Flowers Foods Inc (FLO) 2012 Q4 法說會逐字稿

Welcome to the fourth quarter 2012 Flowers Foods earnings 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 Ms. Marta Jones Turner. Ms Turner, you may begin.

Thanks, Lorraine, and good morning everyone. Our fourth-quarter and full year 2012 results were released this morning. If you need a copy, of course you will find that release posted on our website. We expect to file the 10K on February 20. I also want to announce that Flowers Foods Analyst Day will be held in New York on March 20. We will send more details in a few weeks, but we wanted you to have that date on your calendars. Participating in our call today, we have George Deese, Flowers Foods Chairman and Chief Executive Officer; Allen Shiver, our President; Steve Kinsey, Executive Vice President and Chief Financial Officer.

We'll open the call for your questions following our prepared remarks. But first, you know that I must remind you, our presentation today may include forward-looking statements about our Company's performance. Although we believe our statements to be reasonable, these statements are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters that we will discuss on the call today, important factors relating to Flowers Foods business are detailed more fully in our SEC filings.

Now I'll turn the call to Flowers Foods Chairman and CEO, George Deese.

Thank you, Marta. Good morning to each of you and welcome to our fourth quarter and 2012 conference call. As always, we appreciate your continued interest in Flowers Foods. It is an understatement to say that these are interesting times for Flowers Foods and for the baking industry. I know you have questions about recent announcements regarding the Hostess assets, the Flowers stalking horse bid, as well as our pending acquisition on Sara Lee assets in California, which are being divested by Bimbo as far of a consent order with the US Department of Justice. Although our normal practice is to be transparent about our business and matters of interest to analysts and investors, there are many questions we simply will not be able to answer for you today. I know you understand that these matters are in the legal process, and for that reason, in some instances for competitive reasons, much of what you may want to know we will not be able to discuss today.

Even so, in our prepared comments this morning we will share what is appropriate about these matters. Of course, the purpose of this call is to discuss our results of the quarter and the year. Before Steve and Allen give you the detailed report I want to share my perspective with you. Comparing our performance against the long-term goals we set out in 2011, for the fourth quarter and the full-year of 2012. We delivered sales growth of 14.7% for the quarter and 9.8% for the year. Excluding one-time charges, EBITDA margins were 11.5% for the quarter and 10.9% for the year, and earnings per share increased 65% for the quarter and 7.3% for the full-year, excluding one-time charges. We continue to track well ahead of schedule on our goal to have our fresh products available to at least 75% of the US population by 2016.

During the fourth quarter, we did announce the agreement for Flowers to acquire the license to distribute Sara Lee and Earthgrain brands in California. We discussed the details of that on our call in November. As we mentioned in our press release, the transaction is scheduled to be completed later this month, followed by a staged roll-out of the acquired brands in California. On January 29, Bimbo filed a motion with the court seeking to temporarily suspend the transaction. The hearing on this matter is set for February 13. Beyond that, we cannot comment.

Also in the fourth quarter, Hostess Brands made the decision to exit the marketplace and liquidate their business. Their sudden departure from the market puts Hostess retail and food service customers in a tailspin-- to fill the void. Flowers team members and our distribution partners did an absolutely amazing job of serving customers in the wake of this market disruption. One of our ongoing strategies is to provide exceptional customer service. I am so proud of their efforts from our team members around the Company. In sales, in manufacturing, distribution, accounting and all other departments. You can clearly see the positive impact their efforts had on our fourth-quarter results.

On January 11, Flowers was chosen as a stalking horse bidder for certain Hostess assets, and that process continues to the bankruptcy procedure under the direction of the court. We do not know, and we cannot speculate on the possible outcome of the auctions scheduled for February 28. It is important to remember that any transaction resulting from the auction will be subject to regulatory approval. What I can tell you today is that our focus remains on serving our customers, delivering a good value for consumers, managing our business, and building shareholder value. I am confident in our team's ability to do well as we maneuver through the changing competitive landscape. We started 2013 with continued strong results across all channels, and we have confidence in our business as we look forward to the year ahead. We did tell you, in the press release, that we are delaying giving specific guidance for 2013. However, we expect the year's results to meet or exceed our long-term goals.

Now, I will turn the call over to Steve Kinsey.

Thank you, George, and good morning, everyone. Fourth-quarter net sales of $749 million, increased 14.7% compared to the prior year. Volume was strong in the quarter, up 10.3%, excluding the Lepage acquisition. This was driven primarily by new business as a result of Hostess's brand exiting the market. Price mix was down quarter-over-quarter 2%, all from strong comp's in the fourth quarter of 2011 and the shift of mix within our Cake Group. In order to help cover increased input costs, we did see overall pricing sequentially improve into the third quarter and early in the fourth quarter. The Lepage acquisition contributed 6.4% to the quarterly growth. Lepage is performing as expected and we are pleased with the contribution from this acquisition.

As you can see, volume growth during the quarter was strong across the portfolio. Our GAAP Earnings per Share were $0.28 per share this quarter, compared to $0.17 in the fourth quarter of last year, up some 64.7%. You should note that one-time charges were immaterial to both quarters and did not affect EPS. This is a stronger finish to the year than anticipated and is primarily due to strong volume gains, as a result, again, of the exit of Hostess's brands from the marketplace.

As expected, the Lepage acquisition contributed approximately $0.01 to the quarter's earnings per share. Also impacting earnings per share in the quarter, were higher interest expense related to the April 2012 public debt issuance's, and increase in shares outstanding as a result of the Lepage acquisition. We also did experience a better than expected tax rate, impacting earnings approximately $0.015 in the quarter. The improvement in the rate was driven by a better than expected benefit from several discreet items related primarily to state income taxes and purchase price accounting. Operating earnings in the quarter, excluding one-time costs, were up approximately 67%, this quarter over last year's fourth quarter, driven primarily by the impact of better sales volume and earnings from the Lepage acquisition.

Our gross margin in the quarter as a percent of sales increased 200 basis points to 47.9%. This overall improvement in the percent of sales was driven by stronger sales volumes, overall production efficiency gains quarter-over-quarter, and a sales mix improvement in the core business, as well as through the Lepage acquisition. Lepage contributed approximately 20 basis points as a percent of sales to the improvement. Input costs, ingredients packaging and natural gas, excluding acquisitions were up 9.8% quarter-over-quarter. This brought the full-year impacts from input costs to just over 6%, in line with our full-year guidance. Though input costs were up in absolute dollars, as a percent of sales they were down 100 basis points. SD&A expenses, as a percent of sales, excluding one-time cost for both years, were 36.4% this quarter versus 36.8% in last year's fourth quarter. The 40 basis point improvement shows our ability to leverage selling distribution and administrative costs as we continue to grow sales through organic growth, acquisition, and expansion markets.

Turning now to cash flow. Cash provided by operations was a positive $35 million in the fourth quarter. Year-to-date cash provided by operations was approximately $217 million, up roughly $83 million over the prior year. This improvement reflects a significant reduction between the years in the use of cash required to fund hedge margins. Going forward, one of our priority uses of cash will be focused to pay down any pre-payable debt. Capital expenditures during the quarter were $18 million. This brings our 2012 total spend to $67 million, down slightly from our previously planned full-year spend. We paid dividends of $22 million in the quarter and opportunistically repurchased $5 million in Company stock during the quarter to offset the dilutive effect of share-based comp in the acquisition.

Overall, net cash flow in the quarter was strong, allowing us to finance our cash needs through operating cash flows. We did end the year with $535 million in long-term debt, up approximately $250 million from the prior year. Our total debt was $607 million, up roughly $280 million over the prior year. The prominent increase in debt was to fund the purchase of Lepage, acquired during the third quarter of 2012.

As George mentioned, we have deferred giving any specific guidance for 2013, pending more clarity on the Hostess BBU transactions. As he also said, 2013 has started strong and we continue to see the same strong trend we saw at the end of 2012. We do believe we will meet or exceed our stated long-term growth guidance of 5% to 10% annual sales growth, with double-digit earnings increase, excluding any one-time acquisition-related costs in 2013.

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

Good morning everyone, and thank you, Steve. I want to follow-up on one point that George made. He emphasized that our team members throughout the Company rallied to serve customer needs when Hostess exited the marketplace on November 16. As a reminder, that was the Friday before Thanksgiving. The start of one of the busiest weeks of the year for our customers. Not a time when customers can afford to have empty bakery shelves. The efforts of our team members across every department and every location were simply extraordinary, as we worked overnight to increase production levels and provide the additional service to take care of our customers. Of course, that's the Flowers way. But under the circumstances, it was truly remarkable what our team and our business partners accomplished.

As Steve pointed out, our sales and earnings results for the quarter show the benefit of our team's efforts. Using IRI data, let's look at the marketplace and review how the category performed in the quarter. The Fresh Bakery Category continued the same downward the trend of about 1 point in both dollars and units. This is the same category trend we have observed for the past two years. I am pleased to report that Flowers branded units continue to outperform the market, led by our Nature's Own brand. Our branded sales were up 12.9% in units and almost 10% in dollars. That strong performance was reflected in the sales numbers we reported today.

Our sales growth also translated into gains in our market share. According to IRI for the quarter, Flowers share of the Fresh Bakery Category for the total US increased to 11.6% of dollars and 10.4% of units. Looking at IRI data for the first few weeks of this year, we see even further improvement in Flowers branded performance in market share. Our total food service business including DSD and Warehouse, was up double-digits in the quarter, compared to overall food service industry growth of just over 4% for 2012. In the quarter, our expansion markets delivered sales within our goal of 0.5% to 1% of our total sales increase.

You'll remember that our newest markets are in Pennsylvania. We are making good progress there as consumers get to know our brands. You also may recall that in the fall we introduced the Tastykake and Nature's Own to our Lepage routes in the Northeast. Our sales team, trade customers and consumers are excited about having these new brands in the marketplace. We're also pleased with how Tastykake continues to gain traction across Flowers' core markets. New products again performed in line with our goal to contribute 3% to 5% to sales. Some of our newest products, our Tastykake Kandy Bar Kakes made with Hershey's chocolate.

On our last call, we told you that we were taking pricing up 4% to 6% to help cover anticipated higher input costs of ingredients and other items. We also said that we were reducing our promotional activity. The pricing we put in place in the early fall is in effect as we begin the new year. It has been accepted throughout the market. And continuing the trend we saw in the fourth quarter, the overall level of promotional activity is somewhat lower. When evaluating our change in price mix for the quarter, please remember that our Individual Snack Cake business is up significantly in both our Warehouse and DSD segments. This increase in Snack Cake sales and the related shift from multi-pack to single serve had a significant impact on our price mix comparisons from quarter to quarter.

Looking at operations, our bakeries once again, achieved improved productivity, even as our poundage increased across almost all product lines. Again, this is a testament to our team's efforts. Over the last three years, we have achieved consistent improvements in our efficiency levels, as we work to use our resources better than ever before, reducing our damage products and using our information systems and our team's experience to have the right products at the right location at the right time. All those factors allow us to use our existing production capacity more wisely. That has allowed us to absorb the significant sales growth that we achieved in the fourth quarter as Hostess exited the market.

Our new bread line at our Oxford, Pennsylvania bakery is being installed and we expect to begin bread production on that line by late spring. That additional capacity will help us serve the growing needs of our newer markets and relieve some tight capacity in our bakeries currently serving those markets. As we continue to enter new markets and introduce new products and brands, we will need more production capacity. Our strategies for managing growth have been successful in the past, and we expect them to continue to guide our future. We continue to be very pleased with the Lepage acquisition and the integration of that business is going very well. This past quarter, our team at Lepage successfully introduced both Tastykake and Nature's Own to the marketplace. These brands were introduced during a period of time when marketplace demands were very, very high, due to the Hostess situation. Congratulations to our Lepage team for a job well done.

On our third-quarter call, we outlined our plan for the Sara Lee and Earthgrain business in California, that is part of the BBU divestiture. Since then, our California team has been gearing up for the integration, which is scheduled to begin later this month. I want to thank everyone who's been involved in planning for this acquisition. It has taken a tremendous amount of work to reorganize our distribution system, add new team members, and coordinate plans with our trade customers. The good news is that we are ready to go live when the transaction is completed, subject to the court's decision on February 13.

Across the company, our team members are doing a phenomenal job at a time when the marketplace is in a state of change and our trade customers need our help to serve their consumers. As George said, we realize you want to know more specifics about the business. We hope you understand we cannot share those details today. As we move through the year and events unfold, we look forward to sharing more information about the growth opportunities ahead for our Company.

With that, I will turn the call back to George.

Thank you, Allen, thank you Steve. As you can see, we are focused on doing business the Flowers way. Our team understands the baked foods category, and we have invested over several decades in our bakeries, our distribution systems, our brands, products and team. Through these investments and efforts of our team, Flowers has become the second largest baking company in the country. We are confident in our strategies and in our team as we manage through changes underway in our industry. But, make no mistake, this continues to be a competitive category. We're constantly on watch to keep our products and brands relevant, and our service high, as we meet the needs of our customers and deliver good value for consumers. We look forward to seeing you on March 20 at our Analyst Day at the New York Stock Exchange.

Lorraine, now we will open the call for questions.

(Operator Instructions)

Farha Aslam, Stephens.

Hi, good morning.

Good morning.

Congratulations on a great quarter.

Thank you.

Couple of questions. The first one, starting off with sales. Your sales in the quarter exceeded our expectations, which is likely due to the Hostess transactions, or the market share gains. But you only had one month when Hostess was really out of the market. I know you can't give full-year guidance, but we want to understand the progression of sales as you are entering fiscal 2013. Were you signing up incremental customers in the December time frame that are going to come online in this first quarter?

Farha, this is Allen. It was a very busy time, to say the least. We did see quite a few additional new customers come online in the fourth quarter. I would say that that continues, but not at the rate that we saw in the fourth quarter. We are encouraged, that looking at both the IRI data and our internal data, we are encouraged looking at the first four weeks of this year, that the rate of growth is continuing, and in some areas, accelerating.

Okay. We should plan for really strong growth, again, in the first quarter. And then, when we look at gross profit, it looks like you got great leverage from your facilities. What capacity utilization do you have in your facilities? Can you handle this additional volume coming in?

We are doing a good job handling the capacity that is in our plants today. I mentioned earlier that our Oxford bread line will be coming online. We are also looking at other ways to make adjustments in existing facilities to get more capacity out of our plants. As we stated, we'll continue to look for opportunities to advance with new production facilities.

My final question is really on the SG&A line. It looks like you got more significant leverage on the gross profit line versus SG&A. Could you share with us, are there expenses in SG&A that you have taken on as a result of these changes in the market?

Yes Farha, this is Steve. When you look at SG&A, a lot of the distribution costs is down there, so getting the product to market, there was some cost incurred with that, as well as, we began to ramp-up in California, as Allen said in his comments, and there has significant cost associated with that as well.

Could you quantify that, Steve? In particular, that California expansion cost, roughly?

Yes, for competitive reasons, I would say, we probably don't want to get into the details of that, but it has been pretty significant.

Okay. That's helpful. Thank you.

Thanks, Farha.

Jonathan Feeney, Janney.

Good morning. Thank you very much.

Yes, sir, Jonathan.

Nice quarter. I know it's premature, we have not had our court decision, but if you could walk us through to the extent you can comment, philosophically, how you are looking at both the share gain, and potential assets you're going to be potentially integrating here. Is it going to be a traditional Flowers business model of all owner-operators? Is that the sort of company philosophy you've implemented in past acquisitions? How flexible would you be as far as taking on some of the legacy business practices of any of those assets? Thanks.

Jonathan, thank you for joining our call today. I know this is your first time on this particular call.

It certainly is and I am happy to be here.

Thank you. Jonathan, we did say up front, there's just some things we cannot talk about. As you know, this is being handled in bankruptcy court. It is very technical and legal. We cannot speculate on the future because things are not final. Not only from a court standpoint but also for competitive reasons, that we just can't comment on that beyond what we already said.

Okay. I guess, let me ask you a more broad question from this existing quarter. Do you think this industry's big picture has been experiencing consolidation. I think that's been positive for a long time. Yet you look at the margins of different operators, they have been slowly increasing but slow to really move. With the disappearance, clearly, you picked up some business. It was a big tailwind to the great sales you did this quarter. Are you seeing any signs that there is more rationality out there now? Not just, obviously, some more rationality among Hostess, because they're not there. But more rationality broadly from, maybe, third tier players that would control the low end of the market? Thank you.

Jonathan, thank you. What I will say, if you look at our IRI, you can form your own opinion on that. That's where I would point you to. I would rather not comment on what our competition's doing. We're focused on what we are doing, and that is giving great service to each individual customer, as Allen pointed out. Filling the void that is out there, and we're so pleased with our people and what we have accomplished. They are doing a great job and I appreciate them so much.

Great. Thank you very much. It is clearly working.

Thank you.

Heather Jones, BB&T Capital Markets.

Good morning.

Good morning, Heather.

I wanted to go back to the SG&A question. You mentioned, from what I understand, your IO costs are a pretty much a set percentage. In taking on the new Hostess share gains during the quarter, what incremental distribution costs should we thinking about that were in there for the quarter? I'm not talking related to California, but just with the new Hostess share gains. And, are those going to continue into Q1? I'm trying to look at how we should think of leveraging your overhead structure.

Yes, Heather, if you recall, the distribution from our manufacturing facilities to our distribution centers, that has ramped up quite a bit to get the additional volume into the marketplace. That would be the primary driver of the distribution cost increase. You are correct in your assumption on the discount structure. That is a relatively constant percentage, compared to sales. The big driver would be transportation from the plants to the distribution centers.

And is that a cost that is going to be a large headwind in Q1? Or was it just ramping up in Q4 and now we should see more leverage of the overhead line?

Yes. I think you'll see it continue to ramp-up slightly. I don't think anything significantly different over the fourth quarter.

Okay. I'm sure you know where I am headed with this. When you're leveraging this new business into your plants, like Farha noted, you're getting good luck gross margin line. But it does not look like if you look at SG&A year-on-year, you didn't get much more leverage than you have in Q1 through Q3, despite a really dramatic increase in volume. Which, intuitively, does not make sense, given you would think a lot of your overhead is fixed and can be leveraged. I know you cannot talk about the acquisition, and you don't want to give guidance, but how should we be thinking about when should that overhead leverage really kick in?

From the admin perspective, I think we did a good job leveraging that. And then, there was some higher workforce-related costs in that number, again, as we have taken on some additional responsibilities to get product into the marketplace. From a comp perspective, year over year, there were slightly higher workforce costs as well. Again, the primary drivers of the workforce cost, as well as distribution costs, some of that is related to fuel. You've seen fuel prices move up and down. That is the driver as well. Our targeted SG&A as a percent of sales, is somewhere around 36%, 35% to 36%. Not far outside of that range. And we should be able to continue to see that improve. Also the Lepage acquisition is still being integrated, so there is some duplicate costs there from an administrative perspective.

The other thing I would comment on, as you know in the fourth quarter, we had two holidays. Any time you have holidays, there was always some added costs in that process. Sometimes sales fall off during those two holidays. It also contributed, I think.

We have heard of some companies pre-paying bonuses to get ahead of tax increases. Did you guys do any of that?

We did not.

We did not.

Okay. Your corporate expense line, which is tied into the SG&A discussion, that went up 50 basis points, year on year. Is that the line item where we would see these costs associated with California? Or what would be in that line item that would cause that increase year-on-year?

Yes. All of the acquisition costs, primarily, would be recorded there so any additional legal fees related to M&A, or legal fees related to what's going on with the courts, would be recorded at the corporate level.

Okay. And my final question is, you all talked about pricing kicking in. But the pricing in DSD, as far as on a year-on-year basis, was not as positive as it was in Q3, which I would've anticipated it being more positive, and given that you rolled through some new price increases. Was there a mix impact during the quarter, or did I misunderstand the timing of when those price increases would hit? Could you give me some help on that?

Heather, this is Allen. If you remember, early in the year we took pricing, and as we went through the year, promotional activities really heated up. As I mentioned, we saw that falloff as we moved into the fourth quarter, late third quarter, fourth quarter. I think that it makes the year-over-year comparison for the quarter a little confusing. I think also the comment about the single serve snacks, we have picked up a significant amount of Tastykake snack cake business in convenience stores and other outlets. When you do the math on a per unit basis, it brings that average price down as well. I think the biggest factor was the spike in promotional activity as we went through the year. Then that promotional activity level has come down, as I mentioned earlier.

Was is still aggressive at the beginning of Q4?

We were seeing price promotions reduce in the beginning of the period four.

Okay. Thank you so much.

Thank you, Heather.

Bill Chappell, SunTrust.

Good morning.

Good morning, Bill.

You talk a little bit about the market share gains. I'm trying to understand them, and I'm not sure you can answer this, but the overlap of your markets versus Hostess markets. How much do you think, barring future transactions, how much of this do you think is sustainable, that you can hold on to in existing markets?

Bill, I think it's hard to say. You know, we'd always just to say it all, but there's no way we can predict that. All I'm going back to is our exceptional service. Our distributors do a great job in the marketplace, great relations at all levels with our customers. We are all in, as you well know, we're trying to make sure we do a great job. I wouldn't give guidance on the market share issue.

Trying to understand the competitive dynamic, have things continued to get better or more rational as we've moved into 2013? Do we now, with several months behind us, think that the worst is behind us of this four-year issue?

Bill, are you referring to promotional activity?

Yes. Like the buy one get one free, heavy promotions and deep discounting, and that type of stuff.

I would say the reduction in promotional activities that we saw in quarter four is continuing as we go into the new year. I would not say it is dramatic. I would say there is a reduction in promotional activity and we are seeing a continuation of that.

Okay.

Bill, I did say in my remarks that this has always been a competitive environment. I think it will always be a competitive environment, because it is so important to the grocer, and it is so important to the consumer, that the top people in the food industry is always focused on bread, eggs, milk, et cetera. For that reason, I think you'll ways will be, competitive, even though there has been some improvement.

Got it. One last housekeeping, I think last quarter you talked about the SG&A from Lepage. Can you maybe give us an update for this quarter on that was? And then how Lepage is going in terms of integration?

Overall, I would say that the Lepage integration is going very well. From an SG&A perspective, I think it's very similar to the last quarter. I don't have that in front of me, Bill.

Okay, but you think last quarter is a good gauge?

Yes. Last quarter would be a good gauge.

Okay. Thank you.

Thank you, Bill.

Akshay Jagdale, KeyBanc Capital.

Good morning. Congratulations on the quarter.

Thank you, Akshay.

Can you share with us what the gross margins were by division? I know you put those out during the, in the Q, but can you help us with that? I am trying to get a better sense of what drove the consolidated gross margins up 200? If it was more DSD or Warehouse?

In the quarter, Akshay, we had strong improvement in DSD. It was up roughly 200 basis points, in line with the consolidated total. And then, Warehouse, if you recall last year, margins were down pretty significantly, but it was up almost 400 basis points, but it's just a lesser percent of the sales. Strong growth across the whole.

Okay. That is helpful. In terms of the gross margin performance as you went through the quarter, was it better in the back half? I would assume it was. Directionally, would that be a good way to think about it?

Yes. It improved as the quarter progressed.

Okay, and what's your guidance, since you last gave guidance or talked publicly, wheat costs have come down. What can you say about the cost of goods sold or commodity inflation for '13?

If you recall, on the last call, I believe we said it would be low- to mid-single digit increases on input costs. That is still true, even though we had to pull back some slightly. We have good visibility into the first half of the year and the back half is still the other period, but beyond that, we wouldn't help specifically about the percent, at this point.

Okay. And so, I know you do not want to be specific and I appreciate that, but if you'd help me with the drivers of gross profit, specifically, on DSD. You talked about the direction of their volume in sales growth continuing to be strong, right? You mentioned IRI, you mentioned your branded sales. Volume seems to be up double-digits in recent months for your bread business, commodity inflation is in check. What else, in terms of the promotional activity, what we are hearing is the regionals are continuing to be very competitive, especially in this environment. And even though Hostess is no longer producing bread, and it was highly promotional, some of these gains that you have in terms of market share, you still in the first six to nine months have to honor some of those contracts. So what I am really trying to say, is the impact, if there is any, of reduced promotional activity is probably a little bit of a longer-term issue? Is that a fair way to think about it?

I will comment real quick on the margin and let George or Allen comment on the promotional activity. The volume within our plants is, there is a lot of overhead coverage, so that was also a contributor to the gross margin improvement. As Allen said, we have some additional production capacity that's in the works. I think, over time, running the plants at this level from an efficiency standpoint has been good. So we saw some, we had strong gains in the quarter. That was also a contributor to the quarter and we should continue to see that coming into 2013. And then on the question regarding promotional activity, I will let Allen or George follow-up on that.

Akshay, on our bread, the promotional activity, there are no contracts. That is just how we run our business based on marketplace pressures and marketplace needs. We are not aware of any contracts on branded promotional activity. I would say, as we said earlier, the trend that we saw in promotional activity in the fourth quarter continues as we move into the new year, which is slightly downward.

Okay. This is, obviously, publicly available data. Hostess has been reporting monthly financials. The difference between their gross and net sales was somewhere around 24%, most recently. It used to be around 10% a few years ago, from what I know. Can you help us directionally understand if that is a high number, or low number? Because in the past, I believe Flowers has talked about promotions in DSD being somewhere around 5% of sales. I don't think those two numbers are comparable. I'm just trying to get a sense of how promotional was this company that is in the process of liquidation?

Akshay, we would rather not comment on Hostess's business. That is still their business, even though they're out of business. What I would say would be that we need to focus on our business. You know our margin structure and our business model, and that's our only direction we could go at this point.

And just one last one on capacity within your plants. I was under the impression you are operating pretty close to 100% capacity. I am actually quite impressed that you are able to produce 10% more volume without adding new plants. Can you help me understand that? How much flex capacity do you have? And what are utilization levels now?

Yes. I wouldn't say what we have available, what I would say is what we've always said about capacity is, when we talk about 100% that is always 100 hours. Excuse me, 120 hours, on bread and buns, as we look at full capacity. As you know, there's a 168 hours in the week, so flex, so trying to come to grips with you with that, I would just point out from 120 to 168, that's not to say we're at 168 hours, and we're there, by the way. I think this goes to show how efficient our plants are. As they take on new volume, it really helps the overall bottom line and margin process. We are real pleased with that. But I would rather not get any further into how much is available going forward.

That is helpful. I will pass it on. Thanks a lot.

Thank you.

Amit Sharma, BMO Capital Markets.

Hi, good morning, everyone.

Good morning.

Allen, I just want to take another shot at the market share discussion. Our understanding is that the bakery supply contracts are longer term. Is there any time associated with the contracts that you have gotten since the Hostess liquidation?

I'm going to let Allen follow up on the issue about share. What I would say, as you look out on promotions, a lot of times it could be 12 weeks in advance. Sometimes you, depending on customers, that's not contractually, but it is an obligation once you've told a customer what your plans are, sometimes most customers want at least 12 weeks, some want 24. That is not contractual. You can call it contractual, but it is agreed upon that you plan on running these promotions and specials for X time. So, Allen, you want to follow up?

Amit, I would just say, on market share, we did see the growth that I mentioned in my comments in the fourth quarter. Again, looking at our growth rates as we move into the new year, we are seeing slight improvements over those share gains that we generated in the fourth quarter. We are very optimistic about being able to maintain, and, hopefully, improve the rate of sales growth that we saw in the quarter.

Go it. I understand that the Hostess situation is still not fully resolved. But thinking ahead, is there any way you could take a proactive position in the commodities market, expecting the sort of volume that will come your way if this goes as planned?

Well we look at it from a purchasing perspective, Amit, we would be very conservative about how we look at this until we have more clarity from the courts on where we're headed and where the process ends up. It would be dangerous to take on more coverage than you actually needed if something were to fall out. So we're taking a conservative approach on that.

Sure. That makes sense. I just want to understand the risk is that if you are not protected on your commodity needs for this volume, there is a risk that you might be more exposed to spot markets, at least for that volume. Is that fair?

You know, again, I would not want to comment on specific coverage for competitive reasons. There is always a risk. The markets move quickly and there's a lot of volatility in the commodity markets, so you have to manage that as you see appropriate.

And just one more. Now in this improving competitive environment, is it fair to say that it is easier for you to get 4% to 6% of pricing going forward? Or are we still in flux?

Amit, you have always heard us say we don't just go out and put price increases out. There was always a reason we have to move pricing. That has always been driven by what's going on the cost side from maybe labor, may it be commodities, which is the main reason. Healthcare will be an issue going forward, as you all know. There's always going to be something going on that does -- you have to take a look -- but our number one effort is always to look and see if there's ways we can continue to be more efficient, reduce costs so that the customer, consumer does not have to have the full impact of what is going on in the marketplace.

Got it. Thank you very much.

Thank you.

Gary [Hoo], Field Point Capital.

Hi, can you just give us an update on how the regulatory process on the Hostess bread brands is going? Do you anticipate you'll need to make any kind of divestitures or any other hurdles? Finally, do you think the transaction will be treated differently by regulators because it is a distressed asset sale?

Again, thank you for joining us today. As we said early on, this matter is handled by the bankruptcy court. It is legal proceedings and we really don't want to comment or speculate about what will happen during this process. I just want to leave it there because it is complex and just rather not get there.

Okay. That is fair. One other quick one. Can you just explain why Bimbo wanted to back out of the Sara Lee, Earthgrains transaction?

I can say we can't speculate on what their decision was on that.

Okay. That is all I had.

Thank you.

Thank you.

Thank you. I will now turn the call over to Mr. Deese for closing marks.

Thank you, Lorraine, and thank you for joining us today. It's exciting times at Flowers Foods, and we look forward to seeing you on March 20. We look forward to doing business for the rest of the year and the years to come. We feel like we are in a unique time in the history our Company to continue to add value to our shareholders. Thank you so much.

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