Flowers Foods Inc (FLO) 2011 Q3 法說會逐字稿

Greetings and welcome to the Flowers Foods Third Quarter 2011 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 of Corporation Relations for Flowers Foods. Thank you, Ms. Jones Turner, you may begin.

Thanks Melissa, good morning everyone. Our third quarter results were released earlier and I'm sure you have found a copy, but in case you need one, of course, you can find that posted on our website. We also filed the 10-Q this morning, so you can find that through the SEC filings. During the call we will have a PowerPoint presentation and if you have not found that, or need it in a different way, you can find it on the webcast listing page on our website. Before we get started, I must remind you that our presentation may include forward-looking statements about our Company's performance.

Although we believe our statements to be reasonable, those statements are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters that we will discuss during the call, important factors relating to Flowers Foods' business are fully detailed in our SEC filings. Participating on our call today, we have George Deese, Flowers Foods Chairman and CEO; Allen Shiver, our President; and Steve Kinsey, Executive Vice President and Chief Financial Officer. We will open the call for your questions following our prepared remarks. Now I'm pleased to turn the call over to Flowers Foods' Chairman and CEO, George Deese.

Thank you Marta. Good morning to each of you and welcome to Flowers Foods Third Quarter Conference Call. Thank you for your continued interest in our Company. I'm sure by now you've received and read our Third Quarters Earnings Release. As a whole, I am pleased with where we are, given the complex conditions most businesses find themselves facing today. I will give a quick overview, and Steve and Allen will fill in with the details of the quarter. We all know the marketplace continues to struggle, given the high employment rate of 9% and the number of Americans who feel stretched and unsure of the economic outlook.

In addition, the food and beverage industry, specifically, has been managing through tough commodity volatility. Now to look at our business, I'm very pleased to tell you that our Tastykake acquisition is right on track with our plan. Tastykake performed well in its core markets and we are pleased with the roll-out and acceptance of this brand in the Flowers Foods bakery's markets. The integration of our 2 fine Companies is also on schedule and I commend the Tasty and Flowers' teams for the flawless execution, as we have worked to combine the businesses. In our DSD segment, which accounts for 80% of our business, volume and sales are on the come-back trend. Good performance by our Nature's Own brand is driving that improvement, while our white bread volume continues to trend down in the quarter.

Margins in the DSD segment did suffer some, due to high input costs. As we discussed last quarter, our Warehouse business is lagging in volume and pricing. This year, we are focusing our efforts to get this business back on track. Productivity continues to improve throughout the Company, and I want to congratulate our Manufacturing and Administrative teams for making that happen. In our prepared remarks, Steve, Allen and I will address the concerns we believe that are at the top of your mind this morning. Those concerns are commodity price inflation and our hedging strategy.

Two; recent and future price increases, promotions, and consumer elasticity. Number three; consumer trends in the baking category. Number four; update on synergies, sales, and expansion regarding the Tasty acquisition. Five; the competitive dynamics of M&A activity in the baking industry. And finally, guidance for 2011 and the outlook for 2012. Before I pass the call to Steve, let me take this time to thank each and every one of our team members for the great job they do each and every day to help Flowers be the best of the best. Now here's Steve.

Thank you, George and good morning, everyone. Overall, as George said, the third quarter was challenging. We faced significant cost increases in the quarter that were only partially offset by pricing actions. Volume in the quarter was soft with overall baked goods category remaining under pressure. As George indicated, however, our DSD sales appear to be on the upward trend. We did continue to experience volume pressure in our warehouse cake business, and Allen will provide more detail on this in a moment. As George said, we are pleased with the Tasty integration and how things are going there. Sales in the quarter were up 13%. Price/mix contributed 4.9%, while volume was down 0.6%.

The Tasty acquisition contributed 8.7% to the quarter's gross. Excluding the tasty acquisition, overall growth of the DSD segment was fairly strong, growing at 5.3%. DSD sales growth was driven by price/mix with a slightly negative mid-shift and minimal volume increases. Pricing did contribute across all channels in the DSD segment. Sales in the Warehouse group were flat. Increases in price and mix were offset by volume declines. Overall volume declines in warehouse cake offset the volume increases we saw in the foodservice channel. Earnings per share in the quarter were flat, compared to the third quarter last year at $0.23 per share. However, operating income in the quarter was up $1 million, or 2.2% over last year's third quarter. Excluding approximately $700,000 of costs associated with the Tasty integration during the quarter, operating income was up 3.7% over last year.

Operating income in DSD, which is where Tasty Baking is reported, grew by 12.8%, excluding the Tasty one-time charge. While the warehouse operating income did decline significantly, primarily the result of higher input costs and lower volumes. Our consolidated gross margin in the quarter was down 120 basis points to 45.9%. This decline in margin was primarily the result of higher input costs, specifically ingredients and packaging. Excluding the impact of the Tasty acquisition, ingredients, packaging, and natural gas, which we define as input costs, were up approximately 9.9% quarter-over-quarter. We saw significant increases in flour, sweeteners, shortening, cocoa and packaging. Year-to-date input costs, excluding Tasty, were up 3.3%. And in the quarter, Tasty impacted the consolidated gross margin by about 30 basis points. Our DSD margin in the quarter was down 150 basis points to 50.5% with Tasty impacting that margin by approximately 90 basis points. And the warehouse gross margins were down significantly, 320 basis points to 24.7%. Year-to-date our gross margins were down approximately 30 basis points to 47.2%. And as we had told you earlier why are in the year, we are facing significant cost headwinds in the back half. Our full-year forecast is still for gross margins to be down 75 to 100 basis points on an annual basis. EBITDA, in the quarter, increased to $71.3 million, or 7.2%, excluding the one-time charge, over last year's third quarter. However, as a percentage of sales, we did see EBITDA decline to 10.6%, if you exclude the one-time charge, compared to 11.1% last year's third quarter. Selling, general and administrative costs in the quarter, as a percent of sales, declined 60-basis point to 35.4%, compared to last year's third quarter.

The decline of the percent of sales was due primarily to the higher sales. Overall, selling, general, and administrative dollar increases were driven primarily by higher selling and distribution costs. And as I said earlier, there was a $700,000 charge for severance at Tasty Baking and that number is reported in our SG&A line. Net interest income in the quarter was down quarter-over-quarter and this is due primarily to higher interest expense as a result of debt relating to the Tasty acquisition. Tasty was neutral to the quarter from an earnings perspective, if you exclude the one-time severance charge.

Now turning to the balance sheet and cash flow. Just briefly commenting, cash flow from operations during the quarter did improve over the second quarter this year. However, compared to last year this quarter and year-to-date cash flow from operations was negatively impacted by hedge-margin and pension contributions.

The pension contributions were primarily associated with the Tasty Baking pension plan. Net debt in the quarter increased to approximately $339 million, up from the second quarter. However, our debt to EBITDA on a trailing 12-month basis is about 1.2 times, still giving us the financial flexibility to use our balance sheet as opportunities present themselves. During the quarter, we spent $22 million on capital expenditures, approximately $20 million on dividends, and $8.6 million to re-purchase approximately 460,000 of our common shares. This does bring our total share re-purchase for the year to 1.5 million shares for $27 million. And that leaves approximately 7.2 million shares available for re-purchase under our current authorized share re-purchase plan. Turning to the outlook for the remainder of 2011 and 2012. With just a few weeks to go before we end the year, we anticipate that 2011 sales will be within our current guidance of 7% to 11% including acquisitions.

Sales in the direct store delivery segment remain robust and Tasty is meeting our expectations. From an earnings perspective, we currently are forecasting flat to up 5%, excluding the one-time costs associated with the earlier plant closure and the Tasty acquisition. As we finish the year, fourth-quarter input costs will be up the most, quarter-over-quarter, as compared to all other quarters this year. Though we have taken some pricing actions, gross margin, as I said, continues to be under pressure and is forecasted to be down on an annual basis. Taking these factors into consideration, as well as volume trends to-date, we believe we believe we can end the year on the lower-end of our guidance range. As we look ahead to 2012, we are confident in our ability to grow the top-line, in line with our long-term revenue target of 5% to 10%. As I said, our DSD segment remains strong, and in 2012 Tasty is well within reach of the goals we established in the acquisition.

Allen will address, in a moment, the actions we are taking to get our warehouse business back on track. As you are aware, we have historically provided preliminary annual EPS guidance on our third-quarter call. However, taking into consideration from what we have heard from many of you in the recent months and acknowledging the role of ingredients in our ability to drive results, today we are providing you with a preliminary 2012 cost outlook. As you know, our strategy has been to hedge or buy on average six to nine months in advance of usage. And it's no secret there's been tremendous volatility in the commodity markets. There can be price swings in a day, greater than annual changes historically. The majority of our input costs are trading at some of the highest averages in their history, even with recent pull backs.

When taking in consideration our current buying strategy and also recognizing that we incurred lower costs in the first half of 2011, as compared to trends we are witnessing in the back-half of this year, we anticipate that we will face cost headwinds in the first half of 2012, making for some rather difficult year-over-year comparisons. Market volatility adds a degree of uncertainty to the back-half of 2012 at this point. Therefore, we believe it's more prudent to continue to assess our coverage opportunity, and offer firmer guidance with our year-end call in early February. Now having said that and looking at our coverage as we know it today, with estimates for any uncovered amounts, we are forecasting an annual input cost increase of 4% to 8% on an annual basis over 2011, with the focus on the first half as I indicated. Thank you, and now Allen will update you on the overall operational performance.

Thank you, Steve, and good morning. In the third quarter, consumers continued adjusting their shopping patterns, as they continue to feel financial pressure from a sluggish economy. As a result, volume in the fresh bakery category, both retail and food service, remains soft as consumers focused on stretching their food dollars. Observing the category as a whole, we are seeing continued price increases as the impact of higher input costs is reflected in higher retail prices. During the quarter, IRI for the total US shows a 7.4% increase in average price across the fresh package grid category. In the IRA South market, the category increased in average price about 6.8%, or about $0.13 per unit. The fresh bakery category continues to be relatively inelastic. However there are markets with high levels of promotional activity where consumers tend to gravitate to temporary price reductions.

For the total category, dollars were up 3.4% and units were down 3.7%, based on IRI data for the total US. Store brands did show some growth in the quarter, up 40 basis points in dollar share and 120 basis points in unit share. However, store-brand continues to be below share levels held in previous years. I am proud of our team's overall results, given the difficulty economy and the soft market conditions. IRI data confirms that our market share held steady. In the South market our brands hold a 22.8% share of dollars, and an 18.5% share of units. For the total US, Flowers dollar-branded share is 7.8% and unit share is 6.9%.

As a reminder, IRI data only captures 49% of our retail branded bread sales, and only 24% of our Flowers Foods total sales. For the quarter, excluding Tasty, Flowers Foods internal sales data shows our total sales were down 75 basis points in units, but up 420 basis points in dollars. New products continue to perform well, representing a significant portion of our overall sales increase. We introduced several new products during the quarter, such as the Nature's Own Cinnamon Raisin Thin-sliced Bagel, Nature's Own Whole Grain Sandwich Rolls, as well as Nature's Own Soft Oatmeal Specialty bread. We are committed to continuing to develop products that meet consumers' diverse needs and consumer expectations.

Let's move now to the foodservice category, which has definitely been impacted by the sluggish economy as consumers look for ways to stretch their food dollars. In this difficult environment, our total food service sales were up 3.9% in dollars, quarter-over-quarter. Our team has done a good job gaining new foodservice customers in both core and expansion markets. Food service is an important segment of our business, about 28% of our total sales. Our strategy to offer food service customers the option of frozen warehouse delivery, or fresh direct-store delivery by our distributors, is a meaningful point of difference, which will help us to continue growing our food service business over the long-term. Looking more closely at our 2 operating segments. DSD performed well, with strong top-line growth at 16.3%, with Tasty contributing 11% of that number.

Our Nature's Own continues to show solid growth. As the number one single bread brand, in the US, based on volume, we estimate Natures Own fiscal 2011 retail sales at $940 million, up 5.9%. Our regional brands, primarily in the white bread category, continue to show volume declines commensurate with category declines for white bread. Our regional brands, such as Sunbeam and Bunny are very important to our Company and with the added focus that we are placing on this product class, I'm very confident that we will see improved results soon. Also in DSD, our new markets are performing well. Excluding Tasty, new markets contributed 1% of our third-quarter DSD sales increase, and growth from our new markets was in-line with our goal of 0.5% to 1%.

This past quarter, we saw further improvements in new markets, such as Southern California, St. Louis, and Cincinnati. George mentioned that our integration of Tasty Baking is going well. Since our acquisition in May, the integration team has done a wonderful job in bringing Tasty into the Flowers family. Our integration plans are ahead of schedule, and our efforts to capture synergies are at, or better than our estimates. With much of the integration work behind us, we are leveraging the sales opportunity Tasty brings to Flowers. We have added Tastykake to about 2200 Flowers independent distributor territories, which brings additional production volumes at Tasty's bakeries, as well as incremental sales volume to our independent distributors. The Tastykake brand is now available throughout our distributor network, with exception of our Western markets, which are scheduled for 2012.

We anticipate by the end of 2012, Tastykake will be distributed on over 3500 Flowers and Tastykake distributor routes, providing sales growth and filling available production capacity. We are confident that as we build and expand the distribution of the Tastykake brand, that we will continue to exceed our expectations, helping us to gain our share of the $4.3 billion fresh cake category. We are also making progress on our plans to introduce Nature's Own and other bread products into Tasty's core DSD market. As we have mentioned before, we plan to leverage Tasty's excellent relationship with key trade customers as we introduce our Nature's Own brand to millions of new consumers in the Northeast. As we increase sales, we will need additional bread and bun capacity to effectively serve those markets and we're currently evaluating our manufacturing alternatives.

Turning now to our Warehouse segment. I remind you that this segment is approximately 20% of our business. Sales in our warehouse segment were flat quarter-over-quarter. The anticipated volume growth from store-brand cake that we mentioned last quarter, did not occur within the quarter. However, we are now receiving the initial orders for this new business, and the incremental volume will materialize in the latter part of quarter-four. Our team is tightly focused on improving our results in our warehouse group. We anticipate improved growth in our top-line results, as new business comes on-board with existing and with new customers. We are also implementing additional price increases that are needed to offset significant cost increases in our warehouse business. The majority of our pricing will be in effect this quarter, with more pricing to come in early 2012.

Before turning the call back to George, let me take a moment to address pricing in general. As a practice, before we raise prices, we look first at reducing or eliminating costs from our business. But despite those costs savings and efficiency gains, our commodity ingredients and other input costs have continued to apply pressure on our margins. As a result, we currently have additional pricing going in during the fourth quarter in both our DSD and warehouse segments. As we move further into 2012, our plans are to take additional pricing as necessary. In summary, our position in the marketplace remains solid. We are executing on our plan to expand our Tasty brand across our DSD network and we're moving forward with plans to introduce our Nature's Own brand into Tasty's core markets in the Northeast. We continue to develop and introduce new products that contribute to our total sales growth and we are encouraged by our progress in new markets. Thank you for your attention and I'll now turn the call back over to George.

Thank you, Allen and Steve, for the update. While I acknowledge that this year has been challenging, you need to know I have never been more optimistic about the future. Looking back, you remember that we, along with many others, predicted that consolidation would happen in the baking industry. This chart gives you a time-line to show an evidence of the ongoing consolidation. In 2000, there were 8 major baking companies. In 2005, there were 6 major players. As we end 2011, there are now 4 major companies, along with a small number of regional companies, focused on the fresh baked food category. I am pleased to say that Flowers Foods is a strong number 2 player in this important category.

Our brands are well-known and growing in our core markets in the South and Southwest, and we continue to extend our reach into new markets through expansion and acquisitions. Back to the industry as a whole. The players that will remain in this fresh baked food category will be focused on innovation, productivity, research and development. That will be very good for the industry and for the category. The baked food industry needs investments in all the various [ecru], with the needs of customers and consumers. As I've told you before, the fresh bakery category is important to retailers, is among the highest categories, in terms of volume turns and profitability. That also means that consumers view our products as valuable in meeting their needs.

With investments being made to improve our products, develop new item, improve quality and efficiency, the industry will grow and be even more relevant to customers and consumers. As we said in the past, our team is focused on all growth opportunities, and keeping with all our 3- prong growth strategy. First, we are keenly attuned to possible acquisitions. Mergers and acquisitions have been important throughout Flowers' history. That continues today as we carefully consider all possible acquisitions from all avenues, both on acquisitions of independent bakers, assets available from the combination of major players, and everything else that is out there. At the same time, we continue to focus on opportunities for growth in our core market as well as expanding our DSD footprint by stretching into adjacent markets.

Today Steve gave you our guidance for 2011, as well as the outlook for 2012. Our team has confidence in those numbers. As I mentioned earlier, I have never been more optimistic about the future. The possibilities are great as industry consolidation continues with the resulting M&A activity and we continue to execute our growth strategies, expand our geographic footprint, offering great quality products and leveraging our dedicated team and outstanding independent conservative partners. We believe Flowers' growth should outperform the industry as we work to take advantage of those. As in any business, every quarter and every year may not be 100% predictable. However, we have confidence that our team will achieve our goals over the long-term.

We told you in March, that our five-year plan is for sales' growth of 5% to 10% each year with 3% to 5% from organic growth and 2% to 5% coming from acquisitions. Our compounded sales growth for the past five years has been 8.36%. Our goal for EBITDA margin is 11% to 13%. The compounded EBITDA growth for the past five years has been almost 13%, and over those years our EBITDA margin increased from 9.7% to 11.3% in 2010. We expect EPS to grow by double-digits. Our compounded growth in EPS for the past five years has been 17.7%. Our long-term goal for our returned on invested capital is 13% to 15% return. Over the past five years, our return on invested capital grew from 12% to 14.4% in 2010. So based on our past performance and future expectations, we believe we will continue to deliver very good shareholder value to our shareholders. Melissa, now we will open the call to questions.

(Operator Instructions)

Farha Aslam with Stephens.

This is Eric Gottlieb for Farha. My first question has to do with expansion from 2011 to 2016. I'm wondering if there's any particular areas that you're focused on that map of yours? What comes first?

Oh, if I told you that, all of our competition would know.

Got it. Fair enough.

Eric, I can go back and say, that we do have our five-year plan out before us, and we do know those areas. You can see what we said, which would give you some clues, is we want to be where the people are. So that would be the main focus, is getting to the population-base where there are a lot of population.

Okay.

I feel like that will give us the fastest and quickest growth.

And valuations, I am wondering if the Bimbo-Sara Lee acquisition is holding up M&A activity, as people wait for that to finally close? Are you seeing that?

I would say that it is finally closed and I congratulate the 2 parties for getting that complete. It is complete, and I couldn't begin to predict what people might have been waiting on, but we said we think 2012 is certainly a good environment for future acquisitions as independent bakers, in particular, continue to look at new investments or succession planning, or look at tax rates which they might think will change. Obviously with the Bimbo-Sara Lee issue, they are assets up for sale, so we just wait and see how all that plays out.

Got it.

We are involved and interested.

Okay. Well said. A couple housekeeping items. I'm wondering how much volume was shifted to the fourth-quarter. Can you just talk about that?

Allen, I believe he's talking about on the warehouse cake, come-back volume of --.

I don't think we really quantified how much additional volume we have coming on-board. But it is a significant piece of business that we were looking for last quarter, and there were some unavoidable delays, and we're anxious to get that volume in-house this quarter.

Got it. Okay. And from the 1% added in legacy markets, do you have a volume and price split on that?

He said 1% that was added from core market.

Eric that was in our expanded market.

Oh sorry. Okay. Forget the 1%. But in the legacy markets, I'm wondering how much, if there was a different split on volume and price in overall company?

I think a majority of that would have been volume, Eric. I'm not sure I understand 100% what you're asking.

I'm just wondering if the level of pricing in certain areas is more easily attainable. That's what I'm trying to get. If the South market is more price-driven than volume-driven, versus the Western markets, things like that? And then my last question is, I'm wondering the level of pricing you already took for the fourth quarter, if you can just expand on that a little?

Eric I'm not sure we are publishing an overall percentage of pricing that we have taken. But we have had across-the-board pricing on both our branded side and our non-branded side, and it varies from one market to the next, and we anticipate having to take more pricing as we move into '12.

All right, understood. I appreciate the color. Thanks a lot.

Eric Katzman with Deutsche Bank.

A couple quick ones. I guess, Allen, you referred to the foodservice market as starting to show signs of improvement. I think last quarter we were bemoaning the fact that it was weak. What do you sense is the difference? Did you win a new account there or something?

Eric, overall the foodservice category may be showing a slight improvement, but in general still relatively depressed over prior years. We were successful in picking up some new accounts that significantly moved the needle on our overall food service business, and most of that improvement was, or most of those new customers fell on the DSD side.

Okay. And then Allen, I think you also talked about the regional brands as having some difficulty, versus Nature's Own, in terms of the growth rate, and that you intended to correct that white bread weakness. What exactly do you intend to do, because it seems to me those brands are kind of lost in the middle between the premium brands like Nature's Own and private label, so what is it exactly that will course-correct those brands and get the consumer interested?

Eric, I don't think we are going to be able to completely reverse the category trend on white bread, but I do think that we can improve the internal trend. We are doing a lot different things, from focusing on improving quality, improving freshness in the marketplace. There are some markets where we are having to re-look at pricing from a promotional pricing standpoint. And actually for the brand, we are looking at some additional items that are not white bread, but would be additional items that would be introduced under those regional brands. Really it's a lot about focus and making sure that our distributors and our sales teams understand that this is a big part of our business, we are confident that we are going to be able to move the needle in a positive way. Okay. And just last one, George. I guess on pricing, it feels like I ask this question every 3 to 6 months, but so you moved ahead on pricing recently. Are you first in the market to do that? Have others followed? Or does it, even with the consolidation, does it continue to be a pretty promotional environment? And I will pass on, thanks.

Thanks, Eric. Obviously as costs continue to rise, we're trying to do everything we can to maintain margins, so most of the time we are first in our core markets. We believe we do take leadership position. We have seen, according to IRI, other improved pricing coming from the marketplace. As Allen talked about, the overall pricing goes up in the United States and as well as the South, so we would continue to be a leader in our core markets, and over time, we just have to see how it plays out.

Thank you.

Mitch Pinheiro with Janney Montgomery Scott.

Thanks, this is actually Brian in for Mitch this morning. So most of the questions have been answered here, but one thing we wanted to touch on was, we know about the increased penetration on the West coast and in the Midwest. And here in Philadelphia, we are seeing some product on the shelves. And the data available to us, we're seeing triple-digit growth in the Northeast, obviously albeit on a small base. But given at this point in time when you are shipping from some of your expansion markets, can you talk about how diluted these new markets are, in the very near term and right now, and how you see that evolving going forward?

Brian, good question. I think as we continue to say that we will be serving these major Metropolitan markets, obviously, and we have said that the past continues to be present in some of the markets as we begin to go into those markets. Obviously you can see that what we have, I'm not going to say waiting on, but we have been patiently looking at how the acquisitions do pan out that helps that. And acquisitions will either help that or we will continue to be on equal passage to meet that need. We will continue to press into those B-markets that we have discussed, and like I said, it will either be through acquisitions and/or we will be adding new capacity.

Okay. Great. That's all I had. I'll jump in the queue, back in the queue. Thank you.

Heather Jones with BB&T Capital Markets.

Good morning. Did I understand you correctly when you said that, you are taking price for Q4 that you are going to need to take additional price in 2012?

Heather, what Allen said, was we have taken some pricing in the third- and fourth- quarter. I think the best way to say it, sometimes all of it doesn't happen at one time, obviously, but within a certain period of time it all gets in and you can continue to see in a very specific, when you talk about our warehouse business. Cocoa sugar was certainly hard-pressed through the year and continues to be tough. And we have just not been able to get all the pricing that we need to offset all of these commodities and that is where the focus that those particular areas in the warehouse will be more focused. We're not looking for a tremendous amount. There might be a particular market, you have added Allen indicated, that we would be looking at retail, but in the main, I'll say the majority of what he is talking about, would be in the warehouse segment.

So if I think about DSD, the pricing that you are taking now given your cost outlook, is it a fair assumption that the pricing you're taking now, barring some surprises and input costs in 2012, should cover DSD and that it's more warehouse, where you are going to have to take incremental pricing?

Heather, the pricing, especially the branded pricing that we have taken in DSD, is very close to being adequate to take care of us as we go into the new year. The focus on pricing is really on all the non-branded classes and that is something that we have been working on the entire year, and we need to get more pricing in our non-branded classes. And that is really the focus as we go into '12.

Okay. And you had mentioned earlier that price elasticity is fairly stable. Given, I understand private label is not as strong as it was, say, five years ago, but it has begun to grow. What you are seeing at retail, does it look like price elasticity has increased somewhat since relative to five-years ago? I just wonder if you could talk about what you are seeing at retail that, all of a sudden this year, we are starting to see this growth in private label, when it had been, even back in '08, '09, it had been stable, but now it's begun to grow? If you could give us a sense of what you're seeing?

Heather, again, if you look at this past quarter, you are right. There is a slight uptick in the growth of private label share as we have taken branded prices up, or as the category has taken branded prices up, product label retail prices have not moved at the same rate. Long-term, the gap between private label and brand has to narrow long-term. But again, that is not an immediate problem that is on our door-step today, but long-term, that is an issue for the industry that's got to be dealt with.

Okay. And then my final question is on the consolidation side. If you look at that chart that you all put up, Bimbo has clearly been the big consolidator. So my question is, first of all, do you think there -- what is your view of their size? Do you think they are the size they are limited to how much more of a consolidator they can be? And typically Flowers' strategy has been to do smaller acquisitions, so I guess, if I'm looking out five years from now, I was wondering do you think we'll see the same four big companies, but they will have done a bunch small bolt-ons? Or if you could give us a sense of where you think the landscape is going to look like in five years.

Sure. I think it is hard to predict. Heather, I'll start out by saying, we love our business model. And the huge acquisitions, we felt like, for us, did not meet the criteria that we wanted from a business model-perspective. And we were not looking for a big deal. What I would say, though, that obviously, Bimbo is a very good company. I've said that many, many times. I think they are a tough competitor. I also think Flowers is a very tough competitor.

I'm often asked, do you feel like you can compete in this arena? I always come back to say, since I have been with Flowers Foods, we have always been the small player, or small players. Obviously, now we are the number 2 player, which I am thankful for, and it has been rewarding to see that happen. And to obviously, get that 75% of that market, we will continue to look at acquisition possibilities to grow that footprint. And it grows beyond that, wonderful. But that is our five-year plan and we feel like we will be serving those markets and hopefully we will be through some acquisitions. We feel like that, to-date, is the best avenue to go.

Okay. Thank you very much.

I'll follow back up then on, will there be four left in the major categories? There's all kind of predictions out there, and I wouldn't want to say it would be three or five. I don't see five. I see four, could be possibly three, but nobody knows.

All right. Thanks.

Tim Ramey with D.A. Davidson.

Good morning, thanks. George, in the core Tastykake markets, I think you mentioned the volume was good or in-line with expectations. Can you tell us what volume did in their core markets?

Yes. Volume, they had a good quarter, Tim. Volume was up. I don't remember the exact volume, but their Back to School program is always very good, which obviously fell in the quarter. Like I say, their sales and volume obviously had some pricing in there, but overall they had a very good quarter.

Okay. And one metric that you have frequently given us in the past, I didn't see it in this release, was volume contributable to new markets. Maybe I missed it, but do you have a sense of what that might have been in the quarter?

Tim, we did, Allen stated it, and I'll repeat it.

I'm sorry.

It was 1% in new markets.

1%, thank you.

Which is a little above what it has been recently.

All right. And just on your long-term guidance, slide 39 shows a very commendable five-year CAGR of EPS at 17.7%, but just while we were chatting, I calculated three years at 6.8%, but that's through the end of this year. It doesn't sound like next year is likely to be double-digit. How do you feel about the long-term guidance? Is this just a rough patch related to the economy, or has something changed in the long-term growth picture for Flowers?

Tim, that is a great question, thank you for asking it. That's why I'm going to say it two ways. That's why we look at a five-year chart rather than a two or three. We've always said, that's why we like to set five-year targets every five years, so that we know what we are looking at over the five years. And I said a quarter or a year, sometimes is unpredictable. It's not predictable. But I do believe over time, Flowers has a great business model. If you look back over the past specifically two years, I would say that we all know that the volatility of the commodities has been the worst in the history that I know about. Input cost has been the main issue. Which, when you have volatility in the commodities, you have swings.

You are trying to keep your margins so you are always working on pricing and volume and that input cost, and it has been a very difficult environment, but that doesn't destroy our value and it does not destroy our long-term capabilities. As I look out over time, that's why I'm so confident our past history, to me, continues to prove that the five-year outlook is very positive, and when next year beats up, probably will. But I still very good about, we'll be talking more about the outlook in February, but I feel good about next year and certainly the years beyond as consolidation happens. And sooner or later you would think the volatility will ease up some of these commodities. Obviously not just Flowers Foods, but anybody in the food industry has seen tremendous volatility and it looks like things are beginning to level out some. We just have to see how that plays out next year and the years beyond, but I think hopefully more clarity will come as things begin to level out.

Thanks so much.

Bill Chappell with SunTrust Robinson Humphrey.

Good morning. Just, for a bigger picture from a competitive landscape, I'm trying to see if you've seen anything different from IBC or the old Sara Lee, in terms of promotional or pricing or what have you, just in the past few months before things started to change for their financial situation? Or in the past, in the most recent few weeks since the Bimbo transactions closed and IBC is going back and looking at strategic alternatives. Have you seen anything there? And as you look to next year, are we starting to turn the corner, in terms of getting back to a more rational environment?

Bill, this is Allen. Just a comment on the competitor situation, regarding pricing. I would say that, if you look at this past quarter, we are seeing an upward tick from a competitive standpoint on retail pricing. We see it in the marketplace. Most of that has been taking place on the branded side, and I have said earlier, our focus is on the non-branded side, and we will be moving with additional pricing there. From an overall competitive standpoint, there may be a little bit of an uptick we see in the retail market, but not much change other than that.

And looking forward, do you think these changes of those two competitors, is it starting to see light at the end of the tunnel.

Bill, I would say from a trade-customer standpoint, they understand the consolidation that is happening in the marketplace. And I would say that, from a trade standpoint, that our relationships have never been stronger. Hopefully when there is a jump-ball that would give an opportunity for our Company, that Flowers would continue to come down with the jump-ball from our trade customers, based on our good service and relationship. I would say there is some awareness of consolidation taking place by the trade, and I hope that we will benefit from that in the long-term.

Okay. I understand, back to Tim's comments of the past three years have been part of the very volatile years on the commodity front. But, with the assumption that commodity volatility is here to stay, is there anything you are looking to doing to try to -- I know you already hedge a fair amount out, but to change that, to try to take some of the volatility out of the market? Or is there anything that you can do to try to smooth the numbers over the long-term?

Bill, I would say that our strategy has been six to nine months for many, many seasons and years. That is still true. Over the long pull that has worked, but as we are keenly aware, though, if this volatility does persist, that strategies will have to change probably, or tweaked, or looked at more closely. We said on last quarter's call, that we are beginning to be more cautious, and I still use that word cautious until we sort of get a better handle on the long-term activities in this volatility. It's just not good for any of us. We have -- because of that change, just because we had a long-term strategy, sometimes you have to change the long-term strategy, in any regard. So we are monitoring that very closely and we will keep you aware of any changes that we decide might change that long-term strategy.

Okay. Thank you.

Ann Gurkin with Davenport.

Good morning. Just wanted to ask about the warehouse segment and the volume decline. Is it mostly due to the timing of the additional customer business? Or is there something else in that number?

Ann, that is a big part of it. We had anticipated the additional volume, as I said coming on-board last quarter. That is a big piece, our warehouse snack cake business, the additional volume is finally coming on board now. And then I would say that in some pieces of our warehouse food service business, that business has not been as strong as we would like to see it. Our team understands the situation, we are focused on what we need to do to turn that business around and that's what we are going to do.

Okay. And then on Tastykakes, can you comment on capacity for production to meet additional market roll-outs? And can you talk about the reception by retailers to add Tastykake to their stores?

Ann, first of all, from a capacity standpoint, we do not have overall capacity restrictions on Tastykake at this time, which is a good thing. From an overall reception in the marketplace, our independent distributors are excited about having a brand like Tastykake and having some very unique items that they can add into their product line. From a trade customer standpoint, many of our trade customers are aware of the brand-loyalty of the Tasty brand in the Northeast. So authorization into the supermarket and other channels, we have been very successful there getting additional space and position through the trade. It's all about, from a sales standpoint, it's all about excitement. And we have never had, in my opinion, a real strong brand in the cake segment, and now we do, and it really completes our brand portfolio and the team is excited and we are looking for big things.

Great. And then in your 2012 sales forecast, can you break that out? Or can you comment on the contribution from the Tastykake business?

Ann, back when we made the acquisition, we said Tasty sales would be roughly, on the annualized basis, $220 million, roughly, to $230 million, so they are going to be well within that range.

That's great. Thank you very much.

Amit Sharma with BMO Capital Markets.

Good morning everyone. Just to follow-up on Heather's question earlier about price elasticity, clearly you are seeing decent volumes I'm sure, but are you afraid that we are reaching a certain price-point, where you have greater price elasticity or a greater consumer share from higher-priced branded to private label?

Been in this bread business for 48 years now, we have seen a lot of different prices through the years. As Allen indicated well, it's not that the retail prices on brand is too high, it's really that private label bread is probably too cheap. But let me also say this, I also think in this environment that we're in, and I talk about the unemployment that's in our nation. I talked about, I think it is certainly affecting us. I think consumers are very caution because they are not 100% confident at this point, about their own job, their ability to continue to make house payments, car payments, et cetera. I believe more than I've seen in a long, long time there is that awareness out there that people are stretching that dollar. I believe there is less waste than ever, coming out of the pantries or out of the refrigerators or out of the freezers.

I think that's the time we are in, and we have always been able to manage through any circumstance. Volumes aren't as strong as we think it should be. We just have to manage through that until the consumer gets comfortable again and we see those volumes pick up. But it is a concern. I would not play it down or play it up either one. I think we know that the marketplace is tough. Any major food company, retailer out here that I talk to has those same concerns, so you are right, that concern is out there. All of us are trying to do the best we can to meet our targets and give the consumer the best value we can in doing that. And we'll continue to strive to do that.

All right. And the fact that private label is too cheap, is it because manufacturers have not taken pricing yet, or is that retail holding back pricing on private label?

Probably a combination of both. I would say though, in the main, that it seems like it takes longer for private label to get up, as compared to the branded proposition. And I believe the retailers are keenly aware and trying to make sure they can give their consumers a value when they come in the store, versus their competitors. I think they press their margins some also, not only in bread, but throughout the stores.

Does that come back to the manufacturer like you, in terms of having to discount private label a little bit more?

No, we continue to work hard to make sure we pass along all our commodity costs to all our customers.

And not a follow-up, but separately, in the Bimbo transaction, one of the things that had happened is, that they had to diverse certain brands and routes and production facilities. Are any of those in the regions where you might be interested in taking over?

I'd say, that yes, if you look at our map that we said, we want to get into, you will see some of the markets they are divesting of, we do have interest in. We will work through those as these assets are finally placed, we'll be involved in the process.

And to final, how long does that process take?

I'm sure I can't tell. I remember the schedule that was put out in their announcement, and it talked about it was a certain 60- to 90- day timeframes. But I don't know specifically how long it takes to make this happen.

Okay. That's good enough. Thank you very much for taking the questions.

(Operator Instructions)

We do have a follow-up from Eric Katzman with Deutsche Bank.

Thanks for the follow-up. Allen, I didn't understand your answer to a question earlier about, whether there was more promotion in the marketplace? I think you said retail pricing had ticked up. Did you mean promotion or pricing?

Eric, overall pricing has moved up. I will say that the overall level of promotional pricing is about the same. However, the promotional price-points are slightly higher. So the market has actually moved up slightly on both every day price and promotional price, but in terms of the frequency of promotions, that is about the same. It's just promoted at a slightly higher price.

Okay. So meaning there's less, somewhat less promotion in the market, but the frequency of it is the same?

The frequency, the number of items being run on promotion, is about the same, but the actual retail price of those promotional items is slightly higher.

The depth of the promotion.

The depth of the promotion is not as deep as what we have seen in the past.

Okay. Thanks, Marta, that helps. And then, Steve, I just have got to understand something, the difference here. You don't number the slides, but it's on the one that has the balance sheet on it? It has here, third-quarter year-to-date, 2011 debt borrowings of $208.4 million. But on your balance sheet, or preliminary balance sheet in the press release, it has $339 million. So what is the right number?

$338 million is the balance. I think the $208 million was probably what we have drawn on in the year.

Okay. So the actual amount of debt is the $338 million?

Yes the $338 million is the actual debt.

Okay. Well, we can talk offline on that one. Okay, thank you.

And Eric, we will number the slides. They are supposed to be numbered. I apologize. Thank you for correcting us.

Okay. No worries.

Mr. Deese, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you Melissa, and thanks all of you for joining our call today. We are focused on our business to continue to drive shareholder value. And over the next five years, we will feel very optimistic about doing that, and look forward to seeing you soon. Thank you so much.

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