Flowers Foods Inc (FLO) 2013 Q4 法說會逐字稿

Welcome to the Flowers Foods' fourth-quarter 2013 earnings call and webcast. My name is Ellen, and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Marta Jones Turner. Ms. Turner, you may begin.

Thank you Ellen, and good morning, everyone. Our fourth-quarter and full-year 2013 results were released earlier today. We also expect to file the 10-K on February 19. You will find the release on our website, and the PowerPoint presentation that supports our comments is posted on the conference call page. I do have an announcement that I want to make before we get started, Flowers Foods will host an Analyst Day on March 20 at the New York Stock Exchange. In a few days, we will be sending more information, but I thought you would want to mark your calendars for March 20.

Now, you know that I must remind you that our presentation today may include forward-looking statements about our Company's performance. Although we believe the statements to be reasonable, those statements are subject to risks and uncertainties that could cause actual results to differ materially. In addition to matters we will discuss during the call, important factors relating to Flowers Foods' business are detailed more fully in our SEC filings.

Participating on our call today are Allen Shiver, Flowers Foods' President and Chief Executive Officer; and Steve Kinsey, our Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will open the call for your questions. Now I am pleased to turn the call over to Allen Shiver. Allen?

Thank you, Marta, and good morning, everyone. Thank you for joining us. To open, I want to share a few thoughts about Flowers Foods' recent accomplishments, and where we are today. Our sales are up over $700 million, or 23% over last year. We have added more than 20 million to the population base that now has access to our fresh bread brands.

Today 79% of the US can now find our breads in their markets. We have grown our customer base by 19%, and our DSD system now serves about 140,000 customer locations significantly strengthening our access to new markets. Our market share of the total US has grown from 10% in mid 2012 to almost 14% today, with further growth ahead.

Nature's Own sold $1.1 billion at retail in 2013, with a 17% increase. Our brand portfolio was strengthened by the addition of the bread brands that we acquired from Hostess last year. Our access to market in California has increased by having the Sara Lee brand for bread, buns and rolls in that state. Tastykake is proving to be a strong player across our markets.

Tastykake sales have almost doubled since we acquired the brand in 2011. With the acquisition of the Hostess bread assets, we also have strategically located bakeries that we can reopen, as both market demand and our sales grow. All these factors combine to give Flowers Foods a powerful foundation from which to continue growing our sales and our earnings.

Added to those strengths, we have an amazing team that simply is the best in the industry, with proven ability to deliver for our shareholders. To put all of this into perspective, 2013 was a year of exceptionally strong growth for Flowers Foods, but our growth story is not over. I have confidence in our ability to continue delivering growth, as we build our share in newer markets, strategically extend our DSD reach, build out opportunities in the strong South Market, while taking full advantage of other growth opportunities.

Now speaking more directly about the quarter, and the full year results we reported this morning. With the strong sales increase, and a 31.9% gain in adjusted earnings per share, 2013 was a record year for Flowers. You know that in the first half of the year, we benefited from significant volume increases that we achieved because of Hostess's exit from the market in late 2012.

In July 2013, we completed the acquisition of the Hostess bread assets. So for the second half, our results were impacted by interest expense and carrying costs for those assets. On our last call, we also told you about a few short-term issues that impacted our second-half results. I want to bring you up to date on those matters this morning.

On the warehouse segment issue which involves the Fort Worth tortilla bakery, we have made good progress on improving operations and efficiency levels. We also took pricing on our tortilla business, and we are confident that we will improve operating margins in the first quarter.

Next our overall manufacturing efficiency levels are improved. We told you on the third quarter call, that our bakeries have been impacted by tremendous volume increases during the year. I am pleased to report that in the fourth quarter manufacturing efficiencies improved 200 basis points, compared to the third quarter. This trend is continuing, and we are confident in our ability to regain efficiency levels above 92%.

I want to recognize the exceptional efforts of our team in achieving improved results in our bakeries as they work to further increase our efficiencies, while maintaining focus on producing the highest quality products possible. We told you on the last call that the integration of Lepage bakeries was continuing, with conversion to our information systems.

We did experience short-term issues with the integration, and Steve will tell you how that impacted the quarter's results. The good news is that while these three issues affected results in the short-term, the incremental margin gains will be seen as the issues are fully resolved.

Now let's move on to a few highlights from the quarter. I know you would want to hear about the Hostess bread assets, and how they are performing, so let's start there.

We relaunched the Wonder, Merita, Home Pride and Butternut brands within our DSD territory. Those brands now have a 37% ACV, and have gained a 3.2% dollar share of white loaf in the total US. As we expected, the new brands have been very beneficial to growth in our expansion areas in the Midwest and in the Northeast.

Let me share a few examples of how the brands are performing. Our Butternut white loaf was the number 2 loaf in the Cincinnati market on its very first week of introduction, and it has retained that number 2 rank every week since then. Wonder Classic has been the number 1 loaf in Providence, Rhode Island for the last six weeks.

In the eight weeks ending December 22, 2013, Wonder Classic is in the top-10 loaf breads in Boston, Hartford, Springfield, Kansas City, Little Rock, Mississippi, Oklahoma City, Providence, Richmond, Norfolk and Tulsa. Merita Old-fashioned is now a top-10 loaf item in Charlotte, Jacksonville, Knoxville, and Raleigh Greensboro for the week ending December 22. It is very important to note, that we are gaining incremental sales with the acquired brands.

As expected, there is some conversion from other Flowers brands and from store brands that we produce. However, the brands are also regaining volume from competitor's brands, and from store brands provided by other bakers. In the South market, our most mature market, Flowers' legacy brands gained significant volume in share before we relaunched the bread brands we acquired from Hostess. Even so, we believe our brand portfolio is strengthened in those mature markets, and we have seen slight incremental volume in some markets. And overall, we are maintaining our strong share in the South market.

The most incremental gain as we expected, has come in our newer markets where adding Wonder, Home Pride, Butternut or Merita has strengthened our brand offering because consumers know and trust those well-known brands. Our raw data shows that Flowers gained 6.3% share in the total US in white breads, and 3.18% of that came from the relaunched brands.

Those brands also contributed to our share gain in soft variety breads, and in buns and rolls. In the quarter, our total share of the category was up 2.3 points, and just under 1 point came from the relaunched brands. Sara Lee California and Flowers traditional brands accounted for the remaining share gain. We are confident the acquired brands strengthen our brand portfolio, and provide new sales options to support our continued growth. Ownership of the brands help us in our ultimate goal, which is to deliver the baked food consumers want, while building incremental sales and improved earnings for Flowers Foods.

In mid November, we opened the first of the former Hostess facilities we acquired, a bakery in Henderson, Nevada. We want to congratulate our team in Henderson, and thank them for the very successful start-up of that bakery. In addition to current bun production, we are adding a new bread production line at our Modesto, California bakery that will start up in the spring. Together, the Henderson and Modesto bakeries give us most of the production capacity that we need today to supply the California market. These two bakeries will allow us to exit outside supply agreements for California as planned.

These operational changes will result in cost reductions, margin improvements, and better quality products in the marketplace. You will recall that we acquired the right to distribute Sara Lee bread and buns in California in February of 2013, and completed a multi-phased roll-out of that business in the summer. We now have DSD service in all of California, and we are very encouraged with customers' and consumer's acceptance of our Nature's Own, Sara Lee, Home Pride and other brands. At the end of 2012, we have about a 2% share in the California market. Today our share is around 12%, and we expect our brands to drive further growth over the next several years.

Our warehouse cake business, and to some lesser degree, our DSD cake did experience some pressure from Hostess re-entering the cake market for the warehouse channel. Even so, we are confident that our cake business, both DSD and warehouse, has growth ahead. Our confidence in our ability to grow our snack cake business comes from three factors. First, the quality of our cake, second, our Tastykake and Mrs. Freshley's brands. Consumer like our brands, and our sales increases over time demonstrate our brand's strength. And third, we have almost 6,000 sets of wheels on the street to sell our snack cake to retail customers through our DSD system.

We know you will want to understand more fully what our plans are for the Hostess bread assets that we acquired in 2013. I mentioned earlier, that the Henderson, Nevada bakery has begun production. I can tell you that we will open the second of the Hostess bread bakeries in a few months. We are carefully reviewing the business, and considering the best use of the assets.

In doing so, we are gaining a clearer picture of market demand, and what capacity will be required over time. At our March 20 Analyst Day, we will be able to share a longer-term plan for the acquired Hostess bakeries and brands. At the Analyst Day, we will also give you more specifics about our long-term objectives, in light of recent industry consolidation, and Flowers' position as the number two baker in the US market.

In 2013, the experience, dedication and commitment of our Flowers team was demonstrated to the marketplace, as we took full of advantage of the growth opportunities. By any measure, Flowers Foods exceeded all competitors in sales growth and DSD territory expansion. It was a remarkable year for growth for Flowers Foods, but our growth story is far from over. Steve will now review our financials in more detail. Steve?

Thank you, Allen. Good morning, everyone. Flowers Foods posted another quarter of good growth. As Allen stated, 2013 was a record year for Flowers Foods. Overall, we are pleased with the year, and look forward to the opportunities in 2014.

First, we will take a look at the quarter, and then we will discuss 2014 guidance. I would remind you that it was in mid-November last year, when the former Hostess brand exited the market. So we did cycle the sales gain from that event during the quarter.

Sales in the quarter were up 12.6%, with Pride contributing 3.6%, and volume 6.2 -- 6.3% to the growth. The acquisition of the Sara Lee brand in California contributed 2.7% growth to the quarter. The miss from our targeted sales projections for the full year is primarily attributable to more than expected DSD sales in the fourth quarter. This has not changed the fact that our team executed well throughout the year, capturing market opportunities due to the assets of the Hostess brands from the marketplace.

Adjusted operating earnings or adjusted EBIT was down 4.4% this quarter, compared to last year's fourth quarter. Overall, stronger sales were offset primarily by lower manufacturing efficiencies, and the carrying costs of the recently acquired Hostess bread facilities.

We continue to work on production rationalization and efficiency improvements. Though we have seen sequential quarterly improvement in our efficiencies compared to last year's fourth quarter, efficiencies were down and cost us about $0.02 per share in the quarter.

Carrying costs associated with the recently acquired Hostess bread facilities were $5.3 million in the quarter, and negatively affected the EBIT margin 60 basis points as a percent of sales. We have worked to reduce carrying costs where possible, and this is a flat improvement over the forecasted amounts.

Total carrying costs for 2013 were $10.6 million. We now expect the fiscal 2014 carrying costs of the closed Hostess bread facilities to be approximately $27 million. This is down slightly from the $30 million forecast we gave you late last year.

Allen mentioned that the integration of our SAP platform did not go as planned at Lepage. This negatively impacted the fourth quarter earnings by approximately $5.5 million, or approximately $0.015 of earnings per share. The system integration is complete, and we are focused on fine-tuning certain processes that should allow us to get Lepage's earnings back on track during the first quarter of 2014. Adjusted EBIT for the full year was up 32.8% over the prior year. Depreciation and interest expense was in line with our expectations. The effective tax rate for the quarter was 29.5%.

This decline over the prior year fourth quarter and over the statutory rate is primarily the result of the recognition of several discrete items during the quarter. This reduction quarter-over-quarter was approximately $0.01 per share on the quarter. The full-year rate without the bargain purchase gain was 33.6%. The lower rate affected full-year earnings by approximately $0.02 per share.

Earnings per share for the quarter were flat compared to last year's fourth quarter. Adjusted full-year earnings per share of $0.91, was up 31.9%, compared to last year's adjusted earnings per share of $0.69. The gross margin in the quarter was 46.9%, compared to 47.9% in last year's fourth quarter as a percent of sales.

The reduction as a percent of sales was primarily related to the carrying costs and the decreased manufacturing efficiencies. The full-year gross margin as a percent of sales was 47.4% compared to 46.9%, up 50 basis points year-over-year. Improvements in the full-year gross margin were driven primarily by stronger sales.

As a percent of sales, adjusted selling, distribution and administrative costs in the quarter were 36.7%, compared to 36.4% in last year's fourth quarter. The full-year adjusted selling, distribution and administrative costs as a percent of sales were 36.2%, compared to 36.4% last year. The primarily drivers of this increase were higher workforce costs, and costs associated with market expansions.

Cash provided by operations was a positive $50.2 million in the fourth quarter. We ended the quarter with approximately $924 million of debt on the balance sheet. Cash flow remains strong, and we will continue to focus on paying down debt.

Our debt to EBITDA or leverage ratio, based on the full-year of 2013 EBITDA excluding the gain on acquisition was 2.3 times leverage. In the quarter, we did buy back $5 million of stock or 231,000 shares. For the full year, we repurchased 436,000 shares, and we have 9 million shares remaining on our current authorization.

This brings us to 2014 guidance. First, let me remind you that 2014 is a 53-week year. We are forecasting sales growth of 6% to 10%, or $3.98 billion to $4.13 billion in sales. The Sara Lee California acquisition should add approximately 1% to the increase, and the 53rd week is forecasted to add 1.8%.

The remainder of the increase will be driven by organic growth. Earnings per share for 2014 is expected to be $0.98 to $1.05 per share. This is approximately a 7.7% to 15.4% growth over the 2013 adjusted earnings per share of $0.91. Earnings growth will be driven by top line growth and cost reduction initiatives, such as improved manufacturing efficiencies.

We are forecasting input cost deflation in 2014, however costs related to employees and facilities are expected to increase year-over-year. Capital expenditures for the year are forecasted to be $95 million to $100 million. Included in this forecast is the buyout of leased equipment of $8.5 million, and investments in our IT infrastructure of $9 million. Now I will return the call back to Allen, before we go to Q&A.

Thank you, Steve.

As I mentioned earlier, 2013 was a year of unprecedented growth for Flowers, and our team did an outstanding job of serving the marketplace and growing our business. But 2013 is over. Now our team is focused on the opportunities ahead. With the recent acquisitions of Lepage, Sara Lee California, and the Hostess bread assets, combined with the volume growth that we achieved following Hostess's exit from the market, sales are up almost $1 billion in two years.

Our team is focused on bedding down the new business we have added, and making certain that we have the right infrastructure from which to continue growing. We are working hard to right-size the organization, and to keep our cost standards in line.

But I want to be certain you recognize that Flowers now has a powerful foundation from which to continue growing. We have a tremendous opportunity to grow sales, as we continue to build market share in our newer markets, and strengthen our position in the South Market.

I encourage you to look closely at the US map that is included in your deck. This map will help you visualize the growth opportunity that is ahead for our Company. We have a market presence that now reaches 79% of the US population, but about half of that is under-developed Flowers brands.

As you can see, Flowers brands now hold a 28.3% share of the IRI South market, while our share of the total US is about 14%. The markets we currently serve outside the South represent just over half the total population that has access to Flowers brands today. It is important to understand that outside the South, our share is much lower, simply because we are relatively new in those markets. With our strong brands, great quality, effective distribution model, and our focus on giving exceptional customer service, we have proven our ability to build share in new markets.

We will continue to do that, and now we have the additional brand strength and idle bakeries that can be opened as needed to serve those markets. I hope you can tell that our team is excited about our growth opportunities for 2014 and the years ahead. We have the brands, the bakeries, and most importantly, the team to get the job done. As our guidance indicates, we expect 2014 to be another year of sales and earnings growth for Flowers.

We are confident that we have the right strategies, the brands, the bakeries, and most importantly, the team that can continue to take this Company to new levels, as we work to build value for you, our shareholders. Thank you, and operator, Ellen if you would please open the line for questions?

Thank you.

(Operator Instructions)

The first question is from Eric Katzman with Deutsche Bank. Please go ahead.

Good morning.

Good morning, Eric.

I guess my first question, Steve, you listed a number of things that held you back in the quarter -- a couple of pennies here and there. But in the text, I think you referred to something called, outside purchases or something along those lines, and you didn't really touch on that. So, what was that, and how much did that cost you in the quarter?

Eric, that relates to the purchases of the product that is being produced for the California market -- the Sara Lee brand. So, we have had that most of the year, because we haven't had the production capacity to handle that for the marketplace. Now that we will be taking over that production in mid-February, we should see some benefit from that. The gross margin line -- that probably cost you 10 to 20 basis points on the year.

On the year. Okay. I thought it had something to do with the tortilla plant and that you had maybe gone out -- that that was unusual for the quarter, in that you had gone outside or something like that?

No, it relates primarily to the Sara Lee product.

Eric, we had some outside purchases related to our cake business, and then we also had some outside purchases, in a smaller way, in other parts of the Company.

Okay. And then, Allen, just a broader question. Obviously, a lot of worries in the market around consumption, and whether it is due to consumers trading down or trading up, or the impact of the SNAP cuts. Can you just talk a little bit about the broader market -- what you are seeing from consumers?

And then, also, you put prices up in the fourth quarter, and what has been the competitive reaction to that?

Yes, Eric, we continue to see the consumer under pressure, just like other food companies. We continue to see a polarization between business being much better at the 1st of the month versus the end of the month. The overall bakery category continues to be relatively flat. They are up slightly, in dollars, but relatively flat in volume.

So, we are excited about the opportunity to be able to reintroduce brands to the marketplace, and we feel like our new markets represent the biggest opportunity for the Company. And in our mature markets, we are looking at different product categories where we may be underdeveloped. So, we have growth opportunity even in our mature markets with segments of the category that are not fully developed. So, overall, we continue to see the consumer under the same pressure that everyone else is seeing.

And then --

As far as the pricing -- the pricing that we took back in the fourth quarter -- we continue to hold that pricing. But overall, the trends that we are seeing -- that we mentioned on our last call -- in the marketplace on pricing, they really continue.

Okay. All right. I will pass it on. Thank you.

The next question comes from Farha Aslam with Stephens Incorporated. Please go ahead.

Hello, good morning.

Good morning, Farha.

You had mentioned on your last call, as you were rolling out Wonder, that you hadn't been able to get into all of your retail outlets, just because of the timing of shelf sets. Could you just update us, in terms of where we stand with being able to put Wonder in key retailers?

Farha, we have done a very good job of getting distribution of Wonder in the majority of retailers. There is one retailer that we are continuing to work on, and we are optimistic that we will be putting Wonder in that chain hopefully this Spring. But really other than that one retailer, we have very good acceptance of the Wonder brand.

Okay. And then, could you just update us on where the tortilla facility stands, and what it cost in this quarter? And what we could look for, going forward, from that facility?

Steve, I will let you comment on the quarter impact, and I can comment on the long term.

Sure. Farha, on the quarter, it cost us roughly $3.5 million, so, slightly over $0.01.

Great.

Farha, we have made good progress in our Fort Worth tortilla plant. We have raised prices on products produced out of that facility, and we are also working to substantially improve our efficiency levels and lower our cost of production. So, we are not fully there, but we have made dramatic improvements in the last -- really, the last six to eight weeks.

Okay. And could you just share with us a little bit more detail on the SAP implementation? What impact that had on sales and earnings -- you quantified earnings for us, but color around that? And what are the steps that we need to take to fix it?

Steve, I will let you mention the financial part, and then I will comment on the --

Farha, when you look at really what happened, we -- typically with integration, bringing up the systems, there was a few things that, probably from a training perspective, we didn't function quite properly. So, it did really affect more the ordering and the sales number, which equated to lost profits for the quarter. We have gone in now, and we have gotten the ordering bedded down. We feel good now about where we are.

So, we are working on now, making sure we are getting the right product mix into the market, and bringing back the sales revenue. Overall, the projection on revenue probably is just slightly above the earnings miss for the quarter. So, it probably cost us somewhere between $7 million or $8 million of revenue on the quarter.

Okay. Thank you very much.

Farha, back on Lepage -- Lepage's ordering system was different than Flowers' order forecasting system. The progress is being now -- made now as we put our system in place, is training the team to make sure that our orders are accurate, and make sure that our top line is back. And we are making good progress there.

So, maybe one more quarter?

We will see improvements as we continue to go through this quarter. The goal would be, Farha, to have this taken care of by the end of the first quarter.

Okay. Perfect. Thank you.

The next question is from Jonathan Feeney with Janney Capital Markets. Please go ahead.

Thank you very much. As you entered these markets with the new Hostess facilities, presumably -- I mean, it seems like it has gone rather well. But presumably there was some disruption -- you are adding supply to a market where demand doesn't change. Do we reach a point where, say, later this year that you could actually see an improved pricing dynamic, as you lap that entry? Or was it just the case that -- it was really just one for one, and there isn't a temporarily aggressive promotional dynamic at the margin?

Jonathan, I think, long term, consolidation in this category will lead to better pricing. In the short term, I really wouldn't say entering new markets is creating a price volatility. Whenever you do introduce a brand to the marketplace, there may be some front-end promotional activity, but that is really minimal. So, I really -- I am not sure I am really answering your question, but I don't see the expansion into new markets with the Wonder brand having a negative impact on pricing.

And just refresh my memory on -- what factors about consolidation specifically? Is it just closing plants, or is it behavior among the leading players that are going to drive superior price rationality, in your opinion -- in two or three years out?

The category continues to consolidate. Really can't speculate about what is going to happen on -- long term on pricing. But if you look at the category today, it's Bimbo, Flowers, Pepperidge Farm, and several independent bakers. And if you compare that to 5 years ago, and certainly 10 years ago, that is a very different picture than what we were dealing with then.

And over that time -- I mean, presumably, there has been consolidation in place for decades in the bread industry, the milk industry, and several others. Has there been steady improvement in the markets you are in right now due to that consolidation?

Jon, what do you mean by steady improvements?

I mean, when you talk about maybe prior experience, where maybe in some of your markets that -- where you have high share, you can look -- think back 20 years ago where there were a lot more players. It was a lot less rational, and that actually led to improved margins -- improved profits per unit specifically.

Well, again, I would say that, looking forward, the category continues to be price-competitive. I mentioned earlier, we are really not seeing any change from last quarter's call. But we do have confidence that we can reintroduce our brands, and we can expand our geographical footprint, and do that in the way that we have done in the past. And long term, we are building our brands, and establishing business in new markets.

Okay. Thank you very much.

The next question comes from Bill Chappell with SunTrust. Please go ahead.

Good morning.

Good morning, Bill.

Just looking back at the guidance, and I just want to make sure my math is correct. The SAP plant cost you $0.015 -- or the SAP implementation $0.015. The Fort Worth plant probably cost $0.04, and you got an extra week. So, it seems like we are pretty close to the guidance in terms of just -- we're just lapping some of these one-time issues for 2014.

So, I am trying to understand -- I understand you are going to have the incremental carrying costs, but is that the right way to look at it? Are you expecting the rest of the business that was unaffected to be up by just a few percentage points in terms of profitability?

I think generally you are looking at it correct. You may be a little strong on the Leo's effect; I think it is probably more around $0.03.

But in general, looking at the year and the guidance, the range, there were a lot of factors in the back half that did affect earnings. And the real key is making sure we drive those costs down, and get those things corrected, and the majority of them are. So, we feel good about where we are headed into 2014, because we have identified what the issues were that really affected 2013.

And then the other big driver in 2013 would be the tax effect -- the $0.02. So, if you take out the tax effect, and kind of level the playing field, and look really at operational growth, we believe it will be a pretty strong year coming into 2014.

So, I guess that is my question, like, is that something -- I mean, from a management standpoint, just lapping the one-time issues and making the numbers, it doesn't seem like you would be happy with that. So, should I assume this is conservative? Or are there other headwinds that we are missing, or expectations, integration risks that we are missing?

No. There are still a few things that have to happen. We talked about the Wonder re-launch; we know we need to get that -- get those brands into all the hands of all the retailers. We need to make sure that we have the things corrected that did happen in the fourth quarter, and as Allen said, we are making good progress. So, right now, I think the guidance we have out there is really the best estimate, based on the factors as we know them.

Okay. And -- (multiple speakers). Go ahead?

Bill, I think the -- within our guidance, our growth plan is represented there, as we continue to build our Business in new markets. We will share more details at our Analyst Day about plans for our Hostess bakeries reopening. So, within that guidance, it also has some growing costs as we move and expand our boundaries.

Well, I guess, maybe to the carrying-cost number, can you give us an idea what that assumes, in terms of total facilities that you will be carrying without opening?

Right now in our guidance we have the $27 million that I mentioned in the comments, talking about the full-year costs for 2013. We have forecasted $27 million for 2014.

Sure. I just didn't know if that meant like -- is that 18 facilities that are idle that are -- anything like that?

I would say, and Allen said, we would give you more detail on that in March, but that is still the vast majority of all of the facilities.

Okay. And then, just a final thing from me. Just trying to understand -- going back -- I think if we were to look at the Nielsen's IRI data recently, it had looked like Bimbo had become maybe a little more promotional in the past few -- couple periods. And kind of to Jonathan's question, are you seeing a competitive response? Are we really looking for a more rational environment a year or two out? Or could we see it this year?

Again, it is hard to speculate about pricing, and I do not want to do that. I will say that the trend that we saw -- that we have seen really for most of last year -- continues. And it still remains a market-by-market business.

Pricing is very different from one area of the country to the other. But long term, consolidation should lead to better pricing for the overall category. But at present time, the trend that we have been seeing is still there.

Got it. Thanks so much.

Thank you, Bill.

The next question is from Brett Hundley with BB&T Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning.

Steve, just real quick, just to clarify -- the $27 million in carrying costs for 2014 -- I assume you are making some assumptions within guidance on a certain level of coverage of those carrying costs? Or are you not? Are you just assuming it is another straight hit of $27 million?

I mean, it is based on all of the items --and it is kind of pro rata throughout the year. It is about half of gross margin, and the other half is depreciation.

Okay.

So, really, it is just a full amount. There is no -- I mean, there are assumptions internally about when some things may roll off --

Yes.

-- how we get to the $27 million versus the $30 million we gave you at the end of last year. But it is basically pro rata throughout the year.

Okay. And then, Q4 DSD sales coming in late due to expectations -- is that pretty much all Tasty? I am just curious if you feel the need to recalibrate expectations there? Or put another way -- what you are seeing thus far during Q1 relative to Q4?

Our DSD business is very solid. Looking at Q4, as far as sales projections, it was slightly below where we anticipated. But I have never felt stronger about the ability of our DSD business to deliver going forward.

Brett, when you look at the fourth quarter -- we talked some about Lepage, and that was a significant part of that. Allen talked some about cake being slightly affected. So, the DSD cake was slightly affected.

And then the other was just general -- some of the weeks didn't come through like we had planned in the last couple of weeks of the year. Some of that was weather-driven. I think some of that could have been driven around the holidays.

So, it just didn't come out quite as planned. But there is no reason to recalibrate how we think DSD can perform.

Okay. And then, Allen, I just want to try and get some further color on -- I thought it was important what you said about the map of the US, and where your total coverage is from a 79% standpoint. But a lot of those markets need to be developed much further. And so, I guess, just any color you can give us on your ability, from a timing standpoint, to really develop those markets fully the way you want them to. And if you want to talk to different regions, I think that would be helpful as well. Thank you.

Okay. What we have accomplished in California to date, to me, is a very good example of our team's ability to grow in new markets. We had a multi-phased roll-out, and now serve all the major supermarkets in California. Our internal goals -- we're exceeding those; our team is in place for future growth.

I really think if you look at the map, you can see that many of the markets that we have recently moved into -- some of the largest population centers in the country. And we understand how to build our brands, and we understand how to develop our Business in those markets. So, I think you have got the internal aspect of -- we have a long track record of being able to do this.

I think another good point is that, on the retail trade side, we have a great reputation with the retailers. Many of the retailers that I have mentioned in the past -- they are encouraging us to serve all of their stores. So, in the case of national retailers, as we move into new markets, we are getting their support with product authorizations, and support with displays and so forth. We are very confident.

If you look at our market share on a total-US basis, I mentioned they are about a 14%, and we expect that number to continue to move up. The key is making sure that we do that in a controlled, organized fashion, so that we can make sure that the earnings are there to coincide with the sales growth.

So, looking back, I mean, this has been a real exciting year. We have kind of a peg down in many new markets, and we are going to be developing those markets. The acquisition of the Hostess brands really help us do that. If you look at the bakeries that we acquired, geographically some of the bakeries that are sitting idle are in really key markets across the country. And as we build market share, and as consumer demand increases, we will talk more about re-opening those plants.

We are off to a very good start with the opening of the Henderson bakery, and that has gone extremely well. Really excited about our product quality coming out of that plant. I expect our share in California to grow significantly, as we are selling bread produced by our plant versus co-packers. So, really pointing to California as an example of doing a good job, expanding the DSD footprint, and our plans are to do the same thing in other markets.

Thank you.

The next question comes from Sarah Burns with Findlay Park Partners. Please go ahead.

Good morning. I have just a couple of questions. Could you tell me what your estimate is of the market share that is still held by the independents, i.e., not the top three?

Sarah, we can --

About 22%.

22%?

And is that primarily related to any particular markets?

Sarah, the independents that are left are -- they have concentrated market share in their geography. Again, I can't really give that to you over the call this morning.

Okay.

But we would be happy to provide that information to you.

Perfect, thank you.

Second question goes in to gross margins. Obviously, you built your (inaudible) out of a 1% gross margin decline. You (inaudible) 20 bps of it was due to outside purchases. Could you break through -- (technical difficulty) -- just a little on the other two?

Sarah, I had a hard time hearing you, but I think you were asking: What caused the drop in gross margin, in addition to the outside purchases?

That is right. So the -- (multiple speakers) so out of that 1%, you said 20 basis points was outside purchases. Can you just weight the remaining 80 basis points?

Yes, the other two main items would be the carrying costs of the Hostess facilities, and the loss in efficiencies -- (multiple speakers)

Okay. Fine. Thanks. If I still have questions, I will come back to you offline.

Thank you, Sarah.

Thank you very much.

The next question comes from Amit Sharma with BMO Capital Markets. Please go ahead.

Hello, good morning, everyone.

Good morning.

Allen, you talked about a good start to a relaunch of Wonder Bread and other Hostess brand into your core markets as well as newer markets. What's the expectations internally in terms of how much of -- if you look at Hostess sales prior to them going out of business? What is the expectation in these markets? What share of those sales can you recapture with these brands?

Each market is different. I mentioned that our best results so far have been in our new markets. And if you think about the product category, white bread is a segment of the market where brands are extremely important. The brands that we acquired: Wonder, Home Pride and Merita -- those are very, very strong white bread brands. So, the brands are really helping us significantly as we go into new markets, and we are able to put a Wonder brand with Nature's Own to complete our product line.

In our mature markets in the South, we -- as far as developing incremental sales, naturally that is much lower than what we are seeing in new markets. But at the same time, consumers that were loyal to, for an example, Merita bread in the South, they either have gone to a competitor's brand or they went to store brand. So, we are seeing some incrementality in bringing back some of the customers that left, even in our established markets. But it is -- the growth in our established market is not as significant as the growth that we are seeing in new markets.

That is perfectly understood. In terms of able to put a number on it? Do we think we can do three-fourths of the sales, half, more than that? Any color on that would be really helpful.

The increments --

In newer markets, yes.

Yes. If we look at new markets, we have individual markets where the incremental sales increase for that category is in the 75% to 80%. Overall, if you look at a blended number, its incrementality is in the 25% to 30% range, as far as an increase.

Got it. And then, perhaps to follow-up to the last question, but slightly different on regional bakers. When you talk to them, or when you look at the marketplace, what is the health of the regional baker? What is the mindset here? Do you think they are well capitalized, their margin structure is in the right place where you expect a good fight as you try to gain back from the share from them, as you launch the Wonder Bread? Or you feel like they are happy with what we have, and wouldn't put up a lot of fight for that?

I don't want to speculate about each individual independent baker; the story is very different from one company to the next. In general, the independent bakers benefited from Hostess's exit from the market, just like Flowers did. But to talk about each one specifically, I think, probably wouldn't be appropriate.

All right. And that is -- probably take too long as well. But overall, we generally tend to focus on the large players in terms of competitive environment, and their impact on promotional activity. But given the regional guys are over 20% share, I mean, what is the message that is coming out of them? Will they be looking at this commodity deflation as an opportunity to hold on to that share, or fight aggressively for it? Or go along, and focus more on margins?

Amit, this is Steve. What I -- if you look back over time, last five years or so, and you look at new markets and expansion markets that we entered, most of those markets would have had one or two regional players, as well as, at that time, maybe one or two major players. And we actually have a chart on this in one of our decks that shows good, steady market share gain and penetration over that five-year period.

I mean, the Baltimore/Washington area would be a good example of that. St. Louis was a good example of that. So, we have entered -- we happen to have good success in markets through our brand strength, and there's always been one or two independents or one or two major players in these expansion markets. So, I think that is what gives us confidence as we enter these new markets, we can continue to gain share.

That is helpful. Just one more for me. When you talk about opening the Henderson, Nevada, factory, and I might have missed it -- did you quantify what sort of extra expenses were with that, in terms of either total gross profit or EPS? And is that a fair number to assume for every new bakery that you open from the Hostess assets?

It really depends on the condition of the bakery or the size. Henderson, Nevada -- we brought up actually one line in November. So, it was fairly insignificant. It was less than $1 million.

So, I would say that could be a good -- kind of directionally a good guidepost -- somewhere between $500,000 to $1 million when we bring up a bakery. And that would exclude any additional capital expenditures though.

I am sorry --

At our March meeting, we will provide you more detail not only about Henderson, but future plans for other bakeries.

Got it. Okay. Thank you very much, guys.

The next question is from Brian Rafn with Morgan Dempsey Capital. Please go ahead.

Good morning, everybody.

Good morning, Brian.

Give me a sense -- as you guys migrate from the southeast US, and you are heading west, north in the new territories. Is there any incremental market share cap? You talked about 28.3% in your legacy south markets, 14% overall. Is there any cap, from the standpoint of coming out of the south, brand loyalty with those customers, where that 28% is maybe not achievable 10, 15 years out in the other markets? Or do you fully feel that your expectation is that you can push those same incremental market share that you have in the south across the US?

Brian, my expectation is, with time, we can develop market shares in any new market across the country, that are similar to what we are seeing in the south. The reason I feel that way is because of the brand selection, the team that we have got in place, and the fact that we are in the process of doing it now. You can look at our -- our overall share has gone from 12% to 14% on the US basis, just within the last several years. And now with the brands that we have acquired, the bakers we have acquired, there is no reason that we can't take our overall share up significantly. (multiple speakers)

Okay.

We will not be at 28% within the next several years, but we are certainly going to be moving the number north of 14%.

Yes, okay. I think that's fair. You guys talked on your CapEx budget, $95 million, I think, to $100 million -- how much of that would be applied to opening incremental closed bakeries you acquired from Hostess, if any?

What we said was we would give guidance on that at our Analyst Day in March. There is some there, but we will talk more fully about that in a couple of weeks.

Okay. Can you -- maybe I will ask it a little different. If you look at what you did in Henderson, how much -- because when you were in Milwaukee with us, you talked about there is a standard that Flowers has in plant quality that is not always there in the competitors. On a plant-by-plant basis on a normal size plant, what might it be in CapEx on the front end to bring that plant online, to your standards, from where it exists today?

I would say it depends on the condition of the facility. We have had -- it has varied pretty dramatically, as we have made acquisitions over time. So, to say that it is X dollars per average really would not be a good indication.

What I would say about the facilities that we have targeted to open -- we will talk more about this -- they are in pretty good shape. So, it is a modest amount. It is not anything significant.

Okay, okay. All right.

Is there any point, as you guys look out at your incremental growth, where you -- you might, so to speak, cut bait, where you would say: Look, we are growing these peripheral markets, we have these many closed bakeries. And at some point, you hit that time threshold where you know you are not going to keep the plant, and then you start liquidating assets? I am just wondering if that is three years out, five years out, or might you just carry these plants open-ended?

Brian, we will talk more about that at the Analyst Day in New York. But as we really get a better feel for consumer demand and how fast we can grow our Business, we will make decisions about some of the assets, and whether they need to be put on the market or not. We will talk more about that in March.

Okay. And then just on the snack cake platform, your sense -- your experience in purchasing and launching Tasty -- relaunch of Tastykake -- would your aptitude toward snack cakes, not just breads, but snack cakes, the sweeter breads, would that have all changed in acquisitions you might look at going forward?

I would say we will continue to look at opportunities to grow our cake business. The Tastykake brand, and we mentioned it earlier, we have doubled the sales since we acquired Tasty. And our independent distributor network -- our distributors like having a brand like Tastykake. It fits really well with what we are doing on the bread, bun, and roll side.

So, it is a category that represents opportunity for us. And we would certainly look at any opportunities out there to continue growing our cake business.

Okay. And then, if you look across all of the factories, all of the bakeries that you guys run, what might be your plans in 2014, net hiring, headcount, and then payroll, wage and salary inflation?

Can you repeat that, please?

As you look at -- across all of your bakeries, what might you be seeing for 2014 in employee headcount, hirings, new job hiring? And then, the second question might be: What do you see for wage and salary inflation?

Well, typically we wouldn't disclose any hiring plans or any increases. I would say, overall, in our guidance, there is slight inflation from an employee cost perspective. It is not anything -- it is low single digit. And that's typically how we would give guidance on that.

Okay. And I missed your opening comments, guys. What are you seeing from the standpoint of commodity cost inflates and inputs? And if you are doing any forward buying, hedging or whatever, for Flower on that?

We did say we expect our input costs to be down for the full year. But when you look at the employee costs, and the carrying cost of the plants, total costs will be up. And we do forward buy. We hedge our main commodities, and we are typically out four to seven months. And then, I would say we are typically on the longer end of that, especially when the pricing gets more favorable.

(technical difficulties) bread product lines. In J&J snack foods, they are in the snack food business, they are always doing recipe re-formulations, new flavorings and that type of thing. How much of that do you guys do on the bread side -- cinnamon bread versus white bread? I am just wondering how much incremental thing, in a flat market, can you drive consumer tastes with new offerings?

We spend a lot of time and energy on consumer research, to make sure we understand where the consumer is headed. In general, we have more new product introductions in the snack cake area than we do on the fresh bread side. But if you look at our Nature's Own brand, we have done a really nice job through the years of continuing to introduce new items that are on trend with consumer changes and taste patterns. So, that is very important, and I feel that it is critical to building strong brands for the long term, and we will continue to develop new items.

Thanks, guys. Appreciate it.

Thanks, Brian.

Thank you.

The next question is from Akshay Jagdale with KeyBanc. Please go ahead.

Good morning, Akshay.

Good morning. Can you hear me?

We can. Good morning, Akshay.

Perfect. Thanks. So, a couple of questions -- I missed a certain part of the call, so if I am -- if you repeat anything, I will go back to the transcript. So, in terms of -- can you help me out with gross margins by segment this quarter? What were the gross margins for DSD and warehouse?

Gross margin for DSD was 51.5%, and warehouse was 23.9%.

Okay. So, basically, sequentially the margin for DSD went down. So, you have talked, and you guys have discussed this significantly -- can you quantify the overall growing pains, if I may, what impact it is having on your margins right now?

And we have talked on and off about efficiency, outside purchases, and then investments for future growth. If those are the three buckets -- first off, am I missing any buckets? And if you could just quantify -- help us just ballpark quantify what impact each of those are having currently on your margin structure?

Sure. I mean, if you look, overall, there have been costs as we have expanded markets. A lot of the market expansion is down in SD&A, so that would be in your net operating margin. But on the gross margin line, we have talked about some factors this quarter that affected DSD. And we also have talked about factors, such as in the warehouse, such as the tortilla plant that affected the last two quarters.

When you look at gross margin, we are up roughly 50 basis points year over year. Going into 2014, we are targeting improvement in gross margin. So, I would say individually, each one is probably, less than 10 or 20 basis points. I would say it is not significant individually. Collectively, they have had a pretty strong effect on gross margin.

What is your embedded expectation for margins in 2014?

When you look where we are --

Gross margin?

-- we would say we would be up roughly, probably 30 to 50 basis points year over year.

That assumes a decline in commodity costs and an offset from higher D&A, roughly? Or it just seems like a pretty small increase, so can you help me understand that in light of your weak -- ?

Well, we also have the carrying costs for the facilities that are in our -- on DSD. They are in the gross margin line, and we will have a full year of those costs versus a half year.

Right. But your costs -- your ingredient costs are going to be down. And your pricing in DSD seems to be stronger than I had expected, which tells me there is good pricing power in that business, relative to history. Can you just help us understand -- maybe a better question is: How do you go from the margins that you have today, to what the margins have been historically?

So, what would be some of the buckets that would really add to the margin structure, from what you are guiding to for 2014 longer term? There is about 300, 400 basis points that you have lost over the last, what, five or six years. And you have said you expect to get back to those historical numbers eventually. So, what are the big buckets that will get you there over time?

Over time, a couple of the big buckets -- typically, we have talked about this -- if you look at the -- from the revenue perspective, we have talked about in this industry, because we have done some remarkable jobs serving the market. Over the last year, we did see our stale rate move up a couple of points. So, over time, we will bring that back into historical averages, because that has affected our rate, and that will probably add -- could add a point or more. It is pretty strong.

And the other big item that affected us over the last 12 to 15 months has been the efficiencies -- getting those back in line. So, with the growth we had, it would be another strong driver over the next couple of years.

And beyond that, as we work the carrying costs out of the equation, that will also be a big driver. So, really, the three buckets are -- the largest three buckets would be sales control, efficiency gains, and making the decisions on these Hostess facilities and bringing the carrying costs down. And the three of those together would be pretty significant.

Okay. And how would you characterize the pricing that you are seeing in the market? I know when we had you guys on the road, I was expecting 3% to 4% increase in Nielson IRI pricing to be a pretty good outcome for the year, given where wheat costs are. And so, it seems like the pricing is sticking pretty well. How would you characterize the pricing environment right now?

The pricing that we put into place going into the fourth quarter is in place. As far as the overall promotional environment and pricing environment, really we have seen no real significant change from last quarter. It really has not improved, and it has not deteriorated overall.

There are certain markets in the country that are kind of hotspots for promotional activity, and we understand where those are at. But overall, the pricing environment really hasn't changed dramatically from our last call.

Okay. And this one, last one -- I do not know if you already said this, but what part of your Business underperformed your expectations in the fourth quarter? It seems like the cake business was weak, but did the quarter come in weaker than you had expected, slightly? And if so, what part of the Business was specifically weaker, and why?

I don't know if you heard this, because I think you said you might have joined late, but there -- we had -- on our SAP integration at Lepage, we had a slight misstep that cost us about $0.015. That had really to do with, once we got the systems in, it was kind of around the ordering process. We have gotten that pretty much worked out, so we expect to see that continue. So, we did underperform there, from a DSD perspective.

And then also, we talked about some cake pressure with the Hostess relaunch of the brands there. So, we did see some pressure, in both DSD and warehouse, from a cake perspective. So, those were the two big items I think that were different than the warehouse issue in the third quarter that really affected the fourth quarter. But if you look at those -- (multiple speakers)

So, on the cake side, what specifically happened in the marketplace that you weren't expecting? Because the view going in was, you knew Hostess was going to be on the shelves. But you felt good about your positioning, especially in the c-store channel, which is where you would gain most of the share. Was most of the underperformance in the warehouse business, and what part of your expectations underperformed? So, what happened -- they just were more promotional, or your brands weren't as good?

Akshay, whenever you have a major competitor enter the category, or in this case a competitor come back into the category, it has an impact. We saw sales impact on our Mrs. Freshley's warehouse business. We also had some short-term sales impact on our Tastykake business.

But again, we feel like that, looking at the long term, those brands are going to do just fine. And we will continue to build both brands as we expand our markets and introduce new items and to do the things that we know how to do. But there was an impact with the Hostess cake coming back into the market in the short term.

Okay, great. Thanks for taking all my questions.

Thanks, Akshay.

The final question is from Eric Katzman with Deutsche Bank. Please go ahead.

Thanks for the follow-up. I will make it quick. The long-term guidance on top line has typically assumed some kind of M&A. But from an antitrust perspective at this point, do you think that that is not really likely? And therefore, guidance in the future, not to steal your thunder, but guidance in the future is really predicated more on the core?

Eric, when you look at the long-term guidance right now -- we have talked about, and Allen talked about bedding down what we have. So, I would say in the near term, even though we look at any opportunity that presents itself, we don't have -- for 2014, other than the Sara Lee sales, we do not have any acquisition potential in that guidance. And then when we meet in March, we will talk more about how we look at the M&A -- are thinking about the M&A environment going forward.

Okay, thanks.

Thank you. That was the last question. Now I would like to turn the call back over to Mr. Allen Shiver for closing remarks.

Good. Thank you for your interest in our Company. This past year was a record year for Flowers Foods. I want to take this opportunity to, again, thank our Flowers team for the extraordinary efforts that we took place in the market. We look forward to a successful 2014, and have tremendous confidence about our ability to execute going forward. Thank you for your interest.

Thank you. Ladies and gentlemen, this concludes the Flowers Foods' fourth-quarter 2013 earnings call and webcast. Thank you for participating. You may now disconnect.