Flowers Foods Inc (FLO) 2011 Q4 法說會逐字稿

Greetings and welcome to the Flowers Foods fourth-quarter and fiscal 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 Corporate Relations for Flowers Foods. Thank you, Ms. Jones Turner, you may begin.

Thanks, Rob and good morning, everyone. Thanks for joining our call today. Our fourth-quarter and 2012 results were released late yesterday and of course you will find the release posted on our website in case you need a copy. We do expect to file the 10-K on February 24. And as a reminder during the call today, we will be using a PowerPoint presentation to support our comments. You can find that presentation on the webcast listen page.

Of course, as we 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, those statements 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 SEC filings.

Before I turn it to George and the Team, I do want to announce to you that we are going to be hosting an Analyst Day in Philadelphia on Tuesday, March 20. We will send more information about that next week. I wanted to upfront ask you to mark that on your calendar.

With us on the call today we have George Deese, Flowers Foods Chairman and Chief Executive Officer; Allen Shiver, President; Steve Kinsey, Executive President and Chief Financial Officer. As you know, we will open the call for your questions after our prepared remarks. Now I will turn the call to Flowers Foods Chairman and CEO, George Deese.

Thanks, Marta. Good morning to each of you and welcome to Flowers Foods fourth-quarter conference call. As always, thank you for your continued interest. I am pleased that we delivered sales growth of 14% for the quarter and 7.8% for the full-year. That is solid growth in light of marketplace and economic pressures, and it shows the strength of our DSD business, the Nature's Own brand, and our ability to grow in new markets and through acquisitions.

On the earnings' side, we did not fully overcome the challenges of high input costs, commodities markets and consumers' reaction to the weaker economy and food inflation. Our margins also were impacted. Our Team is managing through those difficult challenges to deliver future results in line with our long-term goals. You've heard me say before that in business there are ups and downs quarter-to-quarter and sometimes year-to-year. However, over the long-term, Flowers Foods has constantly, consistently delivered growth in line with our goals.

I have great confidence in our Team's ability to continue that trend. Flowers Foods' future is promising. We are focused on our operations, the marketplace, and on opportunities for growth. I will tell you more about that in a few minutes, but I wanted you to know upfront that I have never been more confident in our Company and the opportunities ahead.

As we look back at 2011, it is important to note what we accomplished. We invested $79 million to improve our production efficiencies, product quality and shipping logistics. We discontinued less efficient production, closing one bakery and several individual lines. As a result, we ended 2011 with our bakeries operating at near record levels of efficiency. In May, we acquired Tasty Baking and the iconic Tastykake brand. For the year, Tasty surpassed our sales expectations and also contributed slightly to earnings, not including acquisition costs. In September, we began introducing the Tastykake brand to Flowers' core markets through our independent service system. Consumers are responding well to this introduction.

Our DSD business achieved four, consecutive quarters of improved volume trends in a tough marketplace. Our expansion markets continue to deliver growth within our goal for 0.5% to 1% of sales each year. New products also performed within our expected 3% to 5% of sales growth. Nature's Own reached $935 million in retail sales, achieving its 34th consecutive year of growth.

Turning to the most challenging factors of 2011. Our first point to follow through commodities and have that impacted our cost. Like many other food companies, we were hit with very high costs. We successfully implemented pricing in our DSD segment, and volumes performed largely as expected, given the ongoing price increases across the category. Still, the marketplace remains competitive even though overall pricing has improved, promotional activities is at higher price points but still a factor, so consumers' reaction to food inflation, which has softened unit growth in the category.

From a segment standpoint, our Warehouse business, which is 18% of our total sales, had a tough year. It faced very high cost of flour, sugar, cocoa, shortening. We did not achieve the pricing you need to offset those significant higher prices. We are keenly focused on this part of our business and we believe those margins can return to the levels Warehouse has achieved in the past. Allen will talk more specifically about our plans.

In the DSD segment, which is 82% of our total sales, I am pleased to report that sales growth was above our long-term target. Though margins were pressured by high input cost, the fundamental strengths of our DSD business have not changed. On this morning's call, we will address the questions we think are most important to investors. First, what is the outlook for commodity costs and will we take additional pricing to offset the cost? Next, are higher prices causing a shift to store brand or is there price elasticity in the category? Third, are we pleased with the Tasty acquisitions? And we are. Fourth, what happened in the Warehouse segment and should we expect margins to return to previous levels? Next, what about industry consolidation? Are there opportunities for Flowers? Finally, what is the outlook for 2012?

Before I pass the call to Steve, let me thank each of our Team members for their tremendous efforts to work in even more efficiently and effectively in the face of inflationary pressures and the economic challenges that are impacting consumers. Now, Steve will give you more details on our results.

Thank you, George and good morning, everyone. Just a quick reminder before I go through the financial information, that the Tasty results are reported as a Direct Store Delivery, or DSD segment of the business. As George said, we did not fully overcome the challenges of high input costs, commodity markets and the continued weak economy. However, as our results show, we had healthy sales gains in the quarter and our integration, as George indicated, is going well to Tasty and their results for the quarter and year were within the ranges we announced at the time of the acquisition. Consolidated sales in the quarter were up 14%. The core business posted a 4.4% sales growth. The price mix contributed 3.8% to that growth while volumes were up 0.6%.

The Tasty Baking acquisition contributed 9.6% to the overall revenue growth in the quarter. Excluding Tasty Baking acquisition, overall growth in the DSD segment was strong growing at 5.8%. Growth in DSD, excluding Tasty, was driven by price mix of 3%, with a slightly negative mix shift. DSD volumes posted a strong gain in the quarter growing 2.8%. We were pleased to see DSD volume trends continue to improve in the fourth quarter. The DSD volume growth was driven by Nature's Own soft variety, cake, store brand and growth in non-retail. Store brand growth came from new business from serving visiting customers and a consumer shift into store brands primarily in white breads. The non-retail growth in the quarter was due to increased volume with existing and new fast food and restaurant customers.

Sales in the Warehouse group were down slightly in the quarter. An increase in price mix of 4.3% was offset by volume declines of 4.8%. Overall, volume declines in the snack category did offset volume increases in the food service channel. Allen will provide more detail on the Warehouse segment in just a moment.

EBIT in the quarter was down $9.2 million or 20% from last year's fourth quarter. DSD EBIT was down 8% quarter over quarter due primarily to higher input costs. And Warehouse EBIT declined approximately 65% in the quarter, primarily the result of higher input costs and lower volumes. On a full-year basis, adjusted for the one-time cost, consolidated EBIT was down 2.7%. Earnings per share in the quarter was down $0.06 or 26% compared to the prior year. Again, the decline was primarily the result of higher input costs, soft Warehouse volume, and the inability to fully price to protect margins and offset costs.

For the full year of 2011, earnings per share on an adjusted basis of $0.96 was down $0.03 or 3% compared to 2010. The higher tax rate reflected earnings of $0.01 in the quarter and for the full year. Also during the quarter, Tasty contributed $2 million to EBT and $1.4 million to EBT on a full-year basis. Excluding any one-time costs, this was roughly $0.01 per share for the quarter and for the year.

Consolidated gross margin in the quarter was down 220 basis points to 45.9%. This decline in the margin for the quarter was primarily the result of the higher input costs, specifically ingredients and packaging. Excluding the impact of the Tasty acquisition, input costs, which we define as ingredients, packaging and natural gas, were up approximately 14% in the quarter, with significant increases in flour, sweeteners, shortening, cocoa, and packaging. In the quarter, Tasty had a positive impact on gross margin of 10 basis points.

The DSD margin in the quarter was down 260 basis points to 50.6%. Tasty negatively impacted the DSD gross margin by approximately 30 basis points. And the Warehouse gross margin in the quarter was down 400 basis points to 23.7%. On a consolidated basis, the full-year gross margin was down 80 basis points in line with the guidance we gave for the full year. Excluding Tasty, input costs for the full year were up approximately 6% and for the full year, Tasty negatively impacted the gross margin 10 basis points.

Selling, General and Administrative costs in the quarter as a percent of sales were relatively flat year over year at 36.8%. Overall, Selling, General and Administrative dollar increases were driven primarily by higher selling and distribution costs. For the year, EBITDA was 10.2% of sales down 110 basis points from last year. Adjusted for one-time costs, EBITDA was 10.6% of sales, which was down about 70 basis points from the prior-year. And net interest income on the quarter was down quarter over quarter due primarily to high interest expense resulting from the debt related to the Tasty Baking acquisition.

Briefly commenting on the balance sheet and cash flow, cash flow from operations during the quarter did improve over the third quarter of 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 pension plan. During the quarter, we spent $14 million on capital expenditures and $20 million on dividends. We did not purchase any stock under our share repurchase plan during the fourth quarter. However, for the year we did repurchase 1.5 million shares for $27 million and we currently have 7.2 million shares authorized or available for repurchase under our current share repurchase authorization.

We ended the year with approximately $326 million of debt on the balance sheet or roughly 1.1 times trailing our 12-month EBITDA. Overall our philosophy for uses of cash remain intact; funding capital expenditures, returning cash to our shareholders through a strong dividend policy, share repurchases on an opportunistic basis, and making strategic acquisitions. We believe the strength of our balance sheet allows us to meet these needs and gives us great flexibility to take advantage of acquisition opportunities as they present themselves.

As we look ahead to 2012, we are confident in our ability to continue to grow the top line. In line with our long-term revenue targets, we are forecasting revenue growth of 7% to 9%, excluding the impact of any future acquisitions. Our DSD segment will remain strong, and Tasty is well within reach of the goals we established at the acquisition. As Allen will address in a moment, we are taking actions to get our Warehouse business back on track. We are forecasting earnings per share growth of 7% to 12% as compared to the 2011 adjusted earnings per share of $0.96.

Our costs continue to increase as we enter 2012, and we are forecasting on a full-year basis that input costs will be up 6% to 9% year over year with a significant portion of those costs hitting in the first half. This is coming off of a 6% increase in 2011. As you can see on this slide, gross margin is projected to be flat year over year. The tax rate should be roughly 35.5% on an annual basis, and CapEx for 2012 is projected to be $65 million to $75 million. Finally, our 2012 performance does hinge on our ability to cover back half input costs at the values we have estimated in our projections. I thank you and I will turn the call to Allen.

Good morning and thank you, Steve. I am proud of our Team's achievement of solid, top line growth for 2011. And as Steve and George pointed out, our business is strong and is getting even stronger as we begin 2012. You can basically sum up the challenges for 2011 this way. We had volatile commodity markets and high input costs, pricing issues in a small portion of our business, and volumes were impacted in a few product categories.

The year's wins were the Tasty acquisition, achieving steady improvement in DSD volumes, continued growth for Nature's Own, new business with food service customers, and the strength of our new products and expansion market growth. For the quarter, excluding Tasty, Flowers' internal data shows total sales were up 40 basis points in units and up 440 basis points in dollars. We are well-positioned to manage the high cost in the first half of 2012, by continuing to grow sales at a robust rate and improve earnings through further efficiencies and cost controls.

To get started, let's take a look at the fresh bakery category which is where our DSD segment competes. Our IRI data shows that the volume in the category was still sluggish as consumers continued to use their food dollars carefully in light of the weak economy. For the category as a whole, we saw pricing increase due to higher input costs. In the quarter, IRI for the total US showed a 5.7% increase in average price across the fresh packaged bread category. In the South market, the category increased in average price by 5.2% or about $0.11 per unit. For the total fresh bakery category, dollars were up 1.4% and units were down 4.1% based on IRI data for the total US.

For the quarter and calendar 2011, the category as a whole continued to be relatively inelastic however, it's important to note that certain segments of the category do show some shifts. For instance, white loaf bread volume was somewhat elastic, while soft variety bread proved more resilient to price changes. Store brands in the category did show some growth during the quarter, up 70 basis points in dollar share and 100 basis points in unit share. As you can see on this slide, the current levels are well within historical levels.

IRI, which captures only about 50% of our DSD segment's retail branded bread sales, or 24% of Flowers Foods total sales, shows that in the South market, our brands held a 22% share of dollars and 17.5% share of units in the quarter. For the total US, Flowers' dollar-branded share was 7.6% and unit share was 6.6%. Our brands have performed largely as expected, given our pricing actions over the past 18 months in the relatively soft category performance. You will remember that our Nature's Own brand holds a strong position in the soft variety bread category. We continue to be pleased with the growth of Nature's Own. As we pointed out in the release, Nature's Own sales at retail reached $935 million in 2011, so we are closing in on our goal of having Nature's Own reach the $1 billion mark. Consumers continue to respond well to Nature's Own as we entered new markets and offer new products.

Our regional white breads trended down in the quarter, along with overall market for white bread. Even so, our regional brands commanded a strong presence in local markets, so we are focusing on ways to enhance their performance through quality improvement and line extensions. New products performed in line with our expectations and we have new products in the queue for 2012. We will tell you more about those as the year unfolds. New markets in our DSD segment are also performing well. Excluding Tasty, new markets contributed 0.76% of our fourth-quarter, DSD sales increase, which is in line with our goal.

Moving to first service, our total food service sales were up 5% for the quarter. That increase reflects some new business in both core and expansion markets. From a same-store sales standpoint, our food service customers continued to experience relatively flat performance. Turning to the acquisition. George mentioned that our Tasty acquisition surpassed our sales and earnings goal for the year. I want to thank our entire Team for the work that has been done to fold Tasty into our Company, capitalize on synergies and grow the Tasty brand.

We are beginning to leverage manufacturing synergies between our legacy Flowers' plants and Tasty's operations. We expect the Tasty integration to be complete by midyear. We are pleased with consumers' response to the Tastykake brand in our markets throughout the South. Just last week, our independent distributors in Texas started offering Tastykakes on their routes. Tastykakes are now available on more than 75% of our total Flowers' and Tasty routes.

We are confident that as we build consumer acceptance and expand distribution of the Tastykake brand, our share of the $4.3 billion, fresh cake category will continue to grow. Also, we are completing our plans to introduce Nature's Own and other bread products into Tasty's core markets in the Northeast corridor. Both of these opportunities, Tastykake and Flowers markets and Nature's Own in Tasty's territory, offer significant growth potential. Over time, we expect to gain consumer acceptance and increase market share in our new markets for Tastykake and Nature's Own.

Turning to the Warehouse segment, as George and Steve discussed, sales and margins continue to be challenged. Dramatically higher input costs, weakness in volume, and difficulty in implementing adequate pricing combined significantly to impact the performance in this segment in the quarter and for the year. Our Team is focused on moving the Warehouse segment back in line with historical measures. We are focused on reducing input costs while improving both volume and pricing.

In past calls, we've mentioned new store brands snack cake business with several customers that was to be added in several phases. As we begin 2012, all phases are in place. Volume for some of that business is tracking a bit lower than was originally projected. However, we are working closely with our customers to improve the retail sell-through and overall we are pleased with this incremental business. Rest assured, we understand what we must do in the Warehouse segment. Our goal is to return to the higher margins this business has achieved in the past. We are making solid, strategic moves that will help us do that over time.

Looking at Flowers Foods as a whole, George mentioned our improved efficiency levels as we rationalize manufacturing capacity and invested in improved technology. Throughout the Company, every department and every Team member has been charged with finding ways to do things better and more cost efficiently. It is in our DNA at Flowers Foods to constantly improve our business from every aspect, and we continue those efforts today. Steve gave the specifics of our incremental input cost for 2012. For the most part, we have responded with pricing actions in 2011 and in recent weeks. Our efforts to reduce costs and improve efficiencies also should help offset higher costs in the first half. As we look further ahead in mid-2012, we will consider whether additional price adjustments are needed.

To summarize, we are managing through near-term challenges by staying true to our operating strategies. At the same time, we are looking ahead, evaluating potential growth opportunities and planning for the future. Our operations and our brands are strong. And our Team is the most experienced and the most dedicated in the industry. Thank you for your attention. I will now turn the call back to George.

Thank you, Allen and Steve, for the update. In spite of the challenges we faced in 2011, and those we face in the first half of 2012, I am extremely confident in the future of Flowers Foods. This year, our Team is focused on achieving even greater operational excellence and market execution. 2012 also will be a year of significant opportunities for growth. Our operations are already strong and many say our bakeries are the best in the industry.

Our Team realizes that with volatile input cost and competitive pressures, we simply must have our operations perform even better. This year, we will continue our efforts to improve productivity, reduce waste, control cost by further enhancing the quality of our products. As Allen mentioned, Flowers' way is how every Team member participate in such efforts. In fact, our idea toward improvement often comes from the individual involved directly in the process. And our Team atmosphere encourages that input.

From a marketplace standpoint, we have, by necessity, been managing through pricing actions and maintaining volume in a tough, competitive environment. This year, we will focus on giving our breads greater exposure, offering the best-quality products, introducing new products, delivering exceptional customer service and renewing our efforts to have the right products at the right location at the right time. Flowers Foods is a strong and number two player in this category. Our brands are well-known and growing in core markets in the South and the Southwest. This year, we expect to extend our reach into new markets through expansion and acquisitions. Our growth strategy as you know is three-pronged. We focus on growth opportunities in our core markets, we expand our DSD footprints in adjacent markets, and make strategic acquisitions.

2012 is the year when Flowers Foods has the opportunity to take advantage of all three avenues of growth, more so than we have in the past. The long-awaited consolidation of the industry is upon us. There are now four, major companies along with a small number of regional companies focused on the fresh foods category. We're always interested in acquisitions that expand our geographic reach and help us reach our long-term goals. You know that we are keenly aware the industry consolidation will bring acquisition opportunities. We made more than 100 acquisitions since listing publicly in 1968, and we expect to have acquisitions play an important part of our growth in the future.

Steve gave you guidance for 2012, we have full confidence in those numbers. While our Team is managing through near-term challenging circumstances, we are focusing on further improvement, improving our operations, our access to market and our customer base. It is important to point out that our long-term strategy is to manage cost, have the right operations and distribution model, the most efficient bakeries and the best Team in the industry. Puts Flowers Foods in a very strong position in the marketplace. At the same time, our sights are clearly set on the long-term opportunities to expand the reach of our brands and in doing so, achieve sales and earnings growth in line with our goals as we build value for our shareholders. Rob, now we will open the call for questions.

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) One moment please while we poll for questions. Farha Aslam with Stephens Incorporated.

Good morning. First question is about your core operations. George, do you feel like at this point you have pricing in place to offset the commodity costs that you are going to experience in the first half of the year?

On the DSD side of our business, we feel very confident about our core market and pricing that Allen mentioned that came into play in the fourth quarter.

Yes.

We are confident in that, all that is in our guidance for the year, that is all-inclusive. On the Warehouse side, as Allen also stated, that's a work in process.

Okay.

We still are not where we want to be, but are continuing that effort.

Okay, that's still in work. Then in 2004, when IBC went into bankruptcy, Flowers benefited from a flight to quality with customers looking for really solid balance sheets in terms of suppliers. Have you benefited from any customers coming to Flowers because of your strength in the market?

Farha, I'd say not -- I won't comment on that specifically. What I would say, looking back at 2004, if you remember, Hostess did go in bankruptcy. If you remember, there were some plants closed in that process. Sara Lee also was closing some plants along that same time. Our margins did jump up during that timeframe. We did gain business. That was a good time, during that time period.

Okay. Is there anything that should be different this time around?

I can't predict that. We're just staying focused on our business and really executing with our customers and staying close to them, and trying to build this consumer franchise with Nature's Own and our Tastykake as well as our local, white bread brands. Really excited about it, though.

Okay. Then you mentioned that you are looking at acquisition opportunities. You've been looking for the last year and haven't really decided to pull the trigger. Could you share with us what were the factors that made you wait for the right opportunities? How you would frame the opportunities in front of Flowers right now?

I will, Farha, but I would remind you that we had one of our bigger acquisitions by acquiring Tastykake back in June. $220 million, $225 million in sales I think we predicted and would be very accretive to the Company going forward. We are excited about that. We did pull the trigger last, in 2011, not necessarily in the core bread business. But as I said, there have to be circumstances sometimes to create that opportunity.

Even though we stay close to all potential candidates, things have to be right. I said that can be based on succession planning, that can be based on new capital media for the business. It can also be true because of big consolidation in the industry and some people might want to cash out, so to speak. We are involved in the process, and we also mentioned the new tax rate that could change at the end of 2012. So, we are optimistic, and our line is in the water and we have a hook on it, so we feel the time is right for that to happen.

All right, thank you very much.

Thank you.

Mitch Pinheiro with Janney Montgomery Scott.

Good morning, everyone.

Good morning, Mitch.

In the fiscal '12 sales guidance, how much of that -- and I apologize if you've already said it. But how much of that is Tasty Baking?

Mitch, this is Steve. We didn't say on the call, but it is 3% to 4%, it is really in line with the guidance that we gave when we made the acquisition announcement.

Okay.

Which was I think roughly $210 million to $225 million on an annualized basis.

Right. In terms of routes, I think Allen -- or I forget who said -- your 75% of all the routes have Tasty product. How many -- if you could just share. I think you had said 2,200 routes -- Flowers' routes had that, is that still the right number?

We're over 3,000 now, Mitch. Like I said, we just introduced Tasty on the routes in Texas this last week. Just a lot of excitement from our distributors about having a brand like Tastykake, and we are looking for big things.

What's interesting, so you're on 3,000 routes, but when I visit some stores in your core markets, not every retailer has the product yet. If you looked at your 3,000 routes, what percentage of your customers have the Tasty product on their route now -- or in their stores? Excuse me.

Mitch, I can get that number for you, but we are having success in the supermarket channel, getting distribution on Tastykake. We are working hard in the other channels such as convenience stores, and it's a work in process. In Tasty's core market, they do a wonderful job penetrating all channels, and that is our goal as we roll it out across the rest of the Company. But it's just going to take some time.

Mitch, I would also point out, and we said many times, a lot of supermarkets have, what we call, resets, refresh their categories and shelf space.

Right.

Each one of those do that on a different timeframe. So, if you look at certain accounts and it's not in, it's not that we are turned down. In fact, I feel 100% confident that we will have Tastykake in all of our major supermarket chains. But it's timing based on resets and refreshes to the category.

It sounds like that as you grow your routes, there's also, there should be some, meaningful, same-store sales growth on each route.

That is true.

Knowing the Tasty Baking facility, which we will get to see on March 20 at your Analyst Day, that facility probably is operating at 50% capacity. So, as you add Tasty volume on your routes, that's got to have a pretty strong, incremental margin, contribution margin. Is that fair to say?

I think you are correct with that.

So -- (multiple speakers)

We will talk more about that at our Analyst Day, and really lay that out better. But basically it goes back to when we announced the Tasty joining our Company, we were optimistic then. We are even more optimistic today, about what it does for the Company. Naturally, as you put more volume in there, the overhead factor changes in a good way. We will anxiously want to show it to all the analysts and still get a better feel for what we think the values are to the shareholders going forward.

Okay, thank you. One other question. On the Warehouse side, you say it's a work in progress. Is that a work in progress on pricing initiatives? We're going to still see further pricing initiatives there? Or is it getting the business mix right? Is that part of it as well?

Mitch, it's all of the above. We are working on additional pricing. We mentioned that we were not successful getting the pricing we needed last year. We continue to work on improvements there. At the same time, we have really a very tight focus on growing the top line and a lot of encouragement about some good things that we've got working to grow sales. I would really say, it's all of the above.

When I look, I picked up a box of Mrs. Freshley's, the Pecan Twirls, and it turns out that in the club channel, you get these for $0.20 apiece. I'm talking per pecan swirl. It seems like an awfully low price. This seems like there's a lot more pricing power there for the product quality that you are delivering. I don't see it, but is it a function of competition offering lower prices or trying to fit the retailer's pricing structure? Or consumers not reacting to prices above that low level?

Mitch, I would say that it is a competitive situation, the example that you gave. We are competing with some strong, independent bakers in that particular segment. I would say it's more of a competitive factor to get distribution than it is a consumer factor. We see Tastykake doing a very good job in the club channel, selling at prices that are in our opinion where they need to be. It's a competitive factor on the front end to get distribution, but once distribution is in place, then the products will carry a higher price. I think your observation is right on target.

Okay, thank you very much for your time.

Eric Katzman of Deutsche Bank.

I'm just following up a little bit on Mitch's question. The snack cake business, within Warehouse, is $200 million, and then you add in Tasty. So, let's say that your total, maybe, total snack cake operations are, $500 million, $600 million, $700 million, whatever the number is. But relative to $4.3 billion, your market share in snack cakes is -- I don't know what you estimate it at -- 10% or 15% of the market? Isn't that really the issue here? It was okay for a while before the low end to middle end -- middle income consumer rolled over, but isn't the tide has gone out and the fact that your share is relatively low in that category, isn't that ultimately the issue here, George and Allen?

Eric, we definitely think -- number one, the [North share] is too loaded. We know we needed a brand and that's why we are so optimistic that, we now have a brand that we think has a lot of legs to help us to grow that market share. So it's really, we see Tastykake being the ultimate brand, along with Blue Bird and Freshley to a lesser degree. Again, it's about market segmentation on what items go in which brand.

But you will continue to see us fine tune that. Even our distributors, a good selling and proposition, and we think pricing, we already see it on the Tastykake, the brand is taking a very good price. The consumer does accept it. So, we've got to get the other products inline as well as get further distribution to improve the market share.

Okay. Then just to switch up to the numbers in the first -- I know you don't necessarily like to talk quarters. But last year, first quarter was actually pretty strong. You signaled that snack cakes isn't going to recover quickly. The input costs, it sounds like at least at this point, most of the or a lot of that input cost pressure on the 6% to 9% is first half. Is that basically, we should be pretty cautious on numbers first half? Is that how you're thinking the year unfolds?

You're right, we don't normally give quarterly guidance, but I will say that last year, especially first quarter of last year, that is hindsight, so I can say it, we had very good input cost for the first quarter. First half was good. The back half has been driven more, as Steve has indicated, by higher input costs, especially in the fourth quarter.

We said repeatedly, in third and fourth quarter that would be at headwinds, fourth quarter and first half. We're looking at the back half very carefully. We do have some coverage. We are seeing wheat, particularly the end, to drift down some for that back half. But we are optimistic and that's how we came up with our guidance. We don't do quarterly guidance, but you are right, the first part of the year will be more difficult than the back half. Steve, you want to follow up on any comments -- (multiple speakers)

Eric, looking at the first half, from a trend perspective on the cost, you're looking at it right. If you look at our projections for next year, the first half is the toughest. I would say, first and second quarter are very similar probably to third and fourth quarter from a dramatic cost increase perspective.

Got you. Quickly last question, George, you referenced a tax rate at the end of 2012. Were you referring to capital gains and what a privately-held Company may consider doing? Is that what you were talking about? You weren't talking about your tax rates?

No, no, what I was talking about was the capital gains rate might change for -- (multiple speakers)

For everybody, yes.

Yes, correct.

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

Heather Jones of BB&T Capital Markets.

Good morning. Speaking with the input costs, your former guidance had been up 4% to 8%, and now you raised it. Just wondering, because like you said, you have seen some pull- back in, a little bit of pull-back in, wheat and natural gas. Just wondering what is driving that higher number.

Back in November when we gave guidance, we had certain coverage on the books and certain coverage targets. Obviously since then, we have taken some more coverage. So, based on where we stand today from a coverage perspective and what's left and our targeted prices to cover at, drove the increase. And they are in the range.

What is driving it? I was thinking about [nat] gas and even, maybe, cocoa, I would assume those are going to be down year-on-year. Is it flour and sweeteners?

Yes, a big part of that would be the flour cost, the sweeteners and the shortening.

Okay. Do you -- I know things can change. But based upon your visibility now, would you expect cost in the second half to still be even up year-on-year? Or can you give us a sense of that?

The back half right now in the projections, it could be flat to either slightly up or slightly down. Just depends on where we end up.

Okay. So, this 5% to 9%, I'm thinking, if I remember correctly. So, basically that is very heavily front end loaded?

Yes.

Okay. Going on to your pushing into the Northeast. My understanding as far as the divestitures related to the Bimbo-Sara Lee acquisition, was that the divestitures in Pennsylvania or -- let's just say, the mid-Atlantic area are going to be fairly small. So, I was wondering if you could give us some sense as far as pushing into the mid-Atlantic, are you thinking more of adding capacity to the existing Tasty facility? Or if you could give us a sense of where the capacity will come from.

Good point. We are focused on getting through that market and it will be either through added capacity, which we are looking at as we speak, or again through an acquisition.

Okay. But is it fair, am I interpreting correctly, that the assets available from the Bimbo side are not that large?

What's available, as we read it, is not that large in Pennsylvania -- is that the question?

Yes.

We read it the same way.

Okay. Then finally, a big component of your story are acquisitions. Given the Hostess bankruptcy, given the Sara Lee divestitures, there's been a lot of speculation as far as you guys looking at acquisitions. I'm wondering if you could give us a sense of how big is too big?

Typically, if I remember correctly, Tasty is the biggest acquisition you've ever done and you have seen, you've got, more of a conservative dent. So, my take is that you are not going out there and going to do $500 billion acquisitions. But just wondering if you could give us a sense of how big is too big for you guys?

I will say it this way, and maybe that'll answer that. I can't get in to specifics, but we are not looking at anything transformational.

Okay.

We say that we're not looking at transformational change. It will continue to be certain brands and it will continue to be certain plants, certain companies around the country.

Okay. Thank you so much.

Thank you.

Tim Ramey of DA Davidson.

Good morning, thanks. George, I think you started the call by talking about solid growth in the year. But I was actually a little disappointed. I think originally you gave guidance at 3% to 6% for the year, and ex Tasty you were about 2.8% on 3.7% price, and volume down. Of course earnings were down. It didn't seem like solid growth.

Tim, I would say as you look at the food industry, if you look at the baking industry, if you look at anybody going into the supermarkets or whatever store they frequent, there's been a lot of flat, flat business and down trends. So, I guess I'm overjoyed that we did show some growth.

So, relative it was okay?

Relative, sure.

Also, Tim, I would just point out, in March, if you recall, we reset our long-term target to 5% to 10%, including acquisitions. That was 3% to 5% core growth and 2% to 5% acquisition growth, so -- (multiple speakers)

Got you. One of the things I've struggled with is there's only X amount of space on a truck, and of course when you put Tasty on the truck, something else has to come off. What is coming off and what gives you the confidence that Tasty is better than what is coming off? Because it wasn't such a good franchise, at least in its core markets.

Tim, this is Allen. I would disagree that when you add Tasty that something has to come off the truck. That is not correct. I've always said that the most profitable additional sales that we can get are within the accounts we are already serving. That's exactly what's happening in a lot of cases. Our distributors are basically adding Tasty to the products that they are selling to existing customers.

If you look at the footprint that the Tasty products take on a typical route truck, it doesn't take that much floor space. So, just physically in terms of logistics, Tasty fits very nicely in our existing, independent distributor model. I think the bigger point is that our distributors are excited to have a brand like Tasty. Our retail customers are excited about the Tasty brand. It has really been a winning situation so far.

Tim, I back up what Allen says, particularly on our independent distributors and the business model that we have. We truly think it's a competitive advantage. These are independent business guys who -- and that's why we went there. So, that we could, over years, gain volume because they are after business, and this is just one more tool in their basket that they've got to deal with, to grow it.

Just one more on the SG&A outlook and report. Always concerned about the impact of diesel prices on distributors and how that -- I know that's directly borne by them, but it flows through your P&L one way or another. How do you think about that for '12?

I will let Steve holler upon it, looking at overall costing. What I would say, though, that with our business model -- and that's why our guys are so interested in growing their business, they do bore the cost of fuel. When you see our diesel and you talk about diesel thus far, and we also contract out our long hauling, plant to plant, plant to warehouse. There are some contractual things that you do on the diesel fuel tags, and so forth, to that part of the business.

But again, this is why we love our business model and that's why we must gain sales so that -- that's where the cost has really caught up. As distributors gain sales, that helps them cover their input costs.

Got you. Okay, thank you.

Thank you.

Akshay Jagdale with KeyBanc Capital Markets.

Good morning. On Tasty, just one clarification, Tasty flows only through your DSD segment, and that's going to be the case going forward as well, correct?

That is correct.

Okay. You have been saying that you are more positive on Tasty since you bought it. But as far as I know, you didn't change the accretion guidance, is that correct?

That is correct, in fact, yes.

Can you help me with that? You are more positive, but not positive enough to say it's going to be more accretive. What is stopping you there?

Well, I'm more positive because we see that our customers will accept it, and so as they reset -- I mentioned that earlier -- as you refresh the category inside of a particular supermarket, that happens at different times through the year. But again, we set synergy goals. We set goals for '11, '12, '13, '14, and so forth. Actually, looking forward to [you see] Philadelphia and the great products and the people, how they do the great job they do. I think you'll recognize what's in the store, too, in that market, what is capable of happening throughout the Company. That's why feel more positive about it, because our customers are accepting the product, and the consumers are getting used to the product in this market, and we think is acceptable. That's what I mean by more positive. Now, we didn't, and I think Steve -- (multiple speakers)

When you look at the accretion we gave of our original acquisition, Akshay, there are some cost increases primarily in the cocoa, sugar and oil categories for Tasty as well as snack cake business. So, some of that played into the overall accretion equation as well.

Okay. That's great. Following up, when you look at 2011, and maybe I was expecting going in, I thought your DSD business would actually have a little bit more trouble than it did. I called you for showing -- I think you reported close to 10% EBIT growth in DSD, but in the Warehouse segment, it was well below what I would have expected. To me, it looks like there's a big problem with Warehouse. I'm still not clear as to what you're exactly planning to do there to fix that business, and how long it will take.

Before you answer that, in terms of your guidance for next year, EPS growth, 7% to 12%, I'm assuming, EBIT growth is similar. What is your expectation, let's say, by division, right, just roughly in terms of growth? I'm assuming you're going to be at the high end of that for DSD, and I am not sure what your growth expectations are for Warehouse. Do you expect Warehouse profits to grow next year?

Akshay, what was said, we do not break out in advance. We do give it to you in arrears on what each business unit does. But you are correct in saying that DSD is performing well. I said that also in my comments and I think Allen did too as well. We are real pleased with DSD and where it's going. We did say that we had some issues on pricing and the volume expectations did not come through a strong as we thought it would.

But that's not a give-up. We know the challenges, and as Allen said, he is focused on and his Team is focused on any corrections that's going on in his work in progress. We said that third and fourth quarter as well, last year. But we won't give you a timetable, but we expect to get back to the levels that we've always enjoyed with margins in that particular unit.

Okay. So, can you just frame 2011 just the Warehouse performance relative to the past? You haven't seen a double-digit decline in gross profits, at least in the model that I have in the history that I have for the last 10 years. Can you just frame what was the main driver of that? Is it just competitive purely? I just want to get a sense of order of magnitude of the variable that drove that decline, right? So, the profitability came down significantly.

I will try to take a stab at it, and Allen and Steve can jump in. I think the number one problem in 2011 with Warehouse was input cost. I'd say number two, right behind that would be the competitive factor in that type of business. It's not a DSD model. DSD goes back to people's warehouses and they take distribution of it and take care of it, either to the restaurants or back to the supermarket. There is a tougher competitive environment than we have seen in recent history in that particular business. High input costs, higher than expected, tough environment and volumes did not come through like we thought volumes would in part of the Warehouse business. There's three issues in my mind.

As far as the bakeries, we are right on track. The bakeries are running well. There's not, quote, an operational problem with bakeries. It comes down to input costs, competition and volume. That's three pretty tough things. Each one of them are truly important to the health of this business and getting it back where it needs to be. That's why we've got to work on the input cost. We've got to continue to get the price and get the margins we need in that business. We have great products and we just have to keep working on the volume side of it.

One last one on acquisitions. When you think of what is happening with IBC or Hostess, is the best case scenario part of that capacity comes out of the industry? I believe that, that is the best case. If you want excess capacity to come out rather than somebody to buy it, correct?

I wouldn't comment on that or speculated on it. Based on past history, we've seen capacity come out of the market under some of these circumstances.

Great, I will pass along. Thank you.

Amit Sharma of BMO Capital Markets.

Steve, have you given sales mix in the quarter? What was sales mix? I suppose it was negative, but have you given the degree of sales mix contribution?

We didn't break out mix separately. It was slightly negative on a consolidated basis.

It's probable reasonable to assume that it will be negative for 2012 as well?

Looking at '12, I can give you the components of our price, our sales guidance. Price mix is roughly 3% to 4%. We don't break out mix separate. Volume would be flat to slightly up. Tasty, 3% to 4%, so that's how we get to the 7% to 9%. With new products and hopefully getting the Tasty into our DSD routes, which carry our premium price, we hope we could see some positive mix shift.

Okay. The DSD volume is up 2.8% during the quarter despite taking plenty of pricing. Allen, is that sustainable going forward, especially as you take similar magnitude of pricing in the first half?

I think it is sustainable. In fact, as I said earlier, our DSD business really in my opinion is extremely strong, and looking at numbers as we've entered the new year, that strength continues. I believe that it is sustainable.

Looking at the Warehouse business -- other than the last 2009 and '10, long-term average, EBIT average, EBIT margin average, for that business is 5.5%, which is where 2011 was. Is it possible that you overearned in 2009 and 2010, and the sustainable margin structure in this business is really in this mid-single digit?

We had a hard time hearing you. We had a crackle in the phone. I think, though, what you said was, EBITDA margins have been stronger, they have been weaker further back. We think what we're going to get back to is the high point, not the low point. That's where we're working toward. Not back where they were five years ago, but where they were two years ago.

So, sustainable EBIT margins for this business -- (multiple speakers)

I think your question was, did you say, the Warehouse, the 2011 margin is that really, truly the margin for that business? Did we overearn in 2009 and 2010?

That's right.

No, we would not agree with that assessment.

Okay. That's good. Then finally, private label on a sales mix negative for you. One of the reasons is private label sales are increasing. Do you think your private label sales are increasing faster than the overall category or is it in line?

Our private label, our sales were up based on new business that we have acquired over the past year. If you look at same, private label sales year-over-year, we are in line with what the category is doing. But any significant growth we are showing in private label is basically new business.

Got it. Thank you very much.

(Operator Instructions) David Leibowitz of [Horizon Kinetics].

Good morning.

Good morning, David.

A few things. One, how much hedging are you doing on raw materials this year versus a year ago?

I don't think we have said, in years gone by. What we've said historically, is we believe that six to nine months has been our philosophy. We've said also, that as times change and because of volatility, we might be a little more cautious on that idea. But we still believe in the six to nine months and we would advise if we change otherwise.

What about the prices which you are hedged? Could you share that with us?

David, you ask too much.

We don't, I'm sorry.

The intentions are honorable. (multiple speakers)

So what we did say, David, as I'm sure you heard, was the first half of 2012 was a very tough half for us from a comp perspective year-over-year based on our commodity cost.

Getting back to Tasty for moment -- I'm sorry.

Also we did say that we had a very good first quarter input cost last year, so year-over-year is the issue. Our cost compared to the marketplace is not that much different probably from a lot of people's, a lot of companies'.

Looking at Tasty, how many of their routes have now been sold to the driver?

On the Tasty side?

Yes.

They have been in the independent distributors for probably the early '80s. They operate like Flowers does, in that all of them are independent distributors. New territories that they've gone into, they also have prospective distributors knowing that they will own their territory at some point and date into the future. Very similar to what Flowers does.

In looking at the products that are produced both at Tasty and Flowers where there is overlap, are you using the Tasty brand or are using some of your own brands as well?

David, that's a work in progress and we've got an ongoing strategy looking at, make sure we maximize productivity, that we maximize the quality of the Tasty brand. So, there's not a lot of interchange yet between the plants. But it is a synergy that we will be addressing. We've already addressed it and it is a work in progress. But not to any great deal yet.

When that decision is made -- and I presume from what you said, it would be by the end of this calendar year or the first quarter of next year. I could be wrong, but that was my impression. What would that mean in terms of incremental profit margins?

We don't give that, but we feel like that will make things better and improve things. I just won't be specific into -- as you go down the road, we would like to share more on it. But it's like our bread business, you know how that works, as far as reciprocal baking?

Yes.

What that does for efficiencies and transportation and freshness to the market. All that plays into our business model. But what we are distinctly, positively on that we would never do anything to hurt quality of that brand. So, as we move, looking at products that go into, quote, a Flowers' plant, it will be the same recipe, same -- because Tasty has a distinct aspect of their business. Our quality is good too but sometimes quality versus quality can be different in taste. Tastykake has a distinct taste. So, whatever we change, we'll make -- it will still be a Tastykake and that quality of taste.

Nothing was said about putting the Tasty branded name onto bread or other non-cake products. Is there anything we can talk to in that respect?

Allen, you want to address that, please?

The Tastykake brand is obviously very much of a consumer icon brand. To be good stewards of that brand, we need to make sure we don't do anything to hurt the brand. At this point, we don't have any plans to extend the brand out of the cake category. I wouldn't rule that out, but if we ever do that, we would have enough consumer research under our belt to know that it would be beneficial for the brand and not hurt the brand. But at this point we don't have any plans to move Tasty past the products that you currently see.

Just two last questions. Question one, how many SKUs does Flowers have in all its brands today versus, let us say, 12 and 18 months ago? Going forward, is that number too high, too low, will you feel comfortable, et cetera?

David, we -- I always feel like we have too many? But what we would try to do is always please our customer and consumer. SKUs is always under surveillance in trying to limit, but, at the same time, take care of our customer and consumer base. I would say that on our normal DSD system that what would be new would become the additional SKUs of Tastykake. But I don't classify that is overwhelming or over significant.

Over time distributors find out what's really selling in the market. Over time they fine tune SKUs themselves, because they don't want anything that just sits. They want to see volume and they want to see it turn. So, that decision is a Company decision, but is also what's best to put the consumer and the customer in. More than anything, our independent distributors help us weed out anything that is not moving and help on the SKU in a rational approach.

The last question, if I may. If we look at the Company today by the core business units, bread, Warehouse, snack, et cetera, given the percentages that exist today -- and we're going to annualized the Tasty number -- looking forward 18, 24, 36 months, are we going to see major changes in those percentages given acquisitions, given growth patterns, et cetera?

In my prepared remarks I did say we were looking at growth. I wouldn't speculate on which one of them -- which of those come in. What we did say, when you've got a five-year target that's public -- that we're saying we are going to drive growth from 5% to 10% a year over the next five years, and half of that basically is organically and roughly half of it is in the acquisition pipeline.

Let me say thank you and wish you a great weekend.

Thank you, David.

Last question Tim Ramey of DA Davidson.

Thanks for the follow-up. I wanted to revisit the diesel question again. I'm sorry for beating a dead horse. But I just did a quick look back and I think over the past four years, your cumulative volume increase, excluding acquisitions, is 0.1%. You are forecasting flat for '12. So, that would bring five years of volume flat, excluding acquisitions. If volume is the thing that helps compensate route drivers for their rising diesel costs, how do we reconcile that?

Tim, what I would say is percentages in volume does not go to the bank. Dollars do. It's based on dollars. Our people are compensated based on dollar volume, dollar sales. We do a study every quarter looking at our independent distributors on new fuel costs -- just so we will know, versus our sales increases, and we are very comfortable with our position.

But haven't the sales increases over that four-year period largely gone to compensate the Company for input cost increases? Something has got to give, I would think, right? Or am I wrong on that?

The distributor's discount, Tim, is calculated based off of the dollar increase in the wholesale price. It's not just volume related. If there is pricing or mix in the equation, that also goes into the calculation for compensation to them.

I get that. But if the distributor compensation is driven off of a flow-through of price increase that is all about recovering commodity costs, that is margin pressure for you, right?

One other point to think about, if you look at a single territory and the miles driven, it's fairly, from a cost perspective and a cost increase, individually it would be fairly insignificant one-on-one. As George said, we have ways for the distributors to communicate back to the Company, and margin pressure from rising gas prices has not been at the top of their list.

Thank you.

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

Rob, thank you. I thank all of you for joining our call today and thank you for your continued interest. Again, I thank our Team for the outstanding job you do each and every day. We look forward to seeing all the analyst in Philadelphia on March 20. Thank you.