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Flowers Foods, Inc. (NYSE:FLO)

Analyst Day Call

March 20, 2012 08:30 am ET

Executives

Mary Krier - VP, Communications

George E. Deese - Chairman & CEO

Allen Shiver - President

Brad Alexander - President, Flowers Bakeries Group

Joe Tashie - President, Cake Group

Bob Hysell - President, Foodservice Group

Gene Lord - EVP & COO

Mike Beaty - EVP, Supply Chain

Steve Kinsey EVP & CFO

Analysts

Akshay Jagdale - KeyBanc Capital Markets

Mitch Pinheiro - Janney Montgomery Scott

Bill Chappell - SunTrust Robinson Humphrey

Amit Sharma - BMO Capital Markets

Ann Gurkin - Davenport

Eric Katzman - Deutsche Bank

Mary Krier

Good morning and welcome to Flowers Foods’ Analyst Day. We appreciate all of you who are here with us today in Philadelphia and all of you who are listening by webcast. My name is Mary Krier and I am Vice President of Communications for Flowers Foods. Usually Marta Jones Turner, our Executive Vice President of Corporate Relations opens our analyst events, but unfortunately Marta could not be with us this morning. We do have a number of Flowers’ operations people here and you'll be hearing from key members of our executive team. Before we begin I must remind you that our discussion reflects what we know about the business today, but that may differ in the future. As you can see from our agenda, the focus of our presentation this morning is Flowers’ growth strategy. Now it's my pleasure to introduce George E. Deese, Chairman of the Board and Chief Executive Officer of Flowers Foods.

George E. Deese

Thank you, Mary and good morning to each of you and good morning and thank you those on the way up who have joined us as well this morning. We think today will be an exciting day, what you will hear today is all about driving growth for the future and you will hear from Allen Shiver and his operating group when he really talks about all the growth information and then supply chain from Mike Beaty and of course Steve Kinsey will follow up with a financial report which supports that growth.

I'm happy to be in Philadelphia, home of Tastykake and as you know in past years when we have had a new company that’s come into the company or when we build new facilities we have tried to have our Analyst Day at those locations. So it's great today to be in Philadelphia, the home of Tasty Baking. As I think back to this time last year, I think about the Analyst Day in New York. We had just came out of our strategic planning meeting with our Board of Directors and at the analyst meeting last year, we laid out after approval from our Board of Directors a new five-year plan for Flowers Foods.

And it was amazing that and that was in I believe late March and by the end of May, we came back to the market and said here is evidence of our growth plan, Tasty Baking has joined our company, some $185 million-$200 million in sales and we are happy as we can be to have that iconic brand in the portfolio of stable brands with the company and that was a real evidence to our shareholders and people who have followed us that we are very serious about our five-year plan.

As I stated that Tasty brought this iconic brand to state-of-the-art bakeries in Pennsylvania and access to the market in the mid-Atlantic and of course to the northeast. And so there is really two reasons why we felt like Tastykake was going to be a great addition to this company; one why is that brand iconic brand, that we felt like we could take nationwide on our distribution system to give us that big uplift in cake sales that we had been underdeveloped in all of our careers at Flowers. And I will tell you that so far we are meeting and beating those expectations that we knew could happen on the cake side. The second part of the Tastykake acquisition was we wanted to be throughout the mid-Atlantic with our Nature’s Own brand and other brands of bread, bun and rolls that were produced by Flowers Foods and not too long after that, but about the same time I guess, the acquisition of Sara Lee by Bimbo came about and we are patient and said we think there might be some opportunities out of those divestitures that would help us get to this part of the world a lot quicker.

Well that has not happened and so we are at the point and we will have an announcement sometimes in the near future about our plans on future growth of bread and rolls in this market. But today I am not prepared to say that because it will be more than likely building of a new facility or using one of our present facilities to expand, so more news coming on that later. And Tastykake discussion is all about growth and as I sat and talked to you last night and I have told everyone since that day I thought it would be a watershed in the company because I felt saying year after year, after year, that we will have continued growth on Tastykake, not particularly in Philadelphia, we already have a great share here even though I think it will be great. I think the big growth in the cake business will come in the rest of the Flowers territory where Tastykake is new and I think that will be year-after-year-after-year-after-year until we reach a mature stage in the cake business throughout the rest of the company.

So two big reasons for Tasty that acquisition, one is already paying off exceeding expectations and number two being able to go to the rest of this market, well it is yet to come. But also we feel like that will also meet and beat expectations when we get there. The whole focus of our presentation today is about long-term growth. I think that Allen and his team will be looking into that, but before we get to that long-term growth, I would like to talk just briefly about the operating environment today that we see and first one I would like to mention is the input cost which we all know has been volatile for the past three or four years, stable for years. You might have a [peep] because of some crisis, but in truth and I have told you many times, the average price of wheat in most of my career has always been in that 350 to 360 neighborhood is exactly twice as the roughly $7 if you went out and bought wheat today.

That's not only true in wheat, but most commodity has spiked in 2011 for the company. So that did bring a lot of pressure to bear and we said throughout the year that we thought the fourth quarter would probably be our testing time with the commodity cost and you found out that was true and we said also the first half of the year will be pretty tough because of [theory] on hedges and Steve Kinsey will get more into that in a few minutes.

So it has been about volatility and I noticed one day I guess it was last Friday we had a spike in wheat $0.25 up, yesterday I believe it was Monday, we had a $0.20 down day. Looking at overnight, the market is down in overnight on the wheat and reading the Wall Street Journal this morning basically said that there is not going to be rush years and now it is going to be export and not importing, so let's not relieve things. The weather and the crops look good in the West and the Midwest, all of you know we buy hard red winter wheat. That’s basically raised in Texas, Kansas and north of there.

So things do look in my mind, a little bit better on the commodity front and you know not get into that, that’s in the guidance and all is baked in our guidance, but if we see better results than the back half of the year, because the crops are better I think that bodes well for 2013. So we are looking at it longer term as be in a better commodity situation. So volatility has been here for three or four years and it will be great to see it level out and only time will tell that we know there is more and more people in the world and we will have to feed a lot of people going forward. So over time the long pool, expect commodities will still be high.

Many of you asked in the last night and again this morning about consumer and now we would say we are still cautious about the consumer. And I can tell you the first 15 days of every month I get optimistic. Optimism always looks good in the first 15 days of the month, but then you get on to the back part of the month and all of a sudden that optimism turns a little pessimistic because the consumer gets a little more at edge and not shopping quite as heavily. But and I do say with that optimism in that first 15 days I do feel a lot of consumers are feeling a little bit better about and they do have a little more confidence than they would had over the past three years since 2008.

I do believe that, now when that turns into tangible, real tangible results is really hard to say, but I think I can be a little more optimistic about the future from the consumer, than I could this time last year. I think also while we are seeing first of the month, it’s a lot more food stamps. We are seeing a lot more promotions, we are seeing some trading down, which says the consumer still have lower, they are still having some difficulties. And the only worry I would say about that optimism by the next six months could be what happens to the price of gasoline. And you see some of the big retailers say when gasoline approaches that $4 level that they see a difference in shopping patterns, people come to the supermarket less, but they do buy more when they do come and over time though they might not buy as much because of the pressure of some trading down.

We’ve not seen that on bread because as I’ve said all for many, many years now that private label has peaked and it has peaked for many years and in fact it is down slightly from three years ago, slightly at 26% 27% 28% depending on when you look at it, it is a more mature category and I believe the retailers are satisfied with the amount of private label they sell in the bread category. I'm glad I'm not in some underdeveloped brands that or private label, may be chips or some other food like orange juice or whatever that’s underdeveloped, I think that's where the retailer is looking really hard to see how do we get after, 25% to 30% private label share in this particular category. So we are much here and already there.

Last thing, I would like to mention briefly; this morning is the consolidation of the industry and Allen will hit on that more, but the baking industry has been consolidating and I’ve been in the business since 1964. It was consolidating then, is still consolidating today. The difference of what we are seeing today is the major bakers consolidating. You will see it in the chart and Allen will show it later where 10 years ago there were eight major baking companies, five years ago there were six.

Today there's roughly three plus Pepperidge Farm on the bread side, three and a half as we would call it. And that has really changed in the past 10 years. A lot of independents have also helped change in the past 10 years but I would tell you there's more to come and I feel very comfortable in where Flowers is positioned. As Steve would say our balance sheet is in great shape. We have kept our powder dry. We are optimistic about the future and the growth platform. I have never felt better about our operations and the team is in place to take advantage of opportunities as they come forth. And that's why last year we felt comfortable looking at long-term growth chart.

As you can see on the chart; a five-year forecast goes, we are talking about 5% to 10% sales growth and that comes in two platforms, 3% to 5% organic growth and 2% to 5% from acquisitions. Return on invested capital will be from 13% to 15%.

We feel like the EBITDA margin will be from 11% to 13% and that was increased as well from 10% to 12%, to 11% to 13%. And with the business model we have, in low cost producer; low cost distributor in the market place; low cost operator; that our EPS can be at double digit or so in the next five years. We are very comfortable with that and see Steve Kinsey will basically be able to prove why we feel so comfortable about that when he comes up and shows his chart. And you can see why we have the confidence that we have.

So the last chart, David some people would say if its [fact, it’s not brag]. Okay, so not [brag] but I would say that in 2004 we were serving 37% of the US population, which at that time was about 110 million consumers who had adopted to try to serve our products. We said we felt like we need to be at least 50% and we did achieve that some six years later serving some 230 million consumers by 2011. And now we expect in the next five years to reach 240 million consumers or 75% of the US population through organic growth and through acquisitions.

So these, I mean to say have made those predictions. It’s little more challenging for people who were asked to do it. But Allen Shiver is a guy who has been with us now for 32 years and been in lot of parts of the company in those 32 years. He and his team will talk about that growth platform and how we plan to do it through organic growth and through acquisitions.

So Allen Shiver, our President will now come in and present his program. Allen?

Allen Shiver

Thank you, George and good morning. Looking at the inventory of Tastykake in our meeting rooms today, it looks like we had a pretty good sell-off last night and hopefully you enjoyed the evening.

The operation last date we are going to go over this morning is really intended to focus on what are our plans to achieve the growth targets that George has talked about, our five year growth targets of 5% to 10%. Just a reminder, we’ve split that growth targets into two buckets, organic growth and growth from acquisitions that you see in our chart.

The goal really today is to give you the confidence that we have as an operating team and a management team that we will achieve the goals that we've set out before us. So let’s take a look first at organic growth plans. One of the areas that we are excited about, our team continues to develop new products, which we project to contribute between 3% and 5% of our total sales growth. Brad and Joe Tashie, Bob Hysell in just a few minutes they will talk specifically about some of those new products that we are excited about.

We will also continue to grow our organic sales through territory expansions, in the North East markets, the Central US and I will continue to expand organically in the West Coast markets as well. We continue to really focus on where the population centers are at. And I think as we go into these new markets, we are benefiting not only from the Nature’s Own brand and the ability to take it from a consumer standpoint to new markets but also from a retailers. As you know many of the retailers we are already dealing with, they are home office buying fast. So as we go to new markets those retailers they already know Flowers Foods and they know our reputation for good service.

Before we get into details lets take a look at the overall category for bakery products in the total US and as this chart is little busy, but we will walk through it slowly. As you can see, the total retail category for fresh bakery products in the total US is $20 billion at retail. Fresh packaged bread represents $13.8 billion, cake is $4.3 billion, and tortillas and wraps are approximately $2.4 billion.

It’s important to note that the category volume trend for the past several years has been flat to down 3%. As George mentioned it earlier there are multiple reasons for this negative category trend but like many other food categories, consumer purchase patterns are being impacted by the difficult economy and that is true in the baking category as well.

In addition to retail, bakery products in the Foodservice segment are estimated at $6.3 billion on a national basis. In just a few minutes Bob Hysell will talk to you more about what we are doing in Foodservice to grow in this piece of our business. Please note that the category sales in the IRI South market; IRI South is really our core market, its $7.2 billion in retail sales and approximately $2.4 billion in Foodservice sales. In the South market the category has also experienced the same flat trends that we saw in the national numbers.

As George said it earlier, it was really important here in the exercises for looking at category shares, what is really important is the absolute size of the fresh bakery category. Over $27 billion, when you add retail and Foodservice together and also when you compare fresh bakery to other product categories and other food categories we've really weathered the storm better than most. So my point here is not to be doom and gloom about the category, quite the opposite. We are excited about the opportunities to continue to grow our company and get even a greater share of this huge category that we call fresh bakery.

Looking at the category from a consumer behavior standpoint, fresh bread is relatively inelastic. Promotional pricing can temporarily move consumers from one brand to another or one item to another, but as retail prices move up and down, the total category really remains pretty stable in terms of volume and also unit.

Another interesting point from a consumer standpoint is that 98% of consumers buy fresh bakery products. That’s a very, very high penetration level for any product category. Health and nutrition claims continue to drive new product introductions as consumers focus on better few attributes in their bakery products. In addition the majority of consumers are interested in products with whole wheat, whole grain and fiber ingredients. When you think about our Nature’s Own brand and the positioning of Nature’s Own we are positioned perfectly to capitalize on these consumer health and nutrition trends.

The fresh bakery category is very, very important to our retailers. From a grocer’s perspective, fresh bread moves more unit than any other top food category in his store and it is one of the retailers top profit producing categories. That’s the reason that companies like Flowers Foods that can deliver the service, deliver the brands and deliver the product turns, again are very important to our retailers.

Turning to the acquisition portion of our sales growth projections; we are targeting 2% to 5% of our sales growth to come from acquisitions in the next five years. Industry consolidation is no secret to anyone in this room today.

This chart shows the decline in the number of wholesale bakers from 1779 bakeries in 1990 down to 652 bakeries in 2010. Again, these are counting large bakeries and small bakeries and I think you see the trend. Also in 2000 there were eight major bakers competing in the marketplace. Today that number is down from eight to only four with Flowers Foods being a clear number two in the total US markets.

Acquisitions have been a primary growth initiative for our company since we went public in 1968. This is an interesting chart; it shows the 10 year history of our total sales growth year-over-year along with the percentage of that growth from acquisitions. As you can see in FY ’11, our total sales were up 7.8% with acquisitions primarily Tastykake contributing 5% of that total. Before you ask, please note the 18.6% sales increase in FY 08, is really due to three factors; number one, pricing was up about 10% in this year because of the extreme commodity price hikes; number two, we acquired both Holsum bakeries In Phoenix and also ButterKrust bakeries in Lakeland during that year; and number three this year was also a 53-week year. And that is a reason for the 18.6% increase. But really the point here is, that growth through acquisitions, it is today just as important if not more important than anytime in our company’s history.

This map shows our expectations regarding our DSD territory growth over the next five years. As we discussed some of this growth will be from territory expansions from existing markets. Brad will mention that in just a few minutes, but the majority our anticipated growth will be through new acquisitions.

I mentioned earlier, its no secret that consolidation within the baking industry is increasing at an accelerating rate. Through the years, our team has proven our ability to successfully integrate newly acquired businesses into our company. In this past years acquisition of Tastykake and the integration of Tastykake is a really good example of how we can do this successfully.

While we’re not making any acquisition announcements today, I am very, very confident that our company will successfully participate in the final stage of consolidation that we are now seeing in the banking industry.

Thank you. At this point, I would like to introduce Brad Alexander. Brad is President of Flowers Bakeries to continue our operational overview. Brad?

Brad Alexander

Thank you, Allen and good morning. Growing sales is critical to our success. Allen has already spoken about how acquisitions contribute to our overall growth. I am going to touch on the importance of organic growth to our DSD segment.

The sales growth targets or organic growth is 3% to 5%. We have consistently reached that goal through market expansion, new products and new customers. As you can see from this map expanding our geographic boundaries has been a key strategy for us since 2004. The maroon color represents our DSD territory in 2004. From 2004 to 2011, we expanded that territory as shown by the orange color on the map. Two acquisitions have supported this geographic growth; Holsum in Phoenix Arizona and Derst in Savannah, Georgia. With our DSD distribution of breads, buns and rolls and our Tastykake distributors, we are now serving 61% of the U.S. population.

The blue stars show our most recent expansion areas, the ones that we have expanded-in in the last five years. The expansion markets we have entered since 2004 contributed a $140 million in annual sales in 2011. We will continue to expand into new markets. In fact, plans are underway to move into another key market in April.

We also grow through new products. In 2010, new products contributed 5.1% of our sales growth. In 2011, they contributed 3.1%. Our marketing and consumer insights team working with our R&D staff have consistently produced new products that have supported our growth strategy. These new products provide consumers with great tasty and bakery food, many with good view or better view profile featuring Whole Grain, Whole Wheat and Fiber.

What we’re now just bringing however are some unique items that we’re very excited about. We have two new items under the Nature’s Own brand. Nature’s Own Butter Buns and a unique Pull-A-Part Dinner Bread. Other exciting new items are planned and will rollout later this year.

The third part of our organic growth strategy is developing new customer partnerships. Although, we have a strong market share in our core areas, we always have room to grow by capturing new customers. As an example, this past year we picked up a new large Foodservice customer, because of our outstanding service and our can-do attitude. The Foodservice customer called our company in the winter of 2010 because they’re bakery suppliers, one of our competitors told them they could not serve their restaurants because of the weather. Their restaurants were full of customers, but they had no bread. We contacted our bakery in the markets, moved production schedule around and served the customer.

Two weeks later, another weather event occurred, this time in another state and the same thing happened. This customer could not get service from their bread supplier. Flowers found a way to serve the customer when our competitor could not.

As a result, today we are Foodservice customer’s bread supplier and we gained over $11 million in new business. This reminds me of a quote we’ve all heard, but it is true; “If you don’t take care of your customers, somebody else will”.

As you can see from our growth strategy an increase in our geographic footprint, introducing successful new products relevant to today’s consumers and adding new customers by giving extraordinary service that helped us to achieve our growth target of 3% to 5% in the past and will also do so in the future.

Next, Joe Tashie, President of our Cake Group will give you an update on our Cake Group. Joe?

Joe Tashie

Thank you, Brad. As you can see the Cake category brings tremendous growth opportunity. We are positioned to grow our sales through our DSD and non-DSD brands with the premium Tastykake line bearing strong margins with Blue Bird offering DSD value on items that don’t fit the Tasty profile and with Mrs. Freshley's bringing alternative distribution channels to a really strong brand.

And this map shows the rollout of Tastykake to our current DSD route. If you think about it in less than a year, we are all the way to Texas, with great acceptance from our distributors, from our customers and most important from our consumers. This split of rollout will continue with Tasty One Taste sampling tour. TV segments, spot radio, sampling, digital advertising, social media advertising, coupons and PR great support for the rollout, we’ve had all the way through our system; loss of exposure to a great brand as we move to new markets and more customers.

Of course built-in, we are continuing the great traditions of Tasty in Philadelphia with sponsorships with sports teams, creative campaigns like Follow the Freshness, scavenger hunts, awards programs, using radios, digital, social and in-store; we plan to continue to grow the brand here and to grow it in the Northeast.

We want to grow with new product ideas. Tasty Klair Kandy Kakes Limited Edition Baked Pies. We have a great R&D team in Philadelphia and across growth plan and we continue to leverage them for greater more opportunities to build our brands.

The Tastykake core market is strong, but we plan to get stronger. We are going to go to the new market expanding the Tastykake borders pushing out on the boundaries and we will lever the DSD routes for distribution into more markets, more customers and more consumers. Tastykake is a success that's really just started. It’s a success in sales, success in earnings. They are in line with our projections or better. It’s a success with people; it’s a success with merging cultures. And truly, we are just beginning to realize the synergies that are available to it.

The Blue Bird doesn’t go away, it brings opportunity of items that don’t fit the Tastykake profile and help us fill out our selling portfolio. And the warehouse channel is alive and well with opportunities covering markets that we don’t access with our DSD route; working in channels such as then. It gives us a brand opportunity in non-distributor channel, an opportunity with good margins to co-brand with other people.

We are going to be a national branded cake company with premium snack cake sales. We are going to compete in the value area; we are going to compete in alternative distribution channels. Growing sales, improving margin is the mission and I feel comfortable that we’re on target to achieve that mission.

So with that, I am going to introduce Bob Hysell, the President of our Foodservice Division.

Bob Hysell

Thank you, Joe. Like the other speakers you have heard today, I am going to talk about Flowers Foodservice growth as it relates to the company’s long-term objectives. Specifically, I will focus on how foodservice will help to achieve organic growth targets.

First though, I thought it would be a good opportunity to take a look at the overall foodservice industry. As you will see from the chart, the industry as a whole has been trending downwards since 2007 and is basically flat lined since late 2009. There has been a little bit of an increase over the past several months driving some industry optimism, but largely that’s been due to unseasonably mild weather across the country. Clearly, it’s a challenging environment.

Growth in foodservice means a greater and a deeper and a broader penetration into the top 100 chain restaurants and the top broadline foodservice distributors. The top 10 broadline Foodservice distributors represent 44% of the foodservice’s overall industry business. This handful of customers represents a significant and accessible market share and focusing on and partnering with these customers will allow us to achieve our long-term objectives.

Next, the top 100 chain operators in the U.S. represent 57% of the industry volume and while the industry has been soft for the past three years, these folks have continued to update the rest of the industry. Additionally, there are opportunities to continue to grow by supplying other bakers and other large consumer products companies with raw materials help fuel their growth.

As I indicated in the previous slide, the top 10 broadline foodservice distributors represent more than 44% of the overall foodservice business; Flowers has a major presence with the top three largest in the industry and work in relationships with most of the others. Within the top three, we have successfully worked to expand both our geographic footprint as well as our product offerings. We have developed some products specifically for each of them, giving them product differentiation in the marketplace.

We have developed, one of them a line of Flavor Tea biscuits that are unique to them and additionally we have developed a whole new roll specifically designed the meet the flavor profile and taste that the consumer prefers in the Northeast United States.

To be successful, we must also increase our business with the top 100 national chains. One example of this was that in 2011, we were successful in partnering with a major quick-service chain. After servicing the customer in basically the same area in the country for over the past decade, we had the opportunity to work with them and greatly expand both the market service as well as the products sold. While they had been a significant customer in the past, our business with them will more than double to over $50 million in 2012, both in our warehouse and DSD segment.

Consistent with our strategies, many of our new customers now realize we have a fairly unique ability to meet both their needs with both normal breads and rolls off the DSD fresh delivery routes, as well as the specialty items through frozen warehouse distribution. As more and more of the major chains look to upgrade product offerings and quality as a point of difference in the marketplace, as a recognized leader in the baking industry, Flowers is becoming the go to company to meet these needs giving customers coast-to-coast consistency with our products.

As an industry leader with a reputation for highly efficient plants and standards for sanitation and cleanliness, we continue to expand our business of baking for others, either under their brands or as a raw material for further processing. We also offer something else unique, our innovation centers’ product development expertise. We partner with our customers to develop new products. This past year, we have developed new buns for a major restaurant chain, new tortillas for a quick-service Mexican chain, some uniquely flavored buns for a major quick-service chicken chain and specialty honey buns for a major group of chain across the nation. Customer partnering and product development will fuel our Foodservice growth going into the future. Now I would like to introduce Gene Lord, EVP & Chief operating Officer.

Gene Lord

Well, good morning everyone. As a reminder every thing that I'm going to talk about this morning also ties to the goals that have already been laid out and our long-term objectives. There are a number of things that sets Flowers Foods apart from our competition. One of the most notable offering is extraordinary service as we execute our plans in the marketplace. And when it comes to execution, as you have already heard, we are second to none. Our strategy is to go beyond the expected, when it comes to meeting the needs of our customers. Great service helps to build strong relationships with our retail and Foodservice customers.

Our reputation for excellent service supports our sales growth and the efforts in our core markets. Our growth will be driven by an experienced team offering extraordinary service and executing our strategies throughout all levels of our company. Time and time again you have heard George Deese say that our people are our most important asset and we all believe this is true. We are fortunate to have a very diverse experienced and proven team making Flowers Foods successful. Nowhere in the industry will you find the talent that we have at Flowers Foods. Whether it's in the home office, in the bakery, in the marketplace, we know what teamwork means.

Our bakery teams are focused on efficiency and improving performance. Our home office team is focused on providing our bakers and field personnel with the support that they need to be successful. And our sales teams are focused on anticipating and meeting our consumers’ needs that is day in and day out. Across Flowers, we have the most experienced teams in the industry. For instance in our national accounts team which is dedicated to giving our key trade consumers what they need, the average age of our team is 24 years. Thanks to the efforts of our national accounts team, Flowers is the lead category advisor for most of our top customers.

And we believe that our culture sets us apart from our competition. We call it The Flowers Way, you have heard that many times and it speaks to the heartfelt beliefs that we share about how we run our company. Our team members understand and work to preserve this culture. And they understand the company's growth plans and our vision and equally important we all have the same passion regardless of what role that we play. Clearly our experienced teams will help us to ensure that we meet our growth objectives.

One of the most important competitive advantages driving this growth for Flowers is the fact that our team is committed to delivering extraordinary service in everything that we do. You have heard that several times already. From a distribution standpoint Flowers Foods sets the industry standard. As you all know we go to market in several different ways. We serve our customers from a fresh DSD independent distributorship for our top brands as well as fresh Foodservice. We also serve our customers through our warehouse group that involves cake and Foodservice products. Anyway our customer wants the product we have a way to go to market to meet their needs.

We told you several times that we started our independent distributor program back in 1985. And it has grown today to over 4500 DSD territories. Our independent distributors own their business and are highly motivated to provide the excellent service and build sales. As they grow their business, they enhance their own network and increase the value of their territory and they have a vested interest in working hard to earn new business. This program attracts great men and women from all walks of life and they play a critical role in exceeding customers’ expectations in terms of service.

I have been with this company for 45 years and over time I have heard many, many stories from our Flowers team members and our independent distributors who went the extra mile to provide extraordinary service. In fact, providing extraordinary service is one of the guiding principles and one of the main pillars of what we call The Flowers Way. Let me give you a recent example of what I'm talking about and it really involves the same customer that Brad talked about earlier. A Flowers independent distributor was working at a major restaurant location in his territory in December, when a gentleman walked up to him and asked him what he was doing. It was a busy time of the year, but the distributor stopped, he stopped what he was doing and explained that he was running a route book and he says this route book provides a simple, yet extremely accurate way to pinpoint bread orders.

Christmas was a few days away and the stranger asked the distributor, how he would handle the restaurant bread over this holiday. The distributor said that he would service the location the day before Christmas with a large order and then he would be back the day after to fully service the store again. They had a good conversation about what service was about. The stranger said that he was very impressed with this top level and he smiled and they shook hands and he walked away. It was only a few days later that the distributor discovered that he had been talking to the CEO of this restaurant chain.

From serving customer during weather catastrophes to working with customers to develop customized product to working late to be sure that all important deadlines are met, Flowers team members and distributors continuously go beyond what is expected. So what it really all bodes down to is simple. Flowers Foods is the industry leader in execution, in the marketplace and in the workplace and it’s this competitive advantage that will help drive growth and will help achieve our long-term objective.

And at this time now I would like to call on Mike Beaty, who will come and talk about some of the things going on in our supply chain.

Mike Beaty

Thanks Gene. Good morning. The supply chain supports growth and revenue and pushes (inaudible) and margin management in several key areas that I would like to touch on with you this morning. First, strategic investments in new bakeries, new production lines and new equipment provide state-of-the-art bakeries to support growth in our core markets and our new market areas. Next Baking Smart by embracing new technology, some of which you will see today, utilizing process improvements and the wise use of materials and resources is another key area that supports growth.

And most importantly and Gene touched on it very real well, leveraging an experienced and committed team to execute our strategy in terms of supply chain at a point level provides the glue that holds it all together. So before moving on with further detail in this, I would like to look at our score card in terms of how are we doing today by looking at two key performance indicators, our efficiency and our scrap numbers.

As you can see the plants have made significant productivity improvements over the last five years and the trend is continuing year to date in 2012. And simply stated, the productivity gains shown here are equivalent of adding two new bakeries and we found that from two new bakeries were savings of some $120 million in capital resources that we can direct to other areas.

So moving back to the bakery investment side, looking at capital investment, the financial resources allocated to bakery investments over the last several years has provided the funds necessary to support growth in some key ways. We have built new bakeries, strategically located to provide the freshest high-quality product to our customers, we have added new production lines to help rationalize capacity and volume as well as support new product development that you heard our groups talk about. We have replaced less efficient equipment and systems in order to be more cost-effective in delivering products to the marketplace and we've been able to maintain existing equipment and facilities at a high level of operating performance.

And just a quick geographic look at capacity added since 2004 and this does include acquisitions. I will give you an overview of where we have added capacity and where it has come online to support growth both in our core markets and new markets, And to give you a few more details in terms of the funding that we have invested in our new bakery facilities in West Texas, a new facility we built in 2004. Our new North Carolina plant was built in 2006 and our new Springfield plant, a new bakery was built in Bardstown, Kentucky that we completed in 2009.

And as you heard, George mentioned this Mid-Atlantic market is a key market for us and we are looking actively and doing our feasibility studies as far as how to determine the best alternative for adding capacity to support the market and sales plans in the mid Atlantic area.

Moving on to some more specific capacity, major production investments were made in terms of line additions or line replacements, which include new bread capacity in Villa Rica and a total bread line upgrade at our Goldsboro plant, through additional bun capacity, and new cake capacity and lines for new products such as sandwich rounds and bagel thins as well as others. These investments allow for capacity rationalizations, which as we like to say, all the supply chain getting the right product, manufactured at the right place, at the right time and that certainly helps to maximize efficiency and enhance freshness and reduce our transportation miles.

Moving over to baking smart; baking smart by improving processes, embracing new technologies to improve efficiencies and to conserve resources is another key in supporting growth strategy. And one example I like to use as our shipping automation. We have talked to you about this in the past and this system is a paperless, user-directed automated system that uses barcodes, labels, electronic displays and door scanners to direct the workforce and accounts for product shipped and received. This system is providing significant benefits to the logistics area through better cost control and improved service to sales. We will have 14 flowers DSD plants converted to this system at the end of April when we complete the Thomasville bakery.

Moving on with the idea of baking smart, another way we like to look at that in terms of baking smart is to do it in a sustainable way; working with our team members, our business partners, our customers, suppliers, [Flower subscribers] to reduce and eliminate waste of resources and energy. Our 2015 goal is to reduce key resource usage by 10% and landfill diversion rate of 100%.

And to give you little baseline, our manufacturing plants completing 2010, we are doing the calculations for 2011. We were at 94% on the landfill diversion rate as far as the bakeries and sales. We have made significant progress there. We do have a well-established waste reduction and recycling programs and goals at the plants. We have what we call green teams who are very proactive in identifying opportunities to conserve our resources and minimize waste. As you know our commitment to sustainability might just be or better 4% as well as this might be more efficient in the operations.

In terms of leveraging the team and I am not sure I can do it any better than Gene Lord did, but from our standpoint, a key part of driving growth is leveraging experience and committed supply chain and plant teams to support plants in critical operations areas; utilizing real-time manufacturing data and other tools that are provided through our SAP business systems and to support the team. We have results that give us faster turn around and reaction as far as addressing plant issues. It emphasize daily performance and timely monitoring of critical control points and helps to identify equipment needs and other personal training requirements.

Another way of leveraging the team programs for engaging our plant and associate supervision and management in the process of improving productivity are very instrumental in meeting our growth strategy. I like to use this one example; last year Mr. Deese challenged the bakeries and all the corporate staff to find ways to reduce cost. We implemented a program called, it make cents, Small action = BIG savings across the company, involving the whole team and thinking for better and less costly ways of getting their job done, has been instrumental in helping driver performance and improvements and support our growth goals

So thank you and at this point, I would like to introduce Steve Kinsey our Executive VP and Chief Financial Officer.

Steve Kinsey

Good morning and thank you Mike. It’s good to see all of you here last night and catch up with each of you. I was just sitting here thinking of the looking at the, it makes cents, program. We talk a lot about it, this is a penny margin business and you can see it takes a lot of small ideas from our team and then we could take those and kind of roll them all up and then it kind of culminates into big savings and that's what helps drive our margin.

I get questioned often about how do you drop margin with kind of the pressure on revenue growth and I got that question a couple of times last night from a couple of you and you can see through Mike’s efficiency chart over the last five years, what we have been able to do in efficiency gains of that nature can save two plants, you can imagine the impact on the overall margins. And that's how we've been able to maintain some gross margin even though we've had commodity volatility and pressure there.

This morning I am going to kind of wrap up the session by talking or reviewing our long-term financial target. I think what you will see is the elements of our success going forward are really no different than what you've seen in the past. It will be all about strong revenue growth, maintaining the competitive cost advantage and continuing to maintain a balance sheet that gives us strong liquidity and flexibility, so we can take advantage of the opportunities that we believe are going to present themselves within the industry.

But some of the information today and some of the slides may seem repetitive from past presentations. I think it will give you a clear picture of how Flowers Foods can perform whenever we are presented with the right opportunity. As Allen showed you earlier, we have had strong revenue growth over the last ten years. Volume has been somewhat flat, which is really in line with the category over the past few years. Price inflation coupled with mix has allowed us to grow and acquisition had allowed us to grow sales fairly robustly.

As you’ve seen today through speech presentation we tried to outline the elements of growth on the revenue line and we do have tremendous opportunities in the market and through these opportunities we should be able to meet our overall organic growth target and coupled this with the acquisition opportunities, we feel fairly confident to see these opportunities hit with the goals that we have established.

Over the same period we have been able to grow our EBITDA dollars fairly strongly with both the ten-year and five-year compound annual growth rates being in double digits. This growth has led to improved EBITDA margin and this gives us confidence as we move toward our EBITDA margin of 11% to 13%.

As you all know, the gross margin as a percent of sales has been under pressure for the past five or six years. The input cost inflation has been the most significant or had the most significant impact on the margin overall and as George said earlier 2012 will be another challenging year with our cost input forecasted to be up 6% to 9% with significant cost headwinds in the first half. A lot of that is driven by the fact last year, in the first quarter, if you recall, we actually had a down quarter from an input cost perspective as the commodity volatility continues and cost spike in 2011 where we got into the market kind of pushed the cost with cost headwinds in the first half.

But as you can see from the chart, at the same time with the pressure on the margin, we have been able to grow the margin dollars at a compound annual growth rate of almost 7%. We have achieved this primarily through product mix, production efficiency and accretive acquisition.

Typically we disclose product mix as one component of growth sales but as you can see direct selling from this particular slide that over the last five years we have not been able to fully price to offset the dilutive impact that input costs have had in our margins. This means and as Mike showed that going forward we got to continue to work to maintain the competitive cost structure we developed and be able to drive margin expansions through cost efficiencies, as well as revenue growth in expansion markets.

And we would like to show the components of our cost of goods sold and I think the one thing that really, I don’t think. I know the one thing that really can drive our margins is by input cost right. As you can see from these COGS, the ingredients are roughly 50%. The commodity risk management is the key to our success.

Over the last couple of years, George mentioned the markets have been very volatile and we found ourselves upside down on some purchases compared to near-term prices as well as flour pricing. Sometimes this puts you at a competitive disadvantage and knowing this we have re-concentrated our efforts in the procurement process and through an independent review came to the conclusion that during the periods of high volatility we would be better served if we take a shorter view the market.

Now philosophically we believe that we should manage risks through hedging and forward contracts, and it’s no different than we've done in the past, but strategically we've now concluded that shortening our average six to nine months horizon in periods of extreme volatility is really prudent. So going forward on average when the market becomes volatile, we will be looking at a more of a four to seven time horizon and we believe that will allow us to make better buying decisions.

Now that being said, we will maintain the flexibility, opportunistically when we believe prices are attractive. This means we could be longer, but it also means we could be shorter during that period. And as George gave you an outlook on the report this morning, it does appear that we did pretty strong, I think to maintain that could affect the repricing will be other grains such as corn and soybeans, we would have to see how that plays out with the back-half.

And what I was going to say today that for competitive reasons, we typically do not discuss our coverage and that will be no different today and we will limit our comments on commodities to what we made at this point and the projected cost increase guidance that we've given of 6% to 9%.

Though we've seen the pressure on the growth margin over the past few years, we have been able to protect our overall operating margins through selling distribution and administrative leverage. We've accomplished this primarily through revenue expansion, cost control and leveraging technology to efficiently manage administration. Overtime with acquisitions and top line expansion, we should be able to maintain this source of leverage and keep the SG&A as a percentage of sales in this high range of the 35% to 36%.

Net income has grown at compound annual growth rate of just about 20% over the last 10 years. More recently, the last five years has compounded at approximately 12%. Given commodity volatility and consumer weakness, the past three years as you can see have been somewhat flat. But we believe the opportunities over the next three to five years should allow us to get back on-track from an income growth perspective.

And then lastly, the last financial metric, the diluted EPS, as you can see here has grown in line with net income benefiting slightly from share repurchases overtime.

Moving to the balance sheet as George said, we have managed our balance sheet very well we believe and we have done that that we would have the liquidity and flexibility to take advantage of opportunities as they present themselves. And as Allen showed in his slides on the industry, we believe now that those opportunities are good for us.

And our cash flow has been strong overtime. We have been able to spend significant CapEx and complete many projects as Mike showed you and these projects are really what have driven our efficiencies and allowed us to have the most competitive plans in the industry. At the same time, we have been able to make acquisitions and deliver to our shareholders.

Free cash flow, as you can see has been kind of up and down primarily over the last five years and this has been the result of requirements of our hedge margin cash. So as we address our commodity volatility, we believe the overall volatility in free cash flow should improve as well going forward.

This slide, you have also seen several times before, but what I wanted to do today is to show you that as a company we are committed philosophically to our traditional allocations of cash and as we look forward, we believe we continue to have strong cash flow and this is what gives us confidence that we continue to deliver on our allocation of cash.

Overtime, strong earnings and prudent investments have allowed us to steadily improve the return on invested capital. As Mike told you, our plans of operating at some of the highest efficiency levels in the history of our company, so we continue to target the 13% to 15% return overtime and believe at these levels we can continue to drive growth and deliver what we’ve done in the past five or 10 years.

Looking at our share repurchase activity, we still have shares remaining for repurchase through our current share authorization. We’re committed to our strategy to repurchase shares equal to our shares that have been issued for stock based compensation as well as acquisitions to basically eliminate any dilutive affect there and beyond that share repurchases will remain opportunistic.

As you can see here, we have steadily grown the dividends as reinstating it back in 2002. Looking at the pay out ratio, however we believe we’ve been more inline with our expectations that we’ll be repaying out somewhere between 45% to 50%. So what does that mean; that means we have get earnings back on track or the earnings growth back on track and with this earnings growth, you should expect us to be more inline with historic averages.

We continue to outperform several major indices through the end of 2011 and this is due to our strong revenue and earnings growth and it has allowed us overtime to only deliver to our shareholders the share repurchase as well as dividends but also the share price appreciation.

Just to recap briefly our 2012 guidance as we discussed on our fourth quarter call in February, and I have said this earlier, the first half of 2012 we do face significant cost headwinds due to higher input costs. Some of that pressure will be offset by pricing actions and as George said even though we feel good about our growth projections, we are still very cautious on the consumer in the overall economy.

We do believe however 2012 could benefit from the industry dynamics and should some of these opportunities come to fruition and with the rollout of Tasty in our core markets, we believe 2012 could be a good year. Again, it’s all dependent upon the industry dynamics and some of the acquisitions that we've been talking about coming about.

Just to wrap up here in summary, George started out with our long-term growth objectives. And as you can see here and as shown in the blue box really is what we've done in the last five years and we have been able to deliver on growth during this period. And as you saw in today's presentation, we believe there is a lot of opportunity out there and that's what we are excited about today and you can see that revenue growth both organically and through acquisitions as well within reach of our established goals.

Our EBITDA margin continues to be strong and we are approaching the 11% to 13% goal that we've set for ourselves. The strength of our current operations coupled with our growth opportunities gives us confidence that margins should continue to expand and through this margin expansion, we can continue to see strong earnings growth.

So now I would like to thank you for your attention and I’ll turn it back over to George to close out and take us in the Q&A.

George E. Deese

Thanks Steve and thank you team. I hope as we've gone through this process. This is not a half laying cake company. There is a lot of half laying companies or half laying industries. This is a good, core, solid business and the last time I looked that’s pretty good to have ownership in a good solid food company that continues to improve day-in and day-out its operations. And yeah, that’s why I am so confident about our long-term strategy, also confident over the next five years when we end 2016, we’ll look back and we will have achieved the goals that we have set forth this time last year.

And again relative to that right after last year’s meeting in New York, not long enough I stated earlier, we acquired, merging Tasty Baking Company brought in by $200 million in sales and brought in by 30 million new consumers that of Tastykake in Flowers and we’re still yet to take advantage of the bread category, bread, bun and rolls in that Mid-Atlantic and Northeast segment of the market. So I think good things ahead. So our team is experienced. Our strategy is sound. We are very excited about the future over the next five years and beyond, solid-solid, company.

Well with that [Mark Bateau] was really excited to hear, and which is very true and I knew that, and he said that before. So went through the presentation and picked up on several things, think back about the efficiency; you talked about efficiency and that sounds a little dull. What does efficiency really creates?

Well Mark, I would say, it created savings of $120 million in new capital for plans, because we improved efficiency in there, so that we can take care of our growth, but yet save the $120 million in capital. So even though it sounds that’s not a big deal, well it becomes big deal and that’s how we over and over and over stay the low cost manufacturer in the industry and little cost distributor and even in spite of tough input cost we are still able to maintain margins and I feel like now we are set to go see this continued rise because of those efficiencies and the way we operate as the marketplace improves and as input we feel like will improve overtime give us tremendous confidence about the future.

And if you have questions at this time, why don’t we stop and pause for questions and if you have questions, if you would raise your hand and identify yourself we will be happy to take those questions; if I don’t answer, I’ll ask someone else to do it. And I believe Akshay’s hand is first over here.

Question-and-Answer Session

Akshay Jagdale - KeyBanc Capital Markets

Thanks George, Akshay Jagdale of KeyBanc Capital Markets. You know one of the questions, so one question, but I think numerous parts. If you look at the macro factors that are impacting your company and its growth, commodity cost being one and if we assume as investors that the volatility will continue, can Flowers gross margin expand in that environment?

And secondly again, related to gross margins, you put up that chart about the industry consolidation, yet we’ve seen all bread companies seen their gross margins decline over that period. So there are two factors that are going to drive gross margin expansion and we consider the volatility in commodities to remain. And why should we expect gross margins to expand, you know from my perspective I am going to assume commodity volatility is here to stay and I am assuming that industry consolidation since it hasn't really led to margin expansion I'm going to assume that that could continue as well. So where am I wrong?

George E. Deese

[Chad] I wish you would put the slide up that Steve Kinsey used back on the five-year chart just for a moment. And if you just leave it there throughout my discussion, our discussion. So let's come back to the question of how do we have confidence about gross margin, how can we expand that going forward? If you remember five years ago and beyond that, this industry, we performed roughly at 48.5% to 49.5% gross margins. I think with the volatility of commodities and with certain competitors, that’s no longer in the market, there were some things going on that, dynamics this industry had never seen before. We have had commodity influx before and the industry would adjust prices, but for the first time in my 45 plus years history in the industry, we had never seen you have to give all of that back.

And we took the line of, we will not give back the pricing, but because some competitors did, we had to promote much heavier than ever before. And I have got the belief that as the industry consolidates, number one, we are all continuing to have to invest in this industry. We have got to continue to invest in R&D and in plants that can feed all the people in America and around the world.

So with that and the high labor cost to do that, I think our industry deserves more margin than we are getting now. I was happy back to the 49 and 50% margins. And I don't think anybody is happy in our industry with the 45% to 46% margins, we are living with today. So therefore I think over time that input cost you said and I said earlier, I thought would be high, I don't mind to be in high state of the volatility, if they can stay low or stay high or say, I think they we can deal that much better than the volatility, the swings which creates problems.

So I think hopefully we will get more steady. But I do believe because of the investments that will be made in this industry, that we will all have to improve our gross margins. You have heard one of our competitors talking about the amount of money they will be spending in the future. And I would say the people who have not invested in the business and in the companies probably will not be here in the future because they cannot compete with the people who have invested. So that will also create industry consolidation as well.

There is no way that I can stand here and guarantee that we will have better gross margins, but I will guarantee you we are going to try because I think it's important that we get to the right gross margins. So that we can support the growth, support the capital investment that will be needed, support our customers, support our consumers and support our team so that we can veer this company forward and with that it's necessary that we get those gross margins up. I don't know if I actually I have answered any question, but we are dedicated and stand focused to get those back where they need to be.

Akshay Jagdale - KeyBanc Capital Markets

Follow up. Are you assuming that the consumer will get better and commodities will be less volatile in your next five-year plan? To achieve your goals, does that need to happen?

George E. Deese

I will let Steve help on this question. But I don't think all of that is built in, do I think the consumer has become sort of buying slightly where back before 2008, I think it's going to be a while. As I said earlier I think confidence is coming by, but our role models are built on 5 to 10% sales increase, part organic, part acquisitions. And I would say back to the commodity part of that question, I am hoping that we can have not only better buys, but more importantly less volatility. If volatility comes, you have the one action and that's pricing. And hopefully the industry will, Flowers certainly is one who would like to keep part of that margin, so that we can do all things necessary to stay viable in the industry. Steve any follow up from you on that question about the model?

Steve Kinsey

Sure. Looking at the volatility I would say although we believe that the markets will continue to be volatile, we do factor in trying to buy better and manage that volatility better. As I said in the presentation we undertook a study internally, just completed that and realized that probably due to the volatility being wrong was not the thing to do. So hopefully we can take what we learned from that and make better decisions and continue to drive margins through that as well.

And then also we know the consumers, we have not only factored in significant amount of improvement there. If you look at Flowers since I always look at it, we have always performed best when we are making these acquisitions and getting Nature's Own into new markets and if you go back in the last five years, the first three years of that period, even though margins were still under pressure little bit, we did see kind of in 2008, a little bit of pressure, 2009 pressure and in 2010, slight back up and then the economy failed and we saw the consumer under pressure, so the margins came back down a little bit. But in that first three-year period, we were actually, we were making acquisitions pushing Nature’s Own to the new market, so we were starting to see things improve. As this consolidation happens and we can get Nature's Own into other markets and drive product mix if you will and improve there, I think that will be another driver of margin improvement.

George E. Deese

And I will add Tastykake to that, Nature's Own and Tastykake.

Steve Kinsey

And Tastykake, yeah.

Mitchell Pinheiro - Janney Capital Markets

So just staying on the margin theme, the growth markets that you're in, when I look at IRI, you're very aggressive on pricing in these newer markets. In addition, you are shipping like from this market, from Norfolk you are shipping into Southern California, from Phoenix, not very cost effective. So has growth markets, is it a quantifiable drag on your margin or is it not quantifiable? And then second in this environment, especially so first with growth in the new markets plus the economic environment, has your [stale] rates affected your margins at all? Have they been up down or have stale rates remained stable?

George E. Deese

Yeah let's go back and address new markets, I think that's the best way to do that. And we have had new markets, almost since I have been with the company. Somewhere you always have a new frontier in your every year practically. As I think back to pre-Denton plant, we served Dallas Fort Worth, out of Tyler, out of Houston, out of Texas or [Canada], that’s a lot of miles to get to, but once we have built up that mass and parcel Oklahoma as well. As we build up enough mass to build that plant I am still thankful we, as I look back now I am still thankful that we built that plant. Was that new market a drain on the company? We followed our customer, by the way when we entered Dallas Fort Worth, one of our major customers out of Florida had business in the Dallas Fort Worth market and that's why we went there. It hurt profits for a while, it wasn’t major, but it did take a little away from margins.

So the Dallas Fort Worth, as I think about it today, then it is a wonderful plant and it was full of capacity, very profitable and as I think of you are talking about say Southern California or this market here in Philadelphia, same example we’re having this year from [business], but that will fix itself. It's never as quick as we want it to be. Some of that could come through acquisitions or we believe greenfield plants eventually like we had to do in Denton because acquisition could not do it. So that can be a lot more near-term than we realize, I said it probably weeks before we’d make some announcements here in the Pennsylvania market.

But you will have the Californias and you will have the Pennsylvanias and we will have further north as we go into those markets that we will have to support it from elsewhere until we get the mass to get to those new plants. And that's why I have always said you know if you would live and die over a quarter is a problem. Longer term though and you can say about nearly any two-year timeframes you want to look back or especially to 5 years you look back, you will always find a good story. It has been true ever since I have been in the company in the fresh baking business, that you look five years back and you’d wish I owned Flowers five years ago because you had meaningful increases since then.

And since the increases, we met with our Board, I guess week before last, our normal strategy meeting and a chore that I was happy to talk about is how much value we have created for our shareholders. And it’s public, so you could find it if you wanted to. But looking to that and not as big year 2000-2001, we were so keen, we gave our shareholders one point to $5 billion on say a one-time dividend. Since that point in time, the stock closed yesterday at $2.7 billion in market cap yesterday. And in the meantime we have paid out right at a $1 billion in dividends since we went public.

So a little baking company in South Georgia headquartered in Thomasville and a business and not some people would say, well it's slowing, but steady. But we have created tremendous shareholder value. And then as I look ahead and see the opportunities on the consolidation stage, on the markets we do not serve, I see another horizon, there will be frontiers and that this management team is capable of doing that. So we have created between $4.5 billion and $5 billion for our shareholders since we went public in a business that always, it's not high-tech. It's not glamorous, it's not huge dollar spends in marketing, but it is consistent growth day in and day out and you're not going to go broke in this business, if you do it right. And again I will come back to the point of return on invested capital, the people who have not invested really will not stay around in long term to be able to compete with people who are invested.

So Mitch, that’s a long story to talk about. Pennsylvania and Southern California, but we have had those examples throughout my history of always taking the short-term sacrifice for the long-term good.

And that's what I see in Pennsylvania right now even though we shifted it a long way. This field of thing to do so we get another foundation to set down bread, bun and roll facility, to serve this geographic market and there would be another one, and another one and another as we go down the road over the next 10 years. What was the second part of that question, Mitch?

Mitch Pinheiro - Janney Montgomery Scott

Sales rates?

Steve Kinsey

Sale rates; you do have more sales in our new market than you do in mature markets, but it’s not so significant that its big take away from profitability. We look at every week at our new markets and see what is the contribution to the company. And I am happy to report that week in and week even though we've got probably and we look at it we call new markets after five years and as we look at it every week we are okay. It’s not up to the levels of the mature markets but it’s okay, not at the margin level but it’s not hurting overall profitability Mitch, as one would think. So we are steadfast in our belief to get to that 75% market, we have to take some short-term but we know we are headed long-term and feel very, very confident about that.

Bill Chappell - SunTrust Robinson Humphrey

Can you talk a little bit more about the Tastykake, the opportunity and also kind of what you've done in the past year or I guess from the presentation makes you move from Philadelphia to Texas, what I am trying to understand, what the market penetration, I mean if from a distribution standpoint Philadelphia is 100 or from what we've seen maybe it’s 120. What does the rest of the sector look like, are we 10, 20s, and where can you realistically get and then kind of a follow on, with that distribution is that mainly coming from existing Bluebird and Mrs. Freshley’s customers in the deep south and south west or these new customers, new doors that you are adding with the Tastykake brand?

George E. Deese

Bill that was great question. Then there are several ways I want to answer that. Number one, I think about the coming baseball season, I think about baseball analogy, it’s a nine-inning game. Let’s say we are in the second inning, may be beginning of the third in this baseball game season. Early on, what we said when we merged the business its $185 to $200 million in sales. Internally we set goals for synergies and we are all over the synergies. All of that is working very well. On the sale side, we set a goal for sales that Tasty would sell to Brad’s DSD business for the new territory. And we exceeded that number for 2011 and here it is 2012 and I think we said this year that we would see sales of Tasty in the $210 million to $225 million category. So you can see that’s probably $25 million, $30 million increase right away.

But what I’d say about penetration, we are really, really early on and we don’t just look at ever week sort of like the new market’s P&L. We also look at Tastykake every week and the new markets. And we do look at Bluebird, specifically on the DSD side plus the Tastykake volume and I am happy to say we are more than, we had double-digits increase when you put the two together. So these gain it’s not losses, it’s really gains in the total cake business for Flowers. It is early on and I did last night and I said here this morning. I might tell you that it takes long time to be a brand. Nature’s Own today is we think this year we will annualize at $1 billion in retail and Tastykake will be our number two brand and I am very confident of that. First challenge we got at retail is 500 million, I am not saying what year though I might say that one day before too long. But when you set a $1 billion for Nature’s Own well, we are a little skeptical and it took I think in one more year than we anticipated when we set the goal.

So Tastykake will be a steady, steady increase year-after-year in the new markets. We have got a great market share already in the mid-Atlantic. So there will be some markets I am sure we see some increase in the Tastykake. And we can do that because we do have a lot of unique items that is not in the regular product line of most snack companies. Even though most people say they do not eat snacks, specially salted snacks I think we have a feel for that there. So snack business is a good business and you look around and see the snack companies that might be salted snacks, it might be cookies or crackers snacks. Good margins and we think that along the longer pool of that and you see this facility today that needed a lot of capacity that every time we sell an extra unit down south, brings down the overhead cost for the cakes that have been sold on this plant. So overtime that really works on the financial model.

And the next hurdle will have is where do we put our next cake line as they come on board, because we feel this plant will have to go and just like shipping bread from north of here is costly, shipping cake to Texas is more costly than it would be with having a plant somewhere in closer to Texas. So the next new lines will go somewhere else more. It’s not doing good in this plant to do it. So probably that would be out west somewhere, closer to the marketplace and so we would also penetrate further out west than we are today. There was another part of that question.

Unidentified Analyst

(Question inaudible)

George E. Deese

Brad didn't show that whole thing, but he knows exactly how many, and don’t home into the number and I am thinking of top, I think we serve some 19,000 existing accounts but yeah there was another 40,000 or so that we are not in yet. And most of that's on time, I don't think anybody has turned us down about even Tastykake in that supermarket. If we are not in yet it’s because the resets is coming, people do resets either once or twice a year and couple of major companies will be doing a rate resets between May and June and a full [complement] will be serving all of the supermarkets and if you go to south you would say well you don't have big displays or a lot of space like you have in the mid-Atlantic yet? Well, that's true, most retailers today, you've got to prove yourself, you've got to be start selling units and you add the years that you have rate resets, as I think back to our Nature’s Own we started out with, one foot in some stores, then you go and we are six, eight and twelve linear feet and used to caused the turns. The same thing will happen with Tastykake. We have great space in this market even though we were under spaced in one particular chain that we decided to rate reset and gained tremendous space because we re-calculated even in the [Philli] market. On the mid Atlantic we gained lot of space because of rate reset and just over time, that’s the way the food industry works. They gives you the opportunity and that’s why promotions which Mitch mentioned, promoting Nature’s Own a lot early on and talk about this market, we do not promote in. And just like when some competitors come to the south they promote heavy. Well we promote heavy because as we go to new markets. So we will be promoting Tastykake in a lot of ways to get market share up, but for longer term that is getting access to shelf space and that is sort of way the food business works. (inaudible), she is next? Then we come back…

Unidentified Analyst

George, a couple of questions, first of all your warehouse cake business has been under pressure in terms of margins and you were working to improve that. Could you update us on the progress on that one?

George E. Deese

Yes. I will. We said last year, I think midyear, Steve I think my timing is right. We did see two things happen. One, I mentioned earlier, commodity is normally there is one or two items ingredients you might feel spike. Last year we saw spikes in everything you went in product basically. And that was really true in the cakes side; we had record cocoa prices, record sugar prices, record wheat prices. So we were under pressure. I would say because most of warehouse business is non-branded. It is tougher to get the increase you need versus Tastykake or Nature’s Own versus a private label in the bread business. That’s again the way the food business works. But I have full confidence that and another problem we had a major customer who had gave less volume numbers and that didn’t quite turn out the volume numbers and this has slowed down versus what we thought last year. So basically volume didn’t come us as we anticipated, high commodities and did not get the pricing we needed last year were as the work-in-progress and I am feeling better about that today than I did the last quarter of the year. January is always slow in the cake business. I can’t say but January was that much greater but I am seeing signs now that the warehouse cake business has improved and we were able to get some pricing, not major but we did get some pricing and the volume in those plants were being updated on some added capacity that we put in getting ready for some of those volume numbers. And so it is still going to be a tough year and we will pick our sales over and out on this full year but I do have confidence that we will, the team we have will get that business right on the cake side.

Unidentified Analyst

On acquisitions; could you share with us as you looked at opportunities what are the challenges you have seen in buying a new business and when you do pull the trigger, how much debt are you willing to put on the balance sheet, in terms of the debt to cap and in terms of union and pension issues, how are you dealing with that gaining potentially acquired businesses?

George E. Deese

Steve will then prepare you for the debt versus equity standpoint financials. As you know we have always been active in discussion of acquisitions and mergers with people in the baking business, especially the independent side, more recent because of issues with investitures that's more major, with more major players now than it has been. It takes time. It does take time and sometimes that's a disappointment, but there's lot of things you have to go through to. So we are very diligent; we are very disciplined in our approach.

So our discipline you know everybody wants more for the business than we think is worth probably and you've got to go through and yet to the point where we feel comfortable, but yet the seller also feels comfortable with that price and finally you are there. So I would say it’s just negotiations; sometimes it could be a government regulation point of view that takes more time than you think for it.

That's one of the cases now to broom those, the DOJ and finally settle on what the final deposition will be and the Sara Lee divestitures. I think it comes quicker than I thought 30 days ago, but we will all see how that pans out. We may gain something, may not depending on how it shakes out. But with that there are still a lot of opportunities in baking business and back to the debt question Steve why don't you answer that.

Steve Kinsey

As George said we met a couple of weeks ago with our Board and when you look at debt looking at probably 12 months EBITDA we are still comfortable in that two to three time on the leverage ratio.

George E. Deese

Another thing we have back to I was talking about how much value we've created with the Flowers stock, where we do get a nice multiple for our stock and sometimes especially independents we’ve been able to use stock as currency. So hopefully, as time goes over the next two three years, it could be some debt, it could be some of our stock. Sometimes that’s not as a pretty reserved cash, but we don’t get in problems in debt either as we go through these opportunities. So as far as combinations that we feel like can use to take advantage of opportunities that present themselves.

Amit Sharma - BMO Capital Markets

Hi Amit Sharma, BMO Capital Markets. Allen, you indicated that private label in this category has been pretty steady, flattish, although it has been creeping up lately. If cash prices go to $5, we might see a little bit acceleration in that trend, private label. Well, I really want to ask is that if you look at the fresh bread, you will see private label really concentrated in the white bread and soft food variety. On the other hand, in other categories, we have seen segmentation in private label get to (inaudible) private label products? Do you see that trend developing in fresh bread category as well and if it does, are you willing to play into premium segment of the private label as well or are focused on the branded side of that?

Allen Shiver

I think the question is really, do we anticipate with the tough economy is private label going to creep into other segments of product category; so private label wheat breads, white and specialties, I think that’s the question.

And really I think the answer is not, probably not. As George mentioned earlier, private label is really over-developed in the fresh bakery category and traditionally the consumers are really focused on private label and you know there is an income situation that is apparent of the buying habit, so private label white bread is kind of in the main stay forever.

Currently, there is some private label variety bread that is sold, but it’s really dwarfed by the amount of white bread. So when you think of the income levels and even more so today with consumer under pressure from just cash stand point, we really don’t see them moving into more of the specialty breads or even more soft variety on private label, simply because all those products are going to be at higher price points even within the private label specter. So something we need to keep an eye on, but I don’t worry about that at night; that would keep me awake.

Amit Sharma - BMO Capital Markets

(Question Inaudible)

Allen Shiver

We always worry about that; especially in this environment, George mentioned earlier, that in our category private label is over-developed. But when private label ticks up and brand ticks down that is a concern. And one of the messages that we’re doing a lot of consumer research on and taking that message really to the trade, the problem is not that private label prices are -- actually the problem is not the branded prices are too high, the problem is, private label prices are too low.

And we have been showing retailers that they have the ability to make those changes basically improve their bottom line by moving private label products up. And I think that’s way that long-term that you present any further consolidation between brand and private label.

But again I think our category; it is over-developed today, so it’s not merely as the biggest concern; as maybe some other product categories that George mentioned earlier.

Ann Gurkin - Davenport

Ann Gurkin with Davenport, I have two questions on snack cakes. With the inclusion of Tastykake and Blue Bird and Mrs. Freshley’s can you comment on your comfort level with scale in that business; do you need to add anything else or room for opportunities there? And then secondly, you put up the slide where you expanded Tastykake in three different markets, can you talk about consumer trends in terms of term purchases, kind of the impact you are having on those markets as for the power of the brand?

Allen Shiver

The first one thing that wasn’t mentioned about the addition of Tastykake to our existing Flowers routes, one of the real benefits of that is it makes our independent distributors more successful and I want to mention this earlier, that anything that we can do to help make our independent distributors more successful in the accounts they are already serving, it’s good for our distributors and its eventually good for the company. So in terms of putting Tastykake on those routes, I mean that is the real side benefits that we are seeing now.

In terms of product lines or anything else that we need in terms of the total cake product line, really with Tastykake focused on those unique icon items, Kandy Kakes for instance that we talked about outside, if you think about that product line really focused on the high ends and then we've got existing Blue Bird items that are more popular priced. Items that don't fit into Tasty, but we really got a pretty good product line.

And from a grocer standpoint, from a retailer standpoint, they understand that. Cake is very much an impulse product and Bob Brown will probably talk a little more of that when we talk specifically about Tastykake. Bob showed me a display earlier today I think we sold 2,000 boxes of Tastykake in one store in one week I mean it’s amazing number. So a lot of this is about excitement and with the product line, we have got now with Tastykake conjunction with Blue Bird this is a beautiful product line.

We are learning a lot of things from a distribution standpoint from Tasty that is actually helping establish bread bun and roll routes and to learn more about how to sell cakes. They’ve got a tremendous focus on convenience stores. The Tastykake core routes a great job in convenience stores. And I think Brad will be the first to tell you on our existing bread, bun and rolls routes, we can do a better job in convenience stores and we are really focused on that. But the product line is pretty complete.

Was there something else Ann?

Ann Gurkin - Davenport

(Question Inaudible)

Allen Shiver

Yeah, it takes a long time to build a brand. But I think the overall the marketing programs that we have introduced, introduced Tasty across the company have been pretty effective; we’re selling in South Florida like we were selling Philadelphia. But we are encouraged; we’re encouraged that the Tastykake brand is bringing excitement and I would say the returns have not been off the chart. Fortunately, we have got a great for a store system which is also benefiting from having more Tastykake in our retail group stores. But I would say the returns have been acceptable for a new brand.

Eric Katzman - Deutsche Bank

Eric Katzman from Deutsche Bank. The one change that I kind of heard today was in Steve’s presentation regarding the hedging program. And I guess, obviously the company over so many years has had a comfort level at six to nine months, so a little bit longer term. And it’s not really so much the volatility that’s the issue, it’s the volatility combined with irrational competitors.

So I guess I am little bit surprised that the company is changing the hedging strategy at the same time Sara Lee which was a irrational player is now basically been absorbed by a more rational player hopefully; Interstate, now in bankruptcy is probably very restricted to as what they can do. So it just seems to me that you are kind of changing at a point where it would seem as if as the market would be let’s say more helpful to your traditional strategy rather than the interchanging, so can you see….

George E. Deese

Let me say a few words and I’ll call on Steve to finish. I think we have been overtime we have been successful over six to nine month program. The extreme volatility though and not necessarily the customer, and not the competitor has made us three things that position somewhat. One reason we like to fix that much, the one time we felt like we had six months to know what pricing has to be if you got too long, you get prices in and we analyze it carefully with our internal team. And we are very comfortable with that within three months timeframe, if we had a problem that we would be able to change our pricing in the marketplace; not six months and we feel comfortable there.

As Steve said, we feel we have all the flexibility in the world and the main goal will be, when we see we are interacting fast, we will then go out a year and we will then go out a year and a half; if there is a wonderful price. But what we don’t want to be is 12 months out and have a very high price and so in this volatility we change that for the flexibility that we need four to seven, and we take it. If we didn't you know we've got fair prices and we think this is where the marketplace is probably going to be. We have all the flexibility in the world to stay with that. But in a high volatility times we would like to have a shorter timeframe on, especially for the long-term hedging if we see high prices.

So it is a little departure, but I think it’s a slight departure, not a major. I really don't feel like it was a major departure from where we've been but it is a departure and we wanted to make you aware of it. I know more and more companies are saying less and less of about commodities for obvious reasons, but our competitors don't know it and yet we worry about customers all the time anyway they pretty well know about where the markets are. They are smart these days, so they pretty well know where that is.

But for confidentiality purposes we are probably saying less, we felt though that we need to say this today, to update you because last three years it has been a problem and we want to try to correct some of the problems of the past three years and that's why we had the steady and it really was a deep dive into things we could have done better and I think this will make us a better management team going forward based on that steady, Steve you can follow if you would like to.

Steve Kinsey

Just real quick I think what the keyword George said about the flexibility areas and when you look at the overall commodity market and the effect the funds have had on it, that's rubbed along the volatility as well. And then when you look at the major competitors from what we can tell from public disclosures and most of the larger players in the six months time horizon, so this really brings us in line with those and then when you look, as we go to the expansion market and you look at the independence.

We would believe most of those would be three months or shorter. So competitively we think it does, may be align us a little better with the large players and the small players. But as George mentioned we still have and have always had the flexibility to be outside of the threshold that we have set there.

Unidentified Analyst

(Question inaudible)

George E. Deese

No. For confidential purposes as far as, we are not going to talk a lot about what our positions are from a competitive standpoint. In other words we won’t tell you exactly who we are with you and your ranges. We don’t talk about the largest signals of competition with our [current stock]. That is what is meant by confidentiality. I think customers of those, the major customers, they fall at a markets almost as well as we dig because they are buying from everybody and they keep that within themselves. So not many secrets there. Anyhow we do that every day on pricing. So they pretty will keep over there.

So this is not a competitive situation in my mind from trying to -- It is hard to beat the market. We are not smart enough to beat the market. What we are going to do is make our long-term goals successful and we can buy that \, we won’t be their long-term goals. And that’s the main reason for that slight deviation in that timeframe. It has gotten nothing do with saying okay. Competition has just beaten us to their prices, even though we are concerned about it. Over the long term, that works to help out any way over the long pool. Some of them have advantage this month the next month but overtime that shakes itself up. Our ultimate goal is to perhaps, be in our ingredients to help us meet our long term goals not to give us outside of the goals or not be able to make up. It is a little different strategy, but not a great deal, I don’t think; okay anymore?

Unidentified Analyst

Just an easy follow-up and Brad it was nice enough to say that you’re going to move into a new market next month. Do you want to give us any color on how you are going to the market or is this just breaking ground, is just planned to be distributing or anything else you can give us?

Brad Alexander

It will be DSD and probably won’t be too far from this part of the world, that’s all I have to say about. And yeah, we look forward to all our market breaks, but it will be DSD, okay.

George E. Deese

Well, we’re winding down on our time maybe it’s time for one more question if anybody has one?

Okay. I would say this probably end our webcast and let me thank the people on the web for patiently listening today. It’s always more fun to be here I think in person and hopefully we have given you a better glimpse in to why we feel so confident about the future.

And the reason we feel so comfortable about the future is where the industry is headed, and more importantly the team and the cash that we have supporting us throughout the company. We are strong and capable and ready to move it all forward and get ourselves on a different playing level, a little bit higher and we reset those targets every five years and I think this was well said last year and we expect to see those in 26 single banks say, well they did it again. That’s what I am looking forward to.

So maybe we do have some time out to finish that.

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