Flowers Foods Inc (FLO) 2008 Q4 法說會逐字稿

Greetings and welcome to the Flowers Foods fourth quarter and fiscal year 2008 earnings conference call and webcast. (Operator Instructions). As a reminder, this conference is being recorded. It's my pleasure to introduce your host is Marta Jones Turner, Executive VP of Corporate Relations. Thank you Ms. Jones Turner, you may begin.

Thanks Everett and good morning, everyone. Our fourth quarter and first full year earnings were released this morning. If you don't have that release, you can find it on the Flowers Foods website.

Before we get started, I need to point out that our presentation today may include forward-looking statements about our Company's performance. These comments could include discussion about future performance, such as earnings per share, net sales, margin, operating profit, interest extent, cash flow, taxes and such items. The segments that we will make today are based on our view of things as they stand today. However, they may contain some degree of uncertainty. We believe our statements to be reasonable, they are subject to risk and uncertainties that could cause actual results to differ materially.

In addition to matters discussed in the call, important factors relating to our business are detailed fully in our filings with the SEC.

With me on the call this morning are George Deese, Chairman of the Board, Chief Executive Officer and President, and Steve Kinsey, Executive Vice President and Chief Financial Officer. George and Steve will discuss our fourth quarter 2008 results as well as our revised and upgraded 2009 guidance. Then of course, we'll open the call for your questions.

Now it's our pleasure to turn the call to our Chairman, CEO and President, George Deese.

Thank you, Marta. Good morning and thank you for joining our call this morning.

As you all know it's a time of uncertainty for many companies. Flowers Foods continues to deliver consistent and sustainable performance. This isn't a circumstance that occurs by chance. We achieved good results for 2008 through continued focus on our operating strategies and the determination of our team. We have invested in our bakeries, our products, and brands, our distribution and information systems, and in developing our team. These investments and the refinement of operating strategies have occurred over many decades.

Our 2008 results reflect the strengths of our Company and business model. Today our team is looking to further execute strategies, to out perform in the marketplace and to continue to delivering [no audio] value to our customers, consumers and shareholders. In the fourth quarter, which was a 13-week quarter, in the full 53-week year, we delivered strong sales in earnings growth. Sales were up 31.2% for the quarter, 18.6% for the full year. We achieved a 49.7% increase in net income in the quarter and 26% increase in the earnings for the year.

Our EBITDA margin was 11.1% for the quarter and 10.6% for the year. Our brands, our bakeries, and our team performed well as we continued to improve efficiencies and reduce operating cost. I want to once again thank our bakery team for exceptional work in the fourth quarter and for all of 2008.

They achieved a 3% improvement in manufacturing and efficiencies and also reduced waste or damaged products by a significant measure. As we discussed on our third quarter call, we put pricing in place by October 1st of '08 to address our increased cost in 2009. So our fourth quarter results reflect the higher prices and the market reaction.

Our profits and brands performed well in the marketplace during the fourth quarter. We are monitoring the sales trend of our product and brands very carefully. We are very attuned to possible competitive and economic circumstances that could impact our sales. Our sales data warehouse allows us to track sales in individual markets, which is important because this business must be managed market to market. If necessary, we'll adjust promotional activities based on market data to be certain we hold and build our market share. However, through the fourth quarter and to date in 2009, our brands have performed well. In the quarter, our branded retail sales were up 28.6 %. For the year, branded retail sales increased 19.3%.

Across all product categories, our branded products achieved solid growth, showing the strength of our brands, in particular, Nature's Own and Whitewheat. Information from IRI South Market shows our brands gained a 10th of a point in the fourth quarter. For the full year, we gained about one share point.

Our internal sales data shows our products and brands performed well in the fresh packaged bread category. As I mentioned, our brands delivered across all categories. Our branded white breads, led by Wheat -- Whitewheat and regional brands were up strong, double digits, well ahead of category. In the soft variety category, our Nature's Own brand again, achieved strong growth for the quarter and for the full year.

Nature's Own, all natural superpremium bread delivered double-digit growth in the quarter and for the year. Our breakfast items, new under Nature's Own,experienced were strong in the quarter and for the year. Our branded bun and roles and snack cake brands were up double-digits for the quarter and for the year. Sales of store brand, our private label bread, buns and rolls also were up for the quarter.

Looking closer at private label, in the south market, according to IRI, private label units have about a 40% share, which is basically maintaining the level it had for many years. The same holds true for private label dollar sales. For the quarter, private label had between 25% and 26% share. It's maintaining where it's been for quite some time.

In the fourth quarter, our food service sales experienced good growth, driven primarily by increased sales to quick service restaurants and our acquisitions. As expected, we lost unit volume in sales of snack cakes to contract production customers. You will remember that over several years we have been reducing our contract production business and in 2008 that continued. Our strategy has been to grow our branded snack cake business when has higher margins. Sales of our Mrs. Freshley's snack cakes grew at 16% in fourth quarter, which shows our strategies converted to branded sales is working The fourth quarter was a busy one for us.

Let's look at where we are with the integration of the Wholesome and the ButterKrust acquisition. First it is important to note that sales and earnings from these acquisitions are tracking better than our plan. We are already capturing synergies, particularly at ButterKrust and in the state of Florida. We are bringing both Companies into our information system. ButterKrust came on line with [SAP] in the fourth quarter, and Wholesome will be online in the spring. Consumers in Arizona, the Las Vegas area, and parts of southern California can now find Nature's Own breads in their market. Wholesome distributors introduced the brand across their territories in November and December. We are pleased with the success Nature's Own is gaining in those markets.

With synergies already in place with ButterKrust and with added sales with Nature's Own and Wholesome, acquisitions performed well in the fourth quarter, and as I said, better than expected. You'll remember that we entered new markets in St. Louis and Wichita in the third quarter. We are pleased with our results to date. Now we're focused on adding other customer counts to our footprint. Our market expansions overtime have contributed about 1% a year to our DSC sales.

We continue to work to strengthen sales in the expansion markets we have entered over the last few years and we will continue to push our boundaries and reach new markets with Nature's Own and Whitewheat as well as other brands in the future. Our newest bakery in Bardstown, Kentucky will begin production on the bread line in the spring of 2009, relieving some production capacity in our northern-most bakeries and serving the needs of some of our expansion markets. Our team remains focused on executing our strategies through all these opportunities.

Now, I'll ask Steve Kinsey to give you the more detailed report of the quarter and for the year. Steve?

Thank you, George. Thank you all for joining the call today.

This morning I'll discuss the fourth quarter and full year 2008 financial performance and then I'll provide you some update on our fiscal 2009 guidance. So, George has mentioned it, I just want to remind you that 2008 is a 53-week year, providing an extra week of sales and earnings. This is important to note as you look at your year-over-year comps and model 2009. As George said up front, our fourth quarter and full year 2008 performance was strong. We are very pleased with where we ended the year.

We had outstanding sales growth in our margins, both in dollars and percent of sales, fared well for the quarter and for the full year 2008. Net income for the quarter improved almost 50%, quarter-over-quarter, to $32 million. The operating margins, or EBIT as a percent of sales, improved 140 basis points for the quarter to 8% of sales, compared to 6.6% last year. The full year EBIT margin as a percent of sales, also improved nicely to 7.6%, compared to 7.1% over the same period last year. Excluding the effect of week 53, the acquisition and the asset impairment, the EBIT margin was 9.1% of sales for the quarter. For the full year, if you exclude these items, as well as the gain on asset sales and insurance proceeds, the full year EBIT margin was 7.9%, compared to 7.1%, again a nice improvement. This EBIT margin improvement is the result of increased sales as George mentioned, our continued focus on operating efficient and significant reduction in SG&A as a percent of sales.

Diluted earnings per share for the quarter grew approximately 48% to $0.34 per share from $0.23 in the prior year. This is just above the guidance we provided, this upside was the result of the acquisitions performing better in the quarter than expected, as well as our week 53 earnings coming in slightly stronger than originally projected.

The quarter was negatively impacted by the impairment charge on the closed facility. Excluding these items for comparative purposes, EPS would have been $0.33 per share for the quarter, up almost 43.5%. Earnings per share for the year was up 25.5% over the prior year to $1.28 per share compared to $1.02. This also exceeded our full year guidance.

We are pleased with where the year ended. Sales were strong. We had efficiency gains. Selling, marketing and admin as a percent of sales decreased significantly and the acquisitions integration was better than anticipated. As you may recall, we had originally planned for the acquisitions to be diluted, but they ended the year slightly accretive to earnings.

Our brands did perform well in the marketplace. Our consolidated sales growth for the quarter was 31.2% with price and mix contributing roughly 11.8% of the growth and volume representing about 19.4%. Looking at the volume growth, acquisitions provided 12.5% of the growth. Week 53 contributed 8.5% for the quarter and excluding the acquisitions in week 53, volume did decline roughly 1.6%. As George mentioned, this was primarily result of exiting contract production in the snack cake category. Taking a look at the segments briefly, both the direct store delivery group and the warehouse delivery group posted strong sales gains in the quarter.

In the DFZ group, sales were up 34.9%, the price and [VIGS] contributing 9.9% of that segments growth, and DFZ volume was up 25%, on acquisition volume of 15.2%. Again, week 53, an additional 8.4%, with good volume growth in the core and expansion market of approximately 1.4%. Our warehouse delivery group sales were up in the quarter, 14.6%, with price and mix contributing 12.2% and volume in the warehouse group was up 2.4%. Week 53 added about 9.3% of the volume. If you exclude the extra week, warehouse delivery group sales volume was down roughly 6.9%, again for the reasons we just discussed in our snack cake category. Full year 2008 sales were up 18.6% ending the year with sales of $2.415 billion over the same period in 2007. The year-to-date increase was achieved through favorable pricing and mix of 10.6% and volume increases of 8%.

Looking at volume growth, as we had planned, acquisitions accounted for 5% of the sales volume, week 53 was 2% of the volume, with remaining 1% of volume coming from existing and expansion markets. Again, both segments had strong year-over-year sales growth. Gross margin dollars in the quarter increased approximately 30%. The gross margin percentage however, did decline 40 basis points to 48.3% compared to 48.7% in the fourth quarter last year. As has been true for the year, the primary driver of this decrease was an increase in ingredient cost quarter-over-quarter, primarily flour. The full year 2008 gross margin percentage was down some 130 basis points, at 47.7%. However, this was in line with our guidance of 47.5% to 48%. This is being compared to a 49% margin for 2007. The primary driver of this decrease was higher ingredient costs year-over-year.

Looking at gross cost-to-goods sold, remaining components, all of these are relatively flat to down slightly as a percent of sales for the fourth quarter and full year 2008. However, selling, marketing and admin expense as a percent of sells decreased to approximately 36.7% for the quarter and approximately 230 basis point improvement over the same year period, percentage of 39%. Again, this quarter-over-quarter improvement as a percent of sales was driven primarily by increased sales, continued benefits from our distribution rationalization and significant improvement in the selling and admin cost categories as a selling percent as well.

We had lower stock based comp expense in the quarter as a result of the drop in our stock price. We still maintain one liability based [award] that moves with our stock price. For the full year 2008, selling, marketing and admin costs as a percent of sales were 37.1%, 160 basis point improvement over 2007. We anticipate intended to leverage selling, marketing and admin expenses as a percent of sales in 2009 and look for another 50 basis point or so improvement as of a percent of sales. The decrease and net interest income for the fourth quarter of full year 2008 is the result of the higher interest expense from the debt surface on the acquisition related loan and outstanding balances on our revolver.

The fourth quarter tax rate came in at 35.5%, and the full year rate was 35.6%, just slightly below our projected 36% rate due to favorable discrete items in the quarter. Looking to 2009, we are projecting the rate to be in the 36% range, to slightly above where we finished the full year 2008.

Moving to the balance sheet and liquidity, we are comfortable with our current leverage position to just about one time trailing EBITDA, 12-month trailing EBITDA and the ability to generate future cash flow. Cash provided for operation in the fourth quarter was $46 million. The full year cash for operations was $94.9 million. We ended the quarter and year with roughly $256 million in bank debt. $146 million of this debt is related to the term loan executed for the two acquisitions and the remaining $110 million has gone on the revolver.

We're pleased with improvement and cash flows from operation over the fourth quarter over the third quarter. During the quarter, we funded approximately $18 million of capital expenditures and paid dividends of $14 million. There were no share repurchases in the fourth quarter. For the full year we funded capital expenditures of $86.9 million, paid dividends of $53 million and had share repurchases of $44 million, or 1.7 million shares. This leaves about 9 million shares of the 30 million shares authorized to be repurchased under the current plan.

Looking ahead, we are confident our operating cash flows will continue to be strong and continue to be our primary source of cash flow.

Now updating you our 2009 guidance. We have updated our guidance based actual 2008 results. We're projecting 2009 sales to increase by 12.6% to 14.5%. This equates to sales of roughly $2.72 billion or $2.765 billion. The two most recent acquisitions will add approximately [7%] to 7%(Sic-see press release) of this increase. Again, just to a reminder, for comp purposes, we'll be down one week in 2009 compared to 2008. Pricing and mix, still expected to contribute 5% to 6% of this growth and volume, excluding acquisitions will be 1% to 2%. This does reflect growth, excluding acquisition of 6% to 7%, which is in line with our targeted long-term goals for sustainable growth overtime. Based on these sales targets, net income for 2009 is now estimated to be $127.8 million to $138.3 million or 4.7% to 5% of sales.

Using estimated average shares of roughly 93.3 million our earnings per share now is expected to $1.37 to $1.48, an increase of 7% to 15.6% over 2008. This is up slightly from our preliminary guidance we gave on the Q3 call. Our increased earning guidance takes into consideration several changes since our third quarter call.

Since that call, energy costs have come down significantly and as a result, our costs for 2009 will be lower. The lower energy costs will equate to reduced resin cost and that means our packaging costs will be lower than we expected. We told you on the third quarter call, we expected about $75 million or so higher input costs for 2009. With the improvements I've mentioned, we could have more than a $10 million improvement in input costs as coverage stands at this point from the preliminary guidance. If energy costs continue to be lower, we should see an improvement in our distribution costs as well.

There's also been a lot of focus on pension plans given the decline in equity markets. We were not immune. Looking at 2009, we expect pension and post retirement expense to be approximately $5 million. This is an $11 million movement from the $6 million or so from pension income recognized in 2008 and is this about a $7 million movement from our preliminary guidance. We originally estimated an income of about $1.5 million and now we've moved to an extent. So, a $7 million change from our guidance in the third quarter. From a funding perspective, we do anticipate funding of $2 million to $3 million at this point.

Capital spending is expected to be $75 million to $85 million for fiscal 2009 and we are scheduled to pay down $15 million on the term loan evenly over the calendar quarters. Any excess cash flow we anticipate will go to reduce the revolver and, as in the past, we'll consider whether or not to make share repurchases. There's still a lot of volatility in the markets. 2009 is likely to bring significant challenges; we believe we are well-positioned in the marketplace and we'll have earnings in a balance sheet that allows us to provide good growth, even in these down economic times.

Thank you, and now I'll turn it back to George.

Thanks, Steve.

As you can see from our update guidances, we have confidence in our ability to deliver the plans of 2009. Our strategies are proven, our business model works and our team knows how to drive this business to achieve good results. As I said earlier, our pricing for 2009 has been in place since October and our products and brands are performing well in the marketplace. I will say again, we are monitoring sales trends and, if needed, we will increase promotions in select markets to protect our market share and to continue growing our share.

As Steve told you, guidance takes into consideration the volatility of markets as well as variables and other costs where we have benefits and other areas where we have costs that may be higher such as pensions. To help offset our costs, we continue to improve efficiencies and logistics and to review costs wherever possible. These efforts will continue.

In our third quarter call, I figured costs would be the highest for the first quarter of 2009. That is still true, but we're making progress with our improvement and cost reduction efforts. A case in point is our 3% improvement in manufacturing efficiencies and continued improvements in SG&A and energy costs as Steve mentioned earlier. Our plan and our guidance for 2009 takes all that into consideration and we are confident in the ranges we have provided. As I have said before, we are fortunate to be in the food business and particularly in the baked food business.

Sales of our branded products are solid and growing. Altogether there continues to be movement between channels, food service retail outlets and so forth. Our product line and access to market makes us well positioned to address those changes. Looking ahead, we remain focused on delivering good results for 2009. We are managing costs out of the business through carefull analysis of our continuous profit improvement programs which is working well for our Company.

We are tuned to customers and our consumer needs. We remain committed to investing in innovations to enhance our efficiencies, our products, our information and our team. As I mentioned, this year our newest bakery in Bardstown will come online. We continue our focus on integrating Wholesome and on growing the Nature's Own brand in the Wholesome markets. We will continue to grow by building strength in our core markets and our expansion markets. As consolidation continues in our market place, we will stay attuned to potential acquisitions that fit strategically with Flowers Foods.

Our strategies are sound. The Flowers way works. Our team is focused on having that continue in 2009 and beyond.

Now, Everett, we will open the lines for questions.

Thank you , ladies and gentlemen at this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question today comes from Heather Jones, with BB&T Capital Markets. Please proceed with your question.

It's Brett speaking on behalf of Heather.

Hi Brett.

Congratulations once again on a great job.

Thank you.

My first question, just touching on what you were saying about your sales growth for fiscal year '09, removing acquisitions and then taking out expected pricing, you're seeing flattish to up slightly or up-volumes, I'm just curious, so much being said about the global slow down and impacts on volume, if you would walk us through your expectations, does a large portion of your expected volumes depend on DSD expansions? Does it depend on hanging in in existing markets? How should we think about your volume expectations?

I think Steve reported 1% to 2% increase in volume projected for the year, I believe is what we're looking at. We do know the marketplace has been affected by the economic slow down, I don't think any of us know exactly where that is going. I think we, as we've said many times, in good times the baking business is good and in bad times the baking business can be good. People go back to the core of living, they go back to basics and certainly bread is a basic that's been around since creation. And even though you can see changes in shopping patterns, you can see changes from superpremium to soft variety, you can see some change in some white bread to private label, even though we've not seen hugh changes in any of that, to this point, it can happen.

We remain confident that with our execution and plan that will happen this year, we continue to see brands grow. We continue to execute well in the marketplace. And weapon still feel comfortable with that 1% to 2% increase. Also, looking back at overall thought patterns here, long-term we expect 5% to 8% growth on sales. And that's made up of price and mix, volume, we focus this year on the 5%, 8% plus acquisitions on top of that. That's how we arrived at our guidance and we're very confident with the guys at this point.

Okay, thank you. And then you know, we saw one of your competitors is giving back some pricing it looks like. I was curious what you're seeing in regards to competitors and promotion and do you have an updated outlook on the pricing environment?

I have a policy to really not talk about competition. That's an ongoing -- competition's always been out there. There's always been different philosophies of different companies. What I will say though, I think people do, depending on what their need are, different levels and activities, different channels. That's been the history of this industry as long as I've been in it. I don't see that changing.

What I did say in my comments was that through our sales data warehouse and handheld computer system, we see daily and weekly what's going on with our volumes and brands and we're committed to keeping our volume and keeping our brand growing so we'll just have to make whatever adjustments we have to as we go down road, but again, it's a very competitive marketplace.

Yes. So you still feel very confident though, in the pricing you have in place?

I'm comfortable with our pricing, but I did say that if we lose unexpected volumes, we would promote more with those particular products and brands that might have dropped off on the market share.

Okay, thank you. Okay, one last question, looking at the sequential decline in food service sales. We're now in February, wondering if you can speak to further deterioration and demand within food service.

What I've said all year is basically still true today. Casual dining seems to be the area most affected, we have a good share of that market. That market seems to have traded down to fast food service and or and/or back to the retail marketplace. We're well positioned in both places as a trade down to fast foods.

We have a great market penetration with the fast food arena and of course supermarkets throughout our geographic market. The definitely has been change and there could be further change if the environment gets tougher. We're in good shape in either position, I feel.

Thanks, George.

Thank you.

Thank you ladies and gentlemen. Our next question comes from the line of [Alton Stump, with Longbow Research]. Please proceed with your question.

Good morning. Had a quick question on IBC. Looks like they might actually be pulling output of chapter 11, want to get your take on if you think there'll be any impact good or bad from that event.

The announcement did come out a day before yesterday, they were coming out of bankruptcy. Interstate has been a major competitor for us since we've been in business. I don't have a clue to what their game plan is going forward.

We'll work to stay focused on our business and whole our business and I'm sure they're going to be working hard to keep their business and gain market share, but we're attuned to that. And we just have to stay tuned to what rolls out through the year and years that follow. We've always had strong competitors.

Okay, that's helpful. One quick follow-up, obviously there's a lot of talk about private label and if there's trade downs, looks like you guys continue to see extremely strong demand for other higher margin lines, like (inaudible) or Cobblestone Mills, just want to get an idea -- what is it that drives that success? Is it good promotions? Good customer relationships?

All of the above, but let me -- all of our customers are important. That's how we have success is working with our customers. On the consumer, I've said many times having been in business 44 years, I'm going to guess for the last 30, that private label has been a major factor in this industry, unlike some other categories in the retail market. For as as long as I can remember, private label has held roughly a 40% unit share of the bread market and roughly 25% from a dollar perspective. That can change maybe a percent or two depending on times and toughness and not so tough, but we don't see huge swings in this business, the maturity of the private label market.

I think the retailer is focused more on trying to get other categories after the 25% level and not particularly on bread, even though they have a great share of the units, some 40%. I think the consumers who have needed private label as their source of bread have made that choice and it's up to makers like Flowers to keep giving a reason for consumers who've been on brand to keep buying that through promotion, through enhancements and quality. And through better soft type products.

That's exactly what Flowers's strategy's been to continue to be innovative and enhance our product quality and give you good products. Such as Nature's Own, such as Whitewheat, such as Whole Grains. 100% whole wheat has been with us since the late '70's. We focus there and continue to put that out to the consumer.

Okay, great, thank you.

Thank you.

Thank you. Ladies and gentlemen, our next question comes from the line of (inaudible) with [Stephens], Incorporated. Please proceed with your question.

Good morning.

Good morning.

Could you share with us more detail about the 3% improvement that you've gotten in production, how do you measure it? And what are the sources of improvement?

We do have measurements, I won't go into the detail of that specifically. Based on the type of equipment you have in the bakery, what it's capable of running so many units per minute per hour, that's the basis of the foundation. Then we measure that day-to-day, week-to-week, period-to-period, quarter-to-quarter , year-to-year, so we've got those measurements in place. I would credit our capital investment program, the past two years has really helped drive that. I point to two areas specifically. as we build new and larger more automated plants, that always enhances our ability to increase efficiency.

Second thing I would point to, and (inaudible) is a prime example of that. Denton has really helped. Big new line in Villa Rica has helped that process and Bardstown will help our overall efficiencies as we go down the road. It's newer, better and more efficient. The other thing I would point to in our capital investment program, maybe we let our wrapping room get a little outdated. About 18 months ago, we decided to update most of our packaging areas. You have a wonderful product when it goes into the oven and up to the route room, sometimes that can be the area that can really create inefficiencies and cripples and waste.

We put a lot of focus there and capital investments. We believe in, it's helped drive those efficiencies and we still have a few more of those. But that has given us the efficiency gains and reduced waste.

So those are sustainable?

Yes.

Okay.

Those are sustainable. Absolutely. Once you get to a certain level, we'll sustain that increase but when you if we to the point of, -- we might be happy if we get to 98%, but we're not there yet. You strive for perfection, you strive for 100% but that's impossible. We work in between that 90% and 100%, how can you get much better.

You focus on plants not at the Company average and what's causing them not to be there. Work on those to correct that. As they correct their's the averages keep going on up.

Where would you think compared to the 98% you are right now? Are you maybe at 96%? About 2% more improvement opportunity?

Low 90%'s.

Low 90%?

Low 90%'s.

When you look at 40% that's private label, how much is tactic bakeries and how much is produced by outside bakeries?

I'd say the majority of it would be bakers baking for their customers.

So would you say about 80% is now baked at outside bakeries?

That would be an educated guess. I'd say 75% anyway. That is a guess. I'll check that out and give you the numbers.

Okay, are you thinking that the 25% that are captive are going to try and win market share in this down market by really promoting private label heavily or do you think that they're going to have higher costs because their baking -- bakeries might not be as efficient because over time they haven't invested the CapEx?

I'm going to be careful what I say because they're our customer as well as a competitor on the private label side so they are indeed a special customer, even though they have their own CapEx bakery. One thing I would probably point toward -- I don't remember how long it's been since a brand new bakery has been built by someone in the supermarket industry. So that means possibly that even though I'm sure they operated well with the equipment and bakeries they have, I'd have to say that over time, equipment wears out, bakeries do wear out over time, so either they will need to invest more to get up to the standard, or they may choose some other bakeries produce product for them.

I think they have the same issues we have, though. They have the same type cost structure commodities and labor and everything that goes with cost. And I'd say they're in the same boat that the baker in, but they could always choose to let it be a loss leader, so to speak. I guess historical levels, it's not that often you see that. This could be a different year. I hope not, but it could. Most of the time, they're going to do what they need to do to protect sales and margins.

George, you already compete in the toughest kind of bread market in the US, because very few are, bread prices are lower than average in the rest of the US, right?

That's true.

As you expand into newer markets, could be easier than they are in some of your core markets. Could you say that?

I'd have to say that certainly California and Arizona have higher prices than in the southeast. I wouldn't say it makes it any easier though. A lot of times you have higher cost in those markets.

Fair point, thank you, very much.

Thank you.

Thank you our next question comes from the line of Mitch Pinheiro with Janney Montgomery Scott. Please proceed with your question.

Hello, good morning.

Hello, Mitch.

Let's see George, how has your private label business performed? In line with the category? Better than the category?

I'd say in line with the category. Same fringe.

When we look at pricing and mix you had a gain projected in your guidance of 5% to 6%, is that -- is that weight ed towards the first half? How should we think about that on a quarterly basis?

I think what we said, and let me repeat. Because we knew we had cost coming in toward the last of the fourth quarter, we knew we had costs coming in first quarter. We did take that price increase a little earlier than normal because we felt like we needed it with new costs coming.

In our plan though, that was October, we do not anticipate at this moment, unless something really goes haywire, more price increases this year. That's not a promise to you or our customers. We don't know what that final quarter could bring as far as commodities or energy or other costs. We feel like our plan -- pricing is pretty well in place for the year.

Okay. The volume assumption in the sales guidance of 1% to 2%, is the extra week this year pushing that number down? In other words, is that number really a point and a half higher and it's adjusted, or how do we think about that aspect of the guidance?

I think if you look and the volume for week 53 it's about 2%, so if you take -- our guidance takes into consideration that we're building off a stronger year.

So that assumption of 1% to 2% might be closer to 3%? But adjusted downward for the comparison?

I think 3% would be extremely good volume growth. We'd be better to average that in 1.5% to 2%.

Okay. But I'm just asking, implied in the 1% to 2% would be -- you've already accounted for the extra week?

Correct.

You know, one of the brands you don't talk much about anymore is Cobblestone Mill. I'm curious how is that fairing? Premium breads or superpremiums in the market. Is there any distribution gains or losses and how is that being handled?

What I would say is that Cobblestone, the brand was hurt somewhat because we took our full Oval product, superpremium out of Cobblestone because we felt like it would have a better opportunity to compete under the Nature's Own brand. Cobblestone is still very important to the Company, and if our brand managers listened in I want to underline that, it's really important to the Company. We still feel like even with Oval's moving out, this can be $100 million brand of retail. $100 million is always important. We are focused more on special occasion breads and rolls under the Cobblestone brand.

Special occasion, for instance, in the south , people don't eat rye bread every day, it's more of a special occasion. Some particular buns are high end, higher priced, higher quality and more special occasion. It's still really important to the Company.

So when you look, what kind of mix shift do you think you had by shifting out of the Ovals into Nature's Own.

We had a great pick-up.

I'm sorry?

We had a very good pick-up in sales.

What you lost in units, in one end you actually picked up and then some on the Nature's Own side?

And then some, yes.

Just curious, does Cobblestone Mill have higher sales rates than your other lines? Because of the less frequent purchase of rye bread, pumpernickel, etc?

We don't give that out specifically.

Alright. Breakfast breads you said were doing very well, are they in all your major accounts?

Yes, but we still would not have the space in all the market we'd like to have. In today's world, especially with category management and the way the retailer, along with the baker, we feel like over time we have to gain more space. We are in, in my knowledge, every major account though we do not have the space yet. We have to promote, we have to get special displays,that creates volume and, sooner or later, you end up getting more space on the shelf.

So, but the breakfast bread, I don't know if you do the study, but the breakfast breads appear to be an incremental purchase for the Nature's Own buyer, you never really had breakfast, buying loaves of bread are different than buying English muffins or cinnamon raisin type of breads. Are you finding that? Is it an incremental buy?

I think it is an incremental buy, I agree with that. I think it can grow.

On a price per pound basis are breakfast breads at, above or below average?

Above average.

And last question, your wheat coverage, is there anything you can talk to us about, are you covered for '09? How far out are you covered? Or what can you say about that? That you feel comfortable sharing with us?

I'd say that we're covered for most of the year. We're not covered for all the year. We still think there's some downside opportunity, on the back end for our lower pricing and we have saved some of that for that reason.

Okay. All right. Thank you very much .

Thank you, Mitch.

Thank you. Our next question comes in the line of Eric Katzman with Deutsche Bank. Please proceed with your question.

Thanks, good morning, everybody.

Good morning.

A few questions. Could you talk about, probably in your core southeast market is best, what kind of average price point is for let's say private label versus your regional brand, versus Nature's Own, let's say versus Cobblestone.

If I do it this way, it might be easiest.

It's Eric.

Eric, I'm sorry.

That's okay, I like Mitch.

In most cases, historical, especially for the past 20 years, you could roughly buy two loaves of private label or one great branded quality product. That hasn't been true on the soft variety category. The gap hasn't been nearly as wide on soft variety.

On buns, I basically say the same has been true in the main, on private label buns, you could almost buy two for one brand. Even though the brand might be a larger type bun, heavier weight, et cetera. If you get to looking at eight buns versus eight buns. Pretty well been true that you could get two for almost the price of one.

Okay. Maybe it's easier to do it on an index basis. Let's say Nature's Own is 100. Private label you're saying would be about 50, maybe your regional would be 70 and Cobblestone Mills would be 120? Something like that? Is it possible to look at that? Maybe Marta will call me back on that.

We'll work on that and quiet back to you there.

Next question. I don't know if Steve, if you gave an a total amount that you expected inflation for '09 built in. Was the $70 something million that you talked about, was that a total amount or just energy?

That was the (inaudible) we gave in Q3. That was the increase. But we do expect that to drop some. At least $10 million. Depends on how we finish covering the year.

Okay. Some of the other food companies have talked about, for example General Mills, gave a 4 year Kager, where they said that their cost inflation over the last four years is up about 25% but their pricing has only been up 8% and productivity has been the offset. Is there a way for you to share with us, what that similar dynamic would be for you over the last couple years.

What I've looked at over the past two years repeatedly, gross margin, as Steve reported, has been down the last year and year prior. We do have it on a slide and probably presented it at some of the, at CAGNY and so forth. It shows historically we were at 49% to 50% gross margin, I think Steve reported this year -- Steve we were --

47.5%.

You see we haven't kept up, price hasn't kept up with cost. On the other hand, because of the wonderful job that's been done in the marketplace on cost and selling, delivery, administrative type expense, in efficiency gains, we've been able to improve our margins piece of that and not miss getting all the pricing in that we needed to keep up.

I agree with George, our gross margin has suffered because of relative pricing didn't cover the cost from a relative basis. You're basically just covering your cost increases. You have to work hard on efficiency gains as well. If you look at our EBIT margins, you'll notice they've been increasing quite nicely over the last four or five years. What I can do, I can pull that together for you as compound annual growth. I don't have it with me, but I can do that offline for you.

Okay, I think that would be helpful. Maybe you could, I ask about this a lot, but I think it's such a competitive advantage for you. I guess I just like hearing it, the scan-based trading, how's that performing in the market and can you talk about that George, vis-a-vis, the pricing that you put through and therefore, how effective it is.

Well, we still have to go to our customers to work through the pricing issues, to get price increases. But from an overall scan-based trade we're still very happy with it. We continue to expand it. We take on at least one or two big new customers each year. Steve, I think the number's probably up between $600 million and $700 million dollars of DFE sales now are in scan-based trading, there will also be one big advantage for Flowers and Wholesome out in Arizona, as well as our customers, as well as our distributors, as we put in SAP, that's the big enhancement for that market as well. It's wonderful for our customers, I feel like they don't have to have extra labor to check in our distributors and spend a lot of time with that. They don't have to have paper -- office staff though keep up with it.

The advantage, of course that also is true for Flowers. We say through the same mechanism, our shared service, we're efficient there by not having to go through every ticket that we did at once, years ago. I think the big win of course is for our distributor. I came up on a route, it's really easy to stand behind a supermarket, 30 minutes or an hour waiting for someone to check in because all vendors are there early in the morning. That's what the retailer asks. They ask you to be there at X time, there's a game of waiting to be checked in. Our distributor can walk right by, due to scan-based trading, go in the store, build great displays, do a great job with customer relations, asking for more things. It's a great help for our distributor.

Okay, thank you for that. Last question, passed on to Steve, did you talk about share repurchase? I know you said you didn't do anything in the fourth quarter. You have 9 million shares left. Any sense as to how you're thinking about that in terms of timing in '09? Do you expect to do share repo or debt pay down M&A opportunistic year.

What I did say, as we look at cash allocations, I think you will see us focused on the debt repayment as a priority. In the share repurchase, again, it'll be an opportunistic type activity for us. Depending on how the cash flows are for any given quarter.

Okay, thank you, I'll pass it on.

Thank you, Eric.

Thank you, ladies and gentlemen, our next question comes from the line of [Bill Shapelle] with SunTrust. Please proceed with your question.

Good morning, thank you.

Hey Bill.

On the marketing end, sounds like rates in print, TV, radio, have all gone down every year; how should we look at that in terms of expansion of Nature's Own brand in the west, Arizona and Southern California. Does that lessen the cost of extending the brand and make the deal more accretive or do you use that lower cost to step up and accelerate the timing to integrate those businesses?

We try to use good judgment in our mature market where Nature's Own is best known. When we feel like we need to advertise, we do. As you may know, we do a lot of cable, national cable, when we do do it, it goes throughout the marketplace on a national basis, but California or Arizona, we did advertise in the last quarter, we had a six-week, eight week [stretch] of advertisement of the Nature's Own brand in the market.

That'd be it'd help to get the brand known in the marketplace. We'll monitor that as we go. Advertise as we feel like it's needed to get that brand awareness to the consumer. That will also be true, of course, throughout our market. Nature's Own is very important to us. Some years it's depending on a lot of times what the retailer sees as the best advantage. We work in conjunction; is it a good time to advertise a lot or promote a lot based on the consumers?

Got it. Would you expect your, your dollar spend for advertising to remain flat from what you originally expected or should it come down with overall pricing?

We look at it as not advertised as one. We look at it as a whole. We've always invested 5%, 8% per year as a combination of media -- newspaper, magazines, promotions, features. All included into that one number. We manage that based on what we feel is best for the brand and working with retailers on promotions.

Your comment on watching closely on the competitive market share, have you seen, since the Analyst Day in December, more price promotion from your competitors or has it been pretty stable?

I did say fourth quarter was very similar to what it had been most of the year.

Great, thanks so much.

You're welcome.

Thank you, ladies and gentlemen as a reminder, if you'd like to ask a question (Operator Instructions) Our next question comes from the line of [David Gudowitz] with Horizon Asset . Please continue with your question.

Good morning.

Good morning, David.

A few things. Totally unrelated. One. The two acquisitions that are working so smoothly, is there an incremental earnings gain because of that? To this year?

If you look at 2008, you know we had originally projected that would probably be dilutive. It actually came in slightly accretive. It wasn't anything significant, but it was, it was better than we had planned.

Also, how many sales routes do you have with those two transactions and how many of them have you now put out there to the route salesmen to buy from you?

They were already in the Phoenix, Arizona plant. Our merger we had with them, they were already distributors.

Right.

And then Florida, I think they were some 60 to 70, 75 routes involved, territories. And since the acquisition, we have got the synergies and merged them in with other routes already in the marketplace. I think we probably gained an additional 30, 40 routes out of it. Great synergies for Florida and we're excited about what's going on in Arizona, Las Vegas and southern California.

For calendar '09 then, are you going to have fewer routes you expect to sell than you did in '08?

You have your normal type turnover and we will have some routes. We go into new markets, example, St. Louis and Wichita that we talked about today. Normally for the first year, we let people know up front when they come on and start serving the marketplace, they are prospective distributors, most of the time within a year to 18 months, we'll sell them the rights to distribute our brands within those markets. Those are the types of sales we'll have growing forward is new markets.

The rest of the Company is already distributors. After the normal turnover, we do add, we work with distributors now what we call route splits and we might have three routes, we try to create four, you go through that process real often, trying to make sure they have plenty of time to enhance their market share (no audio) and if they're too busy, too loaded, sometimes hard to gain market share if you've got more than you can do, so we're vigilant in that all times in every market. So that's also an ongoing process.

Also, this year versus last year. New product introductions do you think the number of new product introductions will be greater or less than last year?

We always have a pipeline and, I would say we'll be equal to the last year.

Okay and will those products be primarily to the retail sector or the on demand to your commercial accounts?

I would say the majority will be on the retail side even though we all, we have ongoing dialog with major food service customers at all times as they need new products, enhance there menus, it's an ongoing project. That's why we were happy to invest in an R&D center here that really helps us along with the customer build the new product they want for the menus.

The last question, if I may, the change in administration in Washington, is, that as you perceive it, going to have any impact one way or another on Flowers?

I just wish the new administration well.

Don't we all.

America needs help.

Amen.

And we're all Americans and I'm pulling for them. I just hope that we can find ways to straighten out our dire financial mess we're in and come out of it. And depending on what economist you talk to, you hear different things, the consequences to us will be -- do we get in a recession --we don't want a depression, for heaven's sake. But I'm an optimist. I've always been an optimist. This too shall pass.

The great American system will work if we let it work. I believe it will. Therefore we feel optimistic about the future. Thank you very much. Thank you, David.

Thank you, our next question comes from Lars Munsen with (inaudible) Capital. Please proceed with your question.

George I know you don't talk about specific competitors, but can you say something about what you're seeing with industry-wide plant capacity for last year and looking forward into this year and what, if any, implication that has on Flowers. I've not heard of -- and the only way I find that out is through people who supply us with equipment, occasionally we hear of a new line or something that's going up. But in my recent memory, my memory gets short sometimes, but I don't recall any new bakery, except Flowers, going up in the past quite some time. That's not to say somebody didn't put a new line in an ongoing bakery, I think everybody has been vigilant, especially thinking about the -- because the industry has been in tough shape.

We mentioned early earlier about IBC, conditions there. As I've said often on these calls, the industry need to do better to be able to be on new plants, we do have to have margins so we can have a return to our owners. I do recall one though, we do have a new bakery going up not too far from, new bakery in Valdosta, Georgia. That's owned by a family up in Pennsylvania. Specializing in potato type products, potato buns and rolls. Far and few between putting up new bakeries today, or new capacity.

Okay, do you have a sense for where industry wide capacity utilization is? And what is your capacity utilization?

I don't know industry wide, I can tale you though the Flower continues, and I break it out by bread and buns, we've been saying this for quite some time. We're between 100% and 110% capacity. 100% capacity to us is 40 hour shifts or 120 hours per week would be 100% capacity. We run basically 100% to 110% depending on the season.

Same with buns. We've added capacity, but our volume has continued to pick up over the past several years. And as we build new plants we've been able over time to add volume to fill them up.

Thanks.

Thank you, Lars.

Thank you ladies and gentlemen. We have no further questions at this time. I'd like to turn the floor back to Mr. George Deese for closing commence.

Thank You, Everett and thank you to everyone who joined us on the call today. I do want to thank the Flowers team for delivering the wonderful results for the quarter and the year. Your efforts to improve our efficiencies and reduce costs helped us to deliver these great results.

Again, thank you all for joining us on the call and your interest in Flower Foods. Our strategies are working. We've been innovative with our products and brands. Our team is experience and determined to win every day in the marketplace. Thanks for the confidence you have in our team.

Thank you.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.