Flowers Foods Inc (FLO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q1 2012 Flowers Foods earnings conference call. My name is Andrea and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Ms. Marta Turner, Vice President Executive. Over to you.

Thank you, Andrea. Good morning, everyone. Our first quarter results were released this morning and the 10-Q was also filed, so you'll find those if you need a copy. During the call we're going to be using a PowerPoint presentation and you can access those on the webcast listen page of our website. Before we get started, I must remind you that our presentation today may include forward-looking statements about our Company's performance. Although we believe our statements to be reasonable, those statements are subject to risks and uncertainties that could cause actual results to differ materially. In addition to the matters we'll discuss during the call, important factors about Flowers Foods' business are detailed more fully in our SEC filings. Now, turning to the call, with us today we have -- George Deese, Flowers Foods' Chairman and Chief Executive Officer; Allen Shiver, President; and Steve Kinsey, Executive Vice President and Chief Financial Officer. To get started, Mr. Deese.

Thank you, Marta. Good morning to each of you. Welcome to our first quarter conference call. As always, we thank you for your continued interest in Flowers Foods. I'm pleased to report we delivered sales growth of 12% for the quarter, which shows the strength of our DSD business, to Nature's Own and Tastykake brands and our ability to grow in new markets through acquisitions.

As we discussed at our Analyst Day call back in March, the marketplace continues to be challenging and promotional activity robust as volume remains under pressure in the baked foods category. Even so, our expansion markets across all regions delivered growth with our goal for 0.5% to 1% of sales each year. New products also performed in our expected 3% to 5% of sales growth. In addition, our DSD business achieved our third consecutive quarter of positive volume growth. On the earnings side, we delivered in line with The Street expectations of $0.28 per share. But as we had told you to expect, headwinds from our input costs were a significant factor that impacted the bottom line and put pressure on our margins. We continued our efforts to improve operations and productivity levels, which contributed to the bottom line -- will contribute to the bottom line and as we move forward, as our costs improve later in the year.

I now will take time to give the highlights for the quarter as I see them and Allen and Steve will fill in the details. We completed a $400 million bond offering, which will be used for our future acquisitions, general corporate purposes and working capital. We announced an expansion in our Oxford, Pennsylvania bakery, where we add bread and bun capacity to help us expand our geographic reach further into that region. We introduced Nature's Own and other Flowers bread, bun and rolls to the Philadelphia market which adds another 3 million consumers to the population base we serve. The integration and synergies of our Tasty acquisition are right on track. Sales and earnings also are tracking in line with our expectations. Now, I will turn the call to Steve Kinsey for more information on the financial details. Steve?

Thank you, George. Good morning, everyone. Just a quick reminder that the results of Tasty Baking are reported in the Direct Store Delivery or DSD segment of the business. As George said, we did meet consensus expectations on the earnings perspective in the quarter. Earnings for the quarter were also roughly in line with our internal forecast. Input costs in the quarter excluding the effect of the Tasty acquisition were up approximately 12% with all major categories of costs with the exception of natural gas being up quarter-over-quarter. The category continues to be very competitive as Allen will discuss in a moment. In the quarter we did absorb approximately $700,000 of unplanned interest expense related to the issuance of the $400 million 10-year senior notes, which I will discuss more fully in a moment. Our integration of Tasty is going well and results are tracking within the ranges we announced at the time of the acquisition. For the quarter, the Tasty EBITDA contribution was in line and they contributed approximately $0.01 to the quarter earnings. Full-year earnings are tracking on target with our full-year expectation of $0.04 -- earnings per share of $0.04 to $0.06 that we provided earlier. We are scheduled to have Tasty fully integrated into our ERP system by the end of the second quarter.

Turning to the quarter, consolidated sales in the quarter were up 12%. The core business posted a 4.1% sales growth with price mix contributing 2.4% to that growth. Increases in price were offset somewhat by a negative mix. Volumes were up 1.7%. The Tasty Baking acquisition contributed 7.9% to the overall revenue growth in the quarter. Excluding the Tasty Baking acquisition, overall growth of the DSD segment was strong at 4.2%. Price mix contributed roughly 3.4% of the growth with DSD volumes up 0.8%. The DSD growth was driven by Nature's Own soft variety cakes, store brand and growth in non-retail. The store brand growth came primarily from new business with certain existing customers. The non-retail growth in the quarter was due to increased volume with existing and new fast food and restaurant customers.

Sales in the Warehouse group were up 3.8% over the prior year's first quarter. Overall mix was relatively flat for the quarter with incremental pricing being offset by a negative mix. The volume was up 4%. Volume increases were driven by branded cake, food service and contract manufacturing. Increases in these categories were primarily offset by declines in store brand cake and vending. Consolidated earnings before interest and tax or EBIT in the quarter was down $2.3 million or 3.7% from last year's first quarter. Adjusted for last year's one-time items related to the plant closure and the Tasty acquisition costs, EBIT was down $8.8 million or 13%. The DSD that was down 0.6% quarter-over-quarter on a GAAP basis due primarily to the higher input costs. On an adjusted basis, DSD EBIT was down at 0.8%.

Warehouse EBIT declined approximately 15% in the quarter, primarily the result of higher input costs and pricing pressure. Earnings per share on a GAAP basis was down $0.02, or roughly 7% compared to the prior year first quarter. On an adjusted basis, earnings per share was down $0.05 or roughly 15.2% compared to the prior year. The decline was primarily the result of higher input costs and an inability to fully price to protect margins within Warehouse. The approximately 200 basis point decline in gross margin quarter-over-quarter is primarily the result of the significantly higher input costs primarily flour, shortening, oil and sugar. Excluding the impact of the Tasty acquisition, input costs, defined as ingredients, packaging and natural gas as I said, were up approximately 12% quarter-over-quarter. In the quarter, Tasty had a positive impact on gross margin of 10 basis points. The DSD gross margin in the quarter was down 250 basis points to 51.3%. Excluding the effect of last year's one-time cost, DSD gross margin was down approximately 300 basis points. Tasty did negatively impact the DSD gross margin by roughly 60 basis points. The Warehouse segment gross margin in the quarter was down 110 basis points to 25.6% of sales.

Selling, distribution and administrative costs in the quarter as a percent of sales were down about 60 basis points. Overall, SD&A dollar increases were driven primarily by higher selling and distribution costs. The decrease in SD&A as a percent of sales was driven by lower workforce related costs and the effect of the one-time cost last year in the first quarter. EBITDA in the quarter was down roughly $600,000 or 0.6% from last year's first quarter. Adjusted for last year's one-time items as discussed above, EBITDA was down $6.5 million, or roughly 6.8%. Again, the decrease being driven primarily by the higher input costs.

Turning to the balance sheet and cash flow. Cash flow from operations during the quarter was negatively impacted by lower net income and pension contributions. Pension contributions in the quarter were approximately $12 million. Also during the quarter, we spent $14 million on capital expenditures and paid dividends of approximately $20 million. We repurchased approximately 70,000 shares for $1.4 million under our share repurchase plan. This leaves us with approximately 7.1 million shares available for repurchase under this plan. During the quarter, as George said, we did issue $400 million of 10-year senior notes yielding 4.375%. Proceeds from the notes issuance were used in the short-term to reduce outstanding debt on the revolver and the remaining proceeds will be used for acquisitions and general corporate purposes.

We ended the quarter with $497 million in debt or 1.8 times trailing 12 month EBITDA. We also had approximately $186 million of cash on hand, so our net debt was approximately $311 million. Net interest income for the quarter was down quarter-over-quarter due primarily to higher interest expense resulting from debt related to the Tasty Baking acquisition, and the issuance of the senior notes. Based on the step up in leverage, we now estimate interest expense for the full year to be approximately $21 million. Based on the increased interest expense as a result of the senior notes, earnings per share for 2012 is now expected to increase roughly 3.5% to 8% over the 2011 adjusted earnings per share of $0.96. The earnings per share forecast does not include future acquisitions. With the announcement of the expansion of the Oxford bakery we now expect 2012 capital expenditures to be $75 million to $85 million. Thank you. Now, I will turn the call over to Allen.

Good morning, everyone. Thank you, Steve. Our strategy to grow the top line through acquisitions, expansion in new geographic markets, new products and new business drove our strong top line performance for the quarter. From an operating standpoint, the first quarter's challenges were similar to those that we discussed last quarter. Higher input costs, volume shifts in certain DSD product categories and continued pricing issues in some of our warehouse segment business. On the positive side, the pricing that we took late last year in our DSD business helped offset much higher year-over-year input costs. Also, our manufacturing team hit record levels of productivity and efficiency in the quarter. As you heard earlier, once again we achieved positive volume growth. For the quarter, with Tasty, Flowers' internal sales data shows our total sales were up 9.6% in units, and up 12% in dollars. Excluding Tasty, Flowers' total sales were up 1.6% in units and up 4.1% in dollars.

Sales of our Nature's Own brand of soft variety breads were up 3% in units and up 7.7% in dollars in the quarter. Our Nature's Own brand continues to resonate with consumers as it has for decades. Today, many consumers are looking for whole grains, added fiber content and reduced calories. Nature's Own fits all those needs. Currently, soft variety is the largest bread segment in dollars for the total US, now even larger than white bread. As the Number 1 brand in the segment, Nature's Own is ideally positioned to capitalize on the growth in this important category. While the soft variety bread category is growing, other categories, such as traditional white bread continue to trend down slightly. Increased sales of Nature's Own helped offset lower sales for regional white bread brands. Price elasticity is a bigger factor in certain bread segments, including white bread. Premium white breads, like our Nature's Own white wheat and Nature's Own butter bread are more resilient to price increases than our original white bread brands. Also during the quarter, our private label sales increased, primarily due to new agreements with certain private label customers.

Tasty continued to perform to our expectations. As Steve mentioned, the acquisition was positive to earnings. Tastykake continues to gain shelf space and consumer acceptance in our core markets throughout the Southeast and Texas. Our sales team and distributors are excited to have the Tastykake brand, which is already Flowers Foods' second-largest brand. In fact, Tastykake's annual sales is approaching $300 million at retail. We continue to execute a very effective public relations campaign as we introduce Tastykake into new markets, using a mix of product sampling, broadcast media and social media. Our expansion markets in the DSD segment grew in line with our goals and delivered just under 1% of our sales increase.

As you know, our strategy for expanding our geographic footprint is to grow into new markets with high population densities that are adjacent to our existing DSD territory. For example, we have been selling our bread products in parts of Pennsylvania for over a year. In late April, we introduced Nature's Own and other Flowers brands in the Philadelphia market. In anticipation of continued growth in Pennsylvania, we also announced in April that we will add capacity for bread at our Oxford, Pennsylvania bakery, which is one of two bakeries we gained from the Tasty acquisition. We will invest about $31 million in the Oxford bread line project over 2012 and 2013. In the future, we will also add a bun line in the Oxford bakery. In the meantime, our existing bread lines in adjacent markets are providing products for our new markets in the mid-Atlantic. We remain encouraged by the acceptance of our brands in the Northeast and we continue to finalize our plans for additional growth opportunities in these heavily populated markets.

In the Warehouse segment, we achieved volume increases driven by new business and while Warehouse margins remain under pressure, we have made progress with some of the pricing we needed to offset higher commodity costs. However, we still have work to do to return to the margins we've historically achieved in this segment. Turning to food service, you will see that so far this year, we are outpacing the industry. During the first quarter, Flowers' total food service was up 4.75% over the prior year. Again, outpacing industry growth of 4.3%, as reported by Technomics. Our food service growth continues to be driven by new business that started in mid-2011. We also continue to grow our food service business with existing customers, especially in our DSD expansion markets. During the quarter, our manufacturing teams reached a new level of efficiency at 93.7% and pounds per oven hour continue to increase.

I want to recognize the exceptional efforts on the part of our bakery teams. We constantly focus on making our business better. Once again in the face of challenging commodity cost increases, our teams continue to find ways to raise the bar in terms of productivity. We are also nearing the completion of the Tasty integration, which will be finished this summer. I'm very proud of our team both at Tasty and at home office that have worked so well together to make this acquisition successful. Our operational success with Tasty once again demonstrates our team's ability to successfully integrate a large organization into Flowers Foods.

As I close out the operations report, I want to comment on the changing marketplace dynamics. As industry consolidation continues, Flowers Foods has emerged the clear Number 2 baking company in the US. For more than 90 years now, we've built a reputation with our trade customers of being a trusted partner that provides both high quality products and unmatched service. Today, more than ever, our trade customers are confident in our ability to meet their needs, even as the landscape of the baking industry changes. We don't take that responsibility lightly and we work daily to maintain the trust of our customers and our consumers. Thank you for your attention. I will now turn the program back to George.

Thank you, Allen and Steve for that update. While we don't have a crystal ball to predict the future, I can tell you we have an excellent experienced team who will take advantage of opportunities as they present themselves. I believe we have the products, the brands, access to market and outstanding bakers to achieve good results going forward. I believe our Company future is bright with opportunities to grow our core business as well as take advantage of acquisition opportunities. The consolidation of the baking industry will continue and Flowers Foods is in great shape to add to the base of our Company and most of all, to add value for our shareholders. I trust that today we answered many of your questions in our presentation. We will now take questions we did not address. Andrea, we'll now open the mic for questions.

(Operator Instructions) Farha Aslam, Stephens.

First, are some questions on your core business. When we look at IRI -- and admittedly IRI doesn't cover your entire business. It looks like you are really outperforming the category in bread, but are finding it difficult to outpace the category in fresh buns and rolls as well as cupcakes and brownies? Could you just give us some color regarding the three different segments?

Yes, Farha, this is Allen. I will try to answer your question. One of the things that you will notice in our comments today, that we did not reference IRI data. There was -- IRI had some issues regarding their database that affected just this past quarter. So that's one of the reasons we didn't reference IRI data in today's call. But again, overall, I would say that we mentioned the strength in the soft variety category. White bread continues to be soft. I don't know if you asked the question about private label, but in the private label segment, we continue to see private label trending down from a category standpoint. Overall in the cake segment, while the cake category is not up, we are seeing growth in cake primarily with the Tasty rollout that we talked about earlier.

So in terms of competitive activity, you are not seeing unusual competitive activity in cake or in rolls?

Farha, not -- in the cake side, there really has been no real change in terms of the promotional activity in cake. The category is pretty consistent with what we've seen. In buns and rolls is always a very promotional oriented category. Quite frankly, we've led the market in some of the bun and roll pricing and we will be regaining some of that volume back as we get into the summer months.

Farha, I would follow-up on the cake side just for a moment. In the core Philadelphia market, first quarter last year, we didn't own the business. Tasty was still trying to work out from under their issues. They really put a lot of promotions into the market first and second quarter. We maintained some of that through the rest of the year. We did not promote personally as much first quarter this year versus what Tasty was doing. We wanted to monitor that and see how it looked, so you might see a little blip there in the core market. That is the reason, I think it was extraordinary things going on in the market last year that was not repeated this year. So I think that would explain that particular market.

That's helpful. Then, George, in terms of acquisitions, could you just give us some color about how the MA landscape in the baking industry is shaping up right now?

Now Farha, you know I can't say too much here. But what I would say, I think you know that we've continued to say the industry is consolidating. I cannot speculate to you of any specifics. I would say, though, that the industry will continue to consolidate. I don't know of anybody in the bun position to take advantage of these opportunities as has been Flowers today. So we are optimistic. Some years we're more optimistic than others. But we're optimistic on going forward with opportunities.

Okay. Understood. My final question, for Steve, you said that interest expense was going to be $21 million? How much is interest income going to offset that in net interest expense? Where do you expect that to come in for 2012 and 2013?

The interest income should be roughly in line with prior year's. I think it was around $13 million.

Eric Katzman, Deutsche Bank.

So just as a follow-up to Farha's question on just the details on the interest expense, so you're adjustment to EPS, is that just entirely reflective of the net higher interest expense? Or is there something else going on in the adjustment?

No, Eric, the primary adjustment there is all related to the interest expense. We're -- based on our earlier forecast before the bonds, we're about $10 million higher in interest expense.

Okay. Net.

Yes. Net.

Okay. And on the -- I don't know if you -- sorry -- I had to step out for a second. On the segment results in the press release, you talked about lower packaging costs helping warehouse but hurting DSD? How can that be?

Eric, it's George. We would have to look at that and come back to you. I think we got a misinterpretation there. I need to look at it though and we'll get back to you on that particular subject.

Okay. All right. Then, is the -- can you update us at all on what you're hearing from retailers and maybe Farha asked this and I missed it. But are you -- can you update us on what you're hearing from retailers, vis-a-vis they're looking at Hostess's business today whether it's on the snack cakes side or the bread side, and what that means for you and the other competitors in terms of shelf space?

Eric, what I will say specifically and I can't comment on the competitors' standpoint, there is a level of trust that Allen talked about with our customers. We are loyal. We work hard to try to generate good returns for our customers. And they are really counting on us -- as I pointed out in prepared remarks that we were clearly the Number 2 baker in the United States now, which we pinch ourselves and say, is that true? We know it is and we're happy about that. But we are not satisfied with that because the end result, we got to do a great job in the marketplace and continue to grow the category. So I can't comment on (inaudible) competitors. All I would say is, there's a lot of faith and trust in what Flowers can do in its existing market and as we push out into these other markets, they help take care of the marketplace.

Okay. Then, Allen, I think you made some comments about the category and it still being competitive, but are you still seeing the rollover as the paycheck cycle hits in terms of, within a month or within the quarter as -- has that changed at all? Or is it still pretty kind of tough as the month comes to an end and people run out of money?

No, Eric, it has not changed. If anything, the first of the month continues to be strong on sales. As you mentioned, by the time they get to the end of the month, the cash is running out. I think the challenge for us and what we're working hard on is on our forecasting systems, we're selling a perishable product, so it's important that our forecasting systems reflect the first of the month versus the end of the month. So the situation with consumers has not changed.

Okay. All right. On that depressing note, I will pass it on.

Eric, this Steve. Just real quick on your comment on packaging, that was as a percentage of sales. I don't think that was in absolute dollars. Does that clear it up for you?

No. Because whether it's on a percentage of sales basis like on the DSD, I think you had here -- where is it? -- under the -- like the decrease in profit was due to higher ingredient and packaging costs? Right?

Right.

Then under warehouse, it says basically these cost increases were partially offset by lower packaging. So you're saying one is dollars and the others is percentages? Or -- do see what I'm getting at?

Yes. Let me get that for you off-line. It may have something to do with the type of packaging. It may just be certain types were down.

Mitch Pinheiro, Janney Capital Markets.

The one thing -- I saw today's IRI data and volumes have been down about 5% consistently in the category. 5%, whether you look at a 52-week basis --

Yes.

12-week or 4-week, and private label as you mentioned was weak. 5% is a big number. I don't think we've seen this kind of category weakness since -- I don't even think it was this bad during the Atkins days. And -- I kind of joke and think people are eating the ends of the bread these days, but what -- how do you see volumes down that big in such a staple type of category?

Mitch, I would say that -- a couple things then I'll let Allen fill in. You've got so many more channels today that is not measured. Is it -- 5% for us, IRI represents about 48% of our retail sales, I believe is the number. So you're only seeing half the picture or less. So there's so many more outlets that sale product breads that is not captured on anybody's scanned data at this point. I know some of that will be changing in the near term. Some mass merchandisers I think that get more involved in the process. But there is still a lot of different aisles, drugstores for an example, and those are other issues that continue to eat into the marketplace somewhat. Convenience, so forth, that continues to drain on that. But overall I'd say consumer, as Allen said is very cautious. I don't think we are seeing pantry buying. I think also it's been pointed out in the grocery industry that the smaller family situation, a lot of -- actual single-family now -- patterns have really changed as far as going to the retail supermarket and items they are purchasing. In fact, the family gets smaller and smaller in household penetration.

How does your share look in these alternative channels relative to your performance, your share performance in the measured channels? Are you under or over indexed in the others? How do you feel that A, as an opportunity or B, as a weakness?

Yes. That's why, Allen did mention today that we're looking more and more at our internal's numbers like sales down in warehouse. Allen, why don't you fill in the rest.

Mitch, I would say in the channels that are not measured by scan data, I would say our results are good, if not strong. We look at our internal numbers, by channel, by customer, and I would say that we're doing a good job in those channels that are not monitored. So it's really the combination of what George mentioned as far as unmonitored channels and then the consumer is still under pressure. They are not making probably the impulse purchases that maybe they did in the past. But on the other side, we're seeing those -- especially retailers that are targeting an upper end consumer. We're seeing those retailers doing very well. So I think that overall, the category is healthy. There's a lot of moving parts right now. But I think long-term, the forecast for the category is still very strong.

Is there any material difference in margins or profitability in the measured channels versus the unmeasured channel?

Not material. Mitch, every situation is a little different, but I would say the unmeasured channels are not any more profitable or less profitable than the measured channels.

Okay. Then can you talk about -- as you expand, I ask you this occasionally, but as you expand, let's say into Philadelphia and as you roll out stronger on the West Coast and other new markets, is there any earnings drag as you roll out? And did that have -- and will that have an impact for the rest of this year?

What we've promised over the years, Mitch, going all the way back to San Antonio meeting --

2004?

2004, I believe, what we promised was -- and we announced getting to 50% of the market. We said we would do this on a predictable sustainable standpoint, so we will not drain the bank in our expansion. We have religiously made sure that, that is true. You could fudge and say, well, you're not making a big enough impact on sales right up front. But it is calculated in what we do and so that we are not taking a lot of money out of the bank in these expansions. I think that has served us well. We will continue to grow market share in those new markets as I pointed out that 0.5% to 1% every quarter, through the year. So as we go into Philadelphia, they could be a drain, not a big drain, they could be a small loss. But we always said within a year, we thought that loss goes away and from then on, it looks good. Even that is not a big loss in the big scheme of things. It's a small, manageable equation that we feel very comfortable with. That's always in our numbers, in our forecast and of course, you see the past results of it.

Okay. Just last question, maybe Steve, where were some of these cost savings from the administrative and other operating costs? What types of savings did you see in the quarter? Are they sustainable?

I'll point out a couple and let Steve follow up. I think we said a couple quarters ago we were getting more -- a lot more productivity out of the plant activity, and I will let Steve come back and address the administrative side. Allen commented on in his report, we are seeing more pounds per hour out of our plants. Certainly, productivity is driven and lessering on the waste side and just more productivity on that side of the business. Steve, anything on the administrative side, you'd like to mention?

Yes. I would say, Mitch, on the administrative side -- as we continue to integrate Tasty. We did drive out some cost there as a percent of sales bringing that into the mix, that helps the overall decrease in the workflow as a percent of sales there. Then we did have some internal initiatives that -- in the past as we've always have been a Company that looks at our cost structure and looks at how we are performing that I would say we probably have implemented that may not be 100% sustainable, but they do in the short-term help us try to get things back on track from an earnings perspective.

Tim Ramey, DA Davidson.

Steve, am I right in thinking that the basis point bump on the interest cost on the notes, that was about 250 basis points relative to where your revolver was priced?

That's probably a little high, but that would be within the range, Tim.

Okay. So that was a bold move to do that. I'm just trying to -- maybe you or George can chat about the desire to go out and raise that much financing at that steep an incremental cost? Is that just a longer-term view on interest rates? Or is it pre-positioning for something that is a pretty substantial bite?

Tim, I will take a stab. I think five years from now we will look back and say, it was great, we did it. We think the timing was right. We do see -- we said we are using this for general corporate purposes. We also said that we are looking at the M&A activity and acquisitions too. So that's about all I can say. But we did feel like with the historical lower interest rates this was the right thing to do with opportunities that present themselves going forward.

Just a follow-up on that, it gives us -- allows us too, to straighten the balance sheet more from a liquidity perspective as we free up the revolver. As George said, the purpose of the notes was for general corporate purposes and M&A activity as well as short-term liquidity. So we think this strengthens our balance sheet as we move forward.

Sure. Then just -- volume looked better than it has in a long time. A little improvement in the DSD side, but pretty significant in the warehouse side. You did mention you were chasing the market down in terms of price there and maybe there would be more market share to come. Can you talk about -- this maybe ties back to Mitch's question, is the category really weak like IRI says it is or do we really have to be very price promotional to get volume? What would be your outlook on that for the remainder of the year?

Tim, I will say that as repeated, I think the consumer is under pressure. I think that's a given, even those occasionally you feel better about where things are. One, we're keeping to see things are looking better from an overall standpoint in the United States and something happens in Europe or something happens around the world that -- it is a world economy now. We all know that and it does affect different markets. The -- hence of news from around the world does have impact and you can see it. So I think the consumer is bothered by that somewhat. We do see the jobs -- maybe it flattened out at 8.2%. We hope for better and that would really help the overall confidence. Coming back to the promotional -- so I think we do have give the consumers a reason to stay in our category through innovation. In certain categories, more promotional activity will go on until we see all that get to a level that -- we've seen promotions headed years gone by then when the economy gets a lot better you don't have to promote nearly as much. So I still call it as -- I've seen several companies say this, I still think this is temporary. What is temporary, is that one more year of it or two more years, I don't think it's forever. I think things will get better on the margin side, Flowers Foods and I think the overall food category as we go forward. Still have more time to go, but we are at historical lows -- almost historical lows on our margin. I don't believe it will stay there forever.

Heather Jones, BB&T Capital Markets.

You may have said this and I missed it but I was just wondering if you could give us an updated ingredients outlook for the year? I think your last call you had set up 5% to 9% for the full year?

Heather, this is Steve. We have said up 6% to 9% for the full year. We're really not changing that. I would say we're tracking on the lower end of that range. But I would want to remind you that the first half is still a very tough comp year over year. We won't see any relief primarily to the back half.

Okay. Then on the capacity side, we've seen a number of announcements of capacity closures in the industry. Some look like they are pretty small, but some look like they could be meaningful. But we've also seen some of your competitors talk about new plant construction and some expansions. I'm just wondering if you have a sense of on a net net basis are we seeing capacity come out of the industry?

I think you are seeing capacity come out of industry. Most times when you see it come out I think it is inefficient capacity probably. So some capacity is coming out. But I think as you've seen Flowers do for the past six, seven years, we keep putting in more automated and efficient equipment, which yields and keeps then our pounds per hour improvement continues to move forward. I think the industry has to do this. I've seen and you've seen Bimbo send their announcements about new plants and they continue to work on their older plants and inefficient plants. I think that's just the cycle of going through the baking industry. The industry in general that any of us who have capacities not generating true benefit and true value, that you have to look at and look strong because the marketplace will not let you afford to have something that's not productive as it should be.

Clearly, Hostess' pension liabilities are well-publicized and I believe Bimbo has quite a few as well. Do you have a sense of -- in very rough numbers, what proportion of the competitive set has these pension issues? Because that seems like that could really spiral going forward and make uncompetitive producers even more uncompetitive?

I can't, Heather, specifically. I think you said it, Hostess has a lot. I'm not sure how Bimbo stands on theirs, but as you look at certain parts of the nation, you have more of it than others so I couldn't be specific on any of that.

Okay. Finally, in the acquisition market, Hostess clearly has this issue, Bimbo's seems like it's focused on integrating Sara Lee. So there's not a lot of large buyers out there. Are you seeing these private companies become more muted in their expectations as far as multiple paid? What are you seeing there?

Heather, all I'd say is -- any time anybody wants to sell, they want full value for their business. I would say that.

So you haven't seen any change in those expectations over the last couple of years? Given -- and also just given how difficult the environment has been?

I'd say no.

Akshay Jagdale, KeyBanc Capital Markets.

First question is on the channels and how they performed specifically food service growth and the impact and sustainability of that growth. We've been following -- our view has been that the recent weakness in industry grocery volumes has been because people are eating out more. It seems like your food service business did really well this quarter. I don't remember a time when it was this strong. Can you talk about from a volume perspective how well the food service business did? Maybe just before you answer that, just -- you said your sales growth was in line with your expectation prior to the quarter. How did it compare from a channel perspective? And was retail worse and food service better? Or it was pretty much in line?

Akshay, I'll talk. This is Allen. I will mention food service just in general. We were encouraged that we saw an uptick in our overall food service business. If you read the Technomics data, they are reporting some consumer pickup in food service. Which again, we are encouraged. I would really say that our improvement in food service was probably not so much the category improving, but with additional business, new accounts that picked up. I mentioned that we picked a lot of those up in 2011 and now there is a carrying forward. Also, as we extend into new markets, our DSD routes can serve more of the existing food service accounts that we are serving in our core markets. So we're picking up additional food service business as we expand with our DSD routes in new markets. So that is really an overall general comments on food service. I'm not sure specifically if we want to pin down exactly the numbers, Steve.

I think our comment on in line had to do with earnings, Akshay.

So on the sales side, can you help me -- was food service a little bit stronger than you had expected? And retail a little bit weaker? Would that be a fair characterization? Or not really?

I wouldn't say our food service is stronger than expectations. Quite frankly, I would have -- hopefully food service is even stronger than the results we turned in, but we were pleased to see food service has been flat to down slightly. We were pleased to see a turnaround there. You mentioned the product segments and we talked about those a little earlier. We were very encouraged to see our soft variety Nature's Own brand do very well in the quarter. Other segments remain under pressure. I mentioned white bread, branded buns and rolls, specialty breads and some of the other product classes remained under pressure. We are focused on those as well.

Okay, that's helpful. Steve on the cost side, you mentioned tracking towards the low end of the 6% to 9%. What about the spike in wheat recently? It's up 10% in the last five or six trading days. How does that impact that view? As a follow-up to that, the other costs, which are roughly 50% of your COGS -- it seems like you're making a lot of -- you're accelerating the progress you are already making there. Can you give us an update on that cost basket and what your expectations are?

Sure. As you know, we don't talk about how we are covered but we do continue our hedging philosophy. So short-term spikes in wheat don't necessarily affect our overall cost basket depending on coverage and our plan to take coverage. So I would say even though we're watching the short-term wheat market and we did have concern when you see spikes like that, we have positions and plans on positions that hopefully will mitigate the majority of that. As you look at the year and our coverage philosophy we're getting pretty close for 2012 as far as being very comfortable with our overall cost structure. So even on the remaining part of the COGS back at -- I would say we're pretty comfortable with that 6% to 9% and the comment on that we are tracking on the lower end of that range.

Actually, I would say the May 15 edition of Milling & Baking talks about the tour that just went on in Kansas City -- in the Kansas wheat market. We do see testaments of record wheat crop. Of course, that can turn with one weather event sometimes. But it looks like it will be a lot of wheat. The question will be what happens to other grains? Corn, soybeans, et cetera? But I think wheat crop in general is looking real good. And we just have to see how that pans out in 2013. As Steve mentioned, 2012 is off -- we're not concerned about 2012 at this point.

Just one last one on Tasty Baking and just your sales guidance in general, Tasty seems to be going in line with or better than your plan for your comments. Or correct me if I'm wrong there. Then if that's correct, are you still expecting 3 to 4 points of your 7% to 9% growth to come from Tasty? I may have that wrong, but I have your sales growth breakdown of 7% to 9% driven 3% to 4% by Tasty, 3% to 4% by pricing and one by volume. Is that still the right ranges to look at in terms of breakdown of sales growth?

I think that's correct. That was the guidance I think we gave in Philadelphia toward the beginning of the year.

So Tasty is still going to do 3% to 4%? So even though we only have like one more month, I believe, right of --

We're about to cycle --

Yes, we're about to cycle that. That is correct.

(Operator Instructions) Amit Sharma, BMO Capital Markets.

Allen, just wanted to follow up on the Tasty expansion. As you expand your fresh bread line in Philadelphia, are you seeing a better retail takeaway or better reception from retailers because you were there with Tasty? Or does that not have any impact?

Yes. I think one of the benefits of the Tasty acquisition, the Tasty Company had wonderful relationships with the trade. Not only in Philadelphia but also in their expanded markets. Because of the relationship that has been there for many years, we've been very successful getting retailers authorized to Nature's Own and to work with us on shelf space and displays and authorizations and so forth. So I would say that it has been a very much of a benefit as we move into Tasty's core territory with our brands.

Just -- are you able to quantify in any way in terms of either the time for you to fully penetrate that market, or if it helps you with the profitability in a new markets, that might be delayed another market where the issues are a factor?

It's difficult to quantify how long it's going to take. But I think as George mentioned earlier, we are very experienced in expanding our bakery products into new markets. So we know how to do that very well. I'm confident that this expansion through Philadelphia and the Northeast is going to be very successful for the Company. But I can't quantify the exact time.

Okay. On the promotional and the pricing front, as Steve was saying you're tracking the lower end and not descending the spike in the wheat market, the trend is down. Are you expecting retailers to be a little bit more aggressive in terms of promotional activity? Or asking you for -- to scale back some of the pricing that is going through now?

I think one of the positive things about this category, retailers understand very well that fresh bakery is one of the top sales categories. In many cases, it's the top one or two profit category for the retailers' business. So they understand that deflation in the category is not a good thing for them. So I would say that I don't anticipate a lot of pressure coming from retailers to lower retail prices on products that were being sold. The category's just too important to them.

We have no more questions at this time. I will now like to turn over the call to Mr. Deese. Please proceed.

Thank you Andrea. Thank all of you for joining our call today. I would like to say before we close, as always I would like to thank our team members throughout the Company for your continued efforts to grow sales and improve operations, had we were to build value for our shareholders. Thank you so much.

Thank you very much for your participation in today's conference call. This concludes the presentation. You may now disconnect. Have a great day. Thank you.