Flowers Foods Inc (FLO) 2014 Q3 法說會逐字稿

Welcome to the Flowers Foods third-quarter 2014 earnings conference call. My name is Ellen and I will be the 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. You may begin.

Thanks, Ellen, and good morning, everyone. Our third-quarter results were released and the 10-Q was filed earlier this morning. You'll find those posted on our website in case you need them. The PowerPoint presentation that supports our discussion is also posted on the conference call page on the website.

You know that as we get started, it is important that I remind you our presentation today may include forward-looking statements about our Company's performance. Although we believe those statements to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially.

In addition to matters we'll discuss during the call, important factors relating to Flowers Foods business are fully detailed in our SEC filings. Participating on the call today we have Allen Shiver, Flowers Foods' President and Chief Executive Officer; and Steve Kinsey, our Executive Vice President and Chief Financial Officer.

As Ellen said following our prepared remarks, we'll open the call for your questions. Now I'm happy to turn the call to Allen Shiver.

Thank you, Marta, and good morning, everyone. Thank you for joining our call today. During the quarter, we achieved margin expansion. We grew sales in new markets with the help of our new brands.

In addition to growing sales, our team focused on profitability. And this quarter we expanded our margins to achieve adjusted earnings growth of 16.7%.

A two-year perspective shows that we continue to maintain a strong market position in the face of intense competition for market share. We believe the brands that we acquired have helped us hold on to the share that we gained as consumers adjusted to the new competitive landscape caused by Hostess' bankruptcy.

We remain committed to providing great service to our existing and new customers. And we continue to optimize our operations and strengthen our position as the low-cost producer of quality bakery foods.

Turning to the quarter, our branded bread and roll business continued to grow driven by sales of our acquired brands, Wonder, Home Pride, Butternut, and Merita, which were up about 8% sequentially from the second quarter this year. Our branded unit volume is encouraging. The pricing pressure has resulted in sales dollars growing slower than unit volume.

As I've said in quarters past, the consumer remains pressured and competitors are relying heavily on price promotion to drive volume to their brands. Last quarter we discussed our intent to realize the more normalized level of promotions by quarter 4 of this year.

During quarter 3 we took action. And by the end of the quarter, we had reduced our promotional spending as a percentage of sales. Now that our acquired brands are back in the market, we are putting more attention on our core markets and established brands like Nature's Own.

We are focusing on the fundamentals. By strengthening relationships and providing excellent service at the shelf, we will increase sales through off-rack displays and expanded shelf space. Our team will continue to execute on these basics to further increase sales in our core markets.

Hostess cake continues to gain share, particularly in the warehouse segment. Prior to the reintroduction of Hostess cake in July of 2013, we gained a significant amount of new cake business. We now have a 6.5% share of branded cake according to IRI. In 2012 before Hostess exited the market, we had a 3.2% share of branded cake.

We have maintained a good portion of our incremental cake sales and we remain confident in our ability to leverage our DSD network and grow our Tastykake brand. Our cake marketing team is developing new products, new flavors, and new packaging that appeal to today's consumer.

We are expanding our line of single-serve items, as well as using seasonal packaging to drive interest in our cake brands. Our DSD network allows us to work directly with store managers to make sure our products are effectively merchandised to attract those important impulse purchases of snack cake. Because Tastykake offers outstanding quality and unique items delivered fresh to the store, we are confident that more and more consumers will come to love our snack cakes.

Sales of food service and the store branded products declined due to several factors. Because of low margins, we exited certain private label and food service businesses. Also competitive pressure impacted our store brand cake business, contributing to our decline in warehouse volumes.

Sales in our new markets continue to grow rapidly, up almost 60% versus last year. Growing in our newer markets is an important part of our long-term strategy and I am encouraged by the results so far.

For example, we are seeing rapid growth in areas such as Northern California and the State of New York. Success in these large markets can have a major impact over the long term. With our experienced team and our well-known brands, I am confident we will continue to see great progress in our expansion markets.

Several of our acquired bakeries are well-positioned in important expansion markets. As was the case with our Henderson, Nevada and Knoxville, Tennessee bakeries, we will carefully monitor progress in our expansion markets and when appropriate, we'll take advantage of our reopening those bakeries that allow us to maximize freshness and reduce distribution costs.

We expect acquisitions will continue to play an important role in our future growth, just as they have historically. While we are currently focused on completing the integration of our most recent transactions, we continue to constantly monitor the landscape for acquisition opportunities.

Beyond the acquired brands and the new markets, we are also increasing sales of new products, led by Cobblestone Bread Company. Retailers continue to support this new brand with incremental shelf space and we are seeing encouraging trial and repeat purchase statistics that are supported by growing sales figures. In addition to Cobblestone Bread Company, we are working on other new product opportunities within our existing bread and cake brands.

We know growing our market share is not enough. We also have to maintain our position as the low-cost producer. We always search for ways to reduce costs and our team has been working hard to improve operations.

These efforts are bearing fruit. Our margins continue to grow as we improve manufacturing efficiencies in response to the higher volume gained over the past two years.

Right-sizing the business remains a focus. Our team is constantly working to improve our efficiencies by increasing running speeds, reducing changeovers, and adjusting other aspects of the production process.

We are seeing the results of our manufacturing teams' efforts. During the third quarter, our manufacturing efficiencies improved by 270 basis points versus the third quarter last year. The team has identified future opportunities and I'll look forward to higher efficiencies in the future.

We're making good progress at Lepage. In the third quarter both sales and profit at Lepage improved. We have enhanced manufacturing, completed the installation of new systems and continue to invest in training.

Lepage serves an important market and we are focused on maximizing our sales and our earnings potential at Lepage.

I'll now turn the call over to Steve Kinsey to give us a financial report. Steve?

Thank you, Allen, and good morning, everyone. As Allen discussed and our results show, we did experience a weaker top line this quarter. However our efforts to drive margin improvement are paying off, and we were able to drive significant margin improvement year over year.

We completed the sale of certain assets from the Leo's operations during the quarter. And we continue to see improvement in those areas we focused on last quarter, such as improved manufacturing efficiencies, reduced carrying costs of the acquired facilities and improved results at our Lepage operation.

As Allen said, sales in the quarter were down 3.3%. A positive net price mix of 1.1% was offset by decreased volume of 4.4%. The positive price mix was driven primarily by a positive mix shift mostly due to strong brand performance in our portfolio.

Overall, pricing was down due to promotional activity. Volume declines were driven by declines in our branded and store-branded cake businesses, store-branded bread and rolls and food service, primarily our tortilla business. Despite the strength in our expansion markets, our core market sales remained pressured by a strong competitive environment in bread, buns and rolls and cake.

Our DSD business had mixed performance. Growth in our branded bread and rolls did not offset decline in branded cake and store-branded bread and rolls. Our expansion markets, representing roughly 6% of total DSD sales, performed well and contributed to growth of 2.2% to the overall DSD business. In our DSD business sales of store branded products were down 9%.

Our warehouse business sales declined 11.8% as compared to a year ago, driven primarily by decreases in snack cake and food service. The warehouse-branded cake and store-brand cake businesses both continue to be negatively impacted by Hostess cake brands.

Also during the quarter we exited less profitable food service business which contributed to overall sales decline in the warehouse segment. Our exit from the food service tortilla business contributed to the declines in this segment. Going forward our tortilla strategy will center on retail tortillas, which will be operated under our DSD segment.

In total, our cake business was down approximately 8.3%. Our DSD cake business was down 7% and our warehouse cake business was down 10%.

Adjusted operating earnings, or EBIT, were up 15% this quarter compared to last year's third quarter. Adjusted EBIT margins were up 130 basis points year over year to 8.2% of sales. The overall improvement in EBIT was driven by a stronger gross margin and a decrease in selling, distribution and administrative expenses as a percent of sales.

Adjusted earnings per share for the quarter were $0.21, or up 16.7% compared to last year's third quarter adjusted EPS of $0.18. The acquired facilities carrying costs negatively impacted earnings per share for the quarter by $0.01 compared to $0.02 in the prior year. The higher tax rate in the quarter compared to last year negatively affected earnings approximately $0.01 per share.

We did see gross margin improvement quarter over quarter. Our gross margin was 47.8% compared to 46.7%, or up 110 basis points compared to prior-year as a percent of sales. This was driven primarily by lower ingredient costs, lower outside purchases as a percent of sales and improved efficiency.

These improvements were partially offset by higher workforce and utility costs. Carrying costs related to the acquired Hostess facilities reduced gross margin by 20 point basis this quarter as compared to 30 basis points last year.

We cycled the closing of the Hostess bread asset acquisition early in the third quarter. Carrying costs for the Hostess facility of $3.6 million negatively impacted total EBIT margins by 40 basis points. During the third quarter last year carrying costs were approximately $5.3 million and negatively impacted gross margin 60 basis points.

We are pleased that following the close of the third quarter we completed the sale of additional non-strategic Hostess facilities. Year-to-date we have sold three bakeries and 16 warehouses for roughly $18.4 million in net proceeds. Year-to-date carrying costs were approximately $16 million and now we expect full-year costs to be roughly $20 million to $21 million.

As Allen stated, we are pleased with the progress we have made at Lepage. Overall performance continues to improve sequentially, and third-quarter earnings at Lepage were down approximately $1 million compared to last year's third quarter.

We did complete the divestiture of certain assets related to Leo's Foods. During the quarter we recorded a gain of $1 million. Year to date we have recognized a net loss of approximately $3.5 million related to the sale of the Leo's assets. As I said earlier, we remain committed to the Flower tortilla business and we did relocate certain Flower equipment to our San Antonio bakery to support future growth in this category.

Adjusted selling, distribution and administrative costs in the quarter were 36.3% of sales compared to 36.5% of sales of last year's third quarter. This 20 basis point decrease was driven by reduced incentive compensation and lower marketing expenses compared to the third quarter last year. Marketing expenses in the prior year were higher than normal due to the roll-out of the acquired brands in last year's third quarter.

Turning to the balance sheet, cash flow in the quarter was strong. Cash flow provided by operations was a positive $47.3 million. Year to date we have we repaid approximately $116.8 million of debt, ending the quarter at roughly $817 million in debt.

At the end of the quarter our debt-to-EBITDA ratio, based on the trailing 12-month EBITDA, was approximately 2 times. During the quarter we also paid dividends of approximately $25 million and funded $14 million in capital expenditures.

During the quarter we also opportunistically repurchased 550,000 shares of our common stock. As I said, our balance sheet remains strong and that gives us great flexibility to continue to focus on delivering value to our shareholders through dividends and share repurchases, debt repayment, investments in our facilities and strategic alternatives as they present themselves.

Now turning to our final outlook for 2014. As we have mentioned, the market remains competitive and despite positive trends in our expansion market sales and our focus on cost management, we saw the need to update our guidance to better reflect the current environment.

We now expect a sales range of approximately $3.75 billion to $3.77 billion and expect adjusted earnings per share of approximately $0.86 to $0.90. Competitive pressure, continued investment in our brands in expansion markets and slightly less-than-planned tailwinds from commodity costs are affecting our outlook for the remainder of the year.

Though this forecast falls short of our early expectations, we believe we are continuing to take the steps that will provide growth and value over the long term. As a reminder, 2014 is a 53-week fiscal year. The extra week in 2014 is expected to add approximately 1.5% to 1.8% of sales for the full year.

We are not giving guidance today for 2015. However, looking ahead to 2015, we remain cautious about the competitive environment and the impact that has on sales growth. However as Allen stated, we are very focused on reducing excessive levels of promotional activity and that should benefit Q4 and 2015.

We do anticipate today that overall input costs should be down year over year going into next year. And since we have been able to sell some of the Hostess facilities, carrying costs related to the acquired facilities will be lower next year. We will provide specific guidance on our fourth-quarter call in February.

One final note. As noted in our press release today we offered a lump sum benefit to certain former employees as part of a pension de-risking strategy. This offer is one-time in nature and the deadline to accept the officer was October 31.

Our initial review of those acceptances indicate that our overall pension obligation will decline by approximately 10%. The distributions and satisfaction of this offer will be made out of existing plan assets and these lump-sum payments do not require any additional contributions by the Company to the plan.

In settlement of this offer, the Company estimates it will recognize a one-time non-cash charge in the fourth quarter of approximately $14 million to $15 million, or $0.04 to $0.05 per share. This charge is not included in our updated guidance.

We remain committed to our long-term goals. I have confidence that we can continue to drive stronger margins through better management of promotional activity, reducing stales or returned products, continuing to work on improving efficiencies and continuing to eliminate plant carrying costs as we sell these idle facilities.

By focusing on cost reductions and leveraging sales through brand and marketing expansion, we should be able to meet our targets over the long term. Thank you for your interest in Flowers Foods and now I'll turn the call back to Allen.

Thank you, Steve. Our Company has been built over 95 years by the hard work of thousands of Flowers' team members. There have been good years and there has also been lame years. But over time we've consistently improved our quality, our sales and our profitability.

As I look back over the past two and a half years since the Hostess liquidation, I must remind myself how our Company has taken advantage of the opportunities to accelerate both sales and earnings. We have truly taken our organization to a new level.

For example, in the past two years our sales have grown over 25%. Our EBITDA is up 37%. And our adjusted earnings per share is 42% higher. Not only did we add sales volume but we also leveraged our cost structure.

Most important, as we look ahead, our acquisition of the Hostess bread brands and bakeries dramatically lowers our cost of entering new markets. We will realize those growth benefits for many years to come. Thank you for your attention and Ellen will now open the line for questions.

(Operator Instructions) Eric Katzman, Deutsche Bank.

Hi, good morning, everybody. Can you hear me?

Good morning, Eric.

It seems like across your business, the real pressure came from some food service parts of the business, private label, and more of the branded warehouse snack cakes. Is there a way to quantify how much of the business is -- in terms of revenue, is underperforming versus what sounds like a good chunk of the branded fresh bread and roll stuff is doing okay? How much of the top line is really challenged?

Eric, let me take a shot at that and then I'll ask Steve for help. If you look at, really, three areas, our decline in store-brand for private label bread. And again, those were a biz that had significantly low margin, so we made the decision to exit that.

The second area is store-brand cake and also our branded cake, and that is directly tied to the reintroduction of Hostess cake to the market. And then the third area is really the food service tortilla business, and Steve did a good job describing the exit with Leo's. We made the decision to move away from that.

So store-brand private label bread, the cake business, and then our food service tortillas, really those accounted for about 92% of our total decline for the quarter. Those are the three areas.

Overall in our branded products, we mentioned that we were working hard to reduce the amount of promotional activity. I think that is also reflected in the improved margin that we saw during the quarter. Steve?

Eric, when you look at the various categories, obviously store brand, as Allen said, is roughly 16% or so of the DSD business. It was only down, as I said, about 9%. It was fairly inconsequential.

And then on the cake side, about 20% of our business has been tracking down high single-digits this year. Hopefully, that should stabilize as we finish up the year.

If you recall, even though Hostess reentered the market in July of last year, it was a staged roll-out that continued throughout 2013. So we would hope that as we go into 2015, things begin to stabilize from a cake perspective.

Okay, and then next question has to do with, Allen, your strategy around snack cakes. Obviously, you highlighted that you're better than where you were two years ago. But significant pressure, and I assume that is mostly a price-based competition, as opposed to execution issues or something else.

Is the only response from you really to fight to the lowest common to denominator and just cut costs and fight based on price? And do you see any signs of Hostess becoming more rational in the way they're promoting or marketing their brands?

Eric, really the pricing is not a significant issue in the cake segment. If you look in the rear-view mirror, we've been putting a lot of focus on reintroducing the acquired brands, Wonder, Merita, and so forth. Not to say we've neglected the cake category, but we've probably had higher priorities if you look in the past year, year and-a-half.

Never been more optimistic about the growth of our Tastykake brand. We continue to invest in improved packaging. We're developing new items.

We have some really exciting seasonal items on the market right now. We feel like that Tastykake is a great addition to our DSD structure. Still very bullish on growing our cake business over the long haul.

There also is areas of the US, where we do not have DSD distribution, that offer opportunities for expanding our cake business. We'll do all the things you described, in terms of controlling costs and making sure that we're efficient, but at the same time we are very bullish about growing our cake business over the long haul.

Okay, and then -- thanks for that. Last question, Steve, last quarter I think you had highlighted that in the DSD fresh bread and roll side of things, the growth of the business had also resulted in a much bigger hit from stale rates.

You didn't mention that one way or the other. I'm wondering where that stands?

Overall, Eric, we have seen stales begin to trend more positively. It's not significant at this point, but we are pleased with the progress.

We're taking steps to help from the ordering perspective. Coming in -- the third quarter was not that substantial, but coming into the fourth quarter we've seen some nice trends and we feel really good about the direction we're headed there.

Okay, all right. I will pass it on, thanks.

Thank you, Eric.

Farha Aslam, Stephens.

Hi, good morning.

Good morning, Farha.

Following on to Eric's questions regarding cakes, one of the issues was trying to get features outside of the normal cake displays. Have you been seeing an uptrend in that, if you're starting off in the fourth quarter, in terms of display activity?

Again, as we're putting focus, I hate to say, back on cake, but we're putting significant focus on getting off-rack displays of our Tastykake. The seasonal items that I mentioned earlier are a good example.

The single-serve Tastykakes are doing exceptionally well, as we extend that into new markets. It really works well with our independent distributor model, because in many cases these are incremental sales that can certainly help their business as well as ours. So we're excited about the future for Tastykake.

Okay. And then in terms of promotional cadence, I think both you and Steve highlighted that the competitive environment remains very tough. But if you had to compare today's promotional activity versus, maybe, three months ago in the third quarter, how would you characterize it? What are the trends you see going into 2015 in terms of promotions on bread, branded bread?

Farha, I think the best way I can answer that is to really comment on our strategy. With our margin improvement this past quarter, obviously we've taken action to reduce the amount of promotional activity that we're generating.

It's still very much of a market-by-market situation, in terms of competitive pricing. It's hard to say it's dramatically better, but I would not say that it has deteriorated.

I think the action that we're taking is extremely visible in the marketplace. We're focused on building our brands for the long-term. We can do that through quality and great service, without having to rely on price nearly as much as we have in the past.

Great. My last question regarding M&A, do you feel the Flowers organization is ready, if acquisitions came up, to add to your current business or -- are you seeing M&A opportunities come up?

Farha, as I mentioned, we're always looking for the right acquisition opportunity. It's hard to determine exactly what the right time is.

We have to be ready when the other company is ready. But if the right acquisition came along, we certainly would not hesitate if it was a good fit.

One of the strengths of our Company is our team. We've got the most experienced team in the industry.

We have the ability to handle an acquisition, while we continue to keep momentum improving in other parts of the business. I guess of the short answer is that if the right acquisition opportunity came along, we would certainly take a hard look at it.

Great, thank you very much.

Thank you.

Brett Hundley, BB&T Capital Markets.

Hey, good morning, guys.

Good morning, Brett.

Hey, Steve, I had a question on guidance, just to make sure that I'm understanding this correctly or thinking about it correctly. So your gross margins were indeed better than expected during Q3. It was nice to see that improvement.

When I look at your guidance, your implied guidance, for Q4, it implies a scarier margin for DSD than what I would have expected. I'm guessing that some of that is defending share amidst a more competitive environment. So maybe I'm wrong, but if you could address that, and if it is defending share, is that the right call for Q4 and beyond?

I think when you look at the fourth quarter, we still expect margin improvement. As Allen said, and I said, from a competitive perspective, we're trying to pull back on promotional cadence. We think that is [up] to the revenue on the top line.

When we look at margins for the DSD group in the fourth quarter, overall I would say it's not going to -- we don't expect much pressure. We expect it to continue to grow. Our full-year guidance on gross margin growth is still intact, being at that 30 to 50 basis points.

Okay. That's helpful.

Brad, this is Allen. Before you leave that, also a reminder that if you look at the fourth quarter, we have three holidays that also have an impact on our operations.

Okay. I wanted to stay on pricing, particularly as it relates to next year. A couple of things that we're seeing right now are increases in freight. We're seeing some of that disconnect between wheat futures and flour costs.

And I wanted to get your perspective on your ability to hedge today. Is it harder for you guys to hedge out because of that disconnect? Secondly, regarding that pricing outlook, because of some of these additive costs and difficulties, do you think that the industry can be more rational and that you can see a more favorable price going forward because of that environment?

Sure. When you look at the outlook, obviously we've seen a very nice pull-back on wheat futures, and we still feel very strong about our strategy to hedge from the futures perspective, and feel like wheat has gotten to a fairly fair value compared to where it has been.

But we definitely have the same view as you do, when it comes to basis and freight. It seems that there hasn't been any relief of those components of the flour costs.

Now that we've actually had some winter weather hit early, and then the forecast to be for strong winter weather again in the North and Midwest, it does give me a little concern from a freight and basis perspective, because we still have not straightened out the situation that has built over the last couple of years. Looking forward, that does cut into some of the tailwind provided by the pull-back on the wheat futures.

And that's understandable. However, do you think that as a Company and potentially as an industry, that you guys can price that through or it's just too difficult to call?

Brett, I would say it's probably too difficult to call at this point. But obviously this industry, as a whole, deserves higher margins.

And as we look at the years ahead, with the consolidation continuing, you would think that will come to pass at some point. A lot of work is taking place to make sure that the retailers understand the value of this category to their business, and the importance for them to improve their margins, which at some point will improve the bakers' margins as well.

Brett, this is Steve. One final comment on that, I would say. We've talked about promotional cadence and it's really about net getting price. So that you're able to pull back on promotional activity and see net price improve, that could offset some of the higher costs related to the basis and freight as well.

Yes, okay, thank you. And then my last question, Allen, more of a high-level question for you. Our opinion here is, given some of the competitiveness and the moving parts within the broader fresh bread category, two areas that we really see that growth, and maybe even potential for better margins over time, is in premium bread and the breakfast category.

You guys have talked about Cobblestone, but I was wondering if you can lay out additionally how and when Cobblestone can be meaningful for you guys there, your plan surrounding that? Also, what your strategy would be in the breakfast category as well? Thank you.

Brett, you're exactly right. When we look at our opportunities to grow our top line, obviously the specialty bread category is underdeveloped, and also our breakfast category is underdeveloped. Those really underline big opportunities for Flowers.

Cobblestone Bread Company, we're very early in the game there. But as I mentioned, the early indications are exciting. We continue to do extensive research so that we better understand the consumer, both in the breakfast category and the specialty bread category.

Those will be segments of the market that we will be looking at as far as our long-term growth. I don't have anything to report today, but I can confirm that those are important segments to the market for us. They're going to be more important as we look at the road ahead.

Thank you.

Thank you.

Bill Chappell, SunTrust.

Good morning.

Good morning, Bill.

I understand you're not giving next year's guidance, but trying to understand, with what you see today, continued competitive pressures, the expected lag for the cake business, at least through until you lap it mid next year. Is it possible to grow top line next year, excluding the extra week that you'll comp against?

Bill, I think as always, it's possible to grow to the top line. I think if you look at our team, we have an aggressive team in place that is really focused on doing everything that we have to do to grow the top line.

The opportunity really isn't in any one area. We talked a lot about new markets, and the ability to grow our business and our expansion markets. Really exciting to see the work that is being done in that area.

We also continue to look at our Tastykake brand. The Hostess reintroduction now is about the cycle.

Some of the activity, from a displace standpoint, will start to go our way. We've got new items that are in the queue for our cake business, so we're excited there.

Again, there's no reason that we can't grow our top line as we look at next year. But again, I want to be careful that we don't jump the gun and give guidance at this point. In general, our team is not satisfied unless we're growing the top line.

Okay. Maybe you can help me understand the dynamics, then, on the Tastykake business. It seemed like the real surprise came last quarter when they had won some new share and maybe you'd taken your eye off the ball a little bit.

We don't really lap that until next June. Or should we start to see the comps get easier sooner than that?

I think what I was really referring to is the activity in the marketplace with Hostess tying up a lot of the off-rack displays. We're seeing more and more Tastykake displays coming back into play. I think the retail trade -- we're trying to do a better job reminding them the benefits of DSD and how the cake business really fits well with direct store delivery.

It's a category that the good news is that from a pricing standpoint, price really hasn't been a big issue in the cake business. It's all about merchandising, off-rack displays, availability, new items and creating excitement. That's what we know how to do.

Okay. And then looking at -- you talked about retailers are being more educated about the pricing promotion environment. You're continuing to work through your promotions.

Is there any sign from the competitors that it will get better by year end? Or are you assuming where this is where we're going to be? There's not much that can really move until your major competitor moves?

The process I mentioned with the retailers is really a long-term educational process of how important the category is. Again, I don't see any dramatic changes in the near term with retailers' pricing strategy.

What we're working hard on is the pricing environment that we see today. Our assumption is that's going to be the pricing environment that we live in as we go into next year.

If improvements happen, then that will be a good thing. But at the same time, we're making sure that our cost structure is in place so that not only that we can be competitive in the marketplace, but we can also hit our earnings number as we move into the new year. So my comments about improving pricing is more directed at the longer term.

Got it. Last one, with regards to share repurchase, it looks like there was at least a step up this quarter. It didn't show up in the share count, so was that more towards the end of the quarter? Does that signal that we're going to maybe see more like that in coming quarters?

Bill, it really was more opportunistic throughout the quarter. It wasn't a block purchase or anything, at one time.

But what I would say, share repurchase has always been part of our capital allocation. We do consider that a great way to return shareholder value. We'll continue to keep it up at the top of the list, when we think about excess cash and how we can return value to the shareholder.

But no change per se, just at current levels?

Yes, it's hard to say what the cadence will be. We still have our strategy to buy in shares offered at any dilution.

We are currently lagging that over a two-year period. We want to get back in line with at least that strategy, and then try to continue to think about excess cash and how we use that to create value.

Got it, thank you.

Thank you, Bill.

Tim Ramey, Pivotal Research.

Good morning, Tim.

Hey, good morning, thank you. I noted your comment on the acquired brands up 7.8% sequentially. Can you give us any help on where the sales level for those acquired brands would shake out right now?

Tim, I don't -- we really don't disclose -- for the quarter, Tim, it was roughly $45 million.

About $45 million. Okay, terrific.

We've been doing that each quarter. We just put the percentage rather than the dollar figure this time.

Okay, terrific, thanks. And just to recap on the asset sales, I think you said it was 13 warehouses and 3 bakeries for $18 million in total. Is that correct? Year-to-date?

Yes, that's correct.

Okay. I haven't piled through every page of the 10-Q yet, but it seemed like earlier there was maybe a plan to keep about nine of the acquired bakeries, and the remainder were to be sold. Is there an update on that? I apologize if it's in the Q.

Really what the plan was, we had nine listed for sale. We said we had roughly five that we had future plans for, and we had about five that was to be determined. Today we're still evaluating those five to be determined, so there's really no change in our plans at this date.

So five are likely and five are on the bubble?

Correct.

Okay.

What I would say though, that what we have done, is we have equipment that we can use in other locations. We have moved some equipment around, but we wouldn't disclose where, publicly.

Okay. And a random thing, I noted that the distributor notes were up about 9.4% year to date. I can't think of any reason why there would be seasonality in those.

That sounds like it's bigger than the growth in new routes. Any comment on those?

We've actually sold quite a few territories with the new markets. We sold some in California. Then we've also converted the majority of our Lepage distributors to distributors.

Terrific, thanks a lot.

Thank you, Tim.

Amit Sharma, BMO Capital Markets.

Hi, good morning, everyone.

Good morning, Amit.

Steve, you provided a sales breakdown for the cake business, down 8.3% in DSD warehouse. Can you do the same for us for the fresh bread business as well?

I'm not sure I understand what you're asking.

You said that cake was down 8.3%. It was down 7% in DSD and down 10% in warehouse.

If you looked at your fresh bread business, can you say, is it down -- I think it's down 2%. But if you can say that, how much was it down? Then what was the breakdown of sales between branded and non-branded business in the fresh bread?

Overall, branded sales were up fairly nicely. The pressure on the bread business came in the store brand. We chose to not bid lower on some business that we did. We did lose some units on the store brand side, and that affected overall store brand.

What I did say was store brand was down about 9%. You should be able to tell from that that branded was up pretty nicely.

Amit, in our DSD business, branded bread, Nature's Own, acquired brands, were up about 1.4%.

1.4%, that's perfect. That's what I was looking for, okay. You talked about starting to rationalize your promotional activity.

Are we seeing any volume impact from that so far? Is it getting worse? Or if you had modeled some elasticity impact from that, is that within expectations more or less?

Amit, it's really too early to tell. Obviously the reduction in promotional activity is reflected in our improved margins. But again, it is too early to tell.

A lot of the changes in terms of promotional activity hit middle of the quarter. They're continuing now and will continue as we move into the new year.

It's really putting focus on when we have a promotion that we have an off-rack display so that we generate incremental sales, and that's really important. That's what our team is focused on now.

Okay. And then on -- you mentioned and right now you mentioned as well -- about the off-rack displays and merchandising, especially on the cake side of the business, having a bigger impact on underlying sales trend. So other than promoting or paying for those displays, how else can you get some of those displays back? Especially on the cake side, which tends to be highly impulsive, in terms of consumption.

The real key is all about service levels. It starts at the national account level and it ends up at the individual store level.

Our independent distributors do a great job of servicing their accounts. Basically displays are approved usually at headquarter level, then they're implemented all the way down to the individual store level, with our sales team asking for the display.

Once you have the display, it's your job to make sure it's well-stocked and well-maintained, and we do a good job of that. So that's how that works.

How long is the turnaround on that? Are you starting to see some of those displays come back to Tasty yet? Or are you not seeing?

I had mentioned that our single-serve items are doing especially well on off-rack displays. We're also complementing that with seasonal packaging on a lot of our Tastykake items, that, again, are lending themselves to a lot of display activity.

Even though the cake category, with Hostess back, continues to be crowded, I'm very optimistic. With the strength of Tastykake, the strength of our sales team, and all the marketing activity we've got behind Tastykake, that that brand is going to continue to grow.

So the implication is that you're still happy with that brand and you don't need to add any large brand on the cake side to improve your positioning in that segment?

We are happy with our Tastykake brand. But again, we'll look at all opportunities as they present themselves.

I see. Just one more for me. If we look at the 2014 guidance, clearly down a couple of times, if you look back, Steve, on both, what do you think of the issues?

Do you think it is just the competition that you probably underestimated? Or was it something related to expectations? Or execution? If you were to put them into different buckets, how would you see it?

I would say generally, I would say that the issue really is top-line and the pressure we there. Also we've probably forecasted that we would maintain more cake business than what we've held onto from a volume perspective.

In general, it's really all about the top line. We need to generate stronger revenue. With our cost structure, a significant part of that gets to the margin and the bottom line and that really will drive the earnings growth.

Got it, thank you.

Thank you, Amit.

(Operator Instructions)

Akshay Jagdale, KeyBanc Capital Markets.

Good morning. Amit follow-up by Akshay. Pretty good. Anyway, The question I have is related to one that was asked before about 4Q guidance.

The implications are that you're projecting to get your EPS number for 4Q, you're projecting a sequential decline in margin. So 4Q margins are expected to be much lower than 3Q.

What's driving that? Is that conservatism? Or is there something fundamentally different that's going to happen on the margin side in your business in 4Q?

Akshay, you could say it's probably being a little conservative, because this year even with the extra week, we have three holidays. That tends to affect revenue and costs as well.

Coming out of the third quarter we are seeing some softness. That continues somewhat in the fourth quarter, although the last few weeks we've seen some nice trends.

I'd say, generally, there's probably some conservatism in there. But I don't want to get ahead and say that we expect a lot of upside. But we continue to see some softness coming into the quarter.

Okay. And take a step back longer-term, if you look at what's transpired for this year, you were expecting significant top-line growth. And what's transpired is we're going to have no growth, right, in terms of organic growth.

So from a long-term perspective, in my opinion, it might serve your shareholders better if you focused more on the margin opportunity. To get back to historical margins on DSD, there's still plenty of room to go there.

Is that something you're considering instead of going after share aggressively? And that resulting in the year that we saw this year? Why not just focus on what you can control, and you've controlled really well over the years, which is the margin side?

Shouldn't we be switching focus a little bit? Is there a consideration for that?

I think that's a fair point, Akshay, and I think Allen did talk a lot about we're looking to right-size the business. With the growth we did bring in a lot of production capacity.

We have a lot of costs in developing new markets. And now as things settle, we see what the competitive landscape is.

It gives us the opportunity, just like you say, to focus on cost management and really focus on growing margin, trying to move the margin needle while maybe revenue is tempered a little bit. So that is a huge focus for us.

As we set expectations for next year, as we look at longer-term growth, as we meet with our Board, those will be the kind of conversations we're having. Then in February hopefully we can use the appropriate measures and you can see where the cost focus is.

Akshay, while margin improvement is certainly a priority for the team, at the same time we've got to have a balanced approach. We've got to continue to grow our top line.

When you take a step back, the opportunity is really right in front of us in terms of new markets. We talked earlier about underdeveloped product categories that we're working hard on, and continued expansion of our independent distributor model.

While increasing margin is certainly a priority for the team, continuing to grow our top line also is very important. We've got to have a balanced approach to both.

Yes, but to push back a little bit, that's helpful, but in terms of the sales opportunity, it existed this year as well. And you had additional brands in your arsenal, if I may, and strong ones at that. And yet, we're going to end up with a year that's significantly lower than what you had expected.

It's not like people are going to start eating a lot more bread next year, so gaining share, you still have the same DSD network. Hopefully you have lower costs. But why not make margin the number one priority and market share gains probably number two?

Well again, Akshay, it's hard to -- I understand your point. But if you look at our history, this Company has done a very good job at both. Even though we did not hit the sales number that was our original target, we still have the ability to grow this Company.

And if you look at our history, that's exactly what we've done in the past. We've grown the top line and we've also had to keep our focus on margin at the same time. I'm confident we can continue to do that.

That's helpful. And one last one. Can you talk about, broadly, in terms of right-sizing the business, can you give us some sense of what that means?

Is that buckets in the SG&A? Is that costs that are related to the plants? What are some things that you're considering when you think of right-sizing the business? Thank you.

I'll take a shot and then let Steve help me on this one. Akshay, if you look at the -- and I went through the growth numbers that we've experienced over the past couple of years, and we have added a dramatically large number of independent distributors in different territories across the Company. In some cases we are fine-tuning our sales networks to make sure we have the right number of wheels on the street.

At the same time, our manufacturing plants have done a great job of meeting the needs of the sales department. Now we're going back and making sure that our manufacturing operations are in the right location, with the right number of lines, producing the right items.

There really is not any one area that costs have gotten out of line. But obviously when you experienced the kind of two-year growth that we have, we've done a great job taking care of the market and growing the business. Now we're working hard to right-size the Company, really across the board.

Sales and distribution is one area. Logistics is another area. Manufacturing efficiency also is another area.

This past quarter, we saw improvements in manufacturing efficiencies. Stale levels have come down slightly. We still have more work to do there.

And we continued to really fine-tune our cost structure across the Company. Steve, I don't know if you have anything to add?

No, I think that really hits -- it'll be a balance in cost of goods sold and SG&A. Really the focus is on all levels of costs.

One last one for you, Steve. You mentioned the promotional activity. You have reduced the percentage of sales.

Where are we on promotions as a percent of sales for DSD? Can you give us the number for this quarter? Maybe some historical perspective.

And then talk about what are the steps you are taking to increase promotional effectiveness? We're hearing that across the board from a lot of our companies.

Certainly it's a term being thrown around, but we are not seeing any results yet. I'm trying to get a sense of what are you doing to improve promotional effectiveness? Thank you.

We wouldn't get specifically 1%. I would say it's mid to high single-digits. It's been pretty strong.

And as Allen said, and I think I said, from a promotional effectiveness, it's really about making sure when you have an item on promotion, it's positioned correctly in the store so you get the most sell through. Typically from promotional activity, you prefer that to be out of the mainline bread aisle.

That's where some of our focus is going to on cake as well as bread. And then also cutting back on some of the stronger items that may not need to have the additional promotional support.

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

Thank you, Akshay.

Tim Ramey, Pivotal Research.

Thanks. Just reflecting back on, actually, his question a moment ago. I liked your balanced answer there.

It seems like there have been times in the past wherein a focus on maintaining price or margin has led to negative volume performance. You could argue that this period looks like that, the 3Q.

We've ended up seeing negative operating leverage from the lower volume feeding back through the P&L. It seems like that occurs more frequently when input costs are going down rather than up, but I'm not sure about that. Can you comment on that?

When you look overall at the costs, Tim, in the category and tied to price, historically this category, I would say, did not behave that way. Traditionally, people tend to focus really on wheat and that's not really the only cost element.

I would say there's not a direct correlation between promotional activity, I don't think, and overall input costs within the category. I'm not seeing anything that really indicates that. I think it's more volume-driven then share-driven.

So promotions don't necessarily accelerate when input costs decline?

I'm not really seeing that.

Tim, I would agree.

Okay, terrific, thank you.

We have no further questions at this time. I'd like to turn the call back over to Allen Shiver for closing remarks.

Good. Ellen, thank you very much. As always, we appreciate the participation in our call and support of our Company. We appreciate your confidence in our team.

We will continue to deliver the sales and the earnings over the long term. Thank you very much. Have a great day.

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