Flowers Foods Inc (FLO) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Flowers Foods fourth quarter and fiscal year 2010 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, Ms. Marta Jones Turner, Executive Vice President of Corporate Relations for Flowers Foods. Thank you, Ms. Jones Turner, you may now begin.

Thank you, Debbie, and good morning, everyone.

Our fourth quarter and 2010 results were released earlier today. Of course, if you need a copy, you'll find the release posted on our website, www.FlowersFoods.com. We expect to file the 10-K on February 23. And as we get started, I do want to let you know that we will host an Analyst Event at the New York Stock Exchange on Tuesday, March 22, so you might note that on your calendar, and we hope to see you there, March 22.

Now to begin, 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 the matters we will discuss during the call, important factors relating to Flowers Foods business are detailed fully in our filings with the SEC. During the call today, we'll be using a PowerPoint presentation to support our speaker comments. You can access that presentation on the webcast listen page.

A quick review of our agenda, George Deese, Flowers Foods' Chairman and CEO, will give opening remarks. Steve Kinsey, our Chief Financial Officer, will offer more details on the financials. Allen Shiver, President of Flowers Foods, will then report on sales and operations. And then, George will finish-up our prepared remarks and open the call for your questions. Now, I'm very pleased to turn the call over to Flowers Foods' Chairman and CEO, George Deese.

Thank you, Marta, good morning. Thank you, ladies and gentlemen for joining our call this morning, and your continued interest in Flowers Foods.

To begin, we are pleased to report our ninth consecutive year of record earnings per share growth. Even though we did not meet our sales and earnings plan, Flowers Foods strength is evident in the fact that we delivered a record earnings on slightly lower sales. The economic environment remains difficult. The food industry continues under pressure on the manufacturing side, as well as the retail and food service customers. The [baking] industry is undergoing change, and players are having a tough time growing the top line. Even fewer are achieving meaningful earnings growth. In light of economic industry challenges, we are pleased to report that 2010 sales held steady, and that we achieved earnings per share growth of 7.2%, excluding the $0.02 gain from the acquisition recorded in 2009. During the year, we invested more than $50 million in additional capacity with six new production lines. We also invested in new products, new markets, and in new technologies.

Before Steve and Allen discuss our performance for the quarter and the year in more detail, I want to address the questions I believe are at the top of your mind. First, why did the fourth quarter and full year fall short of our plan? Second, what actions are we taking to deliver on plan for 2011, and as a part of that, what about commodities for 2011?Next, what is going on in the competitive landscape? And finally, what about potential acquisitions?

First, our results in the quarter and the year. As you know, we initiated pricing at the beginning of the fourth quarter, in reaction to soaring commodity costs, specifically wheat. The wheat markets as you know are now up over 100% since June of 2010. Our strategy to implement pricing, as commodity and other costs go up, is not a new one for Flowers. We are focused on the long-term, and in order to invest in new bakeries, new products, and new technologies, we know the Company must be profitable. That means running our business as efficiently as possible, and increasing prices when we face higher input costs.

On our third quarter call, I told you the business was looking a little better, with our pricing in place in the market. At that point, our volume also [unsteady]. However, over the remainder of the quarter, our volume was impacted more than we expected. We see this as a short-term situation. In the long run, we know that the pricing action we took was appropriate, and some commodity costs are doubling, and other input costs are also higher. Even though our volume was impacted and sales softer than planned, we delivered earnings per share up slightly from last year's fourth quarter, and we achieved another year of earnings per share growth for the year.

Now, what about our plan for 2011? Our revised guidance takes into consideration the factors we believe are important for 2011. As the year unfolds, we are very aware of the ongoing volatility in commodity costs, factors such as weather shocks around the world, emerging market growth -- the US ethanol policies will impact the global availability and the price of grains in the future. More specifically to Flowers Foods' needs, hard red winter wheat which is used for most of our products is planted and dormant until the spring. The quality and quantity of the crop will help set the final price, especially for the bakers, depending on the company's level of coverage.

Our purchasing strategies have proven effective. The speed and magnitude of the price movement in the current commodity market does give us some uncertainty for late in the year. As the year progresses, we will continue to make the necessary purchasing decisions based on the reality of the commodity environment. Our objective is to reduce price risk for our shareholders and customers.

Another important factor this year will be what happens in the marketplace. Today's volatility in the market, as consumers continue to struggle under pressure from the economy and high unemployment. Our job is to manage through these situations and deliver value for our customers and our shareholders. Flowers' brands hold a strong position in the markets we serve, and our team has a depth of experience that is unmatched in the industry. To grow volume, our team has implemented very select promotions in the categories where we did experience declines in the fourth quarter. I am confident in our team's ability to turn this short-term challenge into a longer-term advantage, as we work to grow sales across all channels. Steve will give you the specifics of the growth [installments] for 2011. Allen will tell you more about operation improvements, as we are making the new products we're introducing.

The third question, what is going on with the competitive landscape? The market remains highly competitive. And as I mentioned, consumers continue to be pressured by high unemployment and a weak economy. As you are well aware, there are also unsettling factors with some players in the industry, and that creates a degree of uncertainty in the category. Within the changing landscape, it is important to point out that Flowers Foods' plan is certain, and that our course is chartered. While the competitive landscape and marketplace may shift, our team is focused on taking advantage of opportunities created by those shifts every day. As the baking industry moves through the next stage of consolidation, over the coming years, our goal is for Flowers Foods to emerge as an even stronger player. We are focused on outperforming in our markets and on improving our sales, and earnings and margins.

The last question, what about potential acquisitions? The baking industry has been consolidating throughout my 47 years with Flowers. We have participated in that consolidation, having made more than 110 acquisitions since the mid-60s. Looking ahead, we expect acquisitions to continue to be an important part of our growth. Although 2010 did not play out as we had expected, in regard to acquisitions, we remain focused on our acquisition strategy. We have more activity today, in regards to potential acquisitions. We look forward to the opportunities ahead. I'll now turn the call over to Steve Kinsey for the financial report. Steve?

Thank you, George, and good morning.

As George mentioned, despite top-line pressure, we were able to deliver earnings per share growth in the fourth quarter and full year of fiscal 2010. Sales declined in the quarter 0.6%, on positive pricing and mix of 2%.Acquisition growth contributed 0.3%, offset by 2.2% volume decline, and 0.7% from the deconsolidation of variable interest entity. Excluding the effect of the VIE, sales would have been slightly up in the quarter. And as an aside, the VIE will not be a factor going forward.

Operating income, or earnings before interest and taxes, was down $1.3 million or roughly 2.8%, as a result of the lower than planned revenue growth from operations. Improvements in the gross margin were offset by increases in selling, delivery, and administrative expenses. The growth in net income, which favorably impacted by reduced interest expense, and an overall lower effective tax rate in the quarter. Earnings per share in the quarter of $0.34 was up 3%, or $0.01 over the prior year.For the full-year, the $1.49 was up 7.2%, compared to the prior year, excluding the $0.02 accounting gain in 2009.

During the quarter, our pricing actions, both wholesale increases as well as reduced promotions, drove negative mix and volume decline. In the face of instant cost headwinds, with ingredients, packaging and natural gas, we began to take pricing actions in the market to counter the rising costs. These overall net pricing actions, though necessary, impacted the fourth quarter volume more negatively than anticipated due to market conditions. Expansion markets contributed approximately 0.6% to the sales change in the quarter.

On a full-year basis, expansion markets added about 0.4% to sales. Gross margin improved in absolute dollars, as well as a percentage of sales in the quarter, and for the full-year. As a percent of sales, gross margin improved approximately 100 basis points in the quarter, and 120 basis points for the full-year. The quarter-over-quarter and year-over-year improvement was primarily the result of year-over-year reductions and input costs, offset somewhat by higher workforce-related costs. Overall input costs, ingredients, packaging and natural gas, were down approximately 6% for the quarter and full year. Included in the higher workforce costs during the quarter, is a charge of an approximately $1.2 million relating to the final settlement of a multi-employer pension liability.

Selling, distribution, and administrative expenses were up quarter-over-quarter and year-over-year, in both dollars and as a percentage of sales. As a percent of sales, SD&A was up approximately 110 basis points for the quarter, and 80 basis points for the year. Selling, distribution, and administrative costs were up, primarily due to higher workforce-related costs, increases in marketing and advertising expenses, and increases in warehouse and storage rent. Given the market pressures in the quarter, we are pleased that overall we were able to basically maintain our EBITDA and EBIT margins.

Net interest income increased for the quarter and the full-year, due mainly to a reduction in interest expense, the result of lower debt and our balances on the revolver throughout the year. The tax rate for the quarter was 33.3%, and the full-year rate was 34.9%. The favorable move in the tax rate, as compared to our estimated tax rate of 35.5%, was the result of several favorable discrete items, primarily related to state income taxes. The lower tax rate added approximately $0.01 to the quarter and full year.

Briefly commenting on the balance sheet and cash flow, cash flow from operations in the fourth quarter and for the full year was strong. We continue to execute on our strategies for usage of cash, investing in our bakeries, share repurchases, and dividend payments. We also paid down our revolver during the year, and at year-end the balance was zero. Also today, we filed a Form S-3, Universal Shelf Registration Statement. Along with our strong balance sheet, this will give us even more financial flexibility to take advantage of the opportunities as they present themselves.

Summarizing our call from the 2010 results. Though not what we had forecast, 2010 was still a record earnings year, despite a very weak economy, and a challenging marketplace. Excluding the deconsolidation effect of the variable interest entity, we experienced only a slight decline in revenue year-over-year, in a very demanding market, while protecting our margin. Fundamentally, we proved in 2010 that we have staying power, and we can respond to changing market conditions.

Looking ahead into 2011, we are adjusting our preliminary 2011 earnings per share guidance provided in November 2010. Input costs remain volatile. We anticipate that the consumer will continue to be somewhat pressured. The marketplace, as George said, still very competitive.Taking these factors into account, we are forecasting sales growth guidance of 3% to 6% over 2010. Earnings per share growth is now expected to be 5% to 10%. We remain cautious as we continue to operate in an uncertain environment. While we have taken pricing action to offset some of the input cost headwinds, overall costs remain volatile.

The sales forecast of 3% to 6% includes volume of flat to up 1%. The remaining revenue expansion will come from price and mix. We are forecasting the gross margin as a percent of sales to be down roughly 75 to 100 basis points. Input costs, ingredients, packaging and natural gas are forecasted to be up 8% to 10%. Selling, distribution, and administration expenses should improve roughly 80 to 100 basis points, as a percent of sales. The forecast for the effective tax rate for the year, exclusive of any discrete items, is approximately 35% to 35.5%. And shares used for the forecast are 91.7 million, exclusive of any share repurchases. Now, Allen will update you on sales and operations. Thank you.

Thank you, Steve.

Flowers continues as a strong competitor in the marketplace, and from an operations standpoint, our Company is well-positioned to take advantage of the opportunities that are ahead. I will go through the IRI data we typically share with you, and also provide additional data using our internal sales information. Our market share information is from Flowers' custom database of the IRI South, food, drug and mass market. It is important to remember that while IRI is an accepted measure of market share, it does have its benefits and its limitations. For example, IRI captures only about 48% of Flowers' total retail sales.

As noted in our press release, our branded sales were impacted by the pricing that we took at the beginning of the fourth quarter. As our prices increase, the level of promotional activity in the category remained high, resulting in a temporary decline in our branded volume. IRI reports our total dollar increase was 1.8% for the quarter, compared to the category increase of 0.6%. Our branded units were down 4.6% for the quarter, compared to the category decline of 0.5%. In IRI South, Flowers continues to hold the number one branded market share. In the quarter, our dollar share increased 30 basis points to 22.7%; however, we lost 80 basis points in unit share to 18.1%. Our internal sales data shows our branded retail dollar sales were down 2.7% for the quarter, and down 1.3% for the year.

In the quarter, the decline was driven by lower sales in our branded white bread segment. Our October price increase, combined with dramatic reduction in our white bread promotional activity, resulted in both unit and dollar declines in this segment. Moving forward, we are implementing very select promotions for our branded white breads in certain markets, as we work to reverse the negative trend in this segment. The decline in branded retail dollar sales for the year reflects the impact of lower white bread volume in the fourth quarter, and also high levels of promotional activity in the earlier quarters.

Turning to the soft variety bread category. We continue to be encouraged by the sales performance of our Nature's Own brand, especially in the growing soft wheat and whole grain bread segment. During the quarter, IRI South reports that our Nature's Own soft variety unit sales were up 1.7%, and our dollar sales were up 5.4%, exceeding the category dollar increase of 2.7%. These positive results in the face of a very turbulent pricing environment are strong evidence of the brand loyalty that consumers have for Nature's Own. In IRI South, Flowers continues to be the market leader in the soft variety bread category with a 44.4% share.

Nature's Own sandwich rounds continue to grow in this emerging new segment of the market. The growth of this category is driven by increasing consumer demand for less calories, reduced portion sizes, and enhanced nutritional value. Nature's Own holds a 24.2% dollar share of the sandwich round category in the IRI South market. With the success of Nature's Own sandwich rounds, combined with this week's market introduction of Whitewheat sandwich rounds, we are confident we will continue to grow our share in this important segment of the market.

New products continue to play an important role in the growth of our Company. New products contributed 5% to our sales in 2010. In addition to the success we're having with our Nature's Own sandwich rounds, we've recently re-introduced Nature's Own bagel thins in a new Ziploc package. The successful development and introduction of new products is a core component of our growth strategy, and that will not change as we move our Company forward. According to IRI, store brand bread, buns, and rolls continue to decline as a category. For the quarter, total US data shows store brand breads down 50 basis points in dollar share, and down 40 basis points in unit share. Our internal sales data shows an increase in our total store brand sales. This increase was driven by new business for store brand snack cakes.

New market expansion continues to be a key component of our overall growth strategy. During the quarter, we continued to achieve growth in our new DSD markets. Los Angeles and San Diego are two of our fastest-growing expansion markets. With a combined population of 22.5 million, southern California offers tremendous growth opportunity for our Company.

Now, for the food service category. Food service is an important part of our business, about 28% of our total sales in 2010. Our food service sales remain soft, reflecting continued impact from high unemployment and a weak economy. Our internal sales data shows that in the fourth quarter, we did see some improvement in our food service sales, but for the year 2010, our total food service sales were down approximately 2.4%.

Turning to operations, in the fourth quarter, we started-up our second production line for sandwich rounds and bagel thins. This additional capacity was added to meet the growing demand for these new items. Looking back on 2010, George mentioned that we added significant production capacity. In addition to the new sandwich round lines in Denton, we also added three new snack cake lines in our Crossville, Cleveland, and Winston-Salem bakeries. We added a high speed bun line in our new Bardstown, Kentucky bakery, and we also added a high speed bun line in our Leeland bakery in Houston.

As we added new bun lines at strategic locations to better serve the marketplace, we shut down several outdated and inefficient bun lines. Through the years, an important part of our growth strategy has been to consistently invest in our plants and in our equipment. Our investment of almost $100 million in 2010 continues that strategy, and will help maintain our position as the low-cost producer in the baking industry. As we implement our strategy of continuous improvement, we constantly evaluate new ideas for process improvements, along with new developments in technology. For example, this year we continue to roll out our shipping automation project, which integrates with SAP to improve both speed and accuracy in our logistics area.

In summary, from an operations standpoint, our Company is in excellent condition. Our brands are strong, our service level sets standards for the rest of the industry, and with our long-term commitment to capital spending, our bakeries are among the most efficient in the country.

Thank you for your attention. And I will now turn the call back over to George.

Thank you, Allen. Thank you, Steve.

As we think about 2011 and the years ahead, I think it's important to take a quick look back. Flowers Foods spun out in 2001, with market capitalization of roughly $400 million. At the end of 2010, Flowers Foods' market cap was $2.4 billion. Add to that, the dividends we paid through the decade, and we created about $2.3 billion for the shareholders since the spin-off. In addition, we bought in some 24 million shares for $400 million. We made $654 million in capital investments and improvements, and we acquired some $500 million of acquired sales to our base sales. So, we have delivered tremendous value to our shareholders, and we'll be able to provide better service and capacity going forward.

You need to know that shareholder value is what drives our team. Looking through the short-term window, we do face challenges brought on by the weak economy, consumers under pressure, and the industry undergoing change and volatile commodities. Looking beyond the short-term though, we can see the other side, the longer-term view. We know our careful approach to making the right decisions, our experience in the industry, and our proven operating strategies, will equate to new value for shareholders over the long-term.

To achieve our goal of value creation, we are committed to growth, to investment, and to the unique culture that is Flowers Foods. Our commitment to growth crosses three avenues. First, we will grow in our core markets by introducing new products, better serving our customers, and seeking new outlets for our products. Next, we will continue growing into new geographic markets. Currently, our fresh bread baked foods are available in over half of the US population. We have room to grow, and the know-how to get it done. Some six or seven years ago when we started on this new road track, we were serving some 38% of the US population. I am pleased today to say that that now rests at 54% of the total population, from a DSP perspective.

Finally, we will grow by making bolt-on acquisitions. Since 2001, when we spun off Flowers Foods, we have added about $500 million to our sales base through acquisitions. Looking ahead, we expect an accelerated pace of growth through acquisitions.

We're committed to investing in our business. We invest to improve our current bakeries to make them more efficient, to add high-speed production capacity, and to build new bakeries to support our growth. We invest in information technology that helps us better serve our customers. We invest in new products, and our brands, and in our people. I mention that because we are committed to maintaining our unique Flowers Foods' culture. That commitment includes helping our team members realize their full potential. Through several decades, we have created an atmosphere that encourages team effort, appreciates each individual's efforts, and that fosters a team of giving more than expected.

Yes, we have something special at Flowers Foods, and we are determined to keep it. And the question is why? It's because our culture, the Flowers way, is a competitive advantage for us. Every day, we focus on continuous improvement. Let me just say, the last few weeks we've had some pretty rough weather in the southeast, and I would say that I am so thankful and so appreciative to all of our team members who are going beyond the call of duty to make sure our customers and consumers have bread in the marketplace, and even times took care of our competitor's needs in some of their units. Throughout our Company, we have team members who simply are going to do more than what is expected of them, every day, and in every way. Our commitment to growth, to investments in the business, and to the Flowers culture, gives me complete confidence in the future of Flowers Foods in 2011, and in the years ahead.

At this time, [Joby] will now open the line for questions.

Thank you. (Operator Instructions).One moment while we pull for questions.Thank you.Our first question is coming from Farha Aslam with Stephens Inc. Please proceed with your question.

Hi. Good morning.

Good morning, Farha.

A couple of questions. The first one is on pricing. Since the end of the year, George, have you noticed competitors increasing pricing, and how do you think they're going to react to your increased promotional activity post the end of the year?

Fahra, let me respond this way. And we know the course we charted on pricing. What I would say for the whole food industry, we all know that commodities are volatile, and going up tremendously. You look at most announcements that are coming out daily, you will see that everybody has the same commodity issues, and I'm sure each, not the baking industry but the whole food industry, will look at their own situation, and will have to make their decisions. But our course is straight, and we know what that is, and we feel confident with that.

Okay. And then you mentioned that you have increased M&A opportunities. You'd mentioned in the past there was a valuation gap between buyers and sellers in the industry, and that's one of the factors that's prevented you to buy more businesses. Have you seen that valuation gap close?

Fahra, I think that is still a challenge. But we continue to work with those potential candidates, with flexibility trying to meet the needs of their shareholders, and how it comes out well for our shareholders as well. So I would say, that expectations are always high, but we just have to manage through that.

Okay. And then my last question is on that 8% to 10% increase in commodity costs for 2011, is that a pretty secure number, because you pretty much hedged out most of your needs? Or can that number change, if commodities continue to increase or decrease?

Fahra, this is Steve. I think George commented in his comments, that there's still some uncertainty late in the year. So we have to try to forecast where we think we can make purchases for the late in the year. But if you were to have a significant run, it could be up slightly, but I think overall the 8% to 10% should cover what we're expecting for the year.

Great. Thank you very much.

Thanks, Farha.

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

Hi, good morning, everybody.

Hi, Eric, good morning.

I guess my first question has to do with the disruption you noted, George, in the marketplace, and how much of an impact that may have had vis-a-vis the pricing versus promotion. It seems like you went one way, and the rest of the industry, or a good part of it, went the other. And I'm just kind of -- how much do you attribute that to all the changes going on with M&A, et cetera?

That's a tough question. I would say though, that we felt it was necessary. We always try to work on cutting all the costs we can, out of the business, be more efficient. Ultimately though, with all these high commodities coming, we had to step out, and do what was necessary.

I would say that -- seems to be a continuation, as you look at our RI for fourth quarter, we were up at that -- as you note. We're -- it's the result of how long someone might be hedged out, or whether or not lack of leadership or lack of understanding the industry. We work hard with our customers, to make sure that we're continuing to do the right thing, in trying to drive the category.

I read somewhere this week, where there is, with the consumer, almost a fatigue factor with promotions, and what's the real value of your product. And I thought it was an interesting article that I read. And I think the food industry and other businesses, with so many promotions, we forget what the true value of the product, and the consumer forgets what the true value of the product really is.

So we know where we are, and where we're trying to head. And we'll just see, as the year unfolds, and the higher costs that's here and -- if you're not taking care of, how much more cost you will have to take on. But we feel good about our position.

Okay, and then as a follow-up, and I'll pass it on. You recently published a report here on elasticity, kind of changes across the industry in the last couple years, and one of the data points which was -- I don't know, maybe it's a surprise, or maybe it isn't, but it looked like fresh bread category elasticity had the biggest increase? I mean it's still a relatively in-elastic product, but are you kind of surprised that the data would come out that way? I mean have you -- maybe this was your point in the last -- the answer to the last question about the inefficiency of promotion, but are you kind of surprised at how elastic the consumer seems to be to when the category is put through pricing?

Yes. Good question, I'll let Allen follow up on that. Let me just say, that there's certain categories that you can see that's more effected by others. Allen reported white bread, not on our white bread was down, but the whole white bread category continues to be down. I think it had so much to do with health and wellness, but I think it speaks volumes about our brand called Nature's Own. It -- in face of higher pricing, we continue to grow share and continued to build on the business. But Allen, do you want to come back and follow-up on that question?

Eric, just to comment on the category, the total dollars for the category in the quarter were up 0.1, and the units were actually down like 10 basis points. So not a lot of movement in the category in general. I think one interesting thing is, is the continued decline of store-brand bread. If you look at it now, we're going on two years of declining volume in the store-brand bread category, and I think primarily due to the promotional activity on the branded side. So in terms of -- I think the category has weathered the economic problems pretty well, and we're encouraged by the future of where the category is headed, especially with new items like the sandwich rounds, that are bringing consumer interest to the category should foster future growth.

Okay. I'll pass it on. Thank you.

Thank you, Eric.

Thank you. Our next question is coming from Mitchell Pinheiro from Janney Montgomery Scott. Please proceed with your question.

Hi, good morning.

Good morning, Mitch.

So in terms of the extreme weather you had in your core territories, is that a positive or negative for the first quarter? How do you think that will net out?

Mitch, you talking about the extreme weather that I mentioned earlier which hit much of the south?

Yes.

I think, all in all, it probably equals out. I think people do go into all kind of panic buying. Depending on how long they have to stay in their home, maybe they consume a little more than normal, but when supermarkets open back up, sometimes they still have a lot on hand, and it takes -- they don't buy it quickly. I don't count it as -- it looks great going out before the storm, and it can also look tough coming back, if the orders are not properly worked on.

Is there any higher costs related to that? I mean, running extra shifts and things like that may have been inefficient?

No, I wouldn't say that at all. I'm thankful that our people show up, and run the bakeries as needed, and take care of the marketplace.

As far as -- were there -- last quarter you had some start up costs, in your, I guess your snack cake lines. Any startup costs in this quarter?

Mitch, it was minimal, it was less than $300,000 in the fourth quarter. And on the full-year, it was roughly $2.2 million, 2.5 million, so --.

Okay. As far as input costs are concerned, the up 8% to 10%, does this include natural gas?

It does.

As related to fuel costs, since you have the independent, the owner operator system, how do you think higher fuel costs, impact your competitors? And whether -- you all face the same input costs on the ingredients side, but it would seem to me that there's additional pressure, given your more favorable distribution system. Is that fair, or how would you respond to that?

I've always felt our entire distributorship program had a competitive advantage, because with (up) the focus on trying to grow sales, also helping to control costs. So our distributors do take care of their own fuel needs, and that also over the years -- and especially when fuel goes up, we're always asked this question a lot, but it always seems to work out for people in the long pull. When you start having higher input costs, higher energy costs, it seems like pricing usually goes up a little to help offset some of that for the distributor.

I would just assume that the competitors that haven't really followed your pricing leads, to the degree to which you've taken pricing, it seems to even have more pressure on their margins, having an additional cost that -- that Flowers does not. But you're not seeing any obviously -- you're not seeing the pricing there yet?

I think you just have to continue to look at people's earnings reports, and make a determination on how they're faring versus Flowers.

Okay. As far as -- one other question I had involved workforce. You had mentioned workforce costs as being higher. The more you build -- your state of the art bakeries, you would think that workforce costs as a percentage of total would be coming down. What's driving the recent workforce costs increases?

I'll let Steve follow up. But he did mention, and we all mentioned the new production lines we put in this year, and the new markets that we have gone into, that always is an investment, and sometimes that investment does not pay out in the first year.

But clearly, clearly, for the longer pull, we need to continue to make those investments, for our added productivity, with our manufacturing being the low cost producer, and as well as continuing to serve more of the marketplace, realizing our whole goal up front, when we said we will expand to at least 50% of the US population over the next five years. And not break the bank doing so, because we would be cautious, and knowing exactly what was doing each step of the way. And I think we may have proven that. Steve, would you like to follow up about the call?

I would say that the increases as a percent of sales -- so it was the pressure on the top line that does affect the relatively percentage. And then as George said, the extra -- entering new market, bringing on extra route, as you know a lot of times those are operated by the Company, until the route average reaches a point where it's feasible to sell that. And then, in the startup costs are also with the workforce costs, just as we were trying to get some of the new lines up and running.

Okay. Just last -- I guess just last question, is have you quantified the degree to which earnings were affected by your new market investments? Whether it's -- sort of your supply chain gets a little stretched, so you hire sort of distribution costs to get the market, to get products to the far-reaching markets, and driving product into Los Angeles and San Diego? And then -- and combining that with lower sales volumes levels, is there some degree of drag that you've been able to quantify on earnings, as far as your investment is concerned?

Mitch, we do. We look at it continually. And like I said, over the six or seven years, we've gone from 38% to 54%. In most cases it has not been a drag. One year might be a little more, a little less than others, but over time -- and see, we have not given out -- quantified by year, I don't think or by quarter.

I think we can say that directionally, Mitch, it's neutral to slightly down, as you enter these new markets, and until you get the distribution. There's a lot of overhead coverage from the extra product in the market as well. So that's why I think you don't really see a significant negative reaction to the earnings. I would say right now we're neutral to probably slightly down, but nothing material.

Okay. All right.Thank you very much.

Thank you, Mitch.

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

Good morning.

Good morning, Heather.

A couple of questions. First, just a quick question on food service. You noted that it was down, I think 2.5% or so for the year, but you noted an improvement in Q4. I was wondering if you could give us some further color on that, and also how has it trended in Q1 to date?

Heather, this is Allen. Just a comment on the category, for food service, we are -- and I'm sure you may have seen some of the same reports, saying that food service is predicted to be up 2.4% in 2011, with a bit of an adjusted rate of basically flat. So we are -- we saw somewhat of an improvement in the fourth quarter, but again, in general, food service is pretty much flat, and really, we don't anticipate a dramatic turn-around looking forward.

However, we are working very hard on developing new customers. We're working very hard on developing new items with existing customers, and we feel like with the efforts of our food service sales team, that we should turn this negative trend around in the long-term. But as far as the category, again, up 2.4% is the nominal growth rate projected, but when you adjust that for a real growth rate it's about flat for next year.

So when you say it was about flat in Q4 for you, are you talking about on a dollar basis or volumes?

Heather, I don't know if we release individual segment detail for the quarter. Steve, do you have any thoughts there?

I am looking at something right here, Heather.

Okay.

If you look at it for the quarter, on a dollar basis it's up slightly, and on a volume basis it's down slightly.

Okay. And is it fair to assume that the trend is continuing into Q1.

Heather, I would say that we are seeing the same trend. Nothing dramatic, no dramatic changes from fourth quarter.

And you saying it was up slightly on dollars, down slightly on volumes, it sounds like the magnitude of pricing that you've taken in that channel -- doesn't sound like it's as significant as what you took in retail?Is that a fair interpretation?

Yes.

Okay. Then my second question's on -- I don't know if I'm misremembering, but I thought in the past that by this time you generally had most of your wheat needs covered for the entire year, and so just wondering.If I'm misremembering, that's fine, but if I'm remembering correctly, why the change this year? Are you expecting prices to come down, or just if you could give us some color on that?

Heather, I will go first, and Steve can follow up.We've been saying quite some time, that six to nine months was our basic philosophy, if we feel like we see a price that meets all of our goals, we have gone out for the full-year. We did say, the market has been so volatile. We feel good about our position -- I did say in the very latter part of the year, there is still some concern, but we'll manage through it, and come to the right decision, when the time's right.

So, is it basically price -- is it a fair interpretation that you don't necessarily see prices going down, given all the weather challenges everywhere? Or is it just that the price level at this point, you're not comfortable locking that in?

Well, I think you know our strategy, Heather, has always been six to nine months. We have been selective with that. Some years we could be ahead, but given where we are right now, 8 to 10%, we have a forecast of where we think we can cover -- I won't say how much we have left, but obviously have to factor it into the guidance, and we're fairly comfortable with that.

Okay. All right. Thank you.

And, Heather --

Yes.

I want to follow up, one thing on your food service question, just to make sure. In our internal data, we include vending in food service, and the unit decline is really driven by -- more by food (service) by vending, than the true restaurant category.

Oh, okay, hat helps. Okay, thank you.

Thank you, Heather.

Thank you. Our next question is coming from Tim Ramey with D.A. Davidson. Please proceed with your question.

Hi, good morning , all.

Good morning, Tim.

George, volume -- organic volume, if you exclude acquisitions in the 53rd week a couple years ago, it has really been flat, I think maybe up 1%, cumulatively for three years, and you just gave us a forecast of zero to 1%. I mean, I kind of sound this theme every year at this time, but it's always a choice, it seems to me, between delivering earnings guidance, or delivering volume growth. And for I think the past two years, you've missed your earnings guidance as well. Why not just come down on the side of -- we're going to defend these brands, and get behind them. And maybe that results in a year that isn't exactly perfect, but does kind of do the right thing for the brand's long-term?

I think we do both, Tim. I -- the earnings guidance -- if you look back over the last eight or nine years, I think we've only missed earnings guidance this year, but that's neither here or there. We do protect our brands. We talked about Nature's Own, and how it has grown through the marketplace. So I think there's a way to hopefully in the long pull, do both.

It's obvious -- if you strictly look at volume, and we could change that, if you strictly looked at volume, and not worry about the top line at all, I don't think you'd have us around for the long pull. And you have to make a return. You have to reinvest in these plants, and we have religiously done that, so we are the low cost producer and we can protect this Company for the long pull, and for our customers for the long pull.

People who will not invest in the business, will not be around. And you see that happen as we speak today, it is the people we take long view that's our -- and I feel wonderful about our long view. Yes, has it been tough the past couple years? Yes, it has been tough. The economy has been tough.We have had deflation, and sort of inflation, as we've always had.

But is our strategy always perfect? Maybe not. We challenge ourselves all the time about our strategy, and always try and come -- with doing what's right for the brands, for our shareholders, for our suppliers, for our customers, and hopefully at the end of the day, we can look back and say, job well done.

And I know someone will always question that. And that's okay. That makes us rethink our position.And thank you for reminding your position on it.

Thank you.

Thank you.

Thank you. Our next question is coming from Akshay Jagdale with KeyBanc Capital Markets.

Good morning.

Good morning, Akshay.

First question, I just wanted a clarification, and sorry if I missed this, but the weakness in branded bread volumes was related to other branded competitors? That's how I interpreted what you said, is that correct or no?

Ashkay, could you repeat that? The weakness that we had in our branded category in the fourth quarter was primarily in the white bread segment, and that was due to the price increase that we took on October the 4th for white bread in a marketplace that remained turbulent for the entire quarter.

Right. But what I'm trying to understand is, so you -- I get that you reduced your promotions, took a price increase, and it seems like others didn't follow in the white bread category. But was that from a branded side in your opinion, or was that retailer brands?

Not, that was from the branded side.

Okay.

It was not from store-brands.

Okay. That's helpful.

And then just going back to -- if you look at 2010, you did mentioned that the year didn't shape out as you had expected. In my opinion, a lot of that had to do with promotional activity.

I'm trying to understand, as you sit here today, and you've given us guidance, what is, in your opinion the risk to that guidance? What's the biggest risk to the guidance that you've given? Is it cost? Is it revenues? What is it?

Well, I think you always have -- must have top line growth. And I also think even though we're -- we said we're -- we feel good about our position on our entire commodity basket, there's some late issues in the very late parts of the year, that as Steve indicated, that we still have that baked into the guidance on what we think we will purchase that little bit of wheat that's left.

But I would say when I look at the guidance, typical for Flowers, we know our cost structure pretty much well in advance, and if you wanted to look at the risk, I think the revenue probably is a little more risk than the cost structure, and kind of like 2010, if we're able to maintain the pricing actions, and the promotional levels that we have in the market. So I would say there's more risk to revenue than cost. But as George said, we do still have some uncertainty late in the year on cost.

Okay. So just to piggyback off of that, given what wheat and flour has done in the last six months, I mean there's one view out there that says with wheat prices being up 65, 70%, and maybe moving up even more, if the industry doesn't take a 5% on average price increase, there will be a lot of bread producers that will be hurting on margins, and maybe even to the extent that they might lose money, which could accelerate some of the M&A activity. I mean is that sort of a view generally, that you prescribe to?

That's what I was trying to explain to Tim. We all, we, Flowers, have charted a course, we've got to be profitable. Will there be a down quarter? We have not had a down quarter in a long time. We're happy with fourth quarter. We said, that it didn't come out like we had intended it to, but we still had a record year.

One quarter does not make the year. And so, so we will continue to implement what pricing we feel like is necessary to -- not just to protect margins but protect our employment base, protect our customers for the long pull, protect our consumers for the long pull, because we want to be here, and produce quality baked foods for a long, long time to come. And to do that, you have to be profitable.

Will there ever be a down year? Could be, but I am not predicting that. I think our guidance -- we feel good about it, and we think we would be able to manage through, and come through with another good year.

Okay, and one last one on acquisitions, can you just give us your view on your appetite for size of acquisitions? I mean in the past, you've done a lot of bolt-on type acquisition, and that seems to be where you do best. But there's a few large assets still out there. Can you give us a sense of your appetite for doing maybe a larger scale acquisition?

Akshay, I'd say our strategy has been the bolt-on type of acquisitions. That's where we're the most comfortable, that's where we take the less risk. Last time I looked, the huge transformational type acquisitions, transformational framework -- we, destroyed our people and -- destroy more value than they create. So our strategy is still trying to stay focused on bolt-ons, and whatever else right come out of the industry that we think we could add to Flowers, and make it a stronger operational, and add value to the shareholders. But try to give you a specific, to say we will do a huge transformational program, is not likely.

Okay, great.Thanks a lot.

Thank you.

Thank you. Our next question is from Ann Gurkin with Davenport. Please proceed with your question.

Good morning.

Good morning, Ann.

I want to start with your sales guidance for the year that did not change for '11, given the continued challenges of unemployment and a tough economy. What gives you that confidence? Why didn't you temper that a little bit?

Well, Ann, what I said all year, each quarter year over year, continued, we continued to improve. If you go back fourth quarter last year, and through the first two or three quarters of the year, we did have a lot of promotional activity last year. So as we look at it, and we're only through a few weeks of the first quarter, but we see that same type trend, continuing year over year improvement.

We think probably more of the -- as we go through this commodity issue for the year, and see how much this will be price and mix. And we said flat to 1% on volume, we do feel like it will play out that way, and that's why we have the guidance that we do, that we'll see some top line movement in pricing and mix.

And also, Ann, if you look back in '10, we have the effect of the variable interest entity, and that was almost 0.75%, and you won't have that, so that kind of helps your comp as well going into '11.

Okay. And given the consolidation among competitors, and changes in ownership of different brands, I guess, I have been concerned, Steve, that you're facing more challenges in some of your Mid-Atlantic market from Bimbo. Is that the case, and are you -- do you need to promote more , step up investment spending to face a tougher competitor now in some of these markets?

Ann, my 47 years, we've always been the smaller person competing against the giants, and we've always been able to find that unique way it give our consumers what they're looking for, and give great service to our customers. And we are facing a much larger competitor, but so have we all our lives, and we feel like we'll be able to compete with that going forward. We'll just, as each quarter and year rolls along, we'll just have to make the decision that we feel is appropriate for the given time. But I'm convinced that as we go through the consolidation, that Flowers will come out a stronger competitor and stronger company.

Okay. And then last, any insight in terms of up and down the street business, convenience stores, how that fared versus expectations in the fourth quarter?

Ann, that's a smaller segment for us.

Right.

And what I see is, up and down the street type of business, seems like more convenience stores are doing more food, and we supply a lot of that trade, not only on the bakery rack, but also in their deli departments, which helps drive more volume through their facilities, which is a good thing for them and us.

Okay. Great. Thank you very much.

Thank you, Ann.

Thank you. Our next question is coming from Bill Chappell with SunTrust. Please proceed with your question.

Good morning, this is [Mike Swartz] filling in for Bill.

Good morning, Mike.

Thanks for squeezing in the question. With regards to capital spending, I think you said you guys invested about $100 million in 2010 on new lines and the like. What is your outlook 2011, are you going to be investing $100 million, or what should we look for? And then, should we see the benefit of any of that spending rolling through in 2011? Or is it more of the productivity savings -- is that more of a 2012 story?

I think guidance has been $90 million to $100 million investment in 2011. Obviously, Mike, hopefully -- not hopefully, we are planning on the lines that we put in last year on the cake side of the business, as well as the bun side of the business, to be more productive than the assets we did have in place.And we're also looking for some new customers and expanded market share, and out of those investments. So I think we do have it baked in, so to speak, for our 2011 guidance.

But as each year goes along we see -- as the line gets more mature, and customers can depend on it, we always see profit enhancements up to the point it gets too old to keep using it, and then we have to start over.

Okay, great. Thanks a lot.

Thanks, Mike.

(Operator Instructions).

Our next question is coming from David Liebowitz with Horizon Asset Management. Please proceed with your question.

Good morning.

Good morning, David.

A few questions, one, going forward, what percentage of the market do you expect white bread to be vis-a-vis where it is, or has been the last couple of years?

David --

Go ahead, Allen.

Hi, this is Allen, If you look at the trend on the white bread categories for the past year, it's showing a downward trend, where our soft variety bread buns and rolls are trending up, so I would say a continued decline in the overall white bread segment. The only increases that I think the category is seeing, is the nutritional better for you white breads that are playing in the segment, but overall for the category, I think we can continue to see a slight trend downward in white bread.

And your reintroduction of bagels, is this part of the overall concept you had of the breakfast line of product, or would this be a stand-alone product?

This is really a stand-alone product. We introduced thin bagels approximately a year ago. We have made formulation enhancements. And we've also made some significant packaging changes with the ziploc package, and we feel like that much like the sandwich rounds, the consumers are looking for smaller portion sizes, less calorie, nutritional enhancements and the changes that we've made to our thin bagels really fit well for those consumer demand.

How many SKUs will be in the line?

There are currently two.

And with all the talk about the promotions that have been going on, how much of the promotion is in the form of couponing?

We know that couponing is at an all-time high. Most of the promotional activity that we're referring to on our call today, is soft promotion at the point of sale. However, the rate of couponing is significant, but the primary concern that we're talking about today is price promotion at the point of sale.

And in terms of price, or put it slightly differently, let's look at it in terms of the overall profit margins that you used to enjoy versus today. To get back to your 2007, 2008 level of profit margins, how much would you have to either raise price or reduce cost to get back to those levels?

David, this is Steve. Looking at -- looking from a long-term view, we said that margin perspective, we're in the high 40%, as far as a goal. I don't think we would disclose any pricing action or cost initiative from a competitive standpoint to get there. And I think given the volatility of the markets right now, being able to maintain a slightly improved margin is really our goal, and we've been able to effectively do that.

David, just to follow up, margins have continued to improve, if you look back over the historical data. I can't tell you specifically -- sitting right here before me whether it was '07 or '08. But ,year over year -- we've got a stated goal on EBITDA, and we've said several years ago, about five years ago, that we felt that we fall into the 10 to 12% EBITDA level, and at the time, we were probably 7 or 8%. And we have succeed in doing that.

We were 11.5% I believe this year, and that's come a long way. And as we continue to innovate new products, and we think we can continue to help drive that, and continue to drive that cost out of the operations.

And the last question, given the constraints the Company is functioning under right now, in terms of raw material costs and growth and profitability, the dividend itself, would you be willing to, or you think the Board would be willing to increase the payout ratio against the earnings? Or are we going to continue along the line of pretty well tracking the dividend against the actual earnings increases?

David, I will tell you this -- the Board will -- we act on that every quarter. And historically, we've reviewed that at the end of the first quarter I believe, at our annual shareholders meeting, and our Company is generating great cash flow. And I mentioned the shares we bought in over time, we mentioned in capital investments we made over time, we mentioned -- so the cash flow is good in this Company. And we feel like dividends is a good thing for our shareholders, as we wait for share appreciation, which will come as we continue to grow our business, grow margins, we trust.

In the meantime, we feel comfortable with having a good dividend policy and rewarding our shareholders that way. That Board will make that decision every quarter and probably once a year to pay out.

Thank you very much.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Jo, thank you for hosting this today, and thank you for joining our call this morning. We hope to see you on our Analyst Day on March 22nd. Thank you very much.

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