Flowers Foods Inc (FLO) 2015 Q4 法說會逐字稿

Welcome to the Flowers Foods fourth-quarter and full-year earnings conference 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 JT Rieck, Managing Director Investor Relations. Mr. Rieck, you may begin.

Thank you, Ellen, and good morning everyone. We realize today is a very busy day with multiple earnings releases and calls, so we appreciate your taking the time to join our call. Our fourth-quarter and full-year 2015 results were released yesterday evening, and we expect to file the 10-K before the end of this month.

You'll find the earnings release on the Flowers Foods website. The slide presentation that supports our discussion today is posted on the conference call page along with the information about our independent distributor program and our updated two page fact sheet. Before we begin please be aware that 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 will discuss during the call, important factors related to Flowers Foods of business are fully detailed in our SEC filings. Before we get started with our discussion of the quarter and year's results, I want to alert you to -- I want to alert you that Flowers Foods will host its investor briefing at the New York Stock Exchange on Wednesday, April 13.

Now let's get started. Participating on our call today we have Allen Shiver Flowers Foods, President and Chief Executive Officer; and Steve Kinsey, our Executive Vice President and Chief Financial Officer. We will open your call -- open the call for your questions following our prepared remarks. Now, Allen, I will turn the call over to you.

Thank you, JT, and good morning. Thank you for joining our call and for your continued interest in Flowers Foods. Today we are reporting adjusted earnings per share for the year of $0.92.

In 2015 Flowers posted increased sales and adjusted EBITDA margins. To capitalize on the changing consumer, we added new growth opportunities through key acquisitions this year of Dave's Killer Bread and Alpine Valley Bread. We delivered these results while also making the investments necessary to support growth in our expansion markets such as the start of our new bakery at Lenexa, Kansas, the addition of new territories in the Northeast and on the West Coast and absorbing higher costs in perforation for the nationwide rollout of our organic business.

While we are disappointed that we did not meet our sales and earnings plan for the year, we are encouraged by our progress which demonstrates our continued focus on driving growth to deliver long-term shareholder value. Here are the key points I want to address today, first, the fourth-quarter and full-year results, second, the category trends and Flowers' top line performance and, third, the integration of Dave's Killer Bread and Alpine Valley.

Turning now to our results for the fourth quarter and the year. Our performance for the fourth quarter was below our expectations due to lower than expected sales. While we saw improving trends as the year progressed, towards the end of our third-quarter that pace slowed, and we revised our guidance accordingly.

During the fourth quarter sales and volume growth in the fresh packaged breads category slowed further than we had expected. We were not alone. Based on channel data tracking the total store, it appears food retail as a whole hit a speed bump in the fourth quarter.

While it is still too early to draw many conclusions from the first few weeks of 2016, I am pleased with the team's dedication and hard work during the recent winter storms. Our results these first few weeks of 2016 are in line with our expectations, and we are cautiously optimistic for the year ahead. Now let's consider in detail the category trends and Flowers' sales.

To keep these simple, the year ago comparisons exclude the impact from acquisitions and the effect of the extra week in 2014. For the year the overall fresh packaged breads category as measured by IRI was up 1.1% in dollars and down 0.8% in units. On a comparable basis Flowers has a [14%] share, up 0.2 share points. Including DKB and Alpine our share is now a [14.7%].

Looking at the trends shown on slide 4 of the presentation, similar to other center of the categories, fresh packaged breads volume growth has been soft for several quarters while overall dollar growth has been positive. Within the fresh packaged breads category light and soft variety loaf bread make of the majority of Flowers' branded retail sales. And I wanted to take a moment to highlight our performance as measured by Flowers' custom IRI database in these two key segments.

Turning to slide 5 in the white loaf segment Flowers is a branded price leader with our brand's average retail prices roughly 15% above our branded competitors. Between growth and our expansion markets in our merchandising strategies we sold more units and improved our price realizations during the year.

Now turning to slide 6. Flowers is also the price leader in soft variety bread with our brands carrying an average price per unit of approximately 9% above other brands in the segment. Our unit volumes posted growth, but due to a heightened competitive environment in our core markets, price realizations declined driving slower overall -- lower overall sales in the segment.

One thing apparent on slide 7 is that in both the white and soft variety segments consumers have been shifting away from store brands and into branded products. Within the portfolio we have brands and products that appeal to shoppers at various price points and budgets, and we are pleased to see progress in this area.

Regarding pricing, trade promotion effectiveness and efficiency remains a top priority for us. We will make every effort to eliminate unproductive activity and maximize return on our promotional spending. Overall I'm encouraged by the trends that we're seeing in our cake business.

Slide 8 highlights our snack cake sales tracked by IRI. As we noted at the time, in the second quarter our cake sales resumed year-over-year growth, and in the fourth quarter we posted a slight increase in market share versus last year's fourth quarter. It has been a competitive two years as Hostess cake gradually came back and the market.

I applaud our team's efforts to bring new products and flavors to our Tastykake brand and drive the sales growth we've seen for the past three quarters. Moving on, I'll quickly discuss Flowers' reported top line results excluding the impact of acquisitions and the extra week last year. Flowers' branded retail sales increased 1.7% for the year and 0.2% during the fourth quarter.

As I mentioned our white and soft variety bread brands performed well relative to the category in their respective segments, and our cake business also contributed incremental sales. The strength of our key segments was partially offset by lower sales of sandwich rounds and competition within the sandwich bun and roll segment.

We have already taken action aimed at improving our performance in these two segments. Our store branded sales tracked overall category trends decreasing 4.5% for the year and 2.7% during the fourth quarter.

This decline was driven by our exit from certain store branded business in the prior-year as well as the consumer shift to branded products. Non-retail on other sales which includes food service, vending and contract manufacturing increased 3.4% during the year and 3% in the quarter driven by new product offerings and business wins. During the fourth quarter we saw strong performance from fast food and casual dining restaurants.

Now an update on the integration of our recent acquisitions. Since closing Alpine it early in the fourth quarter we have made good progress with the integration. The organizational structure is in place, and we are now executing on our plans to make both DKB and Alpine more widely available in our core markets by this spring.

During the fourth quarter the team executed our plans to utilize the excess capacity that was available at Alpine. Also the fourth quarter we expanded DSD distribution of Dave's in selected markets and started of the process of converting our Tuscaloosa, Alabama facility into a dedicated organic bakery.

Once the Tuscaloosa conversion is complete we will work to increase DSD distribution of Dave's across our core and expansion markets. Flowers is committed to maintaining all of the characteristics that Dave's is known for, it's killer taste and texture and ingredients that are organic and non-GMO. The brand itself will remain headquartered in Oregon where the team's innovation and grassroots marketing efforts continue to drive excitement and grow sales.

Looking ahead, as our guidance demonstrates, we expect 2016 to be a year of strong growth for Flowers. Our brands are performing well relative to the category which helps us grow share across our geographic reach. In addition we are working to realize the growth potential from our recent acquisitions.

Before I turn the call over to Steve for the financial review, I want to take this opportunity to recognize and thank the Flowers team members who continue to work tirelessly to produce the fresh quality bread and baked goods that our Company is known for. I also want to thank the thousands of independent distributors who, as demonstrated during the recent winter storms, continue to meet the needs of retailers and food service customers in their territories. We recognize that there may be some questions in the marketplace on the independent distributor business model.

It is important to remember that our competitors and others across a broad range of industries use very similar models. Flowers has utilized the independent distributor program for over 30 years. During that time thousands of these entrepreneurs have grown their business and built wealth.

As I am out of the market often and encounter distributors, and it is a pleasure to hear their stories first-hand as they talk proudly about how they've grown their business. I'm confident in the distributor program. It is good for both of the distributor and good for Flowers.

Recently we posted on our website some additional information about the program as well as a few frequently asked questions. That information can be found at www.FlowersFoods.com. With that, I will turn it over to Steve.

Thank you, Allen, and good morning, everyone. I will start by going over the items that affect year-over-year comparisons for both the quarter and the year. Then I'll discuss the fourth-quarter and FY15 results and finally take a look at our outlook for FY16.

Turning to slide 9 as Allen mentioned it is important to remember that 2014 was a 53-week fiscal year, and 2015 was a 52-week fiscal year. The extra week contributed approximately $63.2 million to sales and approximately $0.01 to earnings per share for FY14. As you know during the back half of the year we made two acquisitions.

Acquisition related sales contributed $39.7 million during the quarter and approximately $49.5 million during the year. As expected, the acquisitions were [mutual] to earnings per share for both the quarter and the year. This year adjusted EPS with $0.16 in the fourth quarter and $0.92 for the full-year FY15.

The net effect of one-time items decreased reported earnings per share by $0.01 in the quarter and by $0.03 per share for the full year. Looking back at 2014 adjusted EPS was $0.20 in the fourth quarter and $0.90 per share for FY14.

The net effect of one-time items in 2014 decreased reported EPS by $0.07 per share in the quarter and $0.08 for the full year. For more details please reference the non-GAAP reconciliation at the end of our slide presentation.

Turning to the fourth quarter comments on slide 10. As Allen mentioned our results fell below our expectations in the quarter driven primarily by softness in the top line. Looking back to November when we revised our guidance, we expected sales growth the moderate but not to the extent we experienced.

With sales being less than anticipated we were unable to leverage our cost structure which resulted in earnings per share coming in below our guidance. Acquisitions performed relatively in line, and when looking across the business there was no one key factor that drove the top line miss. As Allen said, during the quarter we experienced more of a broad-based step down from the growth rates we saw in the second and third quarters which was also reflected somewhat in channel data for the category and food retail in general.

Cash flow from operations was up over 2014. We made capital investments and acquisitions to support the growth. We increased our dividend in 2015, and we repurchased shares.

Though full year consolidate gross margin remained flat, fourth-quarter gross margin was 46.9% down 140 basis points as compared to 48.3% in the fourth quarter last year. In total acquisition negatively impacted the gross margin approximately 80 basis points as a percent of sales in the fourth quarter and approximately 30 basis points as a percent of sales for the full year. The impact from acquisitions is primarily the result of the increased purchases of outside products as well as higher cost for organic ingredients.

Excluding acquisitions the decrease in gross margin during the fourth quarter is primarily due to cost inefficiency as a result of sales coming in below planned and higher workforce cost driven primarily the higher headcount to support our growth. While acquisitions did impact gross margin's negatively they were a positive impact to selling distribution and administrative costs, decreasing SD&A as a percent of sales.

As a results the impact from acquisitions to our adjusted EBITDA margin was minimal as a percent of sales for both the quarter and the year. Adjusted EBITDA margin for the full year was 11.7% an increase of 30 basis points over the prior year. This FY15 full-year increase in EBITDA margins was driven by lower ingredient costs offset by higher workforce related costs.

Adjusted EBITDA margin in the fourth quarter was 10.1% down approximately 50 basis points over last year's fourth quarter adjusted EBITDA margin. The decrease in fourth-quarter EBITDA margin is primarily due to gross margin contraction associated with a higher workforce cost.

With the DSD segment adjusted EBITDA margin expansions for the full year was driven primarily by higher sales and lower ingredient cost as a percent of sales offset by higher workforce related costs. During the quarter DSD adjusted EBITDA margins declined due to sales being below expectations. The expansion in the warehouse segment EBITDA margin for both the quarter and the year was primarily due to lower ingredient and workforce related costs driven by improved sales mix.

In the quarter lower-than-expected sales offset a portion of the margin increase. Adjusted corporate costs were elevated this year due primarily to higher consulting and legal costs. In the fourth quarter consulting costs abated as expected while legal costs remain elevated.

Fourth-quarter carrying costs associated with the acquired Hostess Bakeries were $2.3 million, and for the full year total carrying costs declined $6.6 million to $12.8 million as expected. Early in 2016 we sold an additional bakery which leaves us with eight closed bakeries. Six remain under evaluation, and we continue to market two non-strategic facilities.

Net interest expense in the quarter was $1.5 million, and we ended the year with total debt of just over $1 billion. Our net debt to adjusted EBITDA leverage is 2.3 times.

Maintaining a favorable credit profile is a priority for us. Prior to closing the acquisition we had reduced our debt by approximately $143 million.

Also during the year Standard and Poors updated our credit rating from BBB minus to BBB. With an eye toward maximizing shareholder value, we continue to balance capital allocation opportunities between strategic acquisitions, debt reduction dividends and share repurchases.

Flowers has a strong foundation, and we anticipate continued consolidation within our industry which supports our philosophy of maintaining a conservative financial profile to take advantage of acquisitions. We also recognize the importance of returning capital to shareholders. We have steadily increased our dividend over the years and have made -- also made opportunistic share repurchases.

Adjusted EPS of for the year increased 2.2% to $0.92 for the full year. For the quarter adjusted EPS was $0.16 down 20% from the fourth quarter last year. Adjusted EPS was approximately 4% below the low end of our revised guidance.

As detailed in the press release of the short fall approximately $0.03 was related to the low sales expectations. The remaining $0.01 per share is a result of costs related to our distributor program and new marketing expansion costs incurred in the fourth quarter related to our organic acquisition that was pulled forward from the first quarter of 2016. Looking ahead to 2016 as stated in the press release, we expect sales for the fiscal year to be in the range of $3.96 billion and $4.08 billion or 5.5% to 8% growth over FY15.

EPS is expected to be in the range of $0.98 to $1.04 per share. As we stated when we announced the acquisitions, we were targeting total sales from organic brands to be between $245 million and $265 million, increasing consolidated sales by 5.2% to 5.7% after backing out the results from 2015.

Also we see sales growth of approximately 0.3% to 2.3% driven by a combined impact of price, mix and volume from our revised promotional strategies as well as growth and expansion markets. We see EBITDA margins expanding driven by improved efficiency and leveraging our recent investments to support growth in expansion markets.

We expect costs associated with the conversion of the Tuscaloosa facility into organic production will impact first-quarter earnings per share by approximately $0.01 per share. Including the recent acquisition we now forecast the full year depreciation and amortization to be approximately $145 million to $150 million and full year net interest expense to be $10 million to $11 million. Our forecasted tax rate is approximately 35.9%.

We anticipate capital expenditures in 2016 to be in the range of $90 million to $100 million. For the past decade Flowers has delivered strong shareholder returns by entering new markets and expanding our product offerings. As our recent acquisitions demonstrate, there is opportunity for Flowers to continue to execute on this strategy by taking advantage of the changing consumer landscape and continued industry consolidation as well as gaining share with our current brand portfolio.

Our strong financial position and experienced team gives us confidence in our ability to deliver value to shareholders. Thank you and now I will turn the call back to Allen.

Thank you, Steve. Simply put, 2015 was not the year it could have been. That being said we made important progress positioning the Company for future growth in 2016 and beyond. Our team is committed to executing on the opportunities before us.

I have confidence in our 2016 guidance. We participate in one of the largest categories in the supermarket, and our brands are among the strongest in their segments. The competitive landscape continues to consolidate, and we have opportunities to expand our market share in both new segments and in new markets.

Thank you for your time. Now let's open the line for questions.

Thank you.

(Operator Instructions)

Farha Aslam, Stephens.

Good morning.

Good morning Farha.

I have two questions. The first one is on sales. You discussed sales slowed in the December. Could you give us some color on how they are starting off in January and your thoughts on the cadence of sales going into 2016?

As far as sales, as with many other food companies, sales were soft in Q4. Not just in December before the majority of Q4. We are encouraged that we've started this year in line with our expectations. And we're looking forward to the year ahead.

Okay. And the second question relates to your cost of goods sold versus pricing. We would have thought you would get more of a benefit from the lower commodity input costs. Could you share with us kind of what your ingredient basket Outlook is for 2016 and how much you expect to keep versus how much will have to be passed on in the form of lower pricing?

Sure. I'm assuming you're talking about 2016.

Exactly.

Looking ahead to 2016 obviously you see nice pull back in the wheat markets, and overall the general input basket there is a nice tailwind coming into 2016. Saying that, there are some other costs that will be up. Work force costs will be up.

There will also be some continued costs related to the integration of the two recent acquisitions. As well as some costs related to continue growing in our expansion markets. So from that perspective it is not a wash, but we will see some offset of the tailwinds for 2016. And looking of the total basket for 2016 you're looking at mid-single-digit to slightly below from a percent decrease year over year. Thanks for the added color. Thank you, Farha.

Eric Katzman, Deutsche Bank.

Good morning, everyone.

Good morning, Eric.

A couple of questions. Maybe to follow up on some of Farha's line of questions. I guess you had gone through, if you look over the last eight quarters or so, you had managed to get kind of some either flat or some pricing for seven of the eight quarters. So what competitively occurred in the fourth quarter that pricing became much more challenging?

Eric, in certain core markets we had competitive situations that we had to meet our market share or protect our market share. We are encouraged with IRI. You can look at the last quarter and really the month of December. The IRI number showed that there is improvement in competitive pricing. And I mentioned on the call earlier that we have pricing underway.

It is already being put into place last quarter, but we are also looking at our promotional activity to make sure that we get the return expected whenever there is a price promotion on a certain item. So pricing is top priority. It has been especially in the back half of last year. We expect to the results of that as we move forward.

And, Allen would you say that the competitive pricing environment in the fourth quarter, was that a function of your branded competitors or retailers and their private label program, or both?

It was primarily branded competitors.

Okay. And then, Steve, I guess to the extent that you are forecasting core topline growth that is very modest looking forward including some expansion markets which are typically like 1% or so. When you look forward are you assuming that price is kind of flattish or what have you kind of built into the forecast?

Sure. When you look at the upper end of that range, Eric, we are assuming roughly 1% to 1.5% of price mix and roughly 1% of volume on the core business with the rest coming from acquisitions. And on the low end of the range we are assuming flattish price mix and slight volume increases. On the core business.

Okay. I guess -- I know you can't talk specifically about the IO litigation, but can you just say how much legal expense occurred in 2015 and what you're kind of assuming in 2016?

Looking to 2015, obviously, and thank you for understanding we can't really discuss the specifics of the cost itself, but for the year we were up roughly $5 million to $6 million with regard to legal expenses, so it was a couple of pennies from an impact perspective. And going into 2016, obviously, with the number of lawsuits increasing we are forecasting that to be up slightly at this point.

All right and then I guess the last question -- I guess I was a little bit -- I think on the last call you said that part of the acquisition challenge was -- or the margins on the acquisitions was because demand was strong enough that you kind of had to use some contract manufacturers, et cetera and that threw the production efficiencies off. So that comment would suggest that demand for the organic side of things was pretty good.

But even with that and the understanding that they are not huge businesses, but even with that sales came in obviously below plan. So how do I gauge the success of the acquisition so far? Is demand still strong enough that you're -- that it is screwing up your efficiencies by using outside manufacturing?

Yes, when you look at the acquisitions in the fourth quarter primarily the Alpine acquisition, the big risk is when you begin integration things starting to maybe fall off slightly,. There were some business that was projected to come into fourth quarter with Alpine that did not come about, but the good thing is we're actually beginning to see that the business come to fruition in the first quarter of 2016. So that did impact the projections for the organic business in 2015.

From a margin perspective; however, what I would say is we will continue to buy from co-packers. Prior to the acquisition Dave's was actually using quite a few co-packers primarily to get more distribution across the total US. As we ramp up that distribution, the Tuscaloosa facility will primary fulfill part of the demand in the Southeast. So, obviously, we will continue to have to rely on copackers for Midwest markets and the northern markets as well. So that impact to gross margin will continue through most -- through the year, but we will see improvements over that as we move production into our Tuscaloosa facility.

And, Eric, just to comment on consumer demand, it remains strong and will remain strong for organics as we look forward. So the sales adjustment Steve mentioned is more a function of timing. The consumer demand for organics is still extremely strong.

Okay. I will pass it on. Thank you.

Thank you.

Tim Ramey, Pivotal Research Group.

Good morning, Tim.

I had a question about the sales Outlook versus the statement you made in the FAQ section of the independent distributor piece on your website. One of the key issues here is independence. And how much control the IDs have over how their distributorship is run.

None of these cases are going to get settled this year I am pretty sure. But I guess my assumption is that you would back off from some of the kind of more overt control steps making drivers deliver to dollar stores, Burger King's and so on where they really don't view those as profitable stops. And that would have an impact on 2016 sales.

How do you think about balancing those two needs to continue to have sales growth but also to make sure that you are not being too aggressive on the control of their business?

Tim, some of the comments you just made we do not agree with. Our independent distributors are independent business people. They run their business. They are in charge of their operations.

And the items that you just mentioned are not accurate. We are -- continue to be very confident in our independent distributor model. The lawsuits that are in place we believe do not have merit, and our intention is to vigorously defend our position. That being said really today is about earnings, and we will be happy to take it off-line if you have further questions.

Okay. Thank you.

Amit Sharma, BMO Capital Markets.

Good morning, everyone.

Good morning, Amit.

Steve, a couple of modelling questions first. From a margin perspective acquisitions are they still expected to be gross margin dilutive in 2016? And will they remain dilutive as long as you are buying from copackers?

Yes, from a gross margin perspective you will see them remain dilutive as we continue to buy from our copackers. But again that is key to the integration of the acquisitions and making sure we have the production to meet the market needs. What you will see though the with the Tuscaloosa facility coming online at the end of the first quarter you will see that impact begin to abate some as the year progresses.

And when do you expect to be fully producing the organic bread segment?

I think when you look at the demand for the products and you look at the production capacity, Tuscaloosa will only meet the some of the incremental needs. We will over the next two years to three years will continue to rely on some copack production to be able to fill markets. But again as we bring more of that into Tuscaloosa, some of that into Alpine, you will see the impact of that begin to decrease.

Given that they have lower SG&A structure is that at least accretive on the operating margin basis or not yet?

Yes, from an operating margin perspective we do anticipate them -- they will be accretive. Looking at 2016 we do expect $0.03 to $0.05 accretion from the acquisitions from an earnings perspective.

Than you said the legal expense is slightly higher in 2016. Were you saying incremental $5 million to $6 million or more than that? Or are you saying incrementally just maybe a couple of million higher than they were in 2016.

At this point it is hard to forecast that, Amit. Again those costs can be lumpy from quarter to quarter. Looking at 2015 we were up roughly $5 million to $6 million, and then projecting for 2016 currently we're just saying we anticipate incremental

Okay. Then, Steve -- sorry, Allen, from longer-term perspective, yes, we definitely hear what is happening from a category perspective, but this lack of visibility even in the near term is very surprising, right? And it raises the question that, do we have the ability to lead the category in terms of pricing, promotions or other gross growth initiatives? I hear that some of the competitive activity is beyond your control, but at this time what can you tell us because us a little bit more confidence that this isn't going to happen again in the first-quarter, second quarter or rest of the year at this point?

Amit, again looking at the fourth quarter the market was soft, and we have heard that from retailers. We have heard it from other food companies.

And whatever the reasons were, whether it was weather that was warmer than usual or other reasons, the fourth quarter was soft. I don't see any of the factors that influenced the fourth quarter dramatically changing the profile going forward. We're as I mentioned earlier, we've started this year pretty much on track from a sales standpoint. We're very excited about the brand portfolio that our Company has.

Would you look at the brands we've developed and the brands that we've acquired, now we have a strong brand in every segment of the marketplace. And the good news is that there is a lot of room to grow from a market share standpoint. I would like to point out the specialty bread category and also the breakfast category are two segments that are very much underdeveloped.

Dave's Killer Bread and Alpine, again those also fit well in underdeveloped segments. So we have opportunities from a brand standpoint. We also have opportunities from a geographical expansion standpoint. Even though that we have -- we are now serving 85% of the US with DSD distribution, a large percent of that our market share is underdeveloped, because we haven't been there that long.

So we have tremendous opportunity to grow in new markets like Omaha, Indy, Kansas City, Denver, the list goes on and on. And then we have tremendous opportunity to grow our market share simply by developing our brands in these new markets. And I think it's also worth reminding that this fresh bakery category is the third largest category in the supermarket. And so even though category is flat to down slightly, it is still the third-largest category which is significant. So we are bullish about 2016, and we feel like we have all of the elements of growth that are going to be needed in place.

Allen, I think I appreciate that, and I think the longer-term view or longer-term picture is clear like what the opportunity is. But what happens when you have a couple of disappointing quarters and even the guidance doesn't look like it's going to get you back on track completely. That is what I'm trying to get a better sense of -- I appreciate the detail on pricing on your different categories in the presentation.

But if you look at pricing trend one of your biggest competitor has taken more pricing in the last year than you have. So that is what I am thinking going forward, and you talked about being more focused on pricing, but is it beyond your control if that competitor comes back and is no longer taking pricing? Are you still able to take pricing in this environment or no?

Amit, at the end of the day the consumer determines what the correct price is for products. We're running our offense based on our cost structure and what price should be for our products, and based on what happens in the marketplace, we will make adjustments if necessary. But we're very confident in all of the work that has already been done to maximize pricing whether it's promotional pricing or increases in everyday pricing.

The last one is the discussion that you've had with retailers, they seem open to the opportunities that you have on pricing? Or --

Through category management our retailers realize that profit contribution that this fresh bakery category makes to their store, and they understand the need for improved pricing. That is a general statement. You do have specific supermarkets or retailers that may have a different philosophy. But in general the retail trade understands the value from a profit standpoint of the category.

Got it. Thank you very much.

Thank you.

Akshay Jagdale, Jefferies.

Hello, good morning. I just want to understand a little bit better what happened this quarter. I understand you are calling out category softness but maybe I am missing something. But from a category perspective sequentially I know the growth slowed down it seems like by 50 or 60 basis points, and your DSD sales slowed down sequentially organic growth by about 340 basis points.

And then in November, the guidance you gave in November versus where you ended up, you missed by about $50 million or 4% relative to your own expectations for the quarter with less than two months remaining, Right? So I understand there was a softness. I get it. But the softness from what we're seeing and the data you've presented about the category doesn't seem nearly as much as the numbers that you reported. So what am I missing there?

When you look at the components of the growth primarily in DSD, I think Eric mentioned it earlier we did see some pricing softness. When you look at price mix it was relatively flat for the quarter, and we had seen some improvements from that perspective in the first three quarters so that did fall off in the fourth quarter and continued to progressively, probably deaccelerate a little bit or accelerate more than we anticipated.

As I mentioned the Alpine acquisition did come in slightly below plan, so some of that business did not come on as we had anticipated. That was roughly $9 million to $10 million of revenue. And then our volume and DSD did get softer in the fourth quarter than we had anticipated as well. We did not have as strong of a holiday around Thanksgiving or Christmas than we had forecasted. So those were too big factors in part of the fall off as well.

Is there something going on? The DSD business inherently has more visibility than warehouse, right, because we're getting data pretty regularly. And your category has pretty high turns as well. So it is not like there is some inventory reductions that you are seeing at large customers either. I'm just -- I know there was a slight category slowdown.

But you had a pretty -- you had a more pronounced slowdown in your own sales. So I appreciate the color on sort of the pieces the acquisition being coming in a bit lower than expected. You had a $50 million miss with two months to go on the DSD business. I'm just a little bit lost there. Is it a share issue?

Is it customer reducing inventory? Because in the measured channel we don't see that level of a slowdown if you understand where I am going with that.

From a share perspective we actually improved our share slightly with our DSD business. Again, part of it is just from an execution standpoint we didn't meet some of the targets we had set. And then another factor would be, obviously, some of the slowdown in the category. But generally speaking there's really no one factor that we can point to.

Okay. And then just taking a -- sorry?

I was going to add that if you look at the IRI data for the quarter, obviously the category was down slightly, but our share did not decline. So any sales that we did not capitalize on did not to go to competition. We still maintained our growth trend within the category. The problem is that the category declined in the fourth quarter for a, as Steve said, a multitude of reasons.

And then just taking a little bit of a long-term view, taking into account the midpoint of your guidance instead of taking out the acquisition contribution. So if you take out $0.04 from your $1.01 guidance for 2016 you get to $0.97. If you meet that number, you have grown EPS at a CAGR of 2% over three years. I know the base there has a massive growth number.

You've been talking a lot about long-term opportunities for growth, market share gains, et cetera, et cetera. Why -- can you just help us understand then in that context, why should if there's opportunities for growth, your commodity cost down, rational pricing starting to take hold, why should a company like yours with good execution only grow at 2% CAGR over a three-year period?

When you look over the last two years we've made several acquisitions. There has been a lot of cost coming in to the system. Obviously based on the top line performance you can see we have not gained a topline growth that we had forecasted. So as you look to 2016 and coming off a couple of quarters here where there's been from an earnings perspective and a topline perspective, we feel like we are cautiously optimistic coming into the year. But what I would say is that as we look at the growth opportunities, we're betting down a lot of that in 2016.

We have a history of being the low cost producer. So if cost and revenue are not matching we will take the necessary measures to make sure that cost is in line with the revenue structure. But I do believe with this organic acquisition the all trend growth there, we have a significant opportunity to get back on track from a revenue perspective. And then if we hit our revenue targets then you should see the earnings come back in line with what you would expect from Flowers from a growth perspective as well.

Yes. That is helpful. I just feel like the focus could be more on margin enhancement. Just looking at the category it doesn't seem like there is a lot of growth left ahead that is margin enhancing or margin accretive. You're trying to grow share, but the margins are getting hurt as a result. I think your shareholders would also appreciate it if you are focused a little bit more on margins instead of just expansion. But that's just a comment. Thanks for taking my questions.

Thank you.

Bill Chappell, SunTrust.

Good morning, Bill.

Hello.

Bill, your line is open. We will go to the next question. It is from Brett Hundley BB&T Capital Markets.

Good morning, Brett.

Good morning, guys. Thank you. Wanted to just tag one more question on to pricing just to make sure I am crystal clear, Steve. So within your guidance it sounds like you're assuming anywhere in between zero and 1.5% price impact. And can we assume that the majority of that assumption will be realized in Q1? And then thereafter assuming no decisions are made relative to demand trends that your full benefit of expectations would then flow in the following quarters.

Yes. You should see in the first quarter of 2016 some of the pricing actions take fruition. You should see a majority -- a majority of those will be in place for most of the quarter.

For Q1.

Q1. Yes.

All right. I appreciate the clarification there. And then I wanted to go back, Allen, to just the soft variety competition in core markets during the quarter. You can tell me if I'm just misunderstanding you, but the way that you had said it leads me to believe that maybe competition in soft variety wasn't as heightened in some of your more expansion markets relative to core markets. Am I understanding you correctly there?

No, Bill. Of course our Nature's Own brand is the number one brand in soft variety. Price competition is different from one market to the other. We did have some activity in our core markets we had to react to. But we also in expansion markets basically are growing our nature's own brand and expansion markets by being very competitive with the market leader as we move forward.

There is really no -- it is a market by market situation. And we want to make sure that we protect our brand share. But at the same time we're very focused on maximizing margins. We are -- we have a lot of focus on making sure that we're making the right decisions when it comes to pricing.

Allen, what do you think led to heightened competition in that category in your core markets? Do think that it was just maybe that you had lagged on pricing relative to some competitors? I know we are here in the Virginia market, and we had seen pretty good trends here in this market. We saw a little bit of a de-emphasis on private label. We saw some pretty good price gaps actually.

And we saw some pretty good pricing from some of your competitors. So I am just curious if you have a sense on what led to that heightened competition in your core markets and if you really think that, that can sustainably get better here maybe as you follow along with additional pricing as we move into 2016.

As I mentioned earlier our average price in the soft variety categories is roughly 9% higher than the market. So, because we have the number one brand, our competition is always aiming at that brand. But in terms of moving forward, I don't anticipate any deterioration of pricing. I'm encouraged by the IRI numbers in the fourth quarter showing overall pricing included -- increasing. And as I mentioned earlier we are very focused, starting to see some of the results of that pricing in the last few weeks. So we're optimistic about improving pricing in 2016, not deteriorating pricing.

Okay. And I know before you've talked about how there can be differences between your performance and IRI data. But in this specific instance you believe that price trends that are coming through across IRI are a good indicator of what you can see in future performance?

That is correct.

Okay. And my last question is on merchandising efforts in store. I was just thinking about this the other day, and I was just curious kind of maybe how you measure merchandising effectiveness on a month-to-month or quarter-to-quarter basis. I would be interested in any comments you might have on your measurement as of late. Maybe how you think you are performing from a merchandising effort in store. I appreciate it.

I think that's probably one of our strengths. Our team whether it's an account team or the individual bakeries, we work very closely with the retailers to help them manage their overall bakery department. I feel like from a merchandising standpoint they recognize the benefit of strong brands, and they also understand that selling branded products is the best thing for their margin.

But I feel like in terms of merchandising we have direct influence with many of our retail customers, and we're helping them to merchandise their stores to the benefit of their business which also helps us along the way. Our -- in terms of actually activity within each individual store, our distributors are very important. The relationship between our distributor and that local store manager, they are able to do things from a merchandising standpoint that can help him build his business as well.

So really working on a merchandising improvement at many different levels, and I would like to think that is one of our distributor strengths and one of our strengths.

And we have no further questions at this time. I would like to turn the call back to Allen Shiver for closing remarks.

Very good. Thank you for your interest in our Company. We're excited about 2016 and the momentum that we have moving forward going to the new year. And we'll look forward to visiting with you at the end of the quarter. Thank you for your attention this morning.

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