J M Smucker Co (SJM) 2006 Q3 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the J.M. Smucker Company's third-quarter 2006 earnings conference call.

At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open up the conference for questions and answers after the presentation.

I would now like to turn the conference over to Mr. Mark Belgya. Please go ahead, sir.

Good morning, everyone, and welcome to the J.M. Smucker Company's third-quarter, 2006 earnings conference call. I'm the Company's Chief Financial Officer. Thank you for joining us.

On the call this morning from the Company are Tim Smucker, Chairman and co-CEO, Richard Smucker, President and co-CEO, Vince Byrd, Senior Vice President of Consumer Market, Fred Duncan, Senior Vice President of Special Market, Steve Oakland, Vice President and General Manager of our Consumer Oils and Baking business, Mark Smucker, Vice President and Managing Director of our Canadian business, and Paul Smucker Wagstaff, Vice President and General Manager of our Foodservice market. Tim and Mark Smucker will be joining us remotely this morning.

After this brief introduction, I will turn the call over to Richard for opening comments. I will then review the financial results for the quarter, and Tim will provide closing remarks. At the conclusion of these comments, we will be available to answer your questions. If you have not seen our press release, it is available on our Web site at Smuckers.com. If you have any follow-up questions or comments after today's call, please feel free to contact George Sent, our Director of Corporate Finance and Investor Relations, or me.

I would like to remind you that certain statements in this presentation and during the question-and-answer period that follows may relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995. I invite you to read the full disclosure statement concerning such forward-looking statements in our press release.

I also want to point out that the Company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is also detailed in our press release.

With that, I will turn the call over to Richard.

Thank you, Mark. Good morning and thank you for joining us. I'd like to open with our thoughts on the overall business first and then focus specifically on the quarter's results. First, our business remains solid. Second, we had a successful Fall Bake. Third, we continue to implement our strategy as we execute on a number of multiple fronts. This includes leveraging our multibrand portfolio, stepping up new product developments and introductions, implementing our supply chain initiatives as we installed a new distribution network and closed our Salinas facility, and making strategic decisions to exit unprofitable businesses with certain customers.

Our Fall Bake was successful. But our quarter was impacted by a decrease in sales in our Oils and Baking business, due to a decline in the categories and inventory reductions by key customers in the months of December and January. This impacted the quarter by approximately $0.09 per share compared to last year. Although the results for the quarter were below our expectations, we are confident in our major strategies and our commitment remains the long-term, steady and profitable growth of our brand. The high-cost environment pressuring the industry presents a challenge, but the fundamentals of our business have not changed. Our year-to-date performance is solid with nearly every brand up over last year and we are achieving many of the operational milestones that we set out at the beginning of the year. We recognize that there are additional opportunities to drive out cost and we are actively pursuing them.

In the first half of the year, sales volume allowed us to keep pace with cost increases. However, in the third quarter, we were impacted first by a softening in sales volume in the Oils and Baking categories that I mentioned earlier for the months of December and January; second, cost increases in fuel, raw materials and select commodities; and third, additional on-plan costs during the transition period related to our new distribution network. I want to focus the remainder of my comments today on these areas.

First, in our consumer business, sales were up 4% for the quarter and 7% for the year. Our core food spreads and peanut butter businesses increased in both sales and market share. In the peanut butter category, increases in Jiff have offset a slowdown in the sales of natural peanut butter. Jiff is up 4% for the year. Uncrustables continues to grow and we introduced new varieties during the quarter as we move ahead on our plan to expand this platform. In addition, our investments in Hungry Jack are showing results, as the brand experienced growth in the quarter and for the year.

Before discussing the quarterly performance in the Oils and Baking business, I want to comment on the Fall Bake period of September through December. We had a successful Fall Bake. We were up in share, in volume shipped, and in sales dollars. We executed well with new products, new distribution, new packaging and key merchandising events. In addition, our multibrand promotion was a success. However, we did have a fall-off in the latter period that contributed to the lower performance year-on-year.

Through the first half of the year, Crisco experienced solid performance in the always-competitive oil business area. During that period, sales were up 6% and volume was up even stronger due to the price decrease that was taken last January.

We experienced heavy shipments in September and October to support our customers' earlier-than-usual merchandising programs. November was again strong, giving no indication of a slowdown. In December and January, orders slowed as certain customers reduced inventories, and consumer demand also slowed. While the category experienced a decline in December and January, Crisco continued to gain share. On a year-to-date basis, sales and profits are still ahead of last year's.

While the last couple of months have been difficult in the oils area, there is no specific factor that would indicate this is anything more than a slow period, which we've experienced before. Our strategy for the brand we believe is correct, and we will continue to see growth in the future.

Turning to baking, sales were flat for the first nine months, as strong first-half results were offset by declines in December and January. There were two main drivers. First, the category was very competitive in the period with heavy promotional activity, more than this category has seen for some time. Second, the category declined in the quarter, but we held share.

In the short 18 months that we've owned these brands, we've accomplished a great deal. First, since the acquisition, we have focused on regaining distribution in large core grocery customers that hadn't carried these brands for some time. Second, we have backed away from certain untraditional customers that were unprofitable. Over the short term, this will continue to hurt our overall topline growth. Over the long-term, these brands will grow and at a more profitable level.

Third, we've stepped-up our product introduction efforts. Fourth, we also redesigned the packaging for many of our products to emphasize the brand and in some cases, we reformulated the products. Finally, we started to cross-promote these items with significant marketing activity, and we are seeing the benefits of combining the brands. In total for Oils and Baking, we have increased marketing spending for the first nine months by over 30%.

In Canada, we are experiencing the same kind of category and cost trend that we see in the U.S. For the first nine months, our branded business was up and our flour business was flat. For the quarter, our spreads businesses were up and condiments held their share in the face of competition, while the flour business declined. In addition, we continue to experience a planned decline from the rationalization of certain unprofitable businesses. The effect of favorable exchange rates has partially offset these declines. Again, the Fall Bake was good, as shipments were heavy in September through November, but also declined in December and January. We have completed many of the fundamental infrastructure changes that were necessitated with the acquisition and we look to further implement our Canadian strategy.

Turning now to the cost environment, last quarter, we talked about our expectations for higher energy cost. We also estimated additional cost in the second half of the year of 13 to 16 million for freight, resins and natural gas. Our estimates remain essentially unchanged, and these costs will impact our results over the next several months.

We continue to implement on many fronts to improve our overall cost base and customer service levels. This includes the relocation of production from Salinas to Orrville and Memphis, and the rollout of our distribution network, which has been a major undertaking this year. The new network brought us physically closer to our customers. When we made the decision to roll out our distribution network, we did not anticipate that we would be implementing this project in the face of such a difficult energy and freight environment. It has been more costly than we originally expected. First, we incurred temporary labor and administrative cost at the distribution centers in excess of our original expectations. Second, we delayed closing -- we delayed the closing of the Salinas warehouse until after the Fall Bake to ensure no customer disruptions. The facility is now closed and has been sold, but we incurred additional cost by keeping it open. Third, this disruption caused by last -- the disruption caused by last fall's hurricanes impacted the U.S. trucking industry and challenging the availability of trucks and drivers, and resulted in inefficiencies and higher costs. We will begin to see the benefits of lower manufacturing costs for moving our production from our Salinas facility, which will help reduce our overall cost. Bringing our distribution cost more in line with the original network expectation is a major priority for our company.

We believe these changes, along with broad cost-containment efforts across all areas of our business, will help to improve our margins over the next several years while we continue to execute on our brand strategies.

I would now like to turn the call back to Mark to have him review the financial results with you.

Thank you, Richard.

Sales for the quarter were down 3% compared last year, and income from continuing operations was down 12%. Excluding the U.S. industrial business, which was divested, sales were down 1%. Our GAAP earnings per share from continuing operations were $0.54 this year versus $0.60 last year and included restructuring charges and merger and integration costs that we detailed in our earnings release. Excluding these charges, earnings per share were $0.68 compared to $0.70 last year.

This quarter's earnings included a gain of $0.06 related to the sale of our Salinas facility. The sale generated cash proceeds of approximately $9 million.

Excluding restructuring charges and merger and integration costs, our third-quarter operating margin was 11.3% compared to 12.4% last year. The decrease was solely due to gross margin decline. Our gross margin declined primarily due to the volume decrease in Oils and Baking, along with increased trade merchandising expenses and higher commodity and freight costs. The divested industrial business also resulted in a margin loss of approximately $2.8 million or $0.03 per share for the quarter.

The decrease in gross margins flowed through to our operating margin as the percentage of SG&A expenses to sales was flat for the quarter. Increased costs of approximately $4 million associated with the Company's distribution network were offset by a reduction in marketing and selling expenses and overall lower administrative overhead cost.

Sales in our U.S. retail segment were $376 million, down 1%, with the consumer business area up 4% and the Oils and Baking business area down 8% for the reasons Richard described earlier. Crisco sales were down 10% for the period and baking sales decreased 6%.

Uncrustables experienced another good quarter as demand continues to be strong. Sales of Uncrustables across all channels were approximately $17 million in the quarter and $54 million for the first nine months of the year, an increase of 17 and 22% respectively. In addition to the new varieties, we were expanding the current products to more foodservice markets such as healthcare and colleges and universities. In our schools channel, we currently serve 74 of the top 100 school districts in the United States.

In our special market segment, sales were 161 million for the quarter, down 5% from last year. Excluding the U.S. industrial business, sales were up 2%. The beverage area experienced strong sales, up 16% in the quarter. The category is growing and our brands are well positioned in the natural and organic area where we are seeing increased industry focus. Foodservice was up 5% with increases in both our traditional and schools market. The performance in these two business areas helped offset the decline in Canada.

Regarding other initiatives, the Company purchased 200,000 shares in the quarter against its authorized repurchase plan, and to date, the Company has purchased almost 970,000 shares against its authorization of 1 million. At our most recent Board meeting, our directors authorized the Company to repurchase up to an additional 2 million shares.

With that, I would now like to turn the call over to Tim.

Thank you, Mark, and good morning, everyone.

We recognize that this year has been about building our brands and investing in our strategic initiatives in an unusually high-cost environment. Our businesses are performing well. In the Oils and Baking categories, we are in the early stages of growing and leveraging the brands and refining the portfolio. In Canada, we have made good progress in positioning that business for future growth.

We are improving our distribution and launching new products. Not surprisingly, we saw increased competitive actions during this quarter, but this activity provides more interest in the categories long-term.

Turning to our outlook then, we would expect sales of approximately 2.14 billion, down slightly from our previous forecast. We expect earnings per share, excluding merger integration and restructuring costs and the gain on the sale of the Salinas facility, to be comparable with last year's result of $2.60 per share.

So in closing, let me summarize the key points. First, we had a successful Fall Bake with share gains and growth in volume and sales. Second, our year-to-date performance is solid. Third, we have completed a number of key operating initiatives. Fourth, we continue to implement our strategy. Finally, we are committed, as always, to a long-term view of running our business.

We want to take this opportunity to thank our dedicated and energetic employees, and look forward to a continued success in the future.

We thank you for your time today. Now, we are happy to answer any of your questions.

Thank you, gentlemen. The question and answer session will begin at this time. (OPERATOR INSTRUCTIONS). George Askew, Stifel, Nicolaus.

Well, I've got a handful of questions here. Did I hear you correctly? Inventory reduction and the reduction in consumer demand in December and January was a $0.09 impact?

Yes, that's correct.

Can you kind of deconstruct that for us a little bit? You know, I mean, is the majority -- well, can you just deconstruct just the sales impact and the margin impact?

Hi, George, Steve Oakland. Let me take you back to Fall Bake and then we will look at the impact of that on the quarter. Let's take Crisco. If you look at the syndicated data and you take the grocery market for the 12 week ending December 25, which is really October, November, December. If you take grocery and you add the Wal-Mart estimate to that, Oils category was down 2%, okay? During that same period, Crisco was up 5.5. Our major competitors, including private-label, were down 8, down 11, and down 4. So, Crisco came out of Fall Bake very strong. About the last two weeks of December, we saw a push from a couple of our largest customers to significantly reduce inventory. So, we saw that hit us beginning the middle of December. Consumer take-away remained strong; the month of December was solid.

Typically, after we see a month or a period like that, we do see a competitive period and we saw some competitive activity in January that is typical in that oil business. So we saw the oil business drop off dramatically in the last two weeks of December and the month of January.

Year-to-date it's still up and going forward, we feel it looks great.

Okay, so it's really just -- it's sales and it's deleveraging?

Yes. When we lose those sales, we lose those margins.

Yes. Okay. You indicated the marketing spend for Oils and Baking was up 30% in the quarter, yet there's a reference that marketing and selling expense is obviously down. Can you kind of reconcile that for us?

George, this is Mark. Actually, that reference to the 30% was for the nine-month period.

Okay. So in the quarter, what was marketing? What was the change in marketing dollars year-over-year?

The marketing overall was down for the year -- or I'm sorry, for the quarter, but it still continues to be up over last year for the nine months, for both obviously the Oils and Baking and also overall.

Okay. You've talked about advertising being up 20%, fiscal '06 versus '05. Are you still on that track, or should we think in terms of different numbers?

That number is probably going to be lower, but again, I think the important thing, as we've indicated with the 30% increase in Oils and Baking, where we did make reductions, we held to our focus on spending behind the Oils and Baking brands.

Is the inventory destocking at key customers complete?

Well, we think the short-term for us -- but that's really hard to tell. I mean, we can manage. There's a big push in the industry to drive inventory out of the supply chain. Our turns business has returned, so --.

Okay, so you're saying that late December, January was a big impact?

Are you seeing it in February? Will we see an impact in the fourth quarter? Is that part of the guidance?

No, we think that that is pretty much flown through the inventory and we are back on track.

Okay. Then lastly, what -- can you give us a sense of the -- I mean the IMC cost-cutting strategies and where you are on that path, what kind of savings you're seeing year-to-date and for the balance of the year?

You are referring to the synergy charge?

Yes.

Yes. I think that we generally are still tracking towards our original estimate of the 40 to 60 million, and again, just to refresh your memory, we expected about one-third of that for each of the three years.

I think the key take-away, though, is that a lot of those synergy savings have been eaten up by the high-cost environment we're playing in, so you're not seeing that drop to the bottom line. But as far as the actual synergy, we feel that we're right on track.

I don't want to make this too simple, but it seems to me that the avoided cost of Uncrustables last year is being spent on advertising this year, and the cost savings from IMC this year -- you know, 15 million, call it -- is being spent on higher costs, certainly in the second half. I mean, am I thinking about that properly?

I think you are. I think you can even expand it to the whole year. I think the improvement in Uncrustables cost and the synergies basically are being pretty much offset by our increase in marketing spend and the overall costs that we are seeing increase, not only in commodities but the freight costs and also our distribution network.

Leonard Teitelbaum, Merrill Lynch.

Let me try and pick up a little on what George is saying there. Now, when I'm looking at this, has there been an environmental change or just a bump in the road in terms of how these brands are functioning with the retailers? Did this quarter -- say we are rebasing kind of how the retailers are handling our brands? I was thinking primarily of the bake area now or is it again just kind of like a one-off problem?

Len, Steve Oakland. I think it's a one-off. It would be nice if we could coordinate these promotional shipments to our -- (multiple speakers) -- quarters but it's not going to happen, right. The key is that the merchandising was there; the consumer take-away was there, especially in Crisco. There's a lot going on in baking. We've changed packaging, UPC code, formulas; we've adjusted some customer base, got some key customers back. That's going to take a while to really show in the numbers.

Can we take a look at how, in (indiscernible) look, with one quarter what you've got to have your hands around this year. I'm more want to look forward here. By the way, do you have stock option expense kicking in next year?

Len, this is Mark. We are going to be impacted about $0.05 upon 23R. That's a combination of option and restricted.

Okay, so any growth we have off this base has got to be modified by at least $0.05. Is that right?

That is correct.

Okay. That's what I want -- do we see -- okay look, we just lost the year in terms of growth; we are going to have a recovery next year and at least our long-term growth rate of 8%. If this is going to be a bit of recovery, if it's a one-off, Steve, then we ought to look at something better than 8% for 2007. Is that right? Is that a fair way to look at it?

Well, I certainly like your first description. Our long-term growth rate is 8%, and we definitely feel that is possible. We've said that 8% may not be possible ever year; it depends upon if we get an acquisition, how much our core business grows, but we definitely feel that that's our long-term objective and very achievable.

All right. Well, let's just bring that in a little bit because at my age, long-term isn't as long as of the others on this call. So if I'm just going to take a look at '07 and say hey, look, we had bad quarter and maybe we (indiscernible) and we try and rectify this thing in April. We're coming up against some pretty good comparisons going into the first half of 2007. So do we look at 2007 as a recovery year, more in line with our long-term trend, or we ought to just simply get back on track and maybe get that up higher as we start to look to 2007? Environmentally, at least? And then we will worry about the $0.05 a share later?

Well, what do you mean by environmentally?

Well, look, the problem that you had this year was obviously from the numbers that you put out, not with the brands. You resonated well with the consumer; they moved it off the shelf. The category -- and this is what I was referring to earlier, Steve. Did the category just -- it fell out of bed in a short period of time, and it looks like it may be back on track. I don't know. We will let the IR numbers tell us that. But I just don't know whether the brands have been rebased in the minds of the consumers or not. If we have been looking at in environment that would allow a 2 to 3% growth with good merchandising in oil and mixes, maybe that category is permanently slowed and we should look at something like a 1% or flat growth, because the environment just simply -- it just -- the consumer is just not buying our products like they used to.

Well, these categories are low-growth categories; they are --.

Absolutely.

-- 0 to 1%, and our growth will be in market share. So as we've always said, we hope to get about 3% growth in terms of organic growth, plus another 1% from new products. We still think that is realistic and that is doable. Now, hopefully, on top of that, we can have acquisitions, and we can leverage the brands together. So to answer your question for next year and beyond, we definitely feel that the 8% is achievable.

Now, are we going to make up the difference from this year, is that your question?

Well, basically that's what I'm trying to figure out here is we do -- I mean, we should -- given the shares that I see -- and I don't want to belabor this call; maybe we ought to follow-up off-line. But as I see the retailing environment out there and the way the consumers are taking your product off the shelf, as evidenced by this last quarter, I'm just concerned that maybe 8% is as good as we can do next year and I would've thought we could do better, yet we just had a problem with a handful of, in essence, customers, if you will, who deloaded or destocked our product. We're now back on track; that's flow-through. We've got our inventory cycles back. We ought to at least make that up and then maybe do better than 8% for next year. That's what I'm trying to figure out.

Well, I think, in addition to that, we're still in a high-cost environment. Sugar, for example, is at a 25-year high, which we now buy a lot more sugar than we ever did before now that we're in the baking category. So you know, I think, all those things considered, unless we see some change in the commodity costs, more than 8% would probably be difficult.

Okay, maybe that's the answer we need, then.

But I think that we would also add to that -- Len, this is Tim. Again, as Richard said in the beginning, 8% is a long-term strategy and depending upon where acquisitions hit, it could be greater than that also. So, you've got to still keep in mind the acquisition portion as well as new products and core growth.

Okay, fine. Thank you very much.

Farha Aslam, Stephens, Inc.

Good morning. Just some details -- going back to George's first question, that $0.09 between sales and customer inventory deloading, if you had to split it, like would it be 50-50 between the two, 60/40? Kind of where would you put that $0.09? Just so that we can get a better feel for the business?

Between the two brands, basically between Oils and Baking is what you're saying?

Was it like $0.03 customer de-loading and $0.06 consumers purchasing less kind of -- (multiple speakers) -- what was slower consumer take-away?

I would say -- Hi Farha, Steve Oakland. It's somewhere around -- that's very difficult to tell, because both are going on in the customer store at the same time. 50-50 to a third deloading to probably a little less than 50% is deloading -- or I don't like that term but inventory reduction and the rest is category decline.

We saw some very uncharacteristic declines in December/January in the categories. These are long-term plus 1, minus 1 categories, and we saw double-digit declines in them. I don't know if it's the weather, or you take a couple million households out of the New Orleans/Gulf area. Those are heavy baking and heavy Crisco markets. You know, I can't really explain it this short -- this close to the period, but I would say somewhere around 60/40 category versus inventory.

Farha, you might have noticed, in looking at all categories, I seem to get some syndicated data.

Right?

That during that four-week period, about 70% of dry grocery categories were down. So there's something fundamentally going on there beyond just the categories that we participate in.

Okay. Then, when we look at the baking category, just (indiscernible) this quarter reminds me a lot of historical IMC, which would be hit in that kind of November/December time period and be doing great for nine months and then miss. Is there something fundamental about baking that, in the planning process, you can't see the last few months? How well can you plan the Fall Bake today versus how IMC did it in the past? So that, looking out into next year, we won't be faced with a similar situation again?

You know, Farha, Fall Bake was fine. It was stronger in Crisco; it was a little better than flat in the baking brand. It's a very competitive category. It's very hard to know; you've got two very different competitors in this business. Our plan is to grow it over the whole year. Obviously, Fall Bake is very important in that, but we're going to have periods where we do very well and periods where we don't because those competitive influences.

But this change that we saw in this quarter didn't have anything to do with the Fall Bake and not -- we knew what Fall Bake was, we had our plans in place, we had great take-away from Fall Bake. This actually occurred basically after Fall Bake.

So in January?

Yes. For the last two weeks of December was where they started to reduce inventories, and then January specifically also. But it wasn't really the baking period; that was over.

All right. Then, going onto your core business, your fruit spreads business, you had mentioned that Jiff was up. Was fruit spreads up in the quarter, in terms of sales?

Yes.

How much of that was really driven by pricing, and how much by volume? Just kind of getting a feel for how your pricing is sticking, because you did take some price increases in that.

No, you are right. During the quarter on a tonnage basis, it was probably actually down under 1%, but most of the growth was coming from pricing. But I should also say that we probably lost about 1% of sales due to some customers that we chose not to participate with during the quarter.

Okay, so you are segmenting customers more. Then, in terms of Uncrustables, you mentioned that you are introducing new varieties.

Yes.

Is that aside from the three that we already have, or is that plant now up to kind of where you want it in terms of production that you can start introducing new products?

Yes, it is, and we have two new varieties, the peanut butter-only and the peanut butter and honey on wheat will go into four test markets and they are being shipped as we speak, so it is a little bit earlier than what we had anticipated.

You're also serving new markets, so that means that the volume coming out of that plant should be a nice benefit going into a '07, right?

Yes.

From Uncrustables?

Yes, and Paul might speak to where we are expanding a little bit in foodservice.

Yes, this is Paul Wagstaff. In the school aside, the school business is going very well right now. We have expanded into other what we called traditional foodservice markets, which would include hospitals and daycares and universities, etc. That will be continuing to expand into FY '07.

You're still looking at that sort of $60 million for the full year '06 -- for fiscal '06 in terms of sales for Uncrustables?

It should be a little higher than that actually.

Closer to 70.

Wow, that's great; so you are actually ahead of plan. Then going into next year, where do you think that number can go?

Higher! (LAUGHTER)

Like, above $100 million plus?

No, not next year.

Not in one year.

Okay, I am just trying to figure out.

Then my final question is, in terms of commodities, looking out into next year, how much do you think energy is going to be up year-over-year? Do you think you're going to get any relief in terms of soy and peanuts? I know you actively hedge. How long are your positions? How much are you covered for, if you can kind of discuss that generally?

Well, a couple of things -- we don't discuss the soy position; that's really critical to Crisco pricing and our competitive environment. The categories right now in the agra categories, wheat is up; soy is about where it was a year ago, frankly. It has bounced around. Now, sugar is up. Energy -- spot futures on energy are down from their highs, still up a little bit over last year, so it's hard to believe that the energy and resin and fuel environment won't continue to be competitive through the next year.

I would say, although we are getting some relief on resins, as you've probably heard, still year-on-year those will probably be up. We're going to face some other packaging changes as some contracts come up.

So, net, do you think you're going to need more pricing to protect your margins or do you think the growth in your business and kind of the cost savings you can achieve with IMC, etc., can offset the entire cost across many different sectors?

We will probably have selected price increases, but we probably won't have large price increases. It would be category and brand by brand, but it won't be significant.

Okay, great. Thanks for the answers and look forward to seeing you next month.

Christina McGlone, Deutsche Bank.

I just wanted to follow up on George's question about marketing. Mark, you had said that no for the year it is going to be up less than 20%, which was the original target, so I assume spending in the quarter was below plan. Is that right?

It was.

So, given the Company's long-term focus, why did you pull back this quarter?

This is Vince. I would just say that there's just some discretionary spending that we had, and we didn't cut any advertising, anything that's about building the brand long-term, but there are some discretionary things that we chose to reduce, given some of the cost pressures.

Did you say that spending was up or flat in Oils and Baking in the quarter? I didn't understand that part.

No, the oils -- the overall marketing was down for the Company, including baking and oils for the quarter, but for the nine-month period, it's up 30%.

Okay. Then going back to the cost pressures, another commodity that's up pretty significantly is fructose and I know that's a large -- that's a big commodity for you. Is that a source of pressure or since you didn't mention it, is that sort of under control for you?

I would say it's under control, though obviously we experienced some increase earlier but again, we took, in fruit spread, a price increase in the beginning of the fiscal year.

It primarily affects our fruit spreads business more than the other businesses, and that's where we did take a price increase at the beginning of the year.

Okay. So you took the 3 to 4% price increase on fruit spreads and peanut butter. Have you taken any other price increases since then?

Yes, we toke Uncrustables up, and then we just announced, in the quarter, Hungry Jack potatoes up freely significantly because of the cost of potatoes going up significantly. Those increases were average 5 to 10% actually on some items.

When is that effective?

That is effective as we speak -- this quarter -- basically February. There is a little bit of some price protection on (indiscernible) promotion or two, but it will be in effect in the fourth quarter.

Okay. In your experience, in terms of demand elasticity -- so, do you think that, since the volume of fruit spreads has been down or flat to down in the quarter, do you think that's because of pricing that you took, or do you think it's just the environment? When do you think that would start to I guess ease and you would see volume growth there?

Well, this is one of the first quarters that we've actually been down in tonnage. We've been growing that business for years. It does somewhat depend on whether our competitors move as we look at the pricing gap, and heretofore, none of our competitors have moved on pricing. But the other thing it's affecting -- a little bit last year, we enjoyed the benefit of the low-carb craze and had some very nice double-digit growth on sugar-free and low-sugar-type products, and that growth is not as much there this year.

Okay. Then last question -- Mark, the cash balance was much higher sequentially. I'm not sure if that's a seasonal shift or something else is going on there.

No, it is seasonal to some degree as we get through Fall Bake and then with the sale of the Salinas plant and a few other items.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). Alton Stump, Longbow Research.

Paul [Bodner] sitting in for Alton. I just had kind of a follow-up question on the marketing spending for in particular how it relates to '07. Do you still plan on keeping it up at the elevated levels of 20% or so, or do you kind of -- and do you know how much of that would go behind baking mixes? Do you see it kind of falling back to more normalized levels?

No, Paul, this is Mark Belgya. We wouldn't expect to see the 20% level in fiscal '07. But we will still continue to spend behind the brand, but not at that level.

Any idea of like what kind of number you would come out with or -- at this point?

Well, actually we -- no, the answer is we are putting together a plan right now but we can honestly say that we're going to spend as much as we possibly can and still try to hit our numbers, because we still want to build these brands. You have to take into consideration, a number of these brands we've only owned for 18 months, and we've spent behind these brands for years so we definitely want to put as much marketing dollars behind these brands as we can. But we will obviously look at what impact that has on our earnings.

Maybe just to clarify it and just to your point, it will be 20% higher than what was spent historically. We don't anticipate increasing it another 20%.

Yes, that's what I was kind of going along (multiple speakers) kind of keep it at the same level or something?

Yes, well, at the same levels of this year, which is much higher than what has been historically. But we're not going to cut marketing, but we're not going to probably increase it another 20% -- just so we are clear.

Right, right, but it won't go up as a percentage.

Yes, right. Consistent probably with sales, somewhere around sales growth.

Ann Gurkin, Davenport.

Good morning. If I heard correctly, you said national peanut butter sales were down. Can you comment on that?

I can. We, as you may know, have enjoyed double-digit growth in natural peanut butter for years. If you look at last year's third quarter, we grew natural peanut butter by 17%, so we are coming off a pretty hard comparison. There's clearly been a couple of competitive entries into natural peanut butter this year, in both one of our major branded competitors as well as private label. So yes, natural peanut butter was actually down slightly in tonnage for the quarter, but again, that's coming off a tough quarter from last year.

So you're looking for a further decline in the fourth quarter?

No, I don't know that I would say further decline. It may be flat to down slightly, but it's a very important thing to us that we're looking at.

Okay. I think, on the last call, you all talked about operating margins reaching maybe 13, 13.5% for the back half of 2007. Is that still attainable?

Well, Ann, this is Mark. I think, when we made that statement originally, that was following our IMC acquisition, and that was the pre-IMC level. At the time, we felt that that's where we were. With the cost pressures we've been seeing and would continue to expect to see, a lot of that will just be contingent upon when that release occurs. I think, at the current level, that would be difficult to hit that level by the end of next year.

Okay. How does the acquisition pipeline look? Are you all ready for another acquisition?

We are certainly ready for another acquisition, and we always have our line in the water, so we will just have to see.

Okay. Then, can you talk about the new product pipeline for fiscal '07?

It's in pretty good shape. I think we have a number the items between the various groups who are ready to launch; we spoke about the Uncrustables, which we can speak to. We're looking at a couple of organic items that are in peanut butter and in fruit spreads, for example, and some other things that we've yet to launch.

There are some things in test that are going to be expanded. We've got olive oil in a very small part of the country, about 5%; we're going to expand that. So there's some successful test market items too that we're going to roll out.

Great. Thanks.

Karen Lamark, Merrill Lynch.

Good morning. I think you mentioned incremental efforts around cost. Can you be more specific about what opportunities might be available and maybe give us a little bit of quantification?

Well, I will speak to opportunities. One of the areas that we will focus on -- I think Richard made comments during his part of the presentation -- is, in our distribution network, again with the transition, we had higher operating costs. We clearly think that there's opportunities to reduce that as that is in place, going into next year. So that would be one area of focus. I think, just generally, the cost environment that we are in, we're going to challenge the organization as we go into '07, look at our individual budgets, and feel that there's opportunity to reduce discretionary spending to offset some of the impact.

So there's no explicit program that you might communicate with us? It's sort of incremental belt-tightening? Is that a fair statement?

Yes, I mean, we are not undertaking any major initiatives but I would say that it's going to be a very hard look at where we can reduce cost.

Okay. On IMC, as you think back versus your original expectations when you bought it, what's not met your expectation or maybe been more difficult to execute than you had thought?

I'm not sure there's any specific area. The one brand that we would like to have grow a little quicker is Martha White. Martha White is a great brand in the South, and it's -- out of all the -- all of the brands have been growing with it that we bought from IMC with the exception of Martha White, and it's not -- it's down about 3%. But it's a great brand, and we've got a number of initiatives in place for that brand, so that's probably the only significant area that I would -- Steve, do you have any (multiple speakers) --?

Sure, and I think there's a lot of opportunities with Pillsbury. The consumer loves the doughboy and the products. There has been a lot of things we've had to do to position these brands for growth. I guess there's just been maybe more than we would have liked, but we've addressed a number of them. So, we are encouraged.

Okay. Then on that, if your competitors remain aggressive in the baking category, do you have any plans to change your strategy around pricing or promotion?

No, with the exception maybe of timing. We will try to pick the right battles in the right spots. We're not the number one brand, so we have to be careful when we promote, what we promote. We are fortunate to have the other brands, especially Crisco, to help it merchandising-wise. So Crisco is a big merchandising item in that aisle.

Okay. Then lastly, on capital allocation, can you remind us of your priorities, including acquisitions and buyback?

Yes. We have said that acquisitions is a key priority, particularly as we talked earlier, in our long-term growth strategy of 8%; it plays a major part in that.

We also, as we commented on, we have repurchased about 1 million shares; we have a new program, so that is also a key use of cash. Dividends will continue. In all of these cash allocations, you know, we go through an look at what makes the most financial sense at the time, based upon what our internal needs are for cash and also from a shareholder-return perspective.

Okay. Lastly, any planned divestitures or any businesses you're looking at as potential divestitures?

We are constantly challenging our strategy. You know, we've had a number of strategic divestitures over the last couple of years, and we've just continued to focus on the branded, long-term growth of the Company. I wouldn't say there's any change in our view on that.

Chuck Cerankosky, Key/McDonald.

Good morning, everyone. Chuck Cerankosky. I'm just wondering if you could give us an update on where the test market of the olive oil is going. Most of my other questions have been answered. Thanks.

Chuck, this is Steve Oakland. It's gone well. We entered about 5% of the country, two core Crisco markets, Texas and Florida, and they are very different consumers, very different demographics, so it has given us a nice marketing opportunity. We are pleased with the pickup in the trial so far. We had to take a 20% price increase about six weeks into it. World olive oil supplies the been very volatile. We obviously don't lead those price increases with our size of the business. So even with that, I think, with sort of the turbulent environment, we are pleased with it and we're going to expand it.

All right, thanks a lot.

Bob Simonson, William Blair.

Good morning. Maybe I'm the only one still confused here, so I apologize. (LAUGHTER). But you reported $0.54, and to get it in the form that's consistent with prior reporting that's in First Call, I would add back the $0.06 and the $0.08 and that would get me to $0.68, and then I would take out 6 if I don't want to count the Salinas profit, and that's $0.62. The $0.62 would bring your year-to-date to $1.97, which to be about flat at 2.60 would give you $0.63, which is roughly the consensus expectation for the fourth quarter. Have I done that math correctly?

I believe everything -- but the year-to-date is $2.03, if you are taking out the Salinas gain.

Well, that's 56, 79 and then you reported $0.54. I add back the $0.14, that gets me back to $0.68. Then I take Salinas out, it takes it down to $0.62.

Bob, if it's okay if we could just handle this question off-line?

Sure. The second question is, if it is roughly $2.60 for this year, it was intimated that -- I think you intimated that you could have an 8% gain that would kind of be a target. That would get you to $2.80, and take $0.05 out for options is $2.75. To do that kind of a number, does that assume that your costs stay where they are now, or that they improve, or that they deteriorate further? Do you need some help on cost levels, be it natural gas or anything -- (multiple speakers)?

We will definitely need some help on cost levels. Whether it's commodity cost or whether it's us turning our belt, it will require some cost-containment.

So up 8 would be a very -- an attractive year as far as you managing through some of these costs?

At the current cost levels, certainly.

Okay, that helps.

Fred Speece, Speece Thorson Capital.

Hello? Fred?

Mr. Speece, your line is open.

Fred?

I will check that line. We do have a follow-up question from George Askew.

Yes, hi. This may kind of get to Bob's question before, but your two -- if we assume flat year-over-year earnings and take the $2.60 for fiscal '06, that includes the $0.07 benefit from the -- let me get my term correct here -- from your trade merchandising liability estimate change in the second quarter.

That's right, George, it does.

Okay.

Yes, the only thing we're backing out is the gain on sale because, as we have said, historically we excluded gains and losses on sales of assets.

Okay. Looking forward, to the extent you are able to achieve your 8%, I mean, we should work from that 2.60 base just to kind of confirm what Bob was -- (multiple speakers)?

Yes, that's correct.

Okay, thank you.

Gentlemen, that does conclude our Q&A session. I would like to turn the conference back over to you for any closing remarks.

Thank you again for joining us today. We appreciate your time and we look forward to continued growth. Thank you very much.

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