Flowers Foods Inc (FLO) 2009 Q4 法說會逐字稿

Greetings and welcome to the Flowers Foods fourth quarter 2009 earnings conference call and Webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Marta Jones Turner, Executive Vice President, Corporate Relations for Flowers Foods. Thank you, Ms. Jones Turner. You may begin.

Thank you and good morning everyone. Thanks for joining our call. Our fourth quarter and full year 2009 earnings were released earlier and if you need a copy of that release you'll find it posted on our website. We plan to file our 10-K on March 3rd. Of course you know that I must remind you that our presentation today may include forward-looking statements about our Company's performance. Although 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'll discuss during the call, important factors relating to Flowers Foods business are detailed fully in our filings with the SEC.

Participating with me on our call today are George Deese, Chairman of the Board and Chief Executive Officer, Allen Shiver, our President, and Steve Kinsey, Executive Vice President and Chief Financial Officer. We know that today's a very busy day in the midst of a hectic earnings season. We'll open the call to your questions after George, Allen and Steve deliver brief comments. Now, I'm pleased to turn the call over to our Chairman and CEO, George Deese.

Good morning everyone and thank you for joining our call this morning and your interest in Flowers Foods. I'm happy to report record results for 2009, in line with the guidance we provided in November. On a 52 to 52 week comparison, our sales were up 9.7%. Earnings per share was up 11.9%. And operating income was up by double digits. We achieved this in spite of the deepest recession since the 1930s in a very competitive market. I'm very proud of our team and their efforts to achieve cost controls which delivered on the bottom line. Steve Kinsey will give you more financial details in his comments.

From an operations standpoint, 2009 was eventful. We opened the Bardstown, Kentucky bakery in May, and we're on track to open a second production line in Bardstown this spring. We acquired the mix plan in Cedar Rapids mid year, further improving our supply chain. In August we celebrated the one year anniversary of our Holsum and ButterKrust acquisitions. In October, we acquired Leo Foods, a tortilla business that brings growth opportunities in that category.

We added production capacity for the new items that we're introducing in the first quarter, sandwich rounds and thin bagels. We continue investing to further improve our efficiencies in manufacturing, shipping and logistics. I am pleased to report that manufacturing efficiencies are now the highest level in our recorded history. Today, our discussions will be different from our past conference calls. You have the details of our fourth quarter and fiscal 2009 in our news release.

Our discussions will focus on six questions that we believe are the most important for our Company and for our investors. First, what about pricing and promotions? Second, what about sales growth at retail and foodservice and through acquisitions? Third, are we maintaining our market share and volume? Fourth, what about our commodities? Fifth, what should gross margins be for this business? And sixth, what about earnings per share growth?

Allen and Steve will briefly discuss fourth quarter and fiscal 2009 results. More importantly, they will tell you about our strategies for addressing the issues presented by the six questions that I have just discussed. Then, I will weigh in on the issues and our strategies before we open the call for your questions. Before I turn the call over to Allen, I want to say that I have never been more positive about our Company. Our operations are strong, our efficiencies better than ever, our brands and products positioned to grow. We have new capacity coming online to reduce our cost, and helps us grow in our expansion markets.

Our promotion strategies have been effective. We are maintaining our share in a highly competitive market. Over time, as the economy improves and the market returns to more normal activity, we should begin to see margin expansion. Our business model is sound and I have confidence in our strategies and our team.

Now, I've asked Allen to report on Flowers' brands and market share. As you know, Allen became President of Flowers Foods at the beginning of the year. We are pleased to have him join us on our call today. Allen Shiver.

Thank you, George and good morning. The market share information that I will reference this morning is from Flowers custom IRI database for the IRI south market. As a reminder, IRI captures only about 48% of our total retail sales.

In quarter four of 2009, our strategy to increase our promotional activity improved sales and reversed the decline in share that we reported in quarter three of 2009. IRI reports Flowers' branded sales up 2.4% in dollars and 10.5% in units for the quarter. Flowers gained 50 basis points in dollar share, while unit share increased 120 basis points versus prior year. It is important to note that the IRI south market does not capture sales in our expansion markets. In the quarter, these markets contributed about 1% to our DSD sales, which is in line with our stated sales objectives. Our recent route additions in Indianapolis and Southern California are evidence of our continued success in our new markets.

For the full year, Flowers' brands performed well in a very challenging marketplace. In the IRI south market, we maintained our branded leadership position with a 22.5 share of the total category. Our dollar share trend was unchanged from the prior year. Our brands hold strong market share positions in multiple product categories, including white bread, soft variety bread and buns and rolls.

We continue to introduce new products in each product category, growing our share in both our core and our expansion markets. For example, we introduced a new soft variety bread, Nature's Own 100% Whole Grain late in the third quarter and we're very pleased with the results. In the bun and roll category, we recently introduced two varieties of Nature's Own sandwich rounds with 100 calories per serving, our 100% whole wheat and healthy multigrain sandwich rounds are generating a lot of excitement with both our sales team and our Nature's Own consumers.

In other categories, such as our breakfast breads, we continued to leverage the strength of our Nature's Own brand with exciting new products like our thin bagels which we introduced in all markets earlier this week. Our Nature's Own thin bagels come in two flavors, original white and 100% whole wheat. With half the thickness of our regular size bagel, our thin bagels fit nicely in a toaster. Nature's Own thin bagels also have about half the calories of our regular bagels. During the next few weeks, we will also be introducing three new soft specialty breads under our Cobblestone Mill brand. We look forward to the sales contribution of our new Cobblestone Mill Potato and Italian breads, along with Cobblestone 100% wheat bread.

Turning to foodservice. In both our DSD and warehouse segments, our foodservice customers continue to be impacted by the difficult economy. Foodservice is approximately 28% of our total sales on an annual basis. In 2009, our foodservice sales were down 6% in volume due to softness in the overall foodservice category. Growing our foodservice business remains an important part of our overall strategy.

Our ability to provide our foodservice customers with products through both fresh and frozen distribution remains a competitive advantage for our Company. We continue to work closely with our foodservice customers to develop innovative new bakery products that meet their constantly changing needs. In addition to our goal to be the low cost producer, our leadership position in the foodservice category, along with our reputation for product quality and outstanding service places Flowers in an excellent position to take advantage of growth as the foodservice category recovers.

To summarize, in both the retail and foodservice segments, our products and brands continue to hold strong positions in the marketplace. We continue to have significant growth opportunities in both our core and our expansion markets, as evidenced by recent new product introductions and route expansions. It is also important to remember that we have growth opportunities through acquisitions. As we have in the past, we expect to continue our strategy for bolt-on acquisitions that broaden our geographic reach, product offerings and customer base. This past quarter, we demonstrated our ability to correct short-term market share and volume issues by increasing our level of promotional activity. However, we clearly understand that deep price promotions is not in the best interest of our trade customers, our brands our Company, or the bakery category.

For the first half of 2009, our actions were consistent with our proven long-term pricing strategy of maintaining a fair everyday price on our products, supported by limited price promotions. We have a long track record of success with this strategy, as indicated by our slow but consistent growth in market share over long periods of time. In 2010 and beyond, our proven strategies for growth will continue. We will continue to leverage our competitive advantages, which include our strong brands, quality products, cost effective bakeries and superior execution by our sales team at store level. And, we will achieve our sales objectives through innovative new products, growth in our expansion markets, along with strategic bolt-on acquisitions.

Thank you for your attention. I've shared with you our strategies for pricing and promotion, sales growth, as well as market share and volume. Now, Steve Kinsey, Executive Vice President and Chief Financial Officer, will give you more details on the financials and also provide more answers to the questions that George posed earlier. Steve?

Thank you, Allen. Good morning. This morning I will touch briefly on the fourth quarter and fiscal 2009 results, and then move on to 2010.

As you have heard, the fourth quarter was affected by the continued competitive environment. Heavy promotional activity continued to pressure the top line and the gross margin. However, the fourth quarter and full year operating margins remained strong. Fourth quarter and full-year comparisons were also affected by the fact that fiscal year 2008 was a 53 week year, with the additional week falling in the fourth quarter. The overall effect of the additional week on the the top line was approximately 7.2% in the quarter, and 2% for the full year. The effect of the promotional activity in the quarter and full year was about 1.5% on the DSD sales volume.

As you may also recall, it was the fourth quarter of 2008 we implemented a price increase. So lapping this price increase, coupled with the heavier than planned promotional activity pressured the top line in the quarter. Excluding the effect of the additional week in the fourth quarter, volume was up slightly. Increases in branded and store branded retail volume in the quarter were partially offset by continued pressures in the foodservice channel. As Allen stated, our foodservice volume was down for the year roughly 6%. Even though foodservice continues to be soft, we do anticipate it turning at some point.

In addition to higher promotions, gross margin was negatively impacted by higher input costs. For the quarter, input costs were up approximately 3%, excluding acquisitions. Full year input costs were up 7%, excluding acquisitions. However, we did continue to deliver on improvements in selling, marketing and administrative costs as a percent of sales in the quarter and the full year. One of the primary drivers was lower distribution costs as a result of lower fuel costs. Also, improvement in labor cost in the quarter and throughout the year as well, were partially offset by higher pension costs.

Net income and earnings per share were up approximately a $0.01 or 3% in the quarter, excluding the effect of the additional week. Full year earnings of $1.21 per share were in line with our most recent guidance excluding the $0.02 gain on the acquisition in the second quarter. We are pleased with the progress of our acquisition. Acquisitions were accretive in the yesterday, contributing approximately $0.01. Cash flow in the quarter improved over the fourth quarter of 2008 and the full year cash flow from operations was back in line with our expectations. We continue to execute on our strategy. Share repurchase in the quarter as well and increased our dividend in 2009. Over all, our philosophy for uses of cash remain intact.

Moving to 2010. Just to remind you that our 2010 guidance is compared to 2009 results excluding the $0.02 per share or roughly $3 million pretax gain on acquisitions in the second quarter. We have projected sales volumes or sales growth of 2.45% to 4.5% for the year. As we enter 2010, the competitive environment continues to be challenging. Looking at the full year, we anticipate that the front half comparisons will be tougher because consistent with our pricing strategy and as Allen did say, we did maintain a great deal of our pricing actions early on in 2009. Even so we do believe the strength of our Nature's Own brand will equate to a strong start to our new products as we have seen happen in the past few product introductions.

Just a reminder that our 2010 sales growth should come from price mix of approximately a quarter to 0.65%, volume should be up roughly 150 to 260 basis points, and acquisitions should contribute roughly 75 to 12 basis points. In 2010, we also remain steadfast in our procurement strategy. We will continue to manage risk by buying our commodities and other ingredients on average six to nine months ahead of usage. We're excited that the cost headwinds are behind us and pleased that in 2010 we benefit from cost tailwinds.

We are forecasting input costs to be down roughly 8 to 9% in 2010, excluding acquisitions. The complete cost of goods, we are forecasting roughly 3 to 4% increase in the other components of cost of goods, which would include employee costs, utilities and other indirect costs. The overall targeted impact to the changes of cost of goods will be positive to the gross margin percent. The final outcomes of gross margin in 2010 is dependent on the top line. That being said, we are targeting a minimum 50 basis point or so improvement in gross margin as a percent of sales. Longer term, we do believe we can continue to see margin expansion.

We're still forecasting another 25 to 50 basis point improvement in selling, marketing and admin expense as a percent of sales, driven primarily by more efficient distribution and gains on the administrative side as we continue to integrate our acquisitions forward into the FAC environment. This should equate to incremental improvements in the EBIT margins as well. Given the forecasted improvement in the input cost and the forecasted top line growth, we are targeting 10 to 15% earnings per share growth in 2010. While 2010 does bring its own set of challenges, we are optimistic about the potential in the year. With that I will turn it back to George.

Thank you, Steve. Just a comment. In 2010, we will continue investing to improve efficiencies, locate production closer to the market and to add new capacity. Our major projects this year will be the bun line in Bardstown, which will be up in operation very soon, a new bun line in Leland to support our growth in Texas and back half of the year we will add new capacity for snack cakes to support the growth on this brand and other snack cake opportunities. And the roll-out of our shipping automation continues. Through this effort we're improving our distribution efficiency and tracking our products even better than ever before.

You have heard me say before that Flowers Foods takes a long-term view. We manage the Company with long-term interest of our customers, associates, and stakeholders in mind. Earlier I told you about the six questions we believe are important for Flowers Foods in 2010. Those questions are what about pricing and promotions? alen told you that we will be less dependent on deep promotions as we maintain our position of strength in the marketplace. Our ability to do so is enhanced because Flowers Foods has strong brands, innovative products, consistent quality and superior execution at store level.

And what about sales growth? Steve shared with you the components of our expected growth for 2010. Looking at the segments, our strategies in retail are to maintain the strength of our core sales base, introduce new, innovative products and expand our geographic reach or DSD to deliver growth that outpaces the industry. Our strategy for foodservice is to leverage our R&D expertise, cost structure and customer service to grow our foodservice business and our strategy for acquisitions remain constant. We will grow by making strategic bolt-on acquisition that's broaden our geographic reach, product offering and customer base.

And what about market share and volume? We will maintain our market share and steadily increase our share over time by introducing new products, leveraging the strength of our brands, and our execution in the marketplace. What about commodities? Steve gave you an update on our strategies regarding commodities and our outlook for 2010. Our strategy is to be competitive and manage our risk. We manage our risk by buying commodities and other ingredients at the best price and at the right time to allow us to deliver results in line with our goals and to provide a good value the to our customers and consumers. In doing so, we will deliver consistent earnings growth which enhance shareholder value over time. As Steve told you, our strategies take coverage of major ingredients on a rolling six, nine months ahead of usage.

And gross margin. Steve told you that we expected improvement of 50 basis points or so. We will achieve that through top line growth, efficient manufacturing, improved input cost, and more targeted promotions. And what about earnings per share growth? In 2010, and for the foreseeable future, our forecast is for double-digit growth in earnings per share, with continuing strong cash flow and a pristine balance sheet.

In summary, our team at Flowers Foods understands our mission. Our business model is right, our strategies are sound. We exited 2009 better positioned than we entered it. Our bakers are more efficient, our brands and product mix stronger, our geographic reach broader, our team is focused on opportunities that continue growing through new product innovations, acquisitions, expansion markets, and further penetration of our core territories to deliver earnings growth to our shareholders over the long term.

Now, we will open for questions. Thank you very much.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). One moment while we poll for questions. Our first question comes from Mrs. Farha Aslam from Stephens, Inc. You may proceed with your question.

Good morning. George, I had a question regarding your EPS growth targets. This is a new verse for Flowers in terms of double-digit -- committing to double-digit growth. Can we take that 10 to 15% EPS growth that you're looking for in the next year to be sort of the level you're targeting going forward annually?

Yes, we haven't taken that before, Farha. We do feel with our strength that I've just gone over, we feel very comfortable with that. None of us know what the world brings going forward. As long as things stay as they are or improve going forward, we feel very comfortable with that.

And would you break out maybe how much annually you're targeting to be organic versus how much would be probably driven by acquisitions and how much by the new territory expansions?

You're talking about on sales growth or -- ?

On the sort of EPS growth, as you manage the business, when you think about that 10 to 15%, how much would be coming from core territories, how much from your new territories, and maybe how much have acquisitions been factored into that number?

Of course we start with the top line, which Steve gave. What do we anticipate sales growth being, which does deliver that EPS and we're not confident we're breaking that EPS on those criteria. We're breaking out EPS based on those criteria. We have to start with the top line.

This is Steve. I would say when we look out in the near term, three to five year, we do not forecast acquisitions. That would come from core growth or expansion market growth.

The 10 to 15% EPS would be driven by organic growth?

Yes.

That's fantastic.

And market expansion.

And market expansion. And you've been building a bakery every sort of 18 months. Any plans to accelerate that bakery?

No, we do not have a new announcement. We're finishing up, as I said -- we're building another -- a bakery basically with two production lines, one in Bardstown and one in Leland, two lines, as well as added production lines in our cakery. So you can see the confidence we have in the growth of the Company. It's not new plants. Bardstown is a new plant. These particular lines are an add-on in markets that we feel comfortable with the growth we have.

One final question. Allen, you had mentioned that foodservice was down year-over-year in 2009. Did you see foodservice volumes pick up as you went through the year and could you share with us some color about the first part of the year in 2010?

As far as our trend on foodservice sales for the year, I would say that we saw foodservice sales actually weakening slightly as we moved into the back half of the year. As we mentioned earlier, as the category improves and responds, we're really in a great position to pick back up with the growth trend that we've had in foodservice over many years.

Okay. And early January, have you seen any improvement versus the back half 2009 number?

Thus far, no real significant improvement so far.

Okay. That's very helpful. Thank you very much.

Thank you.

Our next question comes from Eric Katzman from Deutsche Bank. You may proceed with your question.

Hi, good morning everybody.

Good morning, Eric.

I guess a couple questions. I guess first, I'm trying to bridge the gap between I think you said 10% unit consumer offtake in the retail data in the southeast market and yet the DSD business only had volume growth of about 1%. So what's the difference there?

Eric, I think if you look at our overall DSD business, you've got so many components other than retail. You've got private label issues. You've got a lot of foodservice as well in the route operations. What Allen repeated was the share growth in units on --

The numbers I gave you were based on the IRI south which as I mentioned captures about 48% of our total retail sales.

Right. But I guess what I'm getting at is that obviously the product -- the shelf life, volume versus -- your shipments versus offtake are going to be very, very close, and so if you're reporting for the DSD segment basically just slightly -- slight up volume, and yet your brands were up in the southeast market which as you noted is half of the business, that those unit offtake was over 10%, George, you're saying that private label, some foodservice product that goes through the DSD network and what else was down?

That would probably be the biggest areas of down trend.

Okay.

There could be others. But that was the significant part.

Okay. And then I think at the Analyst Day that you held in December, George, you kind of mentioned that one of the kind of critical elements to get from the roughly 3 to 4% sales growth to the earnings growth this year was the mix benefit of new products.

Right.

Could you talk a little bit more specifically about how the new products are performing in market versus other products that you've introduced, given the time span that you've had them in market?

I will. Be happy to and Allen can follow up on his thoughts. We were very pleased with the 100% grain product that we introduced under Nature's Own in the fourth quarter. More importantly, though, originally we had thought we would be up and running earlier on our sandwich rounds and thin bagels and I made some comments probably in the second or third quarter that we anticipated a lot of growth in the fourth quarter with that. Unfortunately, we did not have the equipment up and running in time for that.

But we did introduce the sandwich rounds I believe two weeks ago, three weeks ago, and very exciting and Allen commented, very much excitement from customers, consumers and certainly our sales department because of outtake and uptick we have seen in that. And of course, the thin bagels are introduced this past Monday and it's probably too early to comment on that. And then we see another product line coming, being introduced in different parts of the country.

I would say the rounds and the bagels went throughout the organization. The Cobblestone Mill, as Allen mentioned will not be marketed wide to begin with. It will be selected and targeted and go from there. But this is -- the best year, the best start from new products that we've had in quite some time and as we go through the year and look at more capacity on the back half of the year, we continue to see more improvement on the back half.

Eric, just to add, I think one of the common denominators you'll see in our new product effort is trying to identify the value added attributes that consumers are really tuned into. We do that from a research standpoint, trying to identify exactly which buttons to push. And I think the sandwich rounds, the bagel thins and some of our other new products that you'll see in the remainder of the year, they have value added benefit which also help us improve the margin with those products as we sell through.

Okay. And then my last question, you know, on the promotional environment, have you noticed any improvement -- I guess I'm a bit concerned that wheat has continued to trend down and that allows the marginal player to pass that through, and yet you seem to be suggesting that promotion may not be as deep as it was in the fourth quarter. Can you just kind of comment on that?

Well, let me comment this way. We do see in the first quarter a continuation of the fourth quarter. I guess when I was talking about less dependent on promotions, I'm looking out a little further. Takes time to unravel some things that may be in process. We are going to be more pointed, probably less products, we have too many products on promotion, it's very hard to manage, very hard to get the displays needed to have the drive-through. You've heard more and more about the clean store concept, where a lot of the retailers have taken displays down in their supermarkets, and which leaves you on the shelf at just a discounted price.

And historically, hot specials would bring special displays. Some supermarkets still allow that but a lot have gone to this clean store concept at this point in time. So I think first quarter's more of the same. As we begin to look at the second, third quarter, depending who you listen to, some retailers, some people are predicting some inflation in the back half of the year. I'm not predicting that. We just have to wait and see how it comes. But I think there is a thought that that could begin to -- deflation would let up and we could see some inflation on the back half of the year.

Okay. I'll pass it on.

Our next question comments from Mitch Pinheiro from Janney Montgomery Scott. You may proceed with your question.

Good morning.

Good morning, Mitch.

Just following up on Eric's question on promotion. So I mean, George, I guess in your remarks you had mentioned that -- may have been Allen -- that your promotions had been effective in helping you maintain share. At the same time you say lack of additional merchandising, off the shelf type of display has been a negative. Are your promotions less effective than historical promotions or if you could just color that up for us, would appreciate that.

It is less. Without the display, without the display, units did go up. We would have like to see more up, more dollar sales increases. Not saying they were bad. We achieved what we wanted to achieve. We did stop the erosion on our branded products.

That was our number one objective. That was achieved. Now going forward, what I'm saying second, third and fourth quarter, hopefully we can be more pointed, maybe less products, not quite deeply as promoted is the point I was trying to make.

In the south IRI region, what was the overall bread category performance and then within that, private label share of that?

Mitch, I've got t it right here. As far as the 12 weeks for the quarter, the overall category was basically flat, 20 basis points improvement. Within that, store brand was also flat for the entire year, the category was up 50 basis points. Store brand was -- for the entire year was actually up 1.4% on dollars, and then on units it was actually up only 0.4. So relatively flat.

Okay. Thank you. So when you talk to your retail partners, I mean, is the -- is the conversation around promotion relative to a flat category? Are they -- or is really the promotional environment driven not by the retailer but more by the competitive set?

Mitch, I think the -- one of the encouraging things from my standpoint is that we're hearing more of our retailers recognize that in the bakery category, which 99% of our consumers are buying fresh bakery products, retailers know it's one of their top sales and I think it is the number one profit category. I think what we're hearing is more retailers are recognizing that price deflation is not a good thing for the category. And so I expect that as we move into the year, that retailers are going to become more aggressive and hopefully limiting how much promotion that they allow in their stores.

Okay. And then in your expansion, can you talk a little bit more about your expansion market. Particularly about West Coast. Any sort of -- any tangible progress you can talk about, either like in the number of routes, market share, anything along those lines?

I will not be specific, Mitch, for competitive reasons, but I would say that in California we have added route structure so that we can take care of the marketplace in the southern area. Especially the San Diego area, Los Angeles less so. But we are in a position now to begin to take on some of the major accounts with that route structure. And I would say, and Allen mentioned Indiana I believe.

Indianapolis.

We have solid route structure in a lot of that market as we speak and that product of course is coming out of our new plant in Bardstown. The market expansion does continue. We tried to do it in a way that as we said before, we're not trying to break the bank. We're just trying to grow gradually and over time, hopefully we can get our share and be effective in those new markets as we've done in the past.

Okay. And last question for you is very surprised, positively, in your warehouse delivery business. The margins have I guess for the year look like they're double-digit. They've always been a margins that maybe were half of where your fresh bread business was. What's actually driving the margins to these double-digit and would the third and fourth quarter, your back half levels be sustainable in 2010 or is there something unusual in those numbers?

Actually, we're very pleased, as you indicated. Things have continued to improve. Remember, we have over time really been busy trying to improve those margins and I said many times in past years that we hope some day that our segments could be equal to DSD. And with DSD having a little tough time now. Thank goodness we have that to level things out.

Sustainable? We feel as we look at the coming year it is sustainable and we're planning on that. There's always ups and downs. Sometimes a lot is driven by on the foodservice side, particularly on some national account that we're working with on innovation of a new product, that's what's so crucial to this type of business. Some of it is sustainable and some is a new product introduction, that might. On what I'm talking about. But it's always a continuation of working with customers, trying to find a unique product that helps them be different from their competitors in the marketplace and that's how we can get value for our products as well.

Okay. Thank you very much.

Thanks, Mitch.

Our next question comes from Tim Ramey from D.A. Davidson and Company. Please proceed with your question.

Good morning.

Good morning, Tim.

And I like those sandwich rounds. I wish we could get those up here. Those seem like a good product.

Thank you, Tim.

Steve, just a clarifying question. Was your 1% accretion from acquisition or $0.01 accretion from acquisitions, was that after financing costs or before financing costs.

That's after, all-in.

All-in, thank you. George, I thought the question format you laid out was really good and addressed a lot of the issues, but come back to the very first one which was the strength of the brands, because while your brands have historically been strong, you haven't experienced much in the way of unit volume growth, despite some expansion on the geographic front. And just seems logical, your pricing was above market for the first half or maybe three quarters of 2009. Why isn't that a pretty tough comp, at least for Flowers as we go through at least the first half or three quarters, when your pricing was somewhat above market last year and probably more in line with market this year.

Tim, you might have missed what I said earlier, not in that discussion, I think. I think it was on a follow-up question. I did say comps for the first quarter and possibly part of the second quarter will be our toughest comps on the top line. We are dependent somewhat on our new products to help that, and we do think it will help. But I come back and say that Nature's Own has grown by double digits for years. And I just have to show you the records and prove it to you.

And market share, Tim, is -- you don't -- this is a market that you don't have huge gains in months. It takes years. And you don't lose it by the way in months. It takes years. So I'd like to -- maybe our next analyst meeting we'll show you a ten year chart or whatever you'd like to see that proves my point. Things just do not change as quickly in this industry as in some industries. But we are happy and pleased with where we're at with Nature's Own.

I think I would agree. But I mean, essentially there was very little organic growth in 2009 and, with pricing negative, seems difficult to see. But we'll stay tuned. Thank you.

Thank you.

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

Good morning.

Good morning, Heather.

I have a few questions. Just real quick on the foodservice side, talked about it getting a little bit weaker later in the year. Was that function more of your QSR foodservice business or was it like a broad-based deterioration?

Heather, when we say foodservices, that's several segments that we look at from high end to casual to foodservice. Could be the prisons, the schools, et cetera. It is all-in when you talk about food consumed away from home concept. I would say that fast food would be one that they were not as strong. They did have some issues this year. Not as strong as in past years. I know you read their reports as well.

Casual dining has had a tough time. I did read for the first time this week, I think put out by the Restaurant Association, that they began to see -- it's been bottomed and bottomed and bottomed, but they're beginning to see a climb-out. We have not recognized that yet. Hopefully we will in the very near future. But it's been pretty wobbly.

There's been no particular segment of foodservice institutional that got weaker?

Not really. If you look at the overall business, the decline is impacting all segments. I think if you kind of look back, we've enjoyed nice upward trends in foodservice. One of the things that we know it takes a long time to develop new customers and we've got a lot of good things that are kind of in the pipeline. So one of the things that we're working hard on is bringing in new foodservice customers. At the same time as the total category improves, we should be in good position.

Okay. Thanks. On the snack cake side, I just wanted to clarify what I thought I heard you say to Mitch, that the margins we've seen in late 2009 are sustainable into 2010 and that there was nothing in the quarter like a new product or in and out product that helped growth. Point being, these are sustainable results?

We don't break the segments out. I think I can say, though, that cake was stronger last year, and foodservices, we did indicate in our press release was weaker.

Snack cake side, the success you've had there in the mass channel, et cetera, you believe that's sustainable?

Yes.

There wasn't any special event or something that helped results?

No.

Okay.

We do believe it is sustainable.

I wanted to go back to an earlier question -- well, first, on the DSD sales, the volumes were down slightly but you noted that retail, which is roughly 48% -- the IRI which is 48% of your DSD sales was up roughly 10. So does that imply that foodservice and private label were down roughly 10?

Was down.

Okay. And then finally, on this competitive positioning, if you look at the nearby price, it's down year on year right now. But not nearly to the extent that it was on a year on year basis in early 2009. And in the comps, by the second half of the year, if prices stayed around these levels, would be roughly flattish. So given that that tailwind has begun to ease for your competitors, I know it's greater for you, but it's begun to ease for your competitors, should ease completely going into the second half, does that factor into your confidence somewhat, that the competitive environment should ease going into Q2?

That does say inflation, depending when they bought, Lord knows I don't know, but there are other costs besides commodities. And as overall cost continues to rise in an industry, you have to do a better job of cost control somewhere else. If you've done all you can do, most people have, I believe. Sooner or later, you do have to pass some along to the consumer in some shape, form or fashion. And that might not be general price increases. It could mean less promotions. Which bottom line, would give you a better net price.

But what I don't understand, so all through 2009 and what I believe you are saying now is that, again, nearby futures are down year on year, but it seems as if you went into -- Flowers went into 2009 with meaningfully higher wheat costs than the current spot and so now year on year, the tailwind seems like it should be larger for Flowers than the spot markets might indicate. Is that a fair assumption?

Well, we buy on a rolling basis, Heather. We don't disclose at what levels we buy. You have to kind of -- if you look at the period that we would have been in the market for 2010, it's a pretty wide range, still fairly volatile, over a $2 range still.

Okay.

So won't disclose the exact amount. We did say our costs would be down roughly -- input cost down roughly 8 to 9%. I think you're right in thinking that it's improved as you move through the year.

Okay. Well, thank you very much.

Thank you, Heather.

Our next question comes from Akshay Jagdale from KeyBanc National Association. You may proceed with your question.

Good morning, everyone.

Good morning.

Couple of of questions. Follow-up question, promotions and in the past you've said in DSD there's anywhere from 3.5 to 4% and you said they were up 100 -- that level of spending was up 150 bips in 2009. Can you first tell me what that level of spending was up by in the back half of 2009 versus the first half? And then the second question is what are you modeling for promos in 2010? What's in your guidance for promos?

Looking at the first question here, Akshay. The first half on average we were probably up about 1.5%, on average. In the back half you're up on average roughly 2%.

Okay. And for 2010 you're modeling similar levels at around 5% of sales or so? So up -- ?

For competitive reasons, we wouldn't disclose what our promotional -- what we think our promotional activities will be. So I would not want to give that.

Okay. And then on new products, again, I would agree with Tim, I tried those rounds and they're really good. Can you talk to us a little bit about what you think that market opportunity is? I mean, we look at some of your guidance and I'm assuming that the new products would fall into the volume lift that you laid out, but can you just talk to what the opportunity could be there? Because it seems like a really good product.

Thank you, Akshay. I appreciate your comments on that. We did build our forecast and model based on the new products. You never know -- we know what the market size is, roughly, but we don't know what percent of that share we may get. We don't know, again, it's in our forecast but again, for competitive reasons I wouldn't want to get into what that forecast is.

We do believe that Nature's Own, Nature's Own brand, the quality of product, the new packaging, certainly in our favor and our thin bagels also we feel like will drive some volume in the marketplace. But I would rather wait until we get some facts before I can tell you this. It's still early. We're excited about this, as you can tell. Maybe get a little history under our belt. You can see in the IRI in the quarter what it's doing but it's too early for me to try to give you guidance on that.

Just a few questions on gross margins. First, I just want to confirm, did you say -- Steve, did you say that gross margins, you expect them to be up 50 basis points in 2010 or did I mishear something?

We're forecasting at least the minimum of 50 basis points. I think the big variable on margins will be what happens on the top line, Akshay. We feel confident as far as our cost estimates but the top line will play a big part in that, as to what happens with volume and promotional activity.

And then regarding your cost estimate, which you said is 8 to 9%, roughly in my estimate about $50 million to $60 million, why is that at that level? I mean, you had $127 million headwind in 2008, a $46 million in 2009, and if we a part of that, why wouldn't we expect most of that to come back, if wheat has come down? Why is it a 50 to 60 and not 100 when over the last two years those cumulative have been up $160 million or so.

We won't disclose at what level we bought. Looking just at input cost, I would say our estimates of where we're coming back are probably a little higher than what you've estimated but we won't disclose that exactly. Again, we buy at various levels at various times and it depends on when we're in the market buying and commodities have been primarily wheat has been around the $2 or so grain as far as volatility. It's going to depend on at what point in time we do actually make our purchase.

That's helpful. Last one for George. George, can you just comment a little bit on gross margins over time. When we look at your 10 to 15% or double-digit EPS growth target, longer term, we've seen you have a lot of SMNA leverage over the years but I know you've alluded to the fact that margins over time should go back to historical levels. But can you say anything at least directionally about gross margins, where you are today, relative to your history, et cetera and where you think we should end up?

I'll try to point in a few directions with that. I would say that input cost at some point will normalize, could be higher level, probably will be because of the world economy as it picks up. Commodities will go back up. Sooner or later, things do normalize. Promotions will normalize at some point. Our cost structure we feel like is the real competitive advantage because we have invested in our business. We have invested in our plants. We feel like we are the low cost producer. And that continues on.

We're still not through, as indicated, on the the new lines. And in the future. And with our management team and people throughout the plants, we feel like we have competitive advantage. So price promotion, input cost, excellent plants and people, I feel like over time will deliver margin expansions and, therefore, earnings per share as I indicated on what we see in the future. Which if you look back over the past seven, eight years, compounded, that's where we've been.

Just one last one. I mean, for margins to go to historical levels, do you think there is -- one, do you think that excess capacity in the overall industry and do you think that capacity needs to come out or, in other words, there needs to be more consolidation in some of the branded players for things to normalize to higher gross margin levels? I mean, is that what you expect happen over time?

I think you've seen and I've seen over the years, this industry continues to consolidate. We're not counting on consolidation to save us. We're trying to be innovative and do the things that Flowers knows how to do best to drive our success. We're not waiting on some big event to save us. But consolidation will continue and capacity does come out of the marketplace over time.

Thank you.

Thank you.

Our next question comes from Alton Stump from Longbow Research. You may proceed with your question.

Thank you. Good morning.

Good morning.

Just want to get some color on this whole pricing conversation. It sounds like things haven't necessarily gotten better since the first of the year but you do expect them to get better as the first quarter. I guess the question is are you seeing actual signs of your competition either getting more rational of late or that they may get rational soon? What gives you confidence that you yourself can pull back a little bit on discounting the first quarter?

Alton, this is Allen. There have not been any widespread signs that there's a significant change taking place. However, in some isolated markets, isolated product categories and certain customers, there are some sparks that things could be improving. But it's much too early to predict a significant change at this point.

Okay. Thank you. And then a follow-up, looks like the corporate and other line on the profit side jumped up a fair amount year over year. Is there any reason for that? Is there anything in that number that we should know about.

As you recall, our pension expense was up pretty significant 2009 over 2008. We actually went from pension income in 2008 to pension expense in 2009 and it was roughly $10 million between.

Okay. Thank you guys. Appreciate it.

Thank you.

(Operator Instructions). Our last question comes from Bill Chappell of SunTrust Robinson Humphrey. You may proceed with your question.

Hey, good morning. This is Mike Schwartz filling in for Bill this morning.

Hi, Mike.

Hey. One real quick question. Most of mine have already been taken. I think you had mentioned that you're looking at some new product activity in the back half of the year. If you could go into a little more color on that, and then is that built into your top line guidance that you reiterated today?

I don't think we talked that much about new bread products in the back half. We talked about cake capacity coming on in the back half of the year which could drive some new products in the last half.

Okay. But that wouldn't be built into your guidance?

Yes, it would be.

It would be? Okay. Great. Okay. That's all I had. Thanks a lot.

Okay.

At this time, there are no further questions in the queue. I would like to turn the floor back over to you for closing comments.

Thank you, Nicky and thank you each of you for joining our call today and for your interest in Flowers Foods. Say again we're focused on opportunities to improve and grow. Thanks for the confidence you have in the future of Flowers Foods. Thanks.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.