surprise to you that as we plan for '08, we are facing higher costs of about $130 million. Much of that reflects our higher flour costs as well as other ingredient areas. As you know, the price of wheat is about double for the first half of 2008, and depends -- that depends on which day you look at it by the way, which counting up over the last 50 days -- 30 days of trading, we did see limit up and limit down in 30 of those 50 days, so it is very volatile as you well know.

Our planning process and our hedging program helped us to have visibility into our costs for the year ahead. We have coverage for flour through much of the year. However our coverage is at higher prices as I mentioned. Our guidance for 2008 takes those higher costs into consideration. We took some price in August and we have taken additional pricing will be taken in December and early January.

As we enter the new year for the company as a whole, price and end-mix will be up about 7% to help cover our higher costs. We also are taking specific action to reduce our operating costs at every location, and in every departmentment. We are working to improve our efficiencies even further. This is the Flowers way. When faced with a challenge, our team rises to the challenge with enthusiasm and determination.

Our plans for 2008 include introducing -- introducing new Nature's Own items and new cake items that is will meet the need the need of today's and tomorrow's consumers. We also expect to gain new food service business by partnering with our customers to develop innovative bakery items. To sum up our guidance for next year, which is a 53-week year, pricing and mix should add roughly 7 to 8%. We expect 1% growth in volume. Again, remember next year is a 53-week year, which gives us roughly a 2% increase in volume sales. I also expect selling, delivery, and administrative costs to continue to be reduced.

Our cash flow remains strong. We invest our cash to build value for shareholders over the long term. Those investments include making capital investments to improve our efficiencies, such as our new bakery in Denton, Newton, the new bread line in Villa Rica, our SAC system, and our management information systems in general. Paying dividends to our shareholders is also at the core of our philosophy. Making strategic opportunities also is at the core of our business. In addition, we feel buying our stock under the share repurchase plan is one of the best acquisitions that is we can make. As reported, we did purchase over 600,000 shares during the third quarter.

Going forward, we expect to achieve our growth through new markets as we grow our DSD business, new products under our Nature's Own and other strong brands. We will grow through our core markets where population growth continues to be strong. And we will continue to work on acquisitions that will bring us new markets, new products, and new customers. And we will continue to invest in new bakery facilities and added capacity. As Steve mentioned, we are looking at capital investment next year of roughly 95 to $100 million and taking into consideration will be a new bakery that we will discuss at a later date when everything gets complete.

Our team is focused on growing our sales, on improving our efficiencies, on improving our margins and doing what we do best -- creating value for our shareholders over the long term. Also, I am extremely proud of your management team and every person who is associated with this company. They do execute day in and day out and I am so proud of them and the job, the work that's being done. And I know that we will continue to do that in the future. Jerleen, at this time, Steve and I will take questions. I turn it back to you.

Thank you. (OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Our first question is coming from Farha Aslam with Stephens Inc.

Hi, good morning.

Good morning, Farha.

Good morning.

Congratulations on a great quarter.

Thank you.

And thanks for the detail regarding the commodity outlook. Now just to make sure we have it straight, the flour, you are fully covered for '08 pretty much now?

We are in the 75 to 80% range.

And when you think about soy oil and sugar, are those a significant cost for you or sweetener in general? And can you just share with us how you look on those fronts?

Sweetener is a big item.

Okay.

Probably in the neighborhood of $30 million a year. So it is significant. Soy oil of course with everything going on with soybeans et cetera is also - is a big item for us. Some of that is covered, and some is not. And I had rather not say specifically but all of that is taken into consideration on your guidance.

Okay. So current prices are taken into consideration.

That is correct.

That's great. And then when you look at your CapEx budget it allows for it seems like more than just one bakery, because as I understand it costs about 35 to 40 million to build a new bakery. So, is there probably room for one than one bakery in that CapEx budget?

There is future considerations that we are looking at back after the year.

Okay. And then when you look at the M&A front you have IBC kind of currently in a bidding war. Are you willing to comment at all on the situation and what Flowers' view is on that?

Well, I won't speculate beyond what we continue to say. I don't think any of us know exactly what will come out of that eventually. We have said publicly that we would be interested in some portions if there is a break-up. And I think just stay tuned and see what happens. I don't think any of us know what will be the final outcome at this point.

That's fair. And my last question is in terms of M&A opportunity, you were talking about smaller operators possibly looking to sell with this very challenging commodity environment. Can you update us on that front at all?

Farha, it is a great question. As you know we have showed publicly there's probably about $1.2 billion of companies in sales in the 200, 250-mile radius of our boundaries that we operate out of today. And we are always looking and checking to see what is available that could add to our operational base that could give us new markets, new products, new people, and new brands. We do expect to see some opportunities come as the pressures of consolidation in the industry, consolidation in the food industry in general, through our customers, I think does put pressure on all of us to maximize what we are doing. And that has been at the core of our business since we went public. As you know we have acquired some hundred -- 100-plus businesses since 1968 and hopefully as we go through the rest of this year and next year we will have some opportunities to add to the strong base of this organization.

Great. Thank you very much.

Thank you, Farha.

Thank you.

Thank you. Our next question is coming from Tim Ramsey with DA Davidson.

Good morning. And congratulations.

Good morning, Tim. How are you.

A little croaky this morning. Hey, boy that was sure an amazing performance on the SG&A line. And I am not sure I fully understand what was going on there and you talked about more of it in 2008. Would you mind touching on that just one more time for me?

I'll touch on that so you might want to follow up. Of course SG&A also is driven somewhat by pricing and growth in sales as the percents total of course. We have been seeing now for three or four years as we get closer to the market and Tim you understand that coming out of the industry somewhat. As we get closer to the market with production lines, and our new bakeries, we really take out a lot of costs in double handling from shipping, transportation is much closer. And our distributorship keeps getting stronger with the right averages and so forth.

So all of it works to -- and the business plan is working, the model is working. And speaking of '08, we -- now that we will have the same amount of increase, because this quarter, I think, took out right at 200 basis points. But I do expect to see -- there are are other things we know we can do to make our percent of SG&A continue to shrink some. It has to be more of the same, fine tuning at this point.

Tim, this is Steve. I think the -- I think the improvement there is spread across several items within the category. The distribution cost, as George said, was a significant part of that, getting the production closer to the market. But we also did see some absolute dollar declines on the administrative side and which probably added half -- half of that, half of a basis point.

Got it. Okay. Well, very impressive. Thank you.

Thank you, Tim.

Thank you. Our next question is coming from Diane Greissler with Merrill lynch.

Good morning.

Good morning, Diane.

I guess that's me. You know your Geissler. Anyways, congratulations on your quarter.

Thank you.

And it is, let me just make sure I understand this on the revenue guidance for 2008, you are including about 2% for the extra week.

Roughly.

And I am assuming.

1.7 to 2%.

What.

It is officially 1.7 to 2%, rounds up to two.

Well, I appreciate the detail. And I guess assuming it is a bread business and kind of steady week in and week out. Would that be $0.02 on the bottom line. Is that the way we should look at it?

No, 2 -- 2% in the sales increase side, from top line.

Okay, but presumably the extra week is, there's no seasonality, etc. so if we wanted to --

I think that's, that's a reasonable assumption.

Okay. And then just I am a little puzzled on the share base in the guidance. I know you bought some shares this quarter and you are using a 92 million base for 2007, which actually suggests that share count should go down in the fourth quarter, so if the 92.6 you are using for fiscal '08 -- is that taking into account extra stock options, a suspension in repurchases or you don't put it into the -- you don't make any assumptions about repurchases until you actually make them or if you just could help me understand why it is going up given that the fourth quarter looks like it is actually going to be sub-92 million.

Yes, Diane, I think you touched on a couple of them. One --one would be we don't assume any share repurchases until they happen. The second would be we are forecasting the possibility of future stock awards in that number.

Okay.

And our board and comp committee meets in -- in a couple of weeks. So, we are anticipating that there might been an approval of a future award. So, we do forecast those in.

You are hoping for that. I guess then the question that I have is really the incremental CapEx next year for the production facilities wouldn't necessarily mean that you would have to curtail share repurchases in the future, you budgeted for both in your budget?

Our cash flow is strong. As opportunities present themselves, like they did in the third quarter, we will take advantage of that. So, that will not prohibit anything on share repurchase plan.

Okay. Alright. I appreciate it. Thanks so much.

Thank you, Diane.

Thank you. Our next question is coming from Heather Jones with BB&T Capital Markets.

Good morning.

Good morning, Heather.

Good morning, Heather.

Terrific quarter.

Thank you.

Very impressive. I have a few follow-up questions. I know that coming into '07, you had the vast majority of your wheat cost hedged. But I was wondering is it fair to assume that those weren't like a steady state cost through '07. Did they tend to trend up during '07, even given that you had hedged them in advance?

We -- we didn't have -- number one we didn't have 100% coverage at this time last year but we did have a significant portion. And quite honestly we did pay more for wheat flour third quarter and fourth quarter is also a slight increase compared to the first two quarters. But that's all in our guidance and our numbers. And we feel good about it. We don't feel good about the price we are paying but about the guidance we have.

I was just trying to figure. So, basically it is fair to say it will be an easier comp in the second half next year than it will be in the first half.

Correct. That is very true.

Okay. And your guidance, it seems to be that it's largely predicated on sales growth and further expense leverage. Do you think your -- what you are projecting as far as price mix, do you think that's enough. I was doing just back (inaudible) math and it seems like it is enough but I want to get commentary. Do you think you will be able to keep gross margins flat for the year or do you expect some gross margin deterioration next year?

I think gross margin could tend -- trend down slightly. I don't think it will be a major situation.

Okay.

Depend - it's going to depend on does the 7 to 8% pricing. That's why we did use 7 to 8 pricing and mix. If you think about a $2 billion company, with 7 or 8% you see the -- how much the top line grows. And taking into consideration the added cost, it should pretty well offset those costs but it depends, do we have any slippage. We are not counting on any but it should take care of the -- It should take care of the commodities and other costs, and hopefully, we will get even margin expansion or slightly improved based on our execution of cost control.

Okay.

That's the way we are really looking at it.

Going back to an earlier question on expense leverage, your sales were up, rounding up about 8% for quarter. You are getting -- you are assume you are growing your sales route -- sales-per-route average. Is that fair assumption?

Yes, it is.

Okay. How much did DSD geographic expansion add to sales.

We think, I think, quarter in and quarter out, year in and year out, from the beginning we can add about 0.5 to 1% to our base sales.

Okay. And then finally going back to the share count question, is it fair -- you made a comment, George, that your shares are the best acquisition at this time. Barring something with IBC or another acquisition, is it fair to assume even though it is not included in guidance, is it fair to assume you would be repurchasing shares in '08?

I think if I look at things historically.

Yes.

Historically we have been a firm believer in a dividend policy. We've been a firm believer in (inaudible) on acquisitions. We've been a firm believer on -- investing in technology and building new plants. And we've been a firm deliver in purchase -- repurchasing our stock. So, with history as a guide, we should be, if everything stays as is, we would very much be interested in buying back in our stock. So you could assume that.

Okay. Thank you. Great quarter again.

Thank you, Heather.

Thank you. Our next question is coming from Mitchell Pinheiro with Janney Montgomery.

Hello. Good morning.

Good morning, Mitch.

Mitch? Hello?

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

Jerleen? Hello?

Did we lose Mitch?

I think you got Eric now. Hello, Eric. He will come back hopefully.

Mitch's pain is my gain. I guess, I will obviously, a fantastic quarter in the face of some ugly input costs. But I have a few questions, I guess on the outlook, I think historically, you have mentioned that when you put up new facilities which you are signaling through the CapEx budget that that's actually hurt your efficiency short-term like what occurred in Newton and maybe Villa Rica. Well, I am kind of wondering how is that factored into your SG&A assumptions for '08.

It is -- Eric, it is factored into our numbers. The next -- the next new plant could go awry, and we not do a great job. But it has been fascinating to me to watch our engineers and people who have installed these facilities. That's such a short-time hit and it is less than a penny that we feel like will be involved in starting up a new plant today. The short-term one quarter depending on when we start, if we start at the first quarter versus the last of the quarter, but it is not significant at all.

Okay. And then, in terms of the top line for next year, I know it is -- it is a volatile environment and it is tough to forecast. But it would seem that if you are expanding routes as you kind of indicated that's roughly 1% kind of volume growth over time, and that is, so in other words, if that is the 1% of volume that you are including that basically means the base -- base business in terms of volume is flat. Do you kind of view that as conservative? I guess in the face of pricing it makes sense to be conservative but the last few years you have certainly grown volume versus weakened competitors and there has been some category growth.

Eric, I would look at it two ways. If you look at our baked foods group, we've had nice volume increases and sometimes when I say volume, sometimes I look at it from a little different standpoint, I look at poundage increases. And we talk volume today to the analysts I know it is in units.

So what has happened in our particularly in our cake business as we sell less single serve, say 99-cent snack cakes, and sell more family pack at $3, you actually lose units, but in fact you are doing much better. And certainly on the bread side we've had those nice poundage increases. I know it sounds like we are talking out both sides of our mouths, but really our poundage has been up nicely.

I don't think anybody can claim that you speak out of both sides of your mouth, George, but I will pass it on. Thank you.

Thank you. Our next question is coming from Mitchell Panheiro with Janney Montgomery.

Can you hear me.

Yes, sir. Mitch, how are you doing.

I'm doing great. Eric asked all my questions. So I am finished. No, I'm just kidding. Hey, just a couple of things. One when you talk 75 to 80% of coverage for 2008 was that flour?

Yes.

Or was that all commodities?

That's basically wheat.

Okay. Wheat. Alright. And then, and is that done, I mean, is that sort of saying you are covered for the first three quarters or do you have coverage all year and -- I mean is that just 75% is that through September or how would you --

We look basically, you could say we are covered for the first two quarters at roughly the 90% level on what we think we will use and then some coverage in the third and fourth quarters as things -- when things do shift down in some prices, cost.

How about demand, looking at demand for a second, you have a lot of QSRs and casual dining customers. And I thought you said that things were okay there but could you color that a little bit? I mean, are you seeing any -- any demand changes in those two channels?

Yes. Let me, first of all say all we serve we are happy to serve and we appreciate it. I think if gas goes up, do people go to fast foods more than casual dining, you might can see a little shift in that. I would say that's probably a fair assumption.

Okay. That just, but I mean are you seeing, has it slowed down at all year-over-year, growth in those channels? Volume wise, not necessarily pricing wise, but on the volume side?

It depends. Casual dining you might have some particular restaurant chain not doing as good as others but I think it has slowed down some to answer your question. Fast food has not slowed down, in my opinion.

Okay, when it comes to the SM&A I may have missed this, given my phone troubles here, but marketing -- was marketing -- did you comment on what marketing was in the quarter.

Let me, I will do it this way, marketing, we look at it from what did he invest against the consumer, whether it is in magazines, cable vision, television, since off at the store level we invest anywhere from 3 to 5% of our sales in that category. And this quarter would certainly be in that range.

Okay. Was it -- was it relative year-over-year or was it over the third quarter last year? Do you have the growth rate that you could share.

I would say it is pretty close to the same.

Okay. When we look at -- I was looking at your CapEx budget. Obviously there's one, maybe two bakeries, put in there and I have seen -- I have seen some of your maneuvering down in the Orlando market, with the industrial development authority down there. Does -- is the Orlando market, you don't -- it doesn't look you have a bakery there now. Is that -- is that to add capacity or to consolidate capacity?

No. We, if we.

If you were to do that.

It is just about adding capacity.

Okay. And adding capacity, I mean and so, so is Florida -- is Florida growing for you? I mean was it -- is that obviously it is a growth market for you, but is there any.

Florida is growing. I remember back not too many years ago it had 11 or 12 million. Now it is up to 18 million people now, 20 million people. So, we have seen growth in consumers and we still have three bakeries. And that's why we are looking at the study and the possibility.

Okay. And so -- so would that, would that particular market be a market. I mean, is that sort of the one that is, if I can assume that there's two bakeries in your CapEx budget or parts of two bakeries there, is that sort of the known one or is that, I mean, is that the one that would be the closest to being announced?

Mitch, you are prying too much. No, no, let me say this. We will announce in a couple of weeks probably after final contracts and negotiations are complete, we will have one that, we talk about half a bakery a lot of times. And I can't name the location today but it will be a bakery that will serve half of the territories that we serve today and the other half capacity will go into another direction.

Okay. Great. Terrific. I mean for instance Orlando is obviously not close to any of your boundaries, and so I found that kind of --

Also, and that is, of course Denton was very similar in that half of that capacity went to Texas and half went to Oklahoma. Because of our growth, internally in growing market share, there will be needs, not as much needs as we push out. But internally growth stays pods, mega-growth state areas because we are at capacity and over capacity in some markets we will have to add as needed to take care of the growth.

Okay. And last, -- just last question, you have said private label, there's a mix, there's a shift away from private label or at least you are seeing in your numbers, brands are increasing as a percentage of total. Is there -- is there a geographic change there too? Iin other words, is Florida, do you see any changes like in Florida relative to Maryland? Or any other, because of potential housing impact in the South?

Mitch, I could look at it that way. I have not looked at it that way by geographic market or geographic state. I'm just looking at the overall sheet as we speak and see that the private label is down six-tenths of 1% in dollar share in the South, and down five-tenths of 1% on volume. Now, I don't have, I can get it by state. I just do not at this -- at this setting but we can give that to you that if you need it.

Okay. Terrific. That's all from here. Thank you.

Thank you, Mitch.

Thank you. Our next question is coming from Ann Gurkin with Davenport.

Good morning, Ann.

Good morning, Ann

I was wondering about your -- your push northward into Maryland, D.C. area. Is that still proceeding.

Yes, it is. We are, of course we have been in the northern Virginia market -- new market, I guess going on three years now. In D.C. probably 18 months and Maryland, Baltimore, specifically probably about a year now.

Is that perhaps where your new capacity to move further north.

That's not in the plans this coming year.

Okay, great. Secondly, when you had your analyst day we talked a little about potential acquisitions and maybe some of the valuations were coming down. And is that still correct or maybe are evaluations getting more attractive? Are you further along or closer to potential M&A activity? Can you comment at all on that?

Ann, not a lot because we don't want to say too much about it. We don't comment that much on -- on something until it is done. We will tell you that we are actively involved in trying to grow the company.

Okay.

Valuations go up and down depending on what's going on. I would say overall though, the trend is probably trending down some.

Okay. That's great. That's all I have. Thank you.

Thank you.

Thank you. Our next question is coming from [David Zebowitz] with [Bernshen].

Good morning.

Good morning, David.

Very briefly, George, there was a lot of static. You must have been moving things on the table while you were talking. And I couldn't quite understand, you said something about talking your retail customers about more it sounded almost like joint ventures or joint marketing efforts. Could you tell us what that was about?

That's not that must have been the other call you were on.

That's not the first time I've been accused of that.

No, David it's been quiet here in this room. But no I did not talk about a joint venture with any retailers.

Okay. What you were talking about then with respect to your retailing partners as you referred to it?

I could have said something about we have worked with our retailers as we always do -- as we -- because we are category advisors to a lot of ours retailers. We are always working with them on what's going on with the consumer today and what's going on more important for tomorrow. Consumers insights is important to our retailers and food service people. So we are investing into that knowledge so that we can be a better supplier to retailers and food-service clients. But no other partnership, I don't think I spoke of.

I was wondering whether or not it might be some sort of private label arrangement much as you have with Winn-Dixie or something of that nature. And again I could not hear it distinctly, and I apologize if we went off in the wrong direction.

No, we did not speak of that.

Okay. Now the 100-calorie snack products under the BlueBird and Mrs. Freshley's labels, you said they started reaching retailers in October.

That's correct.

Have you had to promote them had heavily given that this is not the most underpopulated aspect of the snack food business right now?

What we try to do on introduction is get the product in the market at regular price and see how consumers react. If it goes gangbusters, we don't promote. If it looks a little slow we start promoting and because it is so early, that decision has not -- not been made yet.

Yes. How many SKUs are in this line at the moment?

Three today, and it is a chocolate cup, a vanilla cup, and a blueberry muffin. And a delicious product, a great product.

And the calorie count is just based on the weight of the product, not that you have reformulated it. Is that correct.

Basically true.

Okay. Also, as the company is getting larger and at a rate significantly greater than the industry's growth you are going to have to look at larger acquisitions to meet your targets. Are there that many larger facilities available for you to acquire or companies to acquire?

I don't know what you mean by size, David.

Revenue.

Yes, I know, but there's several hundred to $200 million businesses that we would call adjacent to our markets that make sense.

Right. So that being said, you don't feel at the moment that you are going to have to reach to accomplish your goal in terms of acquisitions.

We have come from where we are the way we are executing our plan now.

And a big picture, is it easier to acquire or enter a new market on your own?

David, it depends. We have certainly been more involved in acquisitions than green-field a plant, but the world changes. Due to the consolidation of the retailers, due to our relationships with food-service customers, it is a lot easier -- it is getting a lot more easier to put in green-field plants and go from there. Thirty years ago you wouldn't dream of doing it because it is to expensive, but in today's environment with the consolidation and relationships, and our brands, let me emphasize that because of the brand called Nature's Own, it is easier to do by building new plants like I say compared to 30 or 40 years ago.

With that said though, we love acquisitions that add to our operational strengths. They can bring a good brand to us, or outstanding people, or new customers. We are always looking for those type of companies but it also must meet our financial targets. And that's the first question we ask, does it work operationally. If the answer is yes, can we make it work financially for their shareholders and our shareholders. And hopefully is answer to that is yes because we have different instruments due to our balance sheet that we can use to give them hopefully whatever they need to make it work.

And just one last question, if I may, given the ever increasing price of fuel, and the fact that the majority of your product is distributed by independent distributors, how is that affecting your growth or their growth?

David, it works well as long as we have very good sales increases in those markets. And let's assume for a minute that sales are growing at 8% with an average margin, you can take a number, it could be 18 to 22. That gives quite a bit of income over and above the prior year base so when fuel goes up it -- and I have done -- I do this every quarter basically, I didn't this quarter.

But even though fuel is high, our people are still much better off because of the increase in sales that they have. And that's why the distributorship program works for us. There's a tremendous opportunity for our people to sell more product at a good margin and drive down their SG&A as well. It just works that way. So the answer to your question is that it has not been a problem.

Excellent. Thank you very much.

Thank you very much, David.

Thank you. OPERATOR INSTRUCTIONS) Our next question is coming from Pablo Zuanic with JP Morgan.

Good morning, everyone.

Good morning, Pablo.

Just a couple of questions on the pricing front. I mean, yesterday we had Sara Lee also took a price increase in December. And just wondering when you look at your territories, anyone holding -- holding back on pricing? Either store brands or smaller operators? Can you comment on that or is it generalized pretty much everyone taking pricing up 5, 6, 7%.

I would generalize that, I don't -- I see them in the marketplace when they happen but with the pressure on everyone, I don't see why anyone would try to hold back because nobody is going the gain market share with that. Because competitive factors so strong, none of us will be under sold for long. But again the pressure of cost, I would think everybody would be taking increases.

Okay. And then just a follow-up, we just had the Dean Foods conference call, I am sorry to (heavily accented language) but when I think of milk and bread both basic staples and I guess the milk industry volume up versus been about 3%. They are talking about people trading down to -- trading down to private label. I am wondering why that is not happening in bread or -- and related to that, when you are growing bread volumes of 1.5%, do you have a sense of what happened with the industry in your terrorities in terms of volumes.

Yes, I will comment on that. Number one I think that bread, private label bread, was way ahead of the curve. Private label bread in the South has had a big market share for a long time. And I said many times private label is basically white bread and buns. And consumers of today are more nutritional. They think different, they want healthier type product, better-for-you type products and I think that the baking industry has been focused on that with up-scale products.

And I think private label is right in staying within those quick core items, quick turns, and not trying to get into the, into the niche type markets. So I think that's why private label, like I said it has been here for a long time. They've had a good share of the market. And second part of that question,.

In terms of 1.5% volume growth for your company, what do you think was the industry volume growth in the quarter roughly in your territories?

Okay. Fresh package product was up between 5 and 6% and volume was basically flat.

Right. Okay. And just going back to, when you talk about all the sources of growth and I appreciate every quarter you have given but when you talk about the $1.2 billion in adjacent territories, what about in your core territories, is there a number we would think of in terms of potential share gains or in your core territories it's not really about share gains, it's more about population growth?

Well, we look at share gains -- we look at both, the core markets as well as those fringe markets that we've entered. And it is our goal to continue and it is gradual because you don't lose business overnight and you don't pick it up overnight. Over time, we think there's more share growth for us in our core markets and certainly on the fringe markets, since you have such a small percent of it, we certainly should have growth there with our powerful brands.

ight but just to put it in perspective, I mean, for a company that has $2 billion in sales, roughly, in total bread but what you have said, I believe close to 50% market share. So, if you were over time were able to (heavily accented language)three points per share in your core territories, that would be about $200 million in terms of opportunity, is that a fair analysis?

I forgot what each share point adds to in volume, Pablo.

Okay. That's fine.

That again is why though we have to add bakeries as we, I mentioned that earlier. I don't know if you were on the phone or not or on the call that we do have to add bakeries in our core markets as we go down the road as well such as Denton and Villa Rica extra bread line and in Newton, North Carolina.

Yes. Okay. That's useful. Thank you, George.

Thank you, Pablo.

Thank you. Thank you. Our next question is coming from Jeff Kanter with UBS O'Connor.

Hey, guys, good morning.

Good morning.

A quick question for you. Maybe I missed this. In your prepared remarks you said that the tax rate for this year was going to be 35 to 35.5%. Is that correct?

Yes, that's correct. We had --

Down from 36, right?

Right. Correct. We had some discrete items hit in the quarter that we had not planned for.

Got you.

And we have worked those into our rate for the year.

So what does that -- what does that imply -- what does that imply for the fourth quarter tax rate, give or take?

I think it would be roughly 35.5. I mean I think we have -- I think rate equalized year-to-date. I think you are looking roughly 35.5. I don't have it in front of me but I believe that's correct.

Okay. Fair enough. What about the tax rate for next year?

Next year I think you can look at a rate of 35.5 back up to 36 would be in the good range.

35.5 to 36 for '08. And another question, with respect to your share repurchase, what -- what are these -- what are the hurdle rates that you are using to buy back stock at these levels, right? If you -- like the -- like the implied cost of equity in your stock is 5%. The after-tax cost of debt is , I don't know, 3%, 3.5%. So, it seems like, I guess my question is what -- what -- how is this a good source of cash with the stock at these levels?

Well, our board, we work with the board on this issue and I look back and our average price that we bought in 18.2 million shares, the average price of $14.25. And every time we bought it is pretty close to somebody would say, make the same remark that you are basically making. Why are you buying at these high prices or is it smart to buy at high prices? We just feel that we know the trends in our business. We know where we are going in the future. And I think that we will look back and be happy we bought in 600,000 shares at $21.22 because I think it is the best buy out there.

What is -- what is your after-tax cost of debt about? Is it truly around 3, 3.5%?

Our weighted average cost, yes, probably. After tax. After tax, yes, you are right.

So the hurdle rate is pretty, is -- is pretty low in the 3% range or so.

In the current environment, it would be fairly low.

Like 4%. Okay. That was, those were my questions and lastly, when you say, in the current environment and as you look into 2008, I mean those costs are all over the place. I guess you could just keep on pricing if you have to. With fructose is going all over the place and oil, and you are locked in with wheat and whatnot but it is kind of tough out there. Is your assumption just if it gets tougher you are just going to price.

No, that's the last thing we do. The first thing we do is work through every cost structure we have. And once we get through with that, we try to maintain our margins and grow those so after we take all of the costs out and work on the volume side, you have to work on the price side.

Okay. All right. Well, good luck. Thank you very much.

Thank you. Have a good day.

Thank you. At this time, there appears to be no further questions. I will turn the call back over to Mr. Deese for his closing remarks.

Thank you, Jerleen. And let me hank you all for joining us today and for your continued interest in the company. I really thank our team for the outstanding job they do everyday. Thank you very much.

Thank you. This does conclude today's Flowers Foods third quarter 2007 earnings conference call. You may now disconnect.