Flowers Foods Inc (FLO) 2012 Q3 法說會逐字稿

Welcome to the third-quarter 2012 Flowers Foods earnings conference call. My name is Lorraine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Marta Jones Turner, Executive Vice President of Corporate Relations. Please go ahead.

Thanks, Lorraine, and good morning, everyone. Our third-quarter results were released and the 10-Q was filed late yesterday. Both of those documents are available on our website if you need them. During the call today, we will use a PowerPoint presentation, and you can find that presentation on the Webcast Listen page.

As we begin the call, I must remind you that our presentation today may include forward-looking statements about Flowers Foods' 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 our business are detailed more fully in our SEC filings.

Participating on our call today, we have George Deese, Chairman and Chief Executive Officer; Allen Shiver, President; and Steve Kinsey, Executive Vice President and Chief Financial Officer. Of course, we'll open the call for your questions, after we've completed our prepared remarks.

Now, I'll turn the call over to George Deese.

Thank you, Marta. Good morning to each of you, and welcome to our third-quarter conference call. We thank you for your continued interest in Flowers Foods. Before I get into my comments, let me say that we know many of you were impacted by Hurricane Sandy, and of course, this week by the big northeaster. Our hope is that you and your families came through the storm safely, and that your families will soon return to some level of normalcy.

Before Steve and Allen discuss the quarter results, I want to comment on Flowers Foods from my perspective. At Flowers, we are very serious and focused against the long-term goals we set in 2011. To update our performance against those goals for quarter three, we delivered sales growth of 6.2%, that is well within our 5% to 10% range. Excluding one-time charges, EBITDA margins were 11.5%, and earnings per share increased 8.7%. EBITDA, of course, was within our 11% to 13%, and it was a little short of double digit on the earnings-per-share standpoint.

Another goal we set in 2011 was to have Flowers fresh products available to 75% of the US population by 2016. As you know, we closed on the Lepage acquisitions early in the third quarter. Two weeks ago, we announced our agreement with BBU and the DOJ to acquire the Sara Lee and Earthgrains brands for bread, rolls, and buns in California and the Earthgrains brand in the Oklahoma City market. Allen will give you more details about this acquisition in his presentation. With these additions, I am happy to report that in 2013, we will surpass our goal of reaching 75% of the US population.

Over the long term, our goal is to deliver double-digit earnings growth. Our earnings remain under pressure from elevated commodity costs, and volume is soft as consumers remain constrained due to the economy. The result has been a highly competitive promotional marketplace.

Our management team continuously focuses on these highly elevated and volatile grain prices. We will continue to monitor our industry consolidation and participate when an acquisition can add to our strength and reward our shareholders.

Even though there will always be some short-term issue, I believe Flowers Foods will achieve our long-term growth targets. From our number-two position in the fresh baked foods category, we have the potential to grow sales in our newer markets with acquisitions, opportunities to partner with our key retail and foodservice customers, and grow in our core markets as we gain sales in underdeveloped categories. We have the operational strengths, experienced team, and proven strategies that have allowed us to deliver in the past. That gives me full confidence that we will achieve our long-term goals in the future.

Now, I will turn the mic over to Steve Kinsey for our financial performance.

Thank you, George, and good morning, everyone.

Net sales increased $42 million, or 6.2% in the quarter. The majority of this growth came from the Lepage acquisition, which contributed approximately 5.8% to the quarter. The core business contributed 0.4% on positive price mix, offset by negative volumes. The price mix improved on a strong mix performance. Overall, pricing was a challenge due to high promotional activity quarter over quarter. Declines in volume were driven primarily by warehouse cake as well as volume declines in contract manufacturing.

Our GAAP earnings per share were $0.22 this quarter, compared to $0.23 per share in the third quarter of last year. Excluding the impact of one-time costs related to the Lepage acquisition, earnings per share were $0.25 this quarter, an increase of 8.7% over the third quarter last year. Lepage contributed just over $0.01 to the quarter, excluding the one-time costs.

Impacting earnings per share in the quarter was the heavy promotional activity, higher interest expense related to the April 2012 public debt issuance, and an increase in shares outstanding as the result of the Lepage acquisition.

Operating earnings in the quarter, excluding the one-time costs, were up approximately 19.2% this quarter over last year's third quarter, driven primarily by the impact of the earnings from the Lepage acquisition. Operating margin, excluding one-time costs, was 8% of sales, compared to 7.2% in last year's third quarter.

Gross margin in the quarter, as a percent of sales, increased 80 basis points to 46.7%. This improvement was driven by an overall production efficiency gains quarter-over-quarter, a sales mix improvement in the core business, as well as through the Lepage acquisition. Lepage contributed roughly 50 basis points, as a percent of sales, to the improvement. These positive factors were somewhat offset by margin declines as a result of the pressure on pricing.

Input costs, which we define as ingredients, packaging, and natural gas, were relatively flat this quarter over last year's third quarter, excluding the acquisition costs. SD&A expenses, as a percent of sales, excluding one-time costs in both years, were relatively flat.

Now, turning to cash flow. Cash provided by operations was a positive $55 million in the third quarter, up approximately $27 million over last year's third quarter. Year to date, cash provided by operations is $183 million, up roughly $90 million over the prior year three quarters -- I'm sorry, over the prior year through three quarters. This improvement reflects a significant reduction between 2011 and 2012 in the use of cash required to fund hedge margins.

Capital expenditures during the quarter were $20 million, and we still anticipate spending approximately $75 million to $85 million for the full year 2012. We paid dividends of $22 million in the quarter, and opportunistically repurchased $12 million in Company stock during the quarter to partially offset the dilutive effect of share-based compensation.

The $99 million of net debt in the quarter was primarily the result of completing the Lepage acquisition. You may recall, we paid down our revolver in April with proceeds from the public debt issuance; therefore, we had to make a draw on the revolver to fund the final closing of the transaction during the third quarter. We are forecasting continued strong operating cash flow for 2012.

Let me conclude by updating the 2012 outlook. We continue to anticipate an increase in net sales of approximately 7% to 9%, and we are tracking on the mid-to-high end of this range. We did tighten the earnings per share range, and now anticipate 3.5% to 5% earnings-per-share growth, compared to the 3.5% to 8% previously provided. However, as we guided on the second quarter call, we are tracking on the lower end of the earnings per share range, and nothing has changed with respect to those expectations.

Beginning in the second quarter of this year, we began to see significant changes in the competitive environment through strong promotional activity. That continued and increased in the third quarter.

However, as Allen will discuss in a moment, we have initiated pricing actions in the fourth quarter. Though these pricing actions will provide incremental benefit in the fourth quarter of 2012, the full benefit will not be realized until the first quarter of 2013.

We are not prepared to discuss full-year 2013 guidance today, however, the pricing actions taken in the quarter are expected to cover the first half of 2013, provided there are no significant moves in our major input-cost projections.

Thank you for your interest. And now, I will turn the call over to Allen.

Good morning, and thank you, Steve.

Before I talk about the quarter, I want to thank our team members throughout the Mid Atlantic and Northeast for their extraordinary efforts before, and following, the recent storms. Our team is simply the best at serving customers every day in the marketplace and even more so when dramatic weather occurs.

As Steve pointed out, our results for the quarter showed top-line strength due to our acquisitions, but pressures from a very competitive marketplace resulted in a high level of promotional activity that impacted our bottom line. Even so, I am optimistic about the future.

Our team has begun taking pricing to address the higher costs that we face in 2013. In addition to the increased pricing, we are reducing the frequency and the depth of our promotional activity.

In the quarter, our expansion markets delivered sales within our goal of 0.5% to 1% of our total sales increase. In our newest markets for fresh bread, such as Philadelphia and Pittsburgh, we are steadily growing our market presence as consumers in those areas try Nature's Own.

As expected, new products performed in line with our goal to contribute 3% to 5% to sales. Tastykake sales in Flowers DSD core territories continued to grow in the quarter. We see great growth potential for Tastykake in our core markets as consumer acceptance of the brand continues to grow.

Since September 2011, we have introduced the brand in Flowers territories throughout the South and the Southwest. Today, Tastykake is available in 70% of ACV, compared to our Nature's Own brand, which has a 97% ACV in the South Census Region. We continue to gain space for Tastykake, and we certainly have plenty of room to grow our share in the $4 billion cake category.

From an operations standpoint, our bakeries, once again, showed year-over-year improvements in productivity. Our team continues to focus on manufacturing efficiencies, quality improvements, and sustainability initiatives. I am so proud of our team's achievement. It takes keen focus, hard work, constant attention to detail, and the right investments in technology and support equipment; but most important, it takes an experienced team to consistently achieve those results. We continue to reap the benefits of these long-term investments.

Construction of our new bread line at our Oxford, Pennsylvania bakery is going according to plan, and we are scheduled to begin bread production in Oxford by late Spring 2013. Let's look at the marketplace and how our category performed. The new data reported by IRI now captures 91% of Flowers retail fresh bread sales and 66% of Flowers retail cake sales. As you will remember, IRI now captures Wal-Mart, other mass merchandisers, dollar stores, drug stores, and club stores.

In the quarter, the fresh bakery category experienced a 1.4% decline in units in the South market and a 2.1% decline in units for the total US. Dollar sales in the category were down 1.1% in the South and 2.5% in the total US.

We are pleased to report that Flowers-branded units outperformed the market. Our units were up 1.5% in the South and up 2.3% in the total US. Our dollar sales were up 0.7% in the South and up 1.1% in the total US. Our internal data shows that Nature's Own soft variety breads performed even better with units up 4.9% and dollars up 4.6%.

Consumers continued to seek products that offer a better health and nutrition profile. Nature's Own has always been positioned for that consumer, and new items that we introduce under Nature's Own must fit that brand profile. As we've told you before, Nature's Own is the best-selling branded loaf bread in the country, and our goal is to continue growing this brand in our core and in our new markets.

Moving back to the IRI data, Flowers gained share in both dollars and units in the South, moving to 25.9 share of dollars and 21.9 unit share. Similar increases in our market share were achieved in the total US, where we hold a 10.9 share of dollars and a 9.7 share of units.

Our total foodservice business, which includes DSD and warehouse, was up 8.6% in the quarter. Foodservice industry projections continue to call for approximately 4% growth in 2012. We continue to be optimistic about the growth of our foodservice business.

Although our warehouse foodservice business performed well in the quarter, those higher sales were offset by lower sales in our warehouse cake business. We are keenly focused on achieving better margins for that business by exiting lower-margin contract business and moving steadily to higher-margin retail business.

We are also very pleased with the Lepage acquisition, which was completed at the beginning of the third quarter. Sales and earnings are tracking on plan and our integration is going smoothly. Lepage brings us new markets in the Northeast, new products, three efficient bakeries, and a very talented team.

On the news front for the quarter, we are introducing Tastykake and Nature's Own in the Northeast through Lepage. Tastykake helps fill a void in the Lepage product line. Nature's Own, as the nation's best-selling bread brand with a healthier-for-you profile, also complements the Lepage product line. We believe both Tastykake and Nature's Own will be well received by consumers in the Northeast.

Other news in the quarter. We have introduced Tastykake Kandy Bar Kakes with Hershey's Chocolate. They come in three varieties, Peanut Butter, made with Reese's Peanut Butter Cups; S'mores, made with Hershey's Cocoa; and Peppermint, made with York Peppermint Patties. We hope you have discovered these new products in local stores. They really are a delicious addition to our Tastykake line up.

Now, I'd like to talk about the Sara Lee and Earthgrains acquisition in California and Oklahoma City. From a strategics viewpoint, this acquisition strengthens our position as one of the country's highest population states. It also enhances our position as the second-largest baker in the country.

You will remember that we entered Southern California with a very small presence when we acquired Wholesome Phoenix in 2008. Since then, we have been growing our business and currently have approximately 1.7 to 1.8 market share in California. With Sara Lee and Earthgrains sales added to our existing California business, we will have an 11 to 12 share of the California market.

We are acquiring $134 million in sales in California and about $1 million in the Oklahoma City area.

Throughout the transaction, we will be gaining access to new customers throughout California. Adding Sara Lee and Earthgrains to our product offering in California will strengthen our product mix and give us a solid platform from which to grow. Our purchase price is $50 million for the roughly $135 million in sales. This is an asset-only purchase. We will not assume any liabilities.

We are acquiring the exclusive perpetual and royalty-free license to the Sara Lee and Earthgrains fresh bread brands in California. That does not include bagels or English muffins. We also have the license for the Earthgrains brand for fresh bread in the Oklahoma City market. As part of the acquisition, we also get a closed bakery in Stockton, California. We plan to fund the transaction with cash on hand and existing bank facilities. We expect the transaction to be slightly accretive to 2013 earnings, excluding acquisition and start-up costs. In 2014, we expect the new business to contribute to earnings.

As for the timing, the Oklahoma business will transfer to Flowers before the end of 2012. The timing for the California business is a little more complicated. We expect to complete the transaction for the California brands and business in late February. On that closing date, as phase one, we will begin distributing Sara Lee and Earthgrains throughout Southern California using our distribution model.

As we expand our distribution system, we will take on part of the Northern California business by early May as phase two, and then the remainder of the state by midsummer with our phase three. Under the transaction, BBU will supply product for up to 18 months.

Today, we are serving Southern California from our Arizona bakeries. In the future, we plan to build a new bakery to serve Southern California. For Northern California, we are evaluating our supply options for the longer term. The map shows that when the California acquisition is completed, our DSD territory will reach across the country.

The Lepage acquisition sets our course for growth throughout the Northeast markets. Likewise, the Sara Lee acquisition in California gives us a platform to build sales in the densely populated West Coast. As always, our goal is to grow sales and earnings and to improve margins. We will do that by taking and holding pricing, improving our cost structure, and successfully integrating Lepage and our new California acquisitions.

Thank you for your attention. I will now turn the program back to George.

Thank you, Allen and Steve, for your comments.

Before we open the call for your questions, I want to say that as I look at our team's accomplishments, I am so proud of how we have grown our geographic footprint for our fresh-baked foods. In 2004, our fresh products were available to about 38% of the US population through our DSD network. When we complete the Sara Lee California acquisition, more than 75% of consumers will have access to our fresh products.

The broader footprint is a wonderful growth platform for decades ahead, as we meet the needs of our customers and consumers, and as we increase our penetration in newer markets. It also allows us to grow profitably since our infrastructure in those markets is in place. Of course, our team will add production lines and distribution network, as needed, to support our growth.

We also will continue to expand our geographic reach with future acquisitions and by expanding into new territories. Our expanded market access puts us in good position to build value for our shareholders over time, as we steadily grow our sales and earnings.

Now, Lorraine, we will open the line for questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Farha Aslam, Stephens.

Hostess is having some labor issues. Have any retailers started to hedge their bets and changed order patterns and shifted towards Flowers in this period of uncertainty?

Farha, I'd say that I wouldn't say anything is really unusual. I think some customers always have some apprehension about what's going on in the marketplace. They will make their decisions as we continue to go down the road, them and the consumer, about what's going on in that market.

Okay. So, no major benefits in this quarter, or anticipated in the fourth quarter in your guidance?

I would say not.

Okay. Then, in terms of private label, have you seen any change in pricing? And, as wheat costs have gone up, do you anticipate they will take that pricing as well?

I'd say we've seen some spotted pricing all over the country on not only private label, but brand. As Allen mentioned in his comments, we're certainly moving forward with our pricing structure and feel very good about where we are with that prospect.

Okay. Then, one final question if I could. On the acquired business, do you see significant margin enhancement opportunities, in terms of -- could you give us some color on what the margins are in that business? And, what are the opportunities to improve them and get them to Flowers' average margins?

I'll make a quick comment, and I'll let Allen, certainly, follow-up on that. He's been on the ground out there a lot more than I have.

What I would say is, what we're acquiring is strictly a branded business, with a branded business should come better margins. There will -- as Steve mentioned and Allen mentioned, you will have some start-up costs and things. But we are acquiring that brand and should have, certainly equal to our margins, and hopefully, better as we grow the business there.

Probably just add the California marketplace is an exciting marketplace. It's very vibrant from a retail standpoint, so one of our objectives is to bring our overall market share in California up to our standards in the rest of the Company.

Also, from a margin standpoint, we would have the same goal to bring that up to standards in the rest of the Company, so we're excited about the opportunity on the West Coast.

Farha, I'll follow-up with one more comment, also, in that Sara Lee has a good market share in that market. But we're really excited about what Nature's Own can do throughout the north -- not only the south market, but the north market as we go down the road. That's one of the excitements we're seeing, our footprint expand, is getting Nature's Own into the hands of more people and really displaying it, merchandising it, selling it to our customers and consumers on a broader platform.

Perfect. Thank you so much for your answers.

Heather Jones, BB&T Capital Markets.

I just want to say those Kandy Kakes are amazing (laughter); they are phenomenal.

Thank you. I stayed up all night making them (laughter) --

Honestly, they are too phenomenal, so anyway --

Thank you.

First, on warehouse pricing, there was a big acceleration this quarter from prior quarters. And, you talked about declines in your warehouse cake business. So, was just wondering is that price acceleration, is that a function of a mix or have you already begun to institute more aggressive price increases there?

Heather, this is Steve. When you look at the price mix in warehouse, pricing was up, but there was a big mix improvement in warehouse as well.

Okay, so there's a timing of price increases in warehouse. Is that going to be similar to the timing in DSD?

Yes.

Okay, and I wanted to confirm you were talking about the phase one, phase two, and phase three and the California rollout. I wanted to confirm that you only plan to use your IO model of, hopefully, the entire area?

Heather, that is the fact. We are very happy with our distribution model, and we currently have our IO structure in Southern California, and that is our plan moving forward.

Okay. My final question, George, you talked about your long-term targets, you were affirming those. And as we look to 2013, as you all mentioned, we're going to need further price increases and wheat has moved higher again in the last two or three weeks. And yet, we're -- we have an issue with consumer fatigue here in the US. And I'm just wondering, you talk about long term, and I've asked this before, and just wondering when you look at 2013 -- I know it's premature to give guidance -- but do you believe that you're going to be able to achieve your long-term growth targets in 2013? Or, given this environment, you're adhering to that for the long term, but 2013 may fall short?

It's too early to go out on a limb on the guidance. What I would say, though, I feel better about 2013. And, Allen did say we'd have some start-up costs and things in California, but I feel that the marketplace has improved. I know that we've seen evidence of pricing through our customers as we also are initiating pricing, and Allen pointed out, less promotion.

I will agree there is some fatigue, but I guess I feel better about going into the year, this year, 2013, in regard to the overall marketplace. I think when we have high costs like we are having, things seem to adjust. And, if you look back historically, we've had some of our better years when we did have higher commodity cost.

Is it fair for me to characterize as you feel better about, now, going into 2013 than you did going into 2012 when wheat was falling off?

Yes, I know I'm an optimistic person, so I have to be careful when I say this. I always look forward to ending the year and starting the year because you start out fresh. And with the plans we have in place, I feel very good about '13.

Okay, that's good to hear. Thank you very much.

Eric Katzman, Deutsche Bank.

I guess a couple of questions. First, can you say how much the price increase is going into -- in bread, going into 2013?

Eric, we're looking 4% to 6%. And again, it depends on the area, but in general, 4% to 6%.

Good morning, Allen, thank you.

Good morning.

Then, I guess what is -- given your acquisitions, now, that you've made -- congratulations on those. Can you just -- and given the Bimbo and their acquisition of Sara Lee, previously, and Hostess has to be losing some share. Can you frame, roughly, where your national share is in fresh bread and rolls? And, how that compares to the competition?

I will. As we have talked about numerous times, in the South, we're in that -- when you look at branded, we're in that 25%, 26% neighborhood. When you add private label to it, we say we're 33% to 35%. When you look nationally, we're about 11%. When you add the Lepage situation, that has -- and Allen mentioned, our low presence in California, so we should see that go up next year.

I'd say that -- and, that's why I wanted to emphasize in my closing comments about the footprint and the format that we have. Being the second baker in the nation, and hearing from our customers throughout the United States, we've tried to get that footprint where the people are. There's still a few areas to go, but in the main. We'd say at the end of next year we'll be serving over 75% at the US population.

Now, what gives so much courage and confidence to me, Eric, is that we have low penetration, very low penetration, in some of those newer markets that we've entered in the past two or three years. And as we -- in each year you get better.

So as I look out -- and that's why I said, I feel like decades to come. I won't go out on four or five decades. But, as I think about the next decade, and as we get stronger in those markets that we are weak in. As we grow in the categories that we are weak in our core markets, it gives me complete confidence that in our low cost manufacturing processes, our business model from distribution standpoint, it just gives me complete confidence that with these brands, with Nature's Own and with whatever local white-bread brand we're using is always popular, as well as Tastykake. Allen commented how that is growing in our core markets -- non core to Tasty, because it wasn't here but core to our older Company in that seeing growth in the Georgia and Alabama, Florida, et cetera. Given this platform, there's absolutely no reason in my mind that we can't continue to enhance our positions throughout the United States and be very successful as the number-two baker in the nation.

I hope that answers your question.

Well it does in part. But, where do you see Hostess today, relative to your 11%-plus, and where is Bimbo?

Okay, Bimbo, as I look at IRI, they are roughly 30%, 31%, versus our 11%. If I'm not mistaken, and I can be corrected, I think Hostess is probably in the 7% to 8% -- according to IRI, not according to our numbers. Somewhere in that neighborhood.

Eric, on our fact sheet we have that broken out, and we can follow back up off -- what we've done in our presentations in the past, we can share with you.

Great. George and Allen, to the extent that you are leading pricing 4% to 6%, we've all been waiting for the industry consolidation -- which is why I was asking about the market share data. We've all been waiting for the consolidation to make the playing field more rational. And I guess it sounds like it may be getting a little better but, do you see, George and Allen, enough like that -- so, your top three is close to 50% -- is that enough in your view, or --?

(Multiple speakers) I'd say, when you think about the top three, everybody certainly has pressures. Everybody has got margin compression, as you look at it. I think the evidence is already out there that people have taken some action. We are certainly, in the market, taking our pricing, and then you look at the other 50%, they've got the same pressures. So, normally, I think you'll see that.

Let me go back, Steve Kinsey did hand to me the latest IRI, and let me follow back up. Our 11% was true. I think I said 31% on BBU, it's actually 32%. And, I was right on Hostess with about 7%. In fact, it's 6.9% the latest recap.

Okay. All right, I appreciate it, and I'll pass it on.

Mitch Pinheiro, Janney Capital Markets.

With the continued volume declines in the category, how do you see volumes reacting to you, and Bimbo, and maybe others taking pricing higher?

Mitch the category has continued to trend down for the last, we're looking at three almost going on four years now, but at the same time, it's still -- we remind each quarter that it's an extremely large category that's very important to the retail operators.

So, in terms of the overall category, we still are very positive that this is a category that we can grow our Company in by increasing our share. There are activities, whether it's the Grain Foods Foundation and other industry activities that, hopefully, will be putting the category in a more positive light from a consumer standpoint.

At the same time, if you look at the economics of feeding a family, the fresh bakery category offers a consumer a lot of very cost-effective solutions. So long-term, we are very optimistic about, hopefully, getting the category back on a growth mode; but if that doesn't happen, the category is large enough that we can continue to grow our Company simply by taking share of this huge category.

How about pricing? Are you taking pricing up on private label?

Mitch, we're taking pricing in every part of our business. I think you've seen the commodities situation, commodities have remained high, and when that happens pricing is necessary. We are also looking, as we mentioned, we are looking very hard at reducing the depth of our promotion activity, which is also a big component of pricing. So, the answer to your question would be yes.

Looking at Tastykake, can you provide any color on the type of revenue growth Tastykake has had since you've acquired the business?

We have not been specific on that, Mitch, but we have had growth. The biggest growth, of course, is coming outside of their core market. That's where the growth really is going on.

Are you seeing, given their new facility, and obviously, with ample capacity, are you seeing margins in that business, commodities aside, improve?

You broke up for a minute, Mitch. Would you mind repeating that?

Are you seeing margins in that business -- specifically, they had this new facility with ample capacity, and the whole idea was, you fill it up with volume and incremental margins are strong. Are you seeing that happen in the Tastykake business?

I would say we are seeing that. I've said repeatedly, as we sell more in their non-core markets that helps their overall cost structure for their own market in their core market. So, that is playing out like we thought it would. And, I feel like we are right on track with our forecast that we had put out front before and continuing to grow outside of that market. And, that will continue -- should continue to enhance those margins as we fill up the plant.

Did I understand the number right, where your Tastykake is at 70% ACV in the South? Is that right?

Yes, that's correct.

How much of that space -- we've talked about this before, how much of that space is permanent, as opposed to freestanding displays, temporary space?

Mitch, I would say the majority of our sales growth is from space that is permanent. Of course, we had our Blue Bird brand was on the routes prior to Tastykake, so if there has been any conversion, it's been conversion from Blue Bird to Tasty, but that conversion is at higher retails and better margins.

So, I would say we have done a good job growing permanent space, and we have also generated a lot of excitement with our independent distributer system about having a brand like Tastykake, so that entire program is really working well.

Have you seen velocity in those retailers that you've been in for nearly a year with Tastykake, are you seeing velocities increase, or can you talk about that a bit?

We continue, of course, the Tastykake brand extremely well known in the Northeast. As we grow the awareness of the Tastykake brand in the South and the Southwest, we're seeing the type of incremental sales go with that, so it's encouraging. It won't happen overnight, but we are encouraged about the overall growth trend on Tastykake as we've expanded it across the Company.

Okay, thanks. A couple more questions. Where do you stand with the Oxford, Pennsylvania plant expansion?

Mitch, as we mentioned in the comments, we'll be producing bread late spring of 2013. That project is -- the addition to the bread line in Oxford is well underway. Fortunately, our construction project weathered the storm well, and we're on track to be producing bread, like I said, end of spring of '13.

Okay. Last question is -- some certainly aware one of your competitors testing gluten free on a fresh-delivery basis. I was wondering where you were on that, and if you had any plans you could share?

Mitch, I don't want to give away all of our new product plans; but as you know, we tested gluten free about two years ago in the Atlanta market fresh delivery and discontinued the test. But quite frankly, with the current consumer trends, we're looking at it again. We don't have any firm plans today to enter into another market test, but it is certainly a consumer trend that's very high on the radar, and we're trying to determine the appropriate next step. So, we're focused on gluten free.

Okay, thank you very much.

Tim Ramey, DA Davidson.

First, a question about the transition in California. It sounds like that Stockton facility closes next week, but you've got a supply agreement -- what I'm concerned about is, what steps have you taken to preserve the sales and market share as you transition to this, late in 2013, for Northern California?

Tim, Allen did say in his opening comments that we do have an 18-month guaranteed supply from BBU and also mentioned about Southern California, with possibly a new plant as well as continue to make steady the northern part. And we, of course, still have -- which we've been supplying in the South out of Phoenix and Tolleson plants, so we still have a lot of options. I know Bimbo, BBU has protected the Sara Lee brand in California, and we expect that to continue, until we get our distribution in place and make the transition. So, we feel good about it.

Tim, this is Steve. We can't discuss the specifics of the contract. But contractually, there are some things in there to make sure that the brand and the sales are protected.

Great. I think you said, Allen, that you'd be using your distribution system. You didn't reference, specifically, any trucks or distribution assets. Is that right, it's -- the only real physical asset is the Stockton facility?

And the brand, as we mentioned.

Yes. Okay. Then, in your IRI discussion, you cited some things that are up but I think, year to date, volume is up only 0.2%. What in the DSD category wasn't working well for you from a market-share perspective?

Tim, I wouldn't say that anything was not working well. You start out with a category that's trending down. And, I think if you look at the performance of our brands, relative to competitive brands, and then relative to the growth of the category, I think we performed okay.

With all of the promotional activity in feature pricing, as you look at the quarter, that generates a lot of churn in short-term churn within the category levels of each individual company. So, I don't look at last quarter as a disappointment in terms of share.

I do feel like that going forward, we should expect our shares to continue to, in mature markets, to continue to have some fluctuation with the category. But as George mentioned earlier, the big opportunity for us is in new markets and underdeveloped markets, where our share is low because we haven't been there very long. The big opportunity is to grow our share in those new markets, which will bring the overall share number up. So, I'm not disappointed, I'm encouraged.

George, just back to your long-term targets, which you reiterated is double-digit EPS growth, there are very few companies in the food sector that hold that sort of a target anymore, and most of them have categories that are not secular decline, as we see the DSD bread system. You haven't really been able to do that. It's been four years of right around $1 of EPS.

Sometimes, the target itself can incentivize behavior that's maybe not constructive to long-term delivery versus delivery of goals. I certainly saw that with Sara Lee.

What are your thoughts about the level of target, and the achievability of the target, in a category that's not doing that well, and you're getting to be a bigger share of it. You now have 77%, I guess reach, you said?

Yes, good point. Tim, what I would say, last quarter, excluding one-time costs, we were at 11.4%, which is within our 11% to 13% range from the EBITDA standpoint. I would say, even in the tough times during these past three or four years, we've been in the 11% to down to 10%-ish. We're not back to the 7%s of yesteryear, so I guess that's what gives me courage. We are right on the brink of getting back in that 11%. As you well know, we had the 10% to 12%, and we moved it 11% to 13% in 2011.

So, what gives that to me is, knowing how underdeveloped and some margins in certain parts of the country is not what it will be once we get Nature's Own and our Tasty business up to a standard that we are pleased with, so I guess -- it would be easy for me to drop our goal. I don't think it's prudent, based on where we are.

In the longer pool, if we are not successful, we would have to make some adjustments. This is a five-year goal, and as I stated just this quarter that we're ending, in spite of all of the difficulties, we still generated 11.4%, I believe. So, that's what gives me courage to hang with it at this point.

Okay, thanks.

Akshay Jagdale, KeyBanc Capital.

George, just wanted to talk about the volume trends. If you look at your volume decline, it's probably worst, at least in my model, going back five years. And, I saw your presentation, obviously, it's -- you're talking about a lot of positives and a lot of market share gains. I know a lot the decline this quarter came from warehouse.

But as a Company, one of the better companies in the bakery space, why isn't that concerning to have a major volume decline? So, can you talk about -- maybe get into a little more details about why it's not something you're highlighting in your presentation? Because, that's something that just popped out to me as an analyst.

I would say a couple things, and then I'll let Allen follow-up, and Steve, on the volume component. I would say there's always moving parts in any given time or quarter. I would remind us all, though, we've been in four years of pretty tough circumstances in the United States. We have also been pretty compressed in the baking industry, so volume has been tough.

In spite of that, we are still standing, and I feel good about our position. Also, we talked about, we're trying to improve those margins, so there's times we might give up in some business, some customer that we don't have the margins that we expect, and that does affect volumes at certain times.

All in all, I feel like we've performed real well in the past four years, given all the circumstances in the world. We're always concerned when we're not moving more volume. I created our team for, even though volume has been flat to down, we still been able to achieve pretty respectable results. Are we 100% pleased? Maybe not on the final result, but given the circumstances, I'd say we've been pretty well pleased with it. Steve any -- Allen, any follow-up on the volume question?

Akshay, just looking back as a reminder, the category, as far as units, were down 2.1% total US. Our Flowers-branded growth was up 2.3% for the quarter. As I mentioned, if you look at our internal data, our Nature's Own brand really had a good quarter up 4.9% in units and 4.6% in dollars. We can always do better, but I think if you look at our core business, it was a pretty good quarter in terms of volume.

I did mention that our warehouse foodservice business was showing improvement, and we've got work to do in our warehouse cake business to not only address volume, but really to address margins as well. And, we're working very hard on our warehouse cake business.

So overall, I think you have to look at all of the different components of volume. Overall, it was a pretty good quarter, relative to the category.

Where do you stand with the warehouse cake business? I mean, we've been in this stage that you mentioned. I thought we had stabilized in terms of margin and volume, but it looks like we took another step down. Is that a fair assessment? Or, can you help me understand where we are with it?

I mean, a couple of years ago you added some lines, your volumes were doing really well, and we got this price -- cost increase, which didn't go through, volumes started to decline. They seem to have had stabilized, but this quarter it seemed like it worsened. But, just give me a little bit more perspective on where you are on the warehouse business.

Akshay, before I talk about warehouse cake, I think it's -- looking at the -- from a marketing standpoint, the Tastykake example shows that the consumers are willing to pay a higher price for cake products that are more unique and have, really, a point of difference. That learning is really spilling over to our warehouse cake business. We're looking not only at volume, but we're also looking at how can we develop new items that can generate a higher price point and also better margins.

We're also looking at the categories in which we sell warehouse cake, and we are really focused -- rather than being focused on, we'll say co-packing or private label, we're focused on how can we generate additional sales in warehouse cake with the Mrs. Freshley's brand. We are currently rolling out an enhancement to Mrs. Freshly, co-branding with Cinnabon. Again, looking at how can we generate more revenue and also better margins.

We are not at the point that we're seeing results in warehouse cake, but I feel like we have a good plan and that we're headed in the right direction. And, our warehouse cake is benefiting from some of the marketing learnings that we're observing from Tastykake.

That's helpful. George, just on -- I guess for anyone, but mainly George, gaining share profitably in this category in light of the weakness on the volume side overall, high commodity costs and overcapacity in the industry has been challenging, right? Would you agree that you haven't been able to gain share in your core business profitably? So, that's the first question.

Second, how can you, going forward, feel confident that you're going to be able to do that? What do we need to look for as an inflection point to see -- okay fine, that is industry. The profit pool in the industry is actually starting to expand again?

Well, I'll go back to our customer base, our customers want us to grow, want us to be in a bigger footprint. I feel like we will continue to get assistance from them to help us grow. I feel like we have the brand that helps us grow.

Nature's Own and Tastykake has wonderful position in the marketplace. Quite opposite from one another, of course. But, those brands do contribute a lot to the Company, and we feel like it will continue to grow as it did this past quarter in a very difficult environment.

As I look at it, also, the baking industry, in general, and say there will be continued tough markets, but we have been able to display over time that with our business model, with our brands, with our people, that we can get the job done.

And, I said in my wrap up, I have full confidence that we can do it in the future. Can I point you to one specific place? I'd point back to our people, our efficiency, our know how, our workability, our passion for the business is all there to make this a successful venture going forward, as it has been in the past.

So, I look back at the history of the Company, there's always sometimes we've flatlined, but it didn't flatline forever. And, things and events happened that put us on another plateau, and I'm using history as a guide. But more than just past, is understanding the marketplace and what these brands can contribute as we grow the marketplace. And as the marketplace in the competitive landscape shrinks some more, I feel very comfortable with it.

One last one for Steve on inflation, are you still at the 6% to 9% for 2012, is that still the right number? And, given your comments on pricing 4% to 6%, looks like inflation in '13 might be similar range?

Akshay, when you look at 2012, the 6% to 9% guidance is still there; and as we have said on the last call, around the lower end of that range. And then looking out into '13, the forecast would be low to mid digit increase, which is in line with the pricing.

Low to mid-single digit you mean, right?

Yes.

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

Bill Chappell, SunTrust.

A few questions on the Sara Lee acquisition, just want to make sure if my math is right. If it's similar EBITDA margins and $135 million revenue base, you paid about 3.5 times EBITDA for the business, and with your financing that would make it about $0.05 accretive on a full-year basis. Does that sound right?

Bill, when you get -- once we get past the start up in 2013 and move beyond that in 2014, I would say your estimate is in line.

Okay, great. Then, just trying to understand the health of that business, I guess the Sara Lee Bimbo deal closed almost one year ago. So, you could make a case that Sara Lee didn't have firm management on it before then, and you're not going to actually close, or really have your hands on it for another six months. So, what gets you comfortable that the operating business will continue to move forward, or there won't be a big transition period? And, maybe you can give an update on what sales trends have been there over the past 12 months?

What I would say is we have, in our contract, some provisions that we feel like the brand has been taken care of. I feel like there are things in place that would prevent any erosion of that brand, at least some consequences. So, I don't -- it's not to our competitors advantage to also let that brand go down because it could affect their thought on the rest of the part of the nation, so I don't expect to see them just take all consciousness off of this brand.

We have some -- we've some slippage there, as we've seen all over the United States, not on their brand, but bread in general. I'd say it's been pretty well in keeping with the trends of the industry.

Bill, this is Allen. I would just comment that the Sara Lee brand in California is a very strong brand, especially in the white-bread segment, which is still a very significant piece of the business in California.

The other point is that if you look at the different phases, a significant portion of the sales comes in phase one, which is in that end of February period, so that also gives us comfort that we'll have control over the sales, the majority of the sales, relatively quickly.

Okay, thanks. Last one, maybe understanding now that you're at 75% coverage of the US, does your look in terms of buy versus build change in terms of filling in some of the gaps? I know some of the acquisitions are -- opportunities are pretty lumpy when they bounce up, but it seems from here on out it makes more sense to devote your cash towards -- be it share repurchase or dividends or other things?

I won't say I disagree with you. I think I do agree to a certain extent. We always continue to monitor, and I said -- and, I made a point of making that in my comment to say, we're still interested acquisitions as long as it strengthens us. More importantly, what it does for our shareholder. So, I'd preface that in that comment, if an acquisition -- we've always led at it this way, if it helps us operationally, but more importantly, we find a financial arrangement to have an acquisition, and as to that rewarding our shareholder, well then, we'd look at it and go forward. I would say, this puts us at a different level, and now covering 75% of the US market, it puts us in a great position as we go forward, whether it's acquisitions, or as we build our brands, or build Greenfield plants, it just puts us that much stronger in whatever we're doing.

Great, thank you.

Amit Sharma, BMO Capital Markets.

Steve, just wanted to ask about the promotional activity, or maybe, Allen. Are other competitors following you in reducing the depth and frequency promotions, or have you seen indication that they are going to follow you?

It's a different story from one market to the next. But I would say in general, we are seeing category move upward both everyday pricing, and a slight reduction in promotional activity; but again, it's very much of a market-by-market situation.

Promotional -- high-promotional environment still continues to be a zero sum game. You're not really seeing overall lift in volumes across the entire category, are you?

No, I think we've said in the past, this is the category is relatively inelastic, so a lot of pricing churn simply moves volume temporarily. I think the key here is develop products that have the quality and new items that have consumer interest where your building long-term brand loyalty. We have said the category is inelastic, and excessive pricing simply creates short-term churn.

Got it. Then finally, in California, the South -- the new bakery in South California, should we expect that to be around $50 million to $60 million CapEx, or is it going to be more?

We are early in the planning stage and really not in position to disclose that at this point.

Okay, great. That's all I have, thank you.

Ann Gurkin, Davenport.

I wanted to circle back on the wholesale business -- warehouse business and the lower volume. Can you help me think how I should position that volume as we look out the next 12 months? Is any of that business you're walking away from because it's not meeting targets, or can you help me understand that a little bit?

Yes, and I did mention earlier that we're focused on improving margins in our warehouse cake business. There were several situations where we did part ways with some business. I think the focus on warehouse cake, as I mentioned earlier, is developing points of difference with our Mrs. Freshley's brand to, over time, generate a higher ring. At the same time, we are seeing some positive points growing in the retail grocery channel with Mrs. Freshley's in the warehouse side. So, I don't think it will be a dramatic turnaround as we look at the quarters ahead, but I do feel like we have a solid plan to improve the -- not only our margins, but with time, the sales number as well.

Okay, great. Then, with respect to Lepage, it was very impressive to see that contribution in the quarter. Is that integration proceeding as expected and contribution in line with expectations?

We are excited about Lepage. We're right on track from an integration standpoint. The team is doing a wonderful job, and everything is very positive with Lepage.

If you look at the past week or so, dealing with the storm, not only the Lepage group, but also looking at our Philadelphia group, and the whole team in the Northeast really came together as one Company to take care of the marketplace. And, we're getting a lot of positive comments from our retail customers about how the team performed, so we're very excited about Lepage.

That's great. Thank you very much.

Lorraine, I think you said that was the last question, so we'll take that as that's it, is that correct?

Mr. Deese, do you have any final remarks at this time?

I want to thank everyone for joining us today and hope you continue to get straightened out with the weather and events in the Northeast and look forward to our next call. Thank you so much.

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.