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Flowers Foods, Inc. (NYSE:FLO)

March 20, 2013 12:15 pm ET

Executives

Marta Jones Turner - Executive Vice President of Corporate Relations

George E. Deese - Chairman and Chief Executive Officer

Allen L. Shiver - President

Bradley K. Alexander - President

R. Steve Kinsey - Chief Financial Officer and Executive Vice President

Analysts

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Heather L. Jones - BB&T Capital Markets, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Farha Aslam - Stephens Inc., Research Division

Amit Sharma - BMO Capital Markets U.S.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Marta Jones Turner

[Presentation]

Well welcome, everyone, officially to Flowers Foods Analyst Day at the New York Stock Exchange. We're very happy to have a great group here in the exchange with us, and also, we welcome those of you who are participating on the webcast. On the webcast, we know that you have access to our slides and our videotapes. What you don't have are our -- access to the thousands of bread products that we have in this room and the great aroma that, that brings. So we wish that you could smell the fresh bread and snack cakes that we have in the room, but we welcome you anyway and hope that you'll enjoy the -- our meeting today. We appreciate the New York Stock Exchange allowing us to have our meeting here. To host it here is just very special because it's such a historic and amazing venue. And I want to announce upfront, because we've had several of you ask us, after our meeting, if you're interested in going down on the floor of the exchange, even if you've been before, you might want to go again. Things are pretty amazing down there. But the exchange has kindly said that after our meeting, if you will just meet up at the -- maybe in this corner, we'll be happy to take any of you who'd like to visit the floor. That'd be great. So thank you, Shannon, for being willing to do that for us. We appreciate it.

We want to get started quickly, but it's important that I remind you that our presentation will include discussion of forward-looking statements regarding Flowers Foods' results and our business. We believe that the statements you'll hear today accurately reflect the business as we know it today. However, actual results may differ materially due to risks and factors that are more fully described in our filings with the SEC.

During the presentation today, you'll hear from 4 of our officers. We'll have George Deese, our Chairman of the Board and Chief Executive Officer; Allen Shiver, our President; Steve Kinsey, Executive Vice President and Chief Financial Officer; and Brad Alexander, President, speaking from the podium. We hope that you've had time, as we visited around our table and in the last hour or so, we've had a great time with the visitors who are here, and we hope you've met a number of our other officers who came to join us for our Analyst Day. I'd like to introduce those as well. And because the speakers are going to be up in a few minutes, I didn't ask them to stand. But I do want to ask the officers, as I introduce you to these other officers to please stand. Gene Lord, Executive Vice President and Chief Operating Officer; Steve Avera, Executive Vice President, Secretary and General Counsel; Mike Beaty, Executive Vice President of Supply Chain; Joe Tashie, President of Flowers Cake; Karyl Lauder, Senior Vice President and Chief Accounting Officer; Craig Parr, Senior Vice President of Finance and Chief Risk Officer; Mary Krier, Vice President of Communications and Corporate Responsibility, who's all the way at the back, Mary; Kirk Tolbert, Vice President and Treasurer; Ryals McMullian, Vice President and Associate General Counsel.

We also have several members of my Communications team in the back. You know Libby Marshall and Chad Johnson and Keith Hancock. Thank you for being here to help make the show run. Just a little bit of what's going to happen, to tell you on the agenda. George is going to open our presentation with comments about the current industry dynamics and also look at our long-term goals and strategies. Allen and Brad will then come up to cover recent and pending acquisitions, a little bit more about that. They'll also review our position in the market and tell you some about our operational performance. Steve Kinsey will come back at the end to close out the presentation with a look at our financial measures and also the outlook for 2013. And then of course, we'll get to our favorite part, and that's the Q&A session. So it is my pleasure to introduce George Deese, Chairman and Chief Executive Officer. George, take it away.

George E. Deese

Thank you, Marta. And let me say what a joy it is to see old friends, new friends and your continued interest in Flowers Foods. I also bring greetings from our Board of Directors and from all of our people throughout all of our teams throughout the company, and we appreciate you so much in what you mean to the company, being shareholders in sell side and buy side as well. Well, it may be an understatement to say that this is an amazing time for Flowers Foods. It's also amazing time for the baking industry. We'll try to hit on many of those things as we go through. I know top of mind for you is what's going on with the Hostess assets. As you know, we feel like they fit very well with our long-term growth strategy. We are pleased with the outcome of the bankruptcy court review in which the court approved the sale this week, subject to the finalizing of the sale order, which we expect to occur shortly. However, this process is not over. Now the transaction must continue through the regulatory process. We anticipate completing this transaction in the second half of the year. Because the transaction is not finalized and for competitive reasons, we will not share any specific plans regarding this pending acquisition. And we've also said we will not give full guidance, but I'll start out my presentation this morning by talking about looking at our sales year-to-date, and I'm happy to tell you that as we look at our numbers year-to-date, that the year started roughly January 1 up through this past Saturday, our sales are up some 20% to 25%, and our earnings outlook is also strong. Steve will tell you more about that, but I want to thank the Flowers team members across the country who have made extra efforts to serve our customers when Hostess exited the market on November 16 of last year. From that date until now, we have seen our teams at all locations and in all departments rally to do what might seem impossible to some. And more about that from Brad and Allen in a moment.

Our long-term commitment to invest in our bakeries, improve in efficiencies, delivering quality and the best customer service and building strong brands is paying good dividends for us in the market place today. We've added new customers, serving new locations for customers who we already serve elsewhere and doing our best to capture the opportunities available to us. We believe the outlook for Flowers Foods is exciting. Recent acquisitions helped us extend our geographic reach. We have strong brands, new products and a team determined to deliver for our customers. The pending acquisition of Hostess bread assets fits very well with our growth strategy.

As we have told you for several years, the baking industry consolidation has been underway for decades, as retailers has consolidated, cost pressures came and other factors have caused the independents and now, more recent, the bigger companies to continue to consolidate.

Well, I think you all recognize this chart. We've had it up now for 5, 6, 7 years. As we've recognized that consolidation was coming, we've used this several times with you, looking at 2000, 2005, 2010, 2012, and now, we look at 2013. Like I said, we've been sharing this for a number of years. The Hostess announcement in November, that they would close and liquidate their business, set the stage for the new playing field for our industry. BBU is a solid #1 in the U.S. baking industry; Flowers Foods is a strong #2 and growing; and Campbell's Soup's Pepperidge Farm rounds out the top 3. And we've always said, we weren't trying to be the #1 in the marketplace even though we try hard, but what we try to do is be the very best. And if we become bigger because of being best, that's a good thing. But just growing for size is not what we're after. But make no mistake, there's still plenty of competition in the category. More than 80, more than 80 independent and specialty bakeries across the country compete in the fresh bread aisle, offering customers a wide variety of fresh bread buns, rolls and snack cakes. Also, the store brand also commands a very strong position in the category as it has been for several years, recognizing probably 25% to 27% of the sales go to private label and probably 40% to 50% in units.

It's important to point out that Flowers has participated in the consolidation through our strategy to grow through acquisitions. In the last decade, we made 11 acquisitions that added roughly $870 million to our annual sales. This is not a new approach for our company. In fact, since our company -- we go back all the way to 1937 to see that we had our first acquisition. We've executed a careful strategy of growing into adjacent markets by acquiring bakeries in those markets or by stretching the territories served by our existing bakeries through our market expansion strategy. As a result, Flowers now serves a much larger geographic footprint across the country with our fresh bread and cake brands. And we have grown potentially for decades to come as we build consumer acceptance across our new markets. You'll notice we did not list the pending acquisition of Hostess bread brands and their bakeries in this particular chart. Our hope is to be through the regulatory process in a few months, and then the transaction is expected to be completed. These maps show how Flowers acquisitions and market expansion have helped us to achieve our long-term goal of reaching more of the U.S. population for our fresh-baked products. If you remember back in San Antonio in 2003 or so, we were serving roughly 35% of the U.S. population, and by the end of 2012, we were up to about 70% of the population and still growing. Next chart shows when the Sara Lee and Earthgrains business in California is rolled out by mid-2013, more than 77% of the U.S. population is expected to have access to our fresh products through our DSD segment. In 2011, when we reset our long-term goals in this room, in fact, in 2011, that we hoped to reach at least 75% of the population through our DSD segment by 2016. Well, standing today, you can see that we have achieved that goal and a bit more this year, 3 years ahead of schedule.

Also a reminder, when we told you at our 2003 Analyst Day in San Antonio that we would stretch out to serve new markets, to serve more of the population, we told you our strategy would include both acquisitions and market expansions. We said we would need to either acquire or add greenfield bakeries every 18 months to 2 years to serve the new markets. In addition to the 11 acquisitions that I've mentioned earlier, creating some $900 million in sales, we did build 3 new bakeries: Denton, Texas; Newton, North Carolina; and Bardstown, Kentucky. I believe many of you in this room have visited those plants. We also added new lines to existing bakeries as needed to meet the market demand. We also told you at that time that we could accomplish this without breaking the bank. So many times when you expand, it seemed like it's all about how much money you lose, not how much you make. And we have this strategy about what we didn't want to do is hurt our earnings. The map showed you we delivered on the goal to reach more population. As you can see, we also delivered growth on the top line and we kept earnings in line with our long-term objective.

So if you look at the chart above, from 2003 to 2012, sales grew compounded growth at 8.65% per year and diluted earnings per share grew compounded 13.5% in that same time frame. So when we're here in '11, we set long-term goals again, and we'll see that chart next. What we said was, we felt like over the next 5 years, we would grow sales at 5% to 10%. And we felt like organic growth would create 3% to 5%, and acquisitions would be 2% to 5%, making up the 5% to 10%. We also said that return on invested capital would come in at 13% to 15% and the EBITDA margins, we felt like over the longer period in this 5-year time frame could be at 11% to 13%, and earnings per share would grow in double digits. And last year, I'll just say that, and Steve probably mentioned this earlier, that sales last year grew at 9.8%, EBITDA grew at 12.4% and our earnings per share grew at 7.3%. Admittedly, the last couple of years was tougher than normal due to the volatility of commodities in a tougher marketplace, but we're real pleased with our past results.

We believe that our operating strategies are proven over and over again. We plan to use them as we integrate Lepage in the Northeast, Sara Lee in California, and we hope with the Hostess business, when the regulatory review is complete, our approach to growing our core markets and new markets for fresh-baked foods will always, I'll underline always, be careful and methodical. I have confidence in Flowers Foods' ability to meet or exceed these goals because I know the company and I know our team, and you're sitting with the team here today, as well as all the teams back in all of our plants and the corporate offices back in Thomasville.

We have been focused on baked food business since 1919 when the Flowers family began its process. Our team today is the most experienced in the industry. Our leadership team, the top 200 positions in our company have an average of 26 years at Flowers. Among our almost 10,000 team members, 1,700 individuals have more than 20 years experience. 665 team members have 30 years or more with our company.

And I think it just shows the culture of the company and also shows how much people enjoy being with this company, seeing things grow and be successful as an individual as well as corporately. With our position today as the second-largest player in the industry, we have great opportunities to serve existing and new customers. My confidence in our future is also strong because of the Flowers Way, and we've talked about that many times. Team members across the country know our vision is to be a truly exceptional company, focused on opportunities for grain-based foods. We're all focused on our mission of enhancing value for our shareholders, team members, customers, consumers and others we serve. We are guided by the principle of integrity, service, quality and commitment. But any executive with any company can stand here and say the same. To determine the reality of a company's culture, you need to hear from employees at all levels within Flowers. How do they feel about the company and how it operates? I'd like for you to hear how our team members in Denton, Texas, view our culture and how they define the Flowers Way. We opened the Denton bakery in 2003 as a greenfield operation. Here's what they have to say about Flowers Foods.

[Presentation]

George E. Deese

As you see, Denton is one of our newer bakeries, yet our team in Denton reflects the talent, the experience, determination and understanding of our strategies we seek to find in all of our operations. You'll hear more from the Denton team later in our presentation.

So to recap what our strategies are. It is to grow sales. We've talked about sales last year, and sales up another 20% to 25% year-to-date. Invest wisely, and we think we have. Go beyond the expected to serve our customers and consumers, to bake smart, and perhaps more important than anything else, is to appreciate our team and support each other. We have a wonderful company. And sometimes I pinch myself thinking that I've had the joy of being here some 48 years and seeing the growth from 2 bakeries in 1964 to some 44 bakeries today, from little less than $10 million in sales to -- I'll let Steve talk about the annual sales later. Whatever he's willing to give. But it has been a tremendous amount of fun. And yet, there's still much more to do, much more to accomplish as we look to the future. As I assumed my duties in 2002 as President, 2004 as CEO, the Chairman title, I added in 2006, the thing we always try to do is regardless of who's at the top, that there's always a continuation, continuity of leadership and a continuity of philosophy. And that's so important. And a lot of people said, why would you give up the CEO job right when so much is happening? And I'd say this plan has been in place for a long time, and I have complete confidence in Allen Shiver. I have complete confidence of this team who will be supporting Allen and all those people back home who will be supporting Allen. So I feel wonderful about the company's position, and I feel better even about its future. So at this time, I'll ask Allen Shiver, who will take over as CEO in May at our shareholders' meeting, to come and talk some more about the operations of our company. Allen?

Allen L. Shiver

Thank you, George, and good morning. I guess it's afternoon now. The results of our table, we did a quick survey on the Tastykakes, and I think our cupcake has won all the awards. So Heather, I'm looking to you for that confirmation. Thank you, thank you so much for being here. And George said it very well, this is a tremendously exciting time for our company. It is my pleasure and my honor to be associated with our team. And I think if you -- if nothing else that you take away from the meeting today is just really a confirmation of what a special culture that we have at Flowers Foods. I think when you -- we look at the numbers that George just gave you regarding the amount of time, the amount of individuals that have spent their career at our company, I think you realize that this is something very special. And one of my primary objectives as we move forward is to make sure that, that special culture continues and becomes even stronger as we go into the years ahead.

One of the things that we do is deliver delicious bakery foods that consumers love. It takes -- that's easy to say, it takes an amazing amount of talent, energy, resources, hard work, and it really takes that dedication from the team to make all of this work and to succeed. We believe our team has all of these attributes.

Today, we're going to share a few examples of how our team delivers on these results. Similar examples are repeated every day throughout the company, and we all work very, very hard to deliver for our shareholders.

Looking at where Flowers Foods competes. The fresh bakery category for the U.S. is $21.2 billion at retail and $6.3 billion at Foodservice, for a combined total of $27.5 billion. So we start out with a very large, large category. You can see that at retail, fresh packaged breads, buns, rolls and breakfast items make up $14 billion in sales each year. Snack cake sales are almost $5 billion, and tortillas and wraps make up the difference. The category is large at retail, and it's also very significant with our Foodservice and our retail customers. Fresh bread is the third largest category in grocery sales, only behind carbonated beverages and milk. Bread is the #1 grocery category in terms of weekly profits according to a food industry study. So the fresh bakery department is very, very important to our retail customers. 98% of all households buy fresh packaged breads. And of course, at Foodservice, bread often is a mainstay of the meal, in sandwiches and also meal accompaniments. So Flowers Foods, we compete in a very large and a very vibrant category. Let's take a look at Flowers' position within that category. This chart shows the retail bakery business for 2012. In total, total U.S., Flowers held just over an 11 share of branded sales. Our share of store brand was 2.4 share points. It's important to point out that store brand in the category commands more than 25% share of sales dollars and 36% share of unit volume. Our largest competitor is Bimbo Bakeries out of Mexico, with 32.4% share of the total U.S. Independent and specialty bakers combined have about a 20 share.

This chart shows you that before they exited the market, Hostess had a 6.3 share. Since the playing field has changed with Hostess' exit, let's take a look at how the market looks year-to-date. Flowers branded position through the most recent period reported by IRI was up 1.6 points to 12.7, and our store brand share was relatively the same at 2.3. BBU now holds a 33.8 share of branded, not including the share that they hold in store brand. Independent bakers increased their share over 2 points to 21.9 share.

To help you understand Flowers Foods total business, our fresh-baked foods business through our DSD segment accounts for 82% of our sales. Our warehouse business, which delivers frozen-baked goods and fresh snack cakes through customer warehouses, makes up 18% of sales. Retail customers account for 74% of our sales and Foodservice customers make up the remaining 26%. Our Foodservice business is doing well, and customers appreciate that they can choose to have their Foodservice bread and rolls delivered through our DSD or warehouse segments, whichever is best for them. Our fact sheet and past presentations have more detail about our Foodservice business, but today's presentation is really focused mainly around our retail business and our DSD distribution. As we go-to-market, Flowers has strengths that we believe help us achieve ongoing success. Our strategy is clearly established and proven, and our team members understand what our strategies are and how to execute to create value for our shareholders and for our team members, customers, consumers and our communities. Our brands are well established, and consumers know they deliver breads, buns, rolls and snack cakes of consistent quality and great taste. Our investments over several decades have resulted in Flowers bakeries being among the most efficient in the country. Our distribution networks for DSD and our warehouse segments are effective in delivering the products that our consumers need. We believe the Flowers team is the best in the industry. We are experienced and we're determined to win every day. Our culture fosters a team spirit and respect for every individual's contribution. Our culture also promotes from within when possible, resulting in a continuation of leadership throughout the company as well as our senior management team. Our brand portfolio is positioned to meet the needs of consumers across the entire spectrum of fresh bakeries -- of the fresh bakery aisle. From Nature's Own soft variety breads to Sunbeam, Bunny, Holsum and other regional breads, to Tastykake and Mrs. Freshley's, our brands stand for quality, freshness and great taste. Without a doubt, Nature's Own is our top brand. This year, Nature's Own will reach $1 billion at retail. And I will say, when George gave us this challenge 5 or 6 years ago, it seemed out of reach. And George, I am happy to report that we will be at $1 billion at retail this year.

Nature's Own has been an important growth vehicle for our company since we developed the brand in 1977 as one of the first healthier bread choices for consumers. Since its launch, Nature's Own has had no artificial preservatives, flavors or colors, and since the beginning, Nature's Own offered several different wholegrain choices. Today, Nature's Own is made with no high fructose corn syrup and with very many better few ingredients. In the last decade, the brand achieved a compound growth rate of over 11%. Today's consumer gets her information from a wide range of sources, many of those through social media. Our marketing team uses a combination of print and online advertising and local PR efforts to keep Nature's Own brand in front of our consumers. Let's take a look at a few of those marketing examples now.

[Presentation]

Allen L. Shiver

Okay. So Nature's Own not only is the #1 selling bread brand in the country, our Nature's Own Honey Wheat is the #1 SKU in the country. So again, a lot of excitement with Nature's Own and continued growth. Like Nature's Own, our premium cake brand, Tastykake, has an enthusiastic consumer following. Today, Tastykake is more than $350 million at retail. Since our acquisition of Tasty in 2011, we've been expanding the reach of Tastykake across the South and the Southwest. The result is that Tastykake is the fastest growing cake brand in the South. Consumers continue to tell us how much they enjoy our delicious Tastykake products. From its core territory in the Mid-Atlantic, you can see the footprint now includes much of the U.S. population. Most recently, we've introduced Tastykake to consumers in Arizona and Nevada. The result is that Tastykake sales at wholesale have grown from about $170 million at the time of our acquisition to a projected $276 million for 2013. You will see that core Tasty markets are about $186 million, and we've added $90 million in sales through Flowers' DSD system. As consumers continue to discover what Tastykake offers, we expect sales to continue to grow. Because of its iconic status as a Philadelphia brand much loved by consumers for decades, Tastykake is often in the news. Our marketing and our PR efforts have met with success as we expand Tastykake into new markets. Let's roll the tape and take a look at some of the marketing efforts [ph].

[Presentation]

Allen L. Shiver

So a lot of excitement about our Tastykake brand, not just with our distributors and sales team but also with our trade customers. So we're very excited about Tastykake as we continue to grow.

At this point, I'm going to turn the podium over to Brad Alexander. Brad, who heads up our DSD business. I talked earlier about confidence in the company and confidence in the commitments that we're giving to all of our shareholders. One of the reasons I have confidence is because of people like Brad Alexander. So Brad, we'll turn the podium to you.

Bradley K. Alexander

Thanks, Allen. As a reminder, we completed the Lepage Bakeries acquisition in July of 2012 and at acquisition, sales were about $171 million. Since that time, we've been achieving double-digit sales growth at Lepage. You'll remember that prior to the acquisition, Lepage also had strong margins. We are pleased to report margins are continuing at those levels. Lepage has 3 bakeries: 2 in Lewiston, Maine; and 1 in Brattleboro, Vermont. It has great access to the market, with a strong customer base and experienced team and wonderful products and brands. Historically, Lepage focused on breads and rolls and only offered doughnuts in the snack cake category. So in October, we introduced Tastykake to Lepage markets. Today, we have Tastykake in more than 2,000 stores across New England. In November, we introduced Nature's Own to Lepage's markets, and we are pleased with the way the consumers are responding to that brand. Our timing for Tastykake and Nature's Own introduction in the Lepage market was perfect. Since the brands helped fill the void when Hostess left the market. In fact, one customer told me we could have not planned the timing better. We continue to see growth opportunities throughout Lepage's markets. With sales increases across the Lepage footprint, we are adding routes to serve retail and Foodservice customers. To support our sales growth, we've added shifts to Lepage bread lines and are reopening a bun line in Brattleboro, Vermont, at the Brattleboro, Vermont, bakery. Another benefit of Lepage acquisition is their diverse product line. From specialty rolls to organics, we see opportunities to leverage these unique items in other Flowers markets. Lepage also brought innovative concepts and excellent product quality, and we're working to leverage that strength throughout our market [ph] area as well. We still have a lot to do at Lepage as we continue the integration of our systems, but we are pleased with our progress. To summarize, our Lepage acquisition is just what we thought it would be. Lepage brought us great people, great brands, significant production capacity and a strong P&L.

Now let's move from the Northeast to the Far West and talk about our business in California. You'll remember that we entered Southern California with a small presence when we acquired the Phoenix Holsum bakery operation in 2008. And since then, we've grown our business steadily. In February of 2013, Flowers acquired the rights to Sara Lee bread, buns and rolls and the Earthgrains brand in California as part of the BBU divestiture following their acquisition of the Sara Lee bread business. The acquisition brought us $134 million in sales, as well as a bakery in Stockton, California. We'll have 4 phases to roll out as we take on the acquired sales across the state. In February, we took the first and the largest portion of that business in Southern California. We already had distribution in Southern California with a route structure in place. With the additional business we acquired, we reconfigured every route territory and added additional distributor routes. I was in California last week and felt the excitement of our team. I want to share a story I heard from one of our distributors. He had been a distributor for over 4 years and with the new brands that we just recently acquired, the Sara Lee business, along with the hard work that he's done over the last 4 years, his sale in one account went from $70 a week 4 years ago to last week he did $10,000 in that stop. As you can see from the map, we are preparing for Phase 2 which is only 4 weeks away. When we complete all 4 phases, our distributors anticipate access to profitable territories with future growth potential. I do want to mention that we've had great support from all key customers. By mid-June, we intend to serve about 4,500 stops in California. When we are done with the rollout, our DSD segment will serve the entire state of California and have added 15 million to the population Flowers Foods serves DSD.

We mentioned how the market changed when Hostess exited the market November 16 and how our teams across the country rallied to serve our customers. I thought you'd find it interesting to look back at March 2012 and compare the number of store locations Flowers Foods serve to today's number. This includes new store location added in our new markets and also in our Southern California business that we picked up. It also includes new customers we've added since Hostess left. We've increased service from 114,000 stops to more than 135,000 locations, an increase of 19%. Now adding 21,000 customers in a relatively short period of time took a lot of work from a lot of people. From sales to production to purchasing to our shared service department, everyone pitched in to do their effort. This was a huge task, but we had the team to do it. This is a great example of how our team members make sure that the effort they do, when they need to, will help us succeed.

I will end on a quote from a key customer that e-mailed me 2 days ago. He said, and I quote, "I place a lot of importance on vendor relationships, on business success. And he," he was talking about our Flowers account person, "is my top cake category national rep by far. Flowers does this better than anyone." That's what we need to do on all of our customers. And with that, I'll turn it over to Allen. Thank you.

Allen L. Shiver

Thank you, Brad. Let's take a little closer look at the timeline regarding the Hostess activity. First, I think we'll kind of review. On November 16, we all know that Hostess exited the marketplace. This was the week before Thanksgiving, extremely busy time of the year for the grocery business in general. On the 17th, our routes, our independent distributors, began serving new customers, picking up new business across our DSD territory. January 11, Flowers agrees to buy certain Hostess brands and assets. February 28, we were declared the winner of the bid for the bread assets. And then as of yesterday, 3/19, we were encouraged that the bankruptcy court approved the sale, and at this point, we are waiting the final approval of the sale order by the judge. So that kind of gives you a rundown of the timeline of what has taken place with the Hostess business. And it's already been 4 months since Hostess stopped producing bread products. Consumer demand has been shifting to other choices in the bread aisle. We continue to meet consumer needs for bread products and plan to reintroduce Hostess bread brands when the acquisition is completed.

To recap what the acquisition would include, 5 Hostess bread brands: Wonder, Merita, Home Pride, Nature's Pride and Butternut. We also would acquire 20 closed bakeries and 38 depots or distribution centers for the $360 million purchase price. Once the transaction is completed, we plan to reintroduce Hostess bread brands through and outside our current service area. Over time, our plans are to continue expanding to parts of the country where we do not currently have distribution. As we do so, we expect to introduce Hostess bread brands to those new areas. As we told you earlier, our long-term growth strategy has been to expand methodically into new regions from our existing bakeries. As we enter new regions, we will build access to retail and Foodservice customers in those new markets, we'll set up appropriate distribution systems, and we'll reopen bakeries as consumer demand for our products grow. As we continue to expand, this strategy will continue. We intend to expand into new regions from our current territories, growing sales and then add or reopen production capacities for that growth.

The Hostess bakeries fit with our growth strategy. Our growth into new areas will be careful and considered as it always has been. We're excited about the growth opportunities the Hostess bakeries and the Hostess brands bring to Flowers. For competitive reasons and due to the pending status of the transaction, we cannot share more specific plans about the reintroduction of Hostess breads to the marketplace.

As we finish up the operations view of Flowers, I want to take just a few minutes to point out how efficiencies have improved in the last few years. Overall, our efficiencies moved from just under 88% up to 93.3% in 2012, much thanks to Mike Beaty, Robert Benton, our entire manufacturing and engineering teams for this accomplishment. So you might ask yourself, why is this so important? That 5.4% increase is the equivalent to the production capacity of 2.5 of our most productive bakeries. In other words, greater efficiency means that we're getting the most out of our production capacity. And it's why our bakeries were able to absorb the new business and that we've want -- that we've won since Hostess left the market.

In addition to efficiency improvements, we're also excited about our new bread line that will be starting up in our Oxford, Pennsylvania, plant later this spring. One of our greatest advantages is the power of our team when it comes to running our bakeries. We are constantly working to improve our operations. To do what we did yesterday just a little bit better tomorrow. That being using ingredients better, having less damaged products and innovations in our process.

To help you understand how the Flowers culture contributes to improving our bakery operations, we want to have our Denton team tell the story. In 2012, as part of our continuous improvement initiative, we launched a Summer Blitz campaign designed to have each bakery team tackle areas that needed improvement at their location. They took a close look at key performance indicators and the other measures to determine what could they achieve in their location. The Denton bakery had been focused the previous year on installing a new production line. They also had other issues that impacted the team. Here's what they did to get Denton back on track.

[Presentation]

Allen L. Shiver

I'm very proud of Denton, Texas, and the team there, but one of the great things about our company, this video could have been filmed in our other 44 plants, or 43 plants counting Denton, and with success stories that are very unique to each individual operation. So again, very, very impressed there. As you've heard, the impact of summer heat and high production volume caused efficiency levels to fall to the low 80s in 2011. The Denton team found creative ways to involve the team, identify the issue and then make corrective changes. That resulted in a 10% increase in the efficiency level in this operation. So again, great work, Denton. We need to keep up the good work. This is a case of the Flowers Way in action, and we consider it one of our greatest strengths. By that, I mean our culture encourages team spirit and respect and appreciation for every individual team member. We strive to have team members know our business and understand how their job fits into the whole. We also offer opportunity for advancement, and our numbers show that thousands of team members have chosen to devote their careers to Flowers Foods because they see opportunity and they appreciate the Flowers Way. We are committed to keeping true to the Flowers Way as we build Flowers future for the next generation.

To close out the operations report, let's take a look at the map of our DSD territory. When we complete our expansion into Northern California, $239 million or more than 77% of the U.S. population should have access to Flowers Foods brands. As George pointed out, we intend to reach that goal that we set for 2016 3 years early. We have strong growth potential across all of our newer markets in the Mid-Atlantic, New England, in California and all of the new markets in between. You can be certain the Flowers team is focused on delivering growth in sales and earnings as we continue to meet consumer and customer demand for baked foods. And remember, we still have our eye on possible expansion markets that are not noted in the blue.

Before I turn the program over to Steve Kinsey for our financial update, really, I would just like to close out with 3 words that come to mind: Number one is excitement. I think all of you who have had a chance to talk with our team today, you can see the excitement that we have about the growth opportunities in our company. Number two would really be confidence. We have tremendous confidence in being able to deliver on the commitments we're making to ourselves and our shareholders. And then the last word I'd like to point out is team. We talk a lot about the team members, we talk a lot about our culture but again, the thing to remember today and the real takeaway I'd like to leave you with is the unique culture at Flowers Foods is very real and is very different and we understand how important it is not just today but for the future. So again, thank you for your attention. At this time, I'll turn it over to Steve Kinsey for our financial update.

R. Steve Kinsey

Thank you, Allen, and let me also extend a big thanks to each of you for being with us today and your continued interest in Flowers Foods. Now, George opened up by saying when he began his career, I think revenue was $10 million and I would give you the, I guess, the upper end of that range. What I would say is, at the end of 2012, that number was $3 billion. And for 2013, today, you'll see we're kind of taking a wait-and-see approach with our guidance based on timing of the closing of the Hostess deal. And Allen just brought up a very interesting point about the company and I would say, I've been with the company now 24 years. And I would have to say, in those 24 years, the excitement about the growth and the future opportunities for this company have never been greater and it's just wonderful to go to work every day and be with this team, support our teams out across the country as they're also working very hard to participate in this growth. It's just an amazing time to be a part of this company. And I hope you're experiencing that feeling today when you talk to the management team, as Allen said. As we think about our future, it's also important to look at our past performance and see where we've been. As George also stated, we do have a proven business strategy and you can see this through our historical performance. Over the last 10 years, our sales have grown at almost 9% from a compound annual growth perspective and our EBITDA margin has also grown just above 10%. When you look at our sales growth over the last 10 years, about 3% of this growth came from price and mix, 1% was core volume growth and about 5% was contributed by acquisitions. So you can see the importance of acquisitions to the continued growth of Flowers Foods. Our EBITDA growth is all about leveraging the revenue growth. Over time, and you've seen this through our EBITDA margin percentage as a percent of sales, we have been able to the leverage the sales growth by keeping a disciplined approach to cost management when it comes to selling, distribution and administrative expenses. And we do this by staying focused on the most efficient and effective ways to produce and take our products to market. We have seen strong growth also in our earnings over the last 10 years. Our net income and our earnings per share have both have compounded at nice double-digit rates with the 12% and 13.5%, respectively. As a percent of sales, we've also seen net income increase from 3.4% in 2002 to 4.5% in 2012. And due to all the acquisitions we've had over time, if you exclude one-time related costs, we're about at 4.7%. So we are pushing back on that 5% as a percent of sales of net income. We do believe the growth we have planned will allow us to continue to improve upon our net income margin as a percent of sales. The next slide, as you can see from our -- looking at our EBITDA or our operating margin, excluding one-time costs related to acquisitions, it has improved since the second quarter of 2011. We're up some 60 basis points over this time period. The improvements are the result of improved margins, resulting from greater manufacturing efficiencies that Allen discussed and we continue to leverage technology, whether it's in production, distribution or administrative areas of our business. Though our gross margin has been under pressure over the last 5 years, again, we have seen improvement in our SG&A [ph] expenses as a percent of sales. What I would say is coming out of 2012, we did begin to see our gross margin improve exiting the fourth quarter and I'll talk about it in a moment, what we're seeing with 2013 coming out of the box. Our improvement earnings and margin drive strong cash flow. Historically, we have been a company that has generated a strong cash flow. We leverage our revenue gains and our margin improvements and we believe we can continue to do this and continue generating the necessary cash flow from an operating perspective to grow our business and to also focus on debt payment over time. The biggest volatile factor when we look at cash flow, and you've seen this 2 of the last 5 years, 2008, 2011, relates to our hedging transactions and the margin cash required to fund some of the margin because of the volatility of the hedge market. As you recall, we'll hedge 4 to 7 months on average in advance of the actual delivery and sometimes, that does create volatility and require us to post margin cash. Fundamentally, we've had a long history of investing cash back into our business, whether it's into our -- through acquisitions or into our bakeries and we've also returned a great deal of cash to our shareholders. This is a board level decision and I would say today, there's still a strong commitment to remain true to these strategies. Over time, we have created some of the most efficient bakeries in the industry while providing strong return to our shareholders as well. So there's a great balance in our philosophy and approach to cash management. Since 2008, we have invested some $404 million in capital expenditures. During this time period, we added a greenfield plant in Bardstown, Kentucky, to support our growth in that section of the country. We've also added production capacity in existing facilities to support growth in our existing markets and our expansion markets. And currently, we are adding bread capacity in our Oxford, Pennsylvania, facility that will support our growth in the Northeast. For 2013, our expected capital spend today is $75 million to $80 million. We've generated -- we have supported this growth while maintaining minimal leverage. While debt is necessary to support our growth, we believe we should prudently manage our leverage to maintain our investment-grade rating. In 2012, we did see leverage jump as we financed the Lepage acquisition. Though we are not prepared to discuss the Hostess transaction fully today, as you've already heard several times, we are in the process of finalizing negotiations necessary to finance the funding of this transaction. The strength of our cash flow is evident in our return to our shareholders. Over the past 5 years, we've returned approximately $542 million to our shareholders through dividends and share repurchases. Based on our current projections, we do not believe the completion of the Hostess transaction would affect our ability to continue to deliver cash as we look out in the near-term. Our strong financial performance and our ability to deliver cash to our shareholders, coupled with the growth we have discussed today, have all been drivers of our stock price performance. Our shareholders have been rewarded with significant share price appreciation. In fact, this slide shows approximately $4 billion in market cap on March 15 of this year. If you go back 1 year to March 16, 2012, our market cap was approximately $2.7 billion, this a 46% growth in 1 year.

Now, turning to the topic you're probably most interested in, our 2013 outlook. As we told you on our 2012 Fourth Quarter Earnings Call, we are very limited in what we're willing to discuss and you've already heard that a couple of times today. What we're really waiting on is more clarity on the timing of the Hostess transaction. We're looking both at closing our transaction with Hostess and also the closing of the cake process. The goal today however, will be to point to several factors as we know them today, that can materially impact the year. First, let's look at the Lepage integration. As Brad told you, the integration is going very well and we're on target today to have our SAP systems fully implemented during the fourth quarter. And as you recall, this is very important to us for managing our business, that we have our -- across the whole, our bakeries on the same ERP system, so we can look at information on a standard -- from a standard perspective. We also expect to meet the accretion guidance that we provided last year at the time of the acquisition. And you may recall, that was also $0.08 to $0.12 earnings per share for fiscal 2013. And I would also say that sales are tracking very nicely at Lepage and in line with our expectations as we move into 2013. Next, the integration and rollout of Sara Lee in California. As Brad told you, this is proceeding in line with our expectations. We did close this transaction in February. It was a purchase price of $50 million, an estimated annualized sales of $134 million. So we're very excited about the ability to begin to integrate this business into Flowers. What I would say is, given the cost associated with the integration and rollout of the brands back into the marketplace, we do anticipate this transaction will be neutral to our 2013 earnings. You can also see there's a lot of excitement around the Tastykake brand. As Brad said, we continue to introduce new products and offer more variety through the Tastykake brand outside of the core Philadelphia markets. In 2012, Tastykake was a strong contributor to sales and EBITDA and both were in line with our expectations. You also saw earlier a slide projecting significant increase in Tastykake sales across the whole. So what I would say about Tastykake is we have great momentum and we are expecting it to be a strong contributor to both earnings and sales in 2013. Allen did bring you up to date with regard to the timeline of the Hostess transaction. It's really important to note that the timing and closing of this transaction is key to being able to provide you more guidance on 2013. And hopefully, within the next couple of months we'll be able to do that on one of our earnings calls. But today, it is premature to talk about the overall financial impact of the transaction. And I would also say, looking at our Cake business, as we've said, we have great momentum with the Tastykake brand, it's performing well and it's really starting to fit in as planned, as the national premium cake brand. The quality, as you can see today, is outstanding. As you've heard, the customer acceptance has been strong, but the ability to predict when the new owners will come back onto the marketplace and reintroduce this brand, is really beyond our capabilities. So we are waiting to see, just like you, when the new owners do plan to start back up production and move this product back into the marketplace. And that will obviously affect the Tastykake business although we believe we have established a strong market presence, and that brand does have great quality and is doing very well. And finally, for 2013, I would point to our input cost. On a volume neutral basis, our overall input cost which is ingredients, packaging and natural gas is still expected to be up 4% to 6% year-over-year and this is in line with the guidance we gave you on our call back in February. And I would also point out that in addition to input cost, across the board, other cost categories such as employee-related cost and distribution cost are expected to also be up in 2013. Some of this will be driven by new market introductions, some of it will be driven by the California expansion. So there are other costs outside of input cost that are increasing as well. Though we are not giving you specific guidance today, I do think it's important to make you aware so far, how the year is progressing. And directionally, we'll try to give you some guidance for 2013, comparing it to our overall long-term objectives. But again, I want to caution you, this is not intended to be specific guidance and please don't interpret this to mean we are going to get into the practice of giving quarterly guidance. It's just the fact we believe circumstances today warrant some limited discussion on our view of the overall expected performance in the first quarter and for 2013. We're about 4 weeks away now from ending the first quarter and you can see from George, Allen and Brad that we are executing very well in the marketplace and we are seeing trends that we saw exiting in some of the same trends we saw exiting the fourth quarter last year. If you look at IRI and Nielsen, the data, you will see that our retail sales have been strong and our Foodservice and Institutional businesses are also performing very well. So far, as George indicated, sales in the first quarter are estimated to be up 20% to 25% quarter-over-quarter. This is driven in part by the Lepage acquisition and strong volume growth across each business unit. Our Q1 EBITDA margin is expected to be in line with our long-term expectations of 11% to 13% of sales. We have continued to see our gross margin improve and that improvement is similar somewhat to the improvement we saw in the fourth quarter of 2012, which was roughly 150 to 200 basis point improvement quarter-over-quarter. So again, we are seeing great improvement in the margin and we are seeing our sales grow at a very good rate. Excluding one-time cost related to the acquisition, earnings in the first quarter are expected to be strong compared to last year's first quarter. And you may ask, what is strong? But when you look at long-term guidance, it says we will deliver double-digit earnings growth. So from that perspective, we do think we'll be delivering strong growth in the first quarter with respect to earnings. And then looking ahead to the full year, again, we're not willing to provide a specific forecast to sales or earnings today, which is typically what we do but I would say today, we do believe, based on what we're experiencing in the marketplace, we will continue to see this strong sales growth as the year progresses. And I would caution you, we will lap price increases and some of the volume growth we experienced starting with the Hostess exit from the market in the fourth quarter. Our EBITDA margins will be in line with our long-term growth objectives and we do expect EPS growth year-over-year to be strong as well. So before George comes back up for Q&A, I would like to close by saying we are focused on executing what we believe is a clearly defined growth strategy and it's growth from our core markets and growth from our acquisitions. This growth provides us with strong cash flows that, in turn, does give us confidence to continue to move forward with these strategies. So again, thank you today, for your interest and participation and I will turn the presentation back to George.

George E. Deese

Well, thank you, Steve, and thank you, Brad, and thank you, Allen, for the presentation. As you can see, we are quite confident. We are excited about the business and hopefully, you can glean from the numbers that we are experiencing, you can see why. So it is that time where we'll open the floor for questions and I know we have some microphones available. And Bill Chappell, I see your hand first, so if you would identify yourself and your organization. Up front here, Pete.

Oh, was somebody in the back also? I'm sorry. We'll start here.

Question-and-Answer Session

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Bill Chappell, SunTrust. Two questions. One, if we look at the kind of the market share you gained already, it seems like it's accelerated from December to January to February and the growth rates are going a bit faster. Can it get even better or are you getting to the point where your capacity's strained and it's going to be tougher to improve off of these kind of market share dynamics in the near-term?

George E. Deese

Bill, I tell Brad every Monday morning, it's easy every week. So he's heard that before. No, on a serious nature, capacity we feel that we've been able to manage, take care of all the channels in the business and we will continue to manage that prudently and we feel like we'll be able to continue to meet the market demands with continued efficiencies and different issues that we're presently working through. Brad, would you like to address the question on -- Bill indicated of course, that we look like period after period, has gotten stronger and we can continue to see much more of that.

Bradley K. Alexander

Bill, we still have a lot of opportunity to grow. I'm told every Monday, we have a lot of opportunity to grow. We do.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Just a second question. While you haven't closed Hostess, I mean, certainly, if it works, you get 20 manufacturing facilities and 38 depots. It wouldn't seem that you need to make acquisitions for the foreseeable future. So I mean, does the game plan change and also from a cash management standpoint, does it change in terms of maybe you don't need to spend as much CapEx, if you look to return more cash to shareholders, have you started to think kind of in that mindset?

George E. Deese

Let me hit the first question and then Steve, if you will follow up on the financial question. The question is can -- will the company change its growth platform? I feel like as we continue to develop the business in our core markets with categories that were underdeveloped, as we expand out in those markets that we're not strong in, that we need to continue to raise the bar on, plenty of growth opportunities. I'd say that sometimes acquisitions comes at a time that you didn't expect it. We certainly didn't think we'd be standing here today talking about Hostess as part of what would happen this year. But things do happen sometimes, you take the opportunities. They come when they come and you have to manage through and if it makes sense operationally for the company and it's a good deal for our shareholders, we'd still continue to grow the company that way. Obviously, though, there's other considerations that I'll let Steve address the capital investment part of it and the needs for cash flow. Steve?

R. Steve Kinsey

Yes. Bill, when you look at our cash management philosophy, I don't really think that changes dramatically. Obviously, although we didn't talk about it today, there will be some debt we have to take on to finance this transaction. So historically, we've been a company that, from a leverage perspective, we're more comfortable with something at 2, 2 or less. So we will be focused on paying down leverage quickly. Again, we're seeing strong cash flow generation so we will focus on our leverage ratio. We've always believed that delivering value to our shareholders, whether it's through dividends, share repurchases, is very important. I don't see that philosophy going by the wayside, so we'll continue to balance that. And also, as George just mentioned, there's still a lot of opportunity in new markets, so we'll have to also continue to invest into our brands, into our facilities. So we'll make the appropriate allocations to make sure we're doing the right thing. But I would say, we are going to be focused on some debt paydown as well. And if you look historically at our, from a dividend perspective, our payout ratio has historically been 45%, 50% over the last 2 years because of the earnings kind of flattening. That number did creep. The percentage creeped up as a payout but the 45% to 50% is what we, as a management team, we feel is most appropriate. So de-leveraging, getting our earnings up to get our payout ratios back in line and continuing to invest in the business. So we think there'll be sufficient cash to support all of those.

George E. Deese

Next question? We'll take Heather then we'll go back into the corner and on the last table.

Heather L. Jones - BB&T Capital Markets, Research Division

Heather Jones, BB&T. Just a real quick question on Q1. Should we expect that to be impacted by relatively high SG&A costs similar to what we saw in Q4?

R. Steve Kinsey

When you look at SG&A costs, Heather, through this period of integration rolling out, getting brands back into the marketplace, establishing new routes, specifically in California. The percentage as a percent of sales will be a little elevated and you'll probably continue to see that for the next few quarters until we get the sales base where it needs to be and then we can begin to leverage on that. So it will be kind of probably in line with what we saw in the fourth quarter.

Heather L. Jones - BB&T Capital Markets, Research Division

And Allen, you mentioned that your drivers got -- were very aggressive in getting into the marketplace quickly after Hostess exited. As resets have come around with the retailers, could you give us a sense of how much of that increased shelf space, you've been able to retain?

Allen L. Shiver

Heather, it's a -- the story is a little different from one retailer to the next, but I will say that the good reputation that our independent distributors had with individual retailers, that really gave them the opportunity to gain the additional space quickly and because our products do turn really well. When those resets come around, it's really a function of turns per linear foot. So we've already seen a lot of progress in terms of holding onto the space that we gained, and really no reason to think that, that's going to change. So it really comes back to great service and having brands that turn and that's what the retailers like to see.

Heather L. Jones - BB&T Capital Markets, Research Division

Okay. And final question is on your Q1 versus your full year projections on the sales line, you go from 20%, 25% to strong double-digits. Are you comfortable sharing with us what you're assuming you lose of your cake gains and coming up with that full-year projection for sales?

Allen L. Shiver

Heather, I don't think we'd be comfortable going that far because it's really so unpredictable.

Heather L. Jones - BB&T Capital Markets, Research Division

I didn't think you would be.

Allen L. Shiver

And also, remember, we cycle Lepage in midyear and we'll also cycle price increases in Q4. And then we'll evaluate at that time, whether it's appropriate to take another increase or not.

R. Steve Kinsey

Heather, I think if we ask Joe Tashie that question, he would say he's going to work like the Dickens to make sure that he keeps all of that business. And that is the attitude of our company, is that we keep the Snack Cake business that we picked up. Obviously, we'll have to work really hard for it. To think there's a lot of accounts who are extremely happy with what Flowers has done with new customers and with the Tastykake brand. So we'll just have to see how that develops in time and it's hard to predict. So we'd like to answer but really, we can't.

Unknown Analyst

Philippe Horsen [ph] from Mitsubishi Securities. Three questions from a credit perspective, if I may, this afternoon. The first one relates to the ongoing review from Moody's. One of the things they're going to be looking at as part of that review is what your plans are with regard to the Hostess assets. I know you indicated you would not comment on that, but one of the things in particular they're going to be looking at is what would be the potential liabilities that you would take on if you were to operate some of these plants. Can you give us enough confidence that these are liabilities that you can handle within your current credit profile? And then I'll list the other questions later on.

George E. Deese

I would say that we buying assets only and we're not taking on any liabilities in this process. But it's back to the creditworthiness question. I guess, Steve, would you like to answer that?

R. Steve Kinsey

I think you're asking from the acquisition, are we getting any liabilities and as George said, we're not taking on any liabilities. So with regard to the transaction, the $360 million purchase price is really the only liability at this point.

Unknown Analyst

So operating let's say or reopening a plant would not necessarily require you to take on all the prior employees that worked in those plants?

R. Steve Kinsey

Again, we've talked about currently, from a production standpoint, we are meeting a lot of production needs through our current facilities and this will be a staged process. So we will look at -- on an individual plant-by-plant basis, we'll make decisions about reopening plants as the market ramps back up.

Unknown Analyst

Then my second question, very happy to hear your commitment to investment-grade ratings. The target leverage ratio of 2x, can you give us a timeline by when you might be able to achieve that? Take in consideration also, your initiatives with regard to shareholders?

R. Steve Kinsey

With regard to that, today we wouldn't be willing to disclose that because that would include some forecast related to the Hostess transaction. But we do believe that it will be fairly quick. But specifically, we would not want to address that today.

Unknown Analyst

Okay. My final question relates to the funding for the transaction. Given your strong cash flow, would your preference be to use bank loans because that would give you the flexibility to prepay or given the low interest rates, you would think it would make more sense to go to the debt capital markets and perhaps kind of seek somewhat longer terming?

R. Steve Kinsey

You're right. As you said, we will be pushing on the leverage ratio from an investment-grade perspective. So obviously, we're looking at prepayable debt or amortizable debt. So that would be our preference.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Akshay Jagdale, KeyBanc Capital Markets. Two questions. First one, just on the Hostess deal. I mean, so far, it looks like from the numbers you're sharing with us, you've gained roughly 40% of the share that Hostess had. And I'm just trying to think about when you do start these plants up, is your -- should the way we think of that growth coming from the new plants and new geographies, should that just be a function of you increasing your guidance on expansion market sales growth, which was, I think, 1% historically? Is that how we should think about it? I mean, it looks like you'll hold onto the share gains you have and then you'll add onto that with the Hostess brand in new geographies. So that's the first question.

George E. Deese

Steve Haddlin [ph], you'd like to handle that?

Unknown Executive

Akshay, we do feel like that in our core markets, we will see an increase in sales once we own the brands. Wonder, being a very strong brand in some of those markets, Merita and Home Pride as well. I think really, the growth to think about, it'll be important in our core markets, will even be more important in our new markets. So areas that we've recently expanded into where our current market share is very low, the addition of strong brands like the ones that I just mentioned will be very important. So in terms of overall share, I don't think we can really speculate at this point, but it will be important both in our core markets and even more important, the brands' growth in our expansion markets.

George E. Deese

And Akshay, maybe think about this way also. It's not just the Hostess Brands like Wonder or it's not just Merita in the South, but what I think about is the success we've had on Nature's Own, it's a $1 billion market at this point, annually. And as you think about the strong Wonder brand tagging along with that will be our Nature's Own brands in these new markets as well. As well as other brands like Tastykake, would be going along also. So Hostess is one set of factors but you also have to -- we'll be considering Nature's Own and Tastykake also flooding -- going into these new markets that we do not serve today. But we're not prepared to get down to the percentages of what we think might come with each one of those.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And then just on gross margins, I mean, historically, DSD gross margins are 56%. Plants, everybody's plants in the industry are operating pretty efficiently right now. Why shouldn't we expect gross margins in a short period of time to reach historical levels or even be higher than historical?

George E. Deese

Yes, okay, Steve, would you like to answer that?

R. Steve Kinsey

Sure. Akshay, as -- when you look at the margin of -- one big component of that will be input cost. Historically, wheat traded at $3 a bushel. Now we're kind of settled at a higher level from a wheat perspective. So that does affect the margin. And when you look historically at pricing, obviously, we've never fully priced as a category to cover all of the input costs, so you've had to work from an efficiency standpoint. And when you look at the plants now and the level they're operating at, we are still getting some efficiency gains. That's not a long-term solution. Over time, you can't operate the plants at this level, so there will be some efficiency issue, potentially, if you don't get the production capacity where you need it. So in the near term, I don't anticipate us getting to historical levels, from a gross margin perspective. Over time, it's hard to speculate: Do you get back there? But we are see -- we are seeing improving margins. We saw that in the fourth quarter. We're continuing to see that in the first quarter, and it is pretty substantial. So there will probably a step improvement as we move forward.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Just one last one, on CapEx. Some other large acquisitions that have been made recently by Bimbo, for example. They've talked about CapEx going up as a step function. I don't think that's the case with this acquisition. It seems as, though, I mean, you have guided to $80 million-ish in CapEx next year. First of all, does that include an estimate for Hostess, if there is any? And secondly, I mean, can you give us just some level of confidence that, longer term, CapEx is not going up step function or just going up in any meaningful way as a result of this Hostess deal?

R. Steve Kinsey

Right. You had the $75 million to $80 million does not include any CapEx for Hostess. Obviously, we haven't closed that transaction. So just like our sales and earnings guidance, we're not going to speculate on what that would be. And then I think, going forward -- historically, from a CapEx perspective, we spend $1 million to $1.5 million on maintenance CapEx. So depending on the number of plants we have in the market, over time, that will affect our CapEx budget. But today, I don't see any kind of significant step. We're not going to increase CapEx by -- any plans to increase it by 50%, 100%. I don't anticipate anything of that nature.

George E. Deese

Akshay, I think, good news is we've kept our plants in great shape. And I shared with Steve that I don't think we seeing a significant increase in overall CapEx as these plants -- which plants do open up -- a big tick-up, like the Sara Lee example. We don't see that. Farha of Stephens.

Farha Aslam - Stephens Inc., Research Division

George, you're capturing a lot of sales from Hostess, as you're talking to retailers about their next shelf set, when you do have the Hostess Brands and as you reintroduce those Hostess Brands, what is the conversation like? Do you think you're going to get -- how much incremental shelf space for those brands do you anticipate garnering?

George E. Deese

I won't -- I can't tell you the particular account, but I can tell you that some accounts were set in January; some more in February; some this week, depending on if it was bread, buns, rolls or cake. And what I would tell you is that Flowers just came out very well with those new sets because of turns that we have in the marketplace. So that discussion, as Allen said, our bread won. Space is driven in the long term not because they like us but based on the turns in the marketplace. And it's sort of -- it's just a calculation: If you're moving products, well, then, you'll end up with a bigger share of the market space. And I -- that -- we do see that going on.

Farha Aslam - Stephens Inc., Research Division

And then one follow-up. Right now, we're really focused on sales growth, but you haven't really changed today your EBITDA targets, and you're basically at your long-term EBITDA targets. Do you anticipate stepping those up incrementally?

George E. Deese

Well, I always think it's easy, but Steve, would you like to -- I would say, though, we did -- if you go back in history, use history as a guide, we were at 8% when we said, "Okay, we think we can get to 10% to 12%." So when -- we did get in the middle of that 10% to 12% range consistently. In '11, 2011, we did come back and say, "We thought the future could call from 11% to 13%." So in '11, we did. We have not adjusted that goal any further at this point. We'll see how things sort of go this year. And as always, we do push the boundaries. And we push so that not only do we award our shareholders but we can have the monies to spend in innovation, spend money on training programs for our people, invest in plants and property and equipment. So we said many times that, a lot of times, underinvestment has happened in the baking industry and we'd like to increase margins so that we could reinvest more back into the business, building brands through consumer research and what drives the consumers for the future. We talked earlier about we do need more innovation with people who have -- left bread to the side because of different health concerns. We need to do a better job, and to do that, it does take investment, it does take money. So that's why we will be driving to make sure that we have the margins necessary to do all the things that's necessary to drive the business. And I've said many, many times, this business is a marathon, it's not a sprint. And we're not trying for 1 year to hit a home run, we're looking way out so that we're doing the right things day in and day out to continue to make the company stronger, day in and day out, and for the future. Yes, Amit? Farha, you through? Okay.

Amit Sharma - BMO Capital Markets U.S.

Amit Sharma, BMO Capital Markets. George, Allen, a couple of questions for you. First one, the -- all our expectations is, as the consolidation gathers steam in this segment, it will get more rationale, you'll have less swings in terms of promotions. Is that playing out, so far? Or as you look 12 to 18 months down the line and you really have 3 major players, is that fair to expect, that sort of rational behavior?

Allen L. Shiver

I would think -- we talked on our last, I think, analyst call that, the pricing that we took going into the fourth quarter, we did take pricing at that point. And I will say that, that pricing has really held in the marketplace. I would say that our dependence on promotional activity has been reduced. So I feel positive about the direction that pricing is headed. But it's a very competitive marketplace, and we really don't know what tomorrow holds. But I will say that the changes that we've seen in recent months has been positive in terms of directional pricing.

Amit Sharma - BMO Capital Markets U.S.

Okay. And the second question is, over the longer term, you stated 2% to 5% growth from acquisition over the next 5 years. Now once we lap this transaction, whenever it closes, is that 2% to 5% growth from acquisitions over the next 3, 4 years still realistic?

George E. Deese

Amit, I think we'll have to reexamine, as Allen and team goes forward. We -- obviously, you don't have 20%, 25% every year, so -- and that sort of levels out. But what -- I would say, which I think is tremendously important, that we're talking about the future and things happen in future and it is -- I've said we're really underdeveloped in a lot of markets. Some -- a lot of markets we're not in, so as we gradually raise our -- awareness of our products in those markets, acquisitions may or may not be less, but I think the growth will continue to be there, based on -- I don't think it's just a 2-year run or a 3-year run. I think, with these brands and with the markets that we're underdeveloped in, along with Nature's Own and Tastykake back in these markets that we do not serve, that I think, it's certainly realistic to say this company's got a lot of growth weight and width for quite some time. Let's take Eric, and then we'll come back over here.

Unknown Analyst

I don't really want to ask a company question but just maybe more of a broader view on the consumer since you're a staple and you're in the market every day. And maybe it's difficult given everything that's going on, but did you see any impact from the payroll tax increase, gasoline prices? Private label has been a challenge in the category. Have retailers become maybe a little less aggressive on the private label side of things?

George E. Deese

Thank you, Eric. Brad, I'll come back to you. But let me say, normally, in our category, it seems like we see from gasoline, we see that pretty quick, especially if we have a real quick run up. I've heard through many calls like this, listening to other food people that a lot of people did see slowdown in February. I'd say that, that was hard for us to see but because of all the new business that was coming our way. So it might not be completely, and I can say things look good. From a -- the way we see it, things improved, continues to improve. But I don't know if that's the overall market or is that because we've got one less competitor in the marketplace. But Brad, Allen, you got anything you'd like to add to that from a overall consumer standpoint?

Bradley K. Alexander

I -- George, I think you're right. It was really hard to tell. We've heard other packaged goods companies in February when the -- in January and February when the tax -- new taxes came out, they did slow down. We really didn't see it because of Hostess vacating the market. So we have not really seen that.

Unknown Analyst

[indiscernible]

George E. Deese

Say it again. I'm sorry.

Bradley K. Alexander

The retailers, but their business is a little soft.

Unknown Analyst

So the retailers have -- and so how have the retailers thought about private label within the category that was something that they were pushing, but kind of -- have they kept pushing that?

Bradley K. Alexander

I'm not -- I don't [indiscernible] change in private label, Eric, on private label, no.

George E. Deese

Pushing it more or less, I've not seen that. I think, obviously, though, let's say a person was eating Wonder Bread. And they had a choice, and they went to the supermarket. Did they buy -- did they turn around and buy a Flowers product, a BBU product? Or do they see a brand on a private label they might have chose. I do think some people did leave Wonder or Merita and did indeed buy some private label. We did see about a 1-point rise on the -- since the first of the year. Again, I don't think that's necessarily about [ph] the economy as much as maybe they didn't -- were not satisfied with the options that were there at that particular time. So we did see a slight rise in private label by about 1 basis point during this time frame. Keith [ph]?

Unknown Analyst

Sala Carlos [ph], Source Capital Group. George, because acquisitions are so key to your long-term growth, what's the decision-making process like when it comes to acquisitions? Who's involved? And how quickly are you able to act once you see an opportunity or you try to research an opportunity? Yes.

George E. Deese

I think the question is back to acquisitions. Again, some of them come disguised and you don't know until it's almost here. But I would tell you that, the management team, even though we're really involved in integrating, we always are keeping our eyes open to the marketplace and what's going on and opportunities that may be on the horizon, maybe not this year or next year or 5 years out. We keep a 5-year plan pretty well at all times, so we're keenly aware of what could happen in the future. And sometimes, they work out. Sometimes, they do not. Sometimes, things do work out that we never thought would happen. So it's a work in progress, quite honestly.

Unknown Analyst

Yes, well, who are the key members that are involved in the acquisitions? And when you consider an acquisition, must you have everybody agreeing on it? Or can someone of -- object to it and you'll have to respond to that?

George E. Deese

Within our company?

Unknown Analyst

Yes.

George E. Deese

Well, we have an M&A team. And it's made up of the people at this table, made of Steve Avera and Ryals McMullian in an audience, along with Gene Lord and that's a lot of operational people, legal, M&A and the finance side. We meet real often to talk about the industry and what's going on around the United States in the baking industry. So as you see, it's pretty active.

Unknown Analyst

So no one has a final vote of...

George E. Deese

The board has the final vote. We -- I'd say, as the CEO, you always have the final vote to recommend to the board how we'd like to move forward.

Unknown Analyst

Okay, another question. Since St. Patrick's Day was recently celebrated over the weekend, have you ever considered offering Irish soda bread?

George E. Deese

Marta Turner has mentioned to me. Marta, did you...

Marta Jones Turner

[indiscernible]

George E. Deese

She ran into some Irish soda bread -- over the weekend?

Marta Jones Turner

In Thomasville, Georgia.

George E. Deese

In Thomasville, Georgia. Sorry to say, it wasn't ours. But it is -- it sounds like something we need to look at. I will say that our founder used to go to England quite a bit and would drop by Ireland. And he came back one time with some Irish bread, and we developed an Irish country bread. Didn't -- it didn't make it to the marketplace, but it's a great product. And he always thought we messed it up. But no, seriously, we're always looking at what's going on in the marketplace. And if something looks attractive, we try to develop.

Unknown Analyst

Well, if you were to develop a new product category like that, would you ever consider using the Flowers name as a brand name?

George E. Deese

We could, but what we're trying to do is continue to develop our Nature's Own brand. But different products meet different brand...

Allen L. Shiver

Criteria.

George E. Deese

So it wouldn't necessarily have to be Nature's Own. Allen, do you want to address that, maybe [ph]?

Allen L. Shiver

Yes. I -- brand development is very important for the company. But if you think about our brands, I mean, a brand has a personality, very much like an individual. So our Nature's Own brand, no artificial preservatives, flavors, colors. It's all about health and nutrition. Tastykake is about indulgence and great-tasting snacking. So I think our strategy is to develop a strong brand for each segment of the bakery marketplace. And we probably would stay away from trying to use Flowers as an umbrella brand just because of the -- I think there's more strength in having a strong brand for each category and focusing our attention there.

George E. Deese

Thanks, Al. Ann? [indiscernible] is anybody over here?

Bradley K. Alexander

No.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Ann Gurkin with Davenport. I have 2 questions, one to continue the conversation about the consumer. And I'm curious, have you seen a change in shopping patterns as to where the consumer shops? Maybe there are opportunities at the higher end where you could explore to add -- offer bread brands, like maybe Whole Foods or so forth? Can you talk about that? And just any change in the shopping pattern of the consumer? And then second, with the exit of Hostess from the marketplace, can you talk about how you feel the industry capacity situation is currently and maybe how that could be -- turn out to be an advantage for you going forward?

George E. Deese

Yes. Allen, would you like to take the, Brad [ph]?

Allen L. Shiver

I'll comment on the -- from a consumer standpoint, in terms of changes in shopping habits, we're continuing to see first of the month is still becoming real [ph] polarization in terms of stronger demand. And "first of the month" consumers, I think, are still under pressure. "End of the month," running out of money. I will also say that we always worry about the private label share in our category. And I will say that I think most of our grocers are realizing that this category is relatively inelastic. In terms of their total sales for the category, they're going to sell about X amount of products. So they also understand that selling more branded product helps drive that total dollar number up for their overall category. So I think, as we go down the road, the retailer is getting a better understanding of the importance of balance between branded products and private label is important. I would also say the consumer is continuously under pressure, and we see that because of the perishable nature of our products. But again, not a dramatic change, I would say, year-over-year. Ann, I'm not sure that -- the other question, I'll refer to Brad...

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Opportunities for offerings of bread where you maybe need to meet the consumer, where their shopping is in, the Whole Foods or a channel where maybe you need to explore.

George E. Deese

I think we're very focused on the super premium part of our business that we're underdeveloped in, also think the organic proposition is real. And we've gotten real busy lately, and our focus came off of that a little. But I think we'll get it back on where -- and we've mentioned, in New England, we have the Barowsky brand. Does quite well in New England. And as Brad stated in his presentation, we do feel like it's got legs to get in more of our territory. It's a matter of priorities right now. But I think those 2 issues, I think -- and gluten-free, I think, is another issue that is certainly important. So come back to wide-band [ph] super premium. I would come in again on the gluten-free, as well as organic. So all of those are real important. Even though it's a small niche, it's growing, and we need to be playing at the smaller size as we -- as it grows so that we can be a player when it really matures. Thanks, Ann. Yes, Sy [ph]?

Unknown Analyst

The figure [ph]?

George E. Deese

Yes.

Unknown Analyst

The -- has the emphasis for nationwide [ph] now on vis-a-vis the eating healthy foods likely to impact a Tastykakes' future, at a time when you're emphasizing healthy eating with your Nature's Own. Then you've got the other side of the house, where you've got a calorie problem.

George E. Deese

Well, we have to be indulged of [ph] occasionally. We have to be indulged of [ph] occasionally. I think it's a fair statement, though. Yes, we are pushing Nature's Own, better-for-you type products. But at the same time, there is 330 million people in the United States, all of them have different needs and wants and consume different foods. If you take a survey in this room today, just -- and said, do you eat salted snacks? All of us would say no. But they continue to grow yearly year after year after year. If, well, you ask, "Do you eat Tastykake's or sweet snacks," most of us think, "well, we don't." But we really do because we do want to reward ourselves occasionally. And I don't think that's talking out of both sides of our mouth. It's this one product line for people to consume Nature's Own who want to be healthy, but at the same time, we want to provide indulgent food for people who want to consume better, sweet good occasionally. Moving on advertise, trying to increase consumption per se, I think Pepsi, over time, is a company that's done quite well to broaden the scope of not having maybe soft drinks and cope [ph] in a lot of schools [ph]. I mean, they continue to look how do they do a better job of that. We'll always have it top of mind and continue to look at ours as well. Thank you. We're getting close to time. Another question? Anybody, about now. Amit's got a follow-up question, I believe.

Amit Sharma - BMO Capital Markets U.S.

Steve, have you started to look at commodities for the Hostess part of the business yet, or is it too early to start looking at it?

R. Steve Kinsey

From a volume perspective, Amit, obviously, we've captured, as I said earlier, additional space. So we are factoring that volume into our buys, but we're not factoring any additional volume at this time in -- related to this closing the Hostess transaction.

George E. Deese

Well, seeing no other hands raised, I will end the meeting again by thanking you for being here. Thank you for your interest in Flowers Foods. It continues to be an exciting company, an exciting future. So thank you for your participation today. And we look forward to meeting you the next time. Thanks so much.

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