J M Smucker Co (SJM) 2006 Q4 法說會逐字稿

Good morning and welcome ladies and gentlemen to the J.M. Smucker Company fourth-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 the conference up for a question-and-answer session 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 fourth-quarter 2006 earnings conference call. I'm the Company's Chief Financial Officer and thank you for joining us. Before I introduce the participants on today's call, I want to inform you that Fred Duncan, our Senior Vice President of Special Markets will be retiring at the end of the summer and as a result Mark Smucker has been named Vice President of International Market and Managing Director Canada and Paul Smucker Wagstaff has been named Vice President Foodservice and Beverage Markets. We want to thank Fred for his many contributions to the Company and we wish him. And all three gentlemen are on the call.

Also joining us from the Company this morning are Tim Smucker, Chairman and Co-CEO; Richard Smucker, President and Co-CEO; Vince Byrd, Senior Vice President of our Consumer Market; and Steve Oakland, Vice President and General Management of Consumer Oils and Baking. After this brief introduction I will turn the call over to Tim for opening comments and a recap of the year. I will then review the financial results for the quarter and Richard will provide commentary on our outlook and 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 website at smuckers.com. A replay is available on the website in downloadable MP3 format. If you have any follow-up questions or comments after today's call, please feel free to contract 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 Tim.

Thank you Mark and good morning everyone and thank you for joining us. Let me begin by summarizing the key points for the year. First, we achieved record financial performance for the year despite a difficult cost environment. Second, we experienced solid performance in our brand portfolio. Third, we continue to invest in building our platform to support future growth. And finally, we repurchased a significant number of shares during the year confirming our confidence in our strategy.

Our financial performance was particularly gratifying in a year that saw volatile and competitive market environments both in our categories and in our costs. In addition, we executed on many initiatives and completed another year of implementing our strategy for the long-term growth of our brands. At the heart of our branding strategy is our commitment to continually refine our brand positioning, improve our consumer communication and serve our customers. We made significant investments in support of that strategy. Our total marketing spending was up 8% for the year and it was up 35% in the key strategic business area of consumer oils and baking. This was the first full year we developed our own merchandising plans for the Multifoods brands and they were successfully implemented.

We continue to leverage our brands and this year we launched our largest ever multibrand event. Based on its success we look forward to additional opportunities. In Canada, we launched television advertising campaigns the first in several years supporting the icon Robin Hood and Bick's brands. And finally, we introduced more new products than ever before exceeding our growth objectives. We look to expand distribution on many of these products this year as well as maintain the pace of innovation.

In addition to investments in our brands, we also invested in our operations and supply chain as we implemented a new distribution network to better serve our customers. We also expanded production capabilities at our Orrville and Memphis facilities and essentially completed the restructuring project we started several years ago. These initiatives were an investment of time, money and people while in a difficult cost environment. We recognize that continued growth requires consistent investment in all market conditions so we did not pull back on our commitment to invest even though we knew many of the benefits would not be realized until future periods.

We produced record results for the year. Sales were up 5% and we gained share of market in our Smucker's, Jif and Pillsbury brands while we essentially maintained share in our Crisco brand. Earnings also grew for the year as we were able to offset some of the cost increases with synergies, management of discretionary spending and price increases. On a non-GAAP basis income from continuing operations was up 8% with a corresponding increase in earnings per share from $2.60 to $2.77.

While the year produced many challenges and unexpected cost increases, the fundamentals of our businesses have not changed and the opportunities for growth remain strong. It is important to point out that we have asked our employees to execute on many different initiatives, reduce cost and still continue to perform at a very high level. We know that the dedicated support of our employees will enable us to continue to generate strong performance in the years to come.

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

Thank you Tim. Let me take a few moments to discuss some of the key components impacting our results in order to provide a better look at our performance during the quarter. Total sales were up 2% compared to last year's fourth quarter as all business areas except Canada increased. Excluding the U.S. industrial business which has been divested, sales were up 4%. The decrease in Canada was attributable to management's decision to exit certain low margin condiment businesses and the realignment of some businesses primarily into the international business area.

Our GAAP operating income was $54 million this quarter and $44 million in the fourth quarter of 2005 including restructuring and merger integration costs as detailed in our press release. If you exclude these charges in both years operating income was approximately $58 million this quarter and $56 million last year, an increase of 4.5%. This was a result of increased gross margin, improved profitability of Uncrustables and a decrease in trade merchandise expense. This was partially offset by increases in marketing expenses which were up 19% over last year as well as higher freight and distribution costs.

Other items below operating income that affected our net income for the quarter included interest income which decreased reflecting the use of approximately $52 million in cash to repurchase shares. In addition we recorded over $2 million in other expenses this quarter primarily associated with the write-off of certain manufacturing assets no longer in use. This compares to other income of $1.2 million last year reflecting a decline in other income expense for the quarter of over $3 million.

During the quarter we recorded income taxes at a lower rate reducing our effective tax rate for the year to 33.5%. The lower rate reflects the tax implications resulting from the realignment of our legal entity structure coupled with recent state law state and rate changes. This realignment reflects changes made for our manufacturing and distribution networks resulting from our supply chain optimization project and the acquisition of Multifoods.

Sales in our U.S. retail segment were $338 million in the fourth quarter up 4% with both consumer and oils baking business areas up 4%. Baking sales were up in the quarter led by strong performance of Pillsbury and Martha White which more than offset the decline in the oils business. For the year, sales in the U.S. retail segment increased 6% with sales in the consumer area up 6% and oils and baking up 5%. The additional six weeks of Multifoods contributed approximately one-half of the segment's overall growth.

Uncrustables expressed another good quarter as results exceeded expectations. Sales of Uncrustables across all channels were approximately $22 million in the quarter and $76 million for the year, an increase of 36% and 25% respectively. We expect our two new varieties, peanut butter only and peanut butter with honey on wheat to be in substantial distribution by the back-to-school period. In addition to the new varieties we are continuing to seek opportunities to expand the current products to more foodservice markets such as healthcare and colleges and universities.

In the special market segment, sales were $164 million for the quarter down 1% from last year. Excluding the U.S. industrial business, sales were up 5% as growth in beverage and foodservice more than offset the decline in Canada. The beverage area experienced strong sales up 14% in the quarter. The category is growing in our R. W. Knudsen and Santa Cruz organic brands are well-positioned in the natural and organic area where we are seeing increasing consumer interest. The foodservice strategic business area was up 4%. And for the year excluding the extra six weeks of Multifoods and the industrial business, sales in the special market segment increased 4%.

Some other key indicators for the year included EBITDA which was $304 million or 14.1% of net sales this year compared to $279 million or 13.6% in 2005. Cash from operations was $198 million, an increase of over 30% reflecting the increase in income, non-cash items and depreciation and amortization and the use of tax loss carryforwards obtained as part of the Multifoods acquisition. This yielded a free cash flow after dividends of approximately $72 million.

And finally, we repurchased repurchase 1,293,000 shares in the quarter against our authorized repurchase plan. This brings the total for the year to just under 1.9 million shares or approximately 3% of the overall outstanding shares. At our April Board meeting, our directors authorized the Company to repurchase up to an additional 2 million shares leaving approximately 2.7 million shares available for future repurchase.

I would now like to turn the call over to Richard.

Thank you Mark and good morning everyone. As Tim mentioned in his remarks, we had a good year. We can now say we have integrated all of the brands from our acquisitions and have the pieces in place for continued growth on all fronts. Our long-term strategy is to own and market North American icon brands found in the center of the store. This strategy leads to growing our top line over time by 8% per year. Half of this growth will come from our core businesses and new products and the other half from acquisitions.

Since the timing of acquisitions is somewhat unpredictable, our core sales growth assumption is 4%. We have more than achieved our 8% number over time due to significant acquisitions in the last five years. Our long-term earnings per share growth target is 8% or better as we would expect some added leverage and efficiencies as we grow our sales. Exclusive of any acquisitions or business or product rationalizations, we would expect sales to grow by our core sales growth assumption of approximately 4% this year. We would expect earnings per share growth in line with our core growth assumption.

While we are confident in growing our brands both top and bottom line there are several factors that affect these results including the cost of raw materials primarily soybean oil, fruit, and wheat along with energy related costs such as fuel, freight, and packaging materials. Second is the impact of FAS 123 of $2 million or $0.02 per share. Third is the magnitude and timing of any share repurchases. Fourth is future tax impacts and finally of course, any acquisitions.

The earnings per share base to apply any earnings growth to is equal to our 2006 non-GAAP earnings per share of $2.77 minus the $0.06 per share gain on the sale of the Salinas, California plant and approximately $0.06 per share of favorable income tax benefit. A portion of the tax benefit recorded during the fourth quarter is considered not reoccurring. We estimate next year's effective tax rate to be approximately 35% or slightly higher.

We continue to generate strong cash flows and would expect free cash flows after dividends to range from between $80 million to $120 million based upon restructuring cost of approximately $4 million and no additional merger and integration costs related to the Multifoods acquisition; capital expenditures of 65 to $75 million; depreciation and amortization of 65 to $70 million; the use of $10 million in tax loss carryforwards; and dividends of $64 million based on our current rates. And finally, we would expect net sales and earnings to be slightly more concentrated in the second and third quarters than what we experienced last year.

In summary, we had a very good year confirming our strategy of building brands for the long term. Our investment in our brands and our new distribution system has and will continue to pay dividend now and in the future. And finally our strategic growth goals are realistic and achievable.

We thank you for your time and now we would be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS). John McMillin, Prudential.

Fred, good luck. When you talk about your core growth in EPS, do you kind of view your core growth in EPS as 4 or 8? I'm just trying to understand that sentence where you said you expected EPS in --

In line with our core growth. It is 4 excluding acquisitions.

I know that is your sale but I didn't realize it was your earnings as well. So basically you earned by my calculations $2.77 this year from operations. Now I guess some of that $2.77 had a favorable tax rate so maybe it is closer to $2.70 and from that growth you expect 4%?

No, we -- there are two factors. One is about a $0.06 earnings per share favorable tax that we had this year that we will not experience next year and $0.06 per share on the gain on the sale of the Salinas plant. So you basically had to adjust that $2.77 by $0.12.

Okay. So get down to 12 and then you will grow 4% from that. I still find it just hard to believe that you can grow -- that there is no operating leverage in your plan but we can discuss this at a different time. You know has there been any pricing implemented in the last month or two to combat some of these higher costs and to what extent have they been successfully implemented?

Hey, John, this is Vince Berg. Good morning. You may recall a year ago we took pretty much across the board on fruit spreads and peanut butter; in fact it was May of the same time a year ago. We in January took increase on potatoes and then within the last month, we took up what I will say is the rest of the line for the segments that we did not take up on fruit spreads year ago, ice cream toppings and the Hungry Jack pancakes and syrups. So effectively we have taken a price increase across all segments and those have all been implemented.

But you haven't taken up Pillsbury or Martha White?

Hi John. Steve Oakland. Not yet, no. The key ingredients there that are up substantially are caught up in the commodity markets today which are soybean oil and flour primarily and sugar. We have been able to hold those places as you know, we have a hedging strategy in place there but we will face those costs later in the year and if they don't change we will have to price for them.

Eric Serotta, Merrill Lynch.

Just getting back to John's question about the base from which you expect to grow, I know that you guys are pulling out the $0.06 gain on Salinas and the $0.06 tax benefit. If I remember correctly there was also a $0.07 favorable trade [sending] adjustment -- I think it was in the second quarter. I am wondering why that is included in the base and whether you are going to be building your growth on top of including that number in it?

This is Mark. That is a good point. If you will recall when we announced that and throughout the rest of the year, we have kept that in our 2006 results and that was part of the number we reported. But the fact that we included in 2006 we felt that we also needed to include it in our base to grow by. So I believe several folks have excluded that. So if you would look at the numbers I think you'll see we will be at the higher end of our strategic growth objective. But we just thought it was consistent with the way we treated it in '06 to keep it in our base.

Sure. And then in the fourth quarter commentary in the press release, there was a mention of reduced trade merchandising expense as a percentage of sales. Was that a onetime adjustment like we saw in the second quarter? I realize it wouldn't have been of nearly the same magnitude since you didn't quantify it, but was that a onetime adjustment or was that something that we should expect to be ongoing?

That was just a normal quarter end adjustment. I think if you look back at our third-quarter results we probably had the trade spending going the other way. It was just a matter of how we record it. It is not like we had a second quarter adjustment.

Okay. And then final question. In the third quarter -- with the third quarter release you talked a bit about a pullback in marketing spending. You said you weren't doing anything that would impair the brands. I would call it more of a tactical pullback in response to the difficult environment that you guys were facing. Your marketing spending was up quite nicely in the fourth quarter on a year-over-year basis. Was it in line with the plans that you had that you gave to us at the end of the third quarter and if so, what got better to cause you to change your spending plans?

Well our marketing was up and in line with our expectations as you look across both U.S. markets business. So I just -- the sales were pretty strong in the fourth quarter. There wasn't a need to cut those any further.

Farha Aslam, Stephens, Inc.

Good morning. Could you break down sales in the quarter for me just by volume, price, mix, etc.?

This is Mark. No, we are not going to break that down. We have been consistently and just reporting what our year-over-year and quarter-over-quarter. I think we spoke to the fact that we did take price increases last year and then spoke to the level of that. So we'll just --

So in the quarter you had positive pricing going -- can you just tell me how much pricing benefited in the quarter? How much it is going to add maybe to your next year sales?

It varies a lot with so many brands that we have and some are commodity oriented. If you look at Crisco, some years we take a 6% decline in that based upon -- which we did versus the year ago. So that is a huge part of our business that is actually a price decline. Other parts we took price increases and so it is not like we are in one line of business anymore or that we have one product category. So it is not as effective to compare that year-to-year.

Okay. And maybe you could speak to the competitive dynamics in each of your kind of key businesses? Could you talk to what you saw in the quarter in that oils category how is it competitive dynamics in the quarter and what your outlook is for the next year?

If you look at this year versus last year on Crisco alone for the fourth quarter, you would see we were down in retail a couple of percent. But if you compare that to a year ago, last year's numbers were up 23% for the quarter. So if you compare it against the prior year it is up double-digits. So it wasn't a great quarter compared to a tough comparison a year ago but probably a more normal quarter in the fourth quarter. So that business will continue to be volatile month-to-month maybe a little bit quarter-to-quarter because of the promotion schedules of us and our competitors but we think the innovation, the drainback bottles continues to do well. The olive oil we're going to expand that this year. Our spray business is growing.

The only area where we did see decline and that we are fighting is in the shortening of business. That continues to decline as consumers hopefully buy more dry bake mixes. But that is declining and we saw that again this year so we fight that.

Then maybe going on to cake mixes, kind of could you highlight the competitive dynamics in the quarter and then looking out what you see?

Well we actually had a great Pillsbury, Martha White fourth quarter. Those are very competitive as you know, three big brands in those businesses. Pillsbury, depending on the segment, our frosting business is very strong, our cake mix business is solid. We think there is opportunities in some of the specialty areas of brownies and quick breads. Those things can do a better job next year. We continue to learn and pick our promotional timings. We are not the leader so it is a little different strategy than our other brands but a lot of new products and really get the timing right, get the promotional mix right.

Okay. And then maybe we could on to U.S. retail and talk about your bake business there, your fruit spread and peanut butter.

Sure. Well we had a very solid quarter as Mark commented on earlier and what is extremely gratifying is that's coming off a very tough comparison. We were actually out about over 10% last year's fourth quarter. Share of market is in very good shape looking on both the 12 and 52-week and as Steve mentioned, we try to manage those for the long term. I really can't comment on anything else at this point --

What was the strength in fruit spreads? Was it just versus competition? Was it new products, better promotional aspects?

Well I think it's all elements of the marketing mix. We have had a number of new products that we are launching. I think you're well aware that we are coming out with a whole line of sugar-free sweetened with Splenda. We launched three new organic varieties and just the amount of support that we continue to give the category.

And peanut butter?

Similar story. If we have one competitive thing that we're watching very closely it is the natural segment where you've seen some very good growth there. There has been some competitive activity on the branded and private label areas. But the Jif brand is very, very solid and continues to grow.

And on Uncrustables, are you closing that one smaller plant you have in this coming year?

Our plan is to keep that facility open through the end of this calendar year and really that was as a result of some changes by our supplier of a bread to Fargo which made it more financially feasible for us to keep that plant open. And just from a contingency standpoint, we thought that would be a good idea just in case we see some unplanned significant increases in sales during the back-to-school period.

And so once that plant is closed into next year, kind of what type of savings would you anticipate from the closure of that Fargo plant this year versus last year?

This is Mark. We wouldn't expect to see a significant change in cost structure. Clearly Scottsdale long-term is the profitable way we want to go and produce net product. A lot of the costs associated with Fargo as you know have been incorporated into our supply chain optimization product already.

And that warehouse redistribution project that you completed last year, how much could we see the benefit this year or kind of in all of your restructuring actions, how much of a benefit do you anticipate in fiscal '07?

I guess as opposed to giving specifics, I think the way I would characterize it we have talked about continuing cost increases. I think Richard mentioned that and we see that the distribution network clearly there is opportunities to lower costs in the going out or the years going forward. We also are going to see some opportunities in our manufacturing facilities. As you know we relocated production from Salinas to Orrville and Memphis, so as those teams get up to speed, I think there will be opportunities there. And we think overall that we will be able to pretty much offset a lot of the raw material and energy costs with the benefits from these varieties of projects.

Christina McGlone, Deutsche Bank.

Just turning to the Scottsdale facility and Uncrustables, this was a quarter where Scottsville was going to be plant profitable and I was wondering if that happened? And then when do you expect Uncrustables to be product profitable?

We continue to make good progress at Scottsdale in terms of achieving our ultimate production metrics. During the quarter we did achieve production rates and necessary for the plant to be profitable and we were profitable for a part of the period. Our focus now is to sustain those production rates to achieve ongoing profitability. From the standpoint of overall profitability of the [venture], I think consistent with what we have talked about in previous calls it is that with the launching of new products we will be supporting those new products and don't expect the venture to become profitable until sometime in calendar 2007.

Okay. So we should see a ramp in sequential profitability there because you said you were only profitable for part of the fourth quarter?

Yes.

And then I just want to make sure that I'm clear Richard with your guidance. When you talked about core or EPS growth of 4%, you are including all the cost pressures, FAS 123 impact and all of the things you pointed out that is included in your 4%?

That is correct. In fact Mark made a good point. We have a lot of cost pressures this year probably some of the commodity costs are at 25-year highs. And in spite of that we expect that we will have a profitable growth this year in the range that I gave you. But that includes that.

And Steve, Pillsbury and Martha White have been weak for a few quarters and now it seems to reverse itself. Do you think that the current situation is sustainable or do you think that maybe we could enter into another period of heavy competition or trade [devode]? What is your outlook there?

Well a couple of things. I think we can count on competition. It is in that business. I mean the cake mix business is about as competitive as it comes, right? But I think we have a better distribution base. We have worked really on fundamentals. Are we with the right customers? Do we have the right products in the right stores that we can promote and that we have the right base? And we have made a lot of headway on that. We have got packaging right; we have got new products that we have in a small percentage of the country that we can now roll into more of the country. So hopefully we will see a little less volatility but that is the nature of that business. We tried to get fall bake right and Easter right this year and I think we did both of those. And if we can continue to do that I think we'll give solid results. We may miss a quarter now and then but we should be able to deliver pretty solid results on a year-over-year basis.

Last question. You had mentioned soybean oil as being one of the headwinds and I think that market may be structurally changing because of biodiesel. How will your hedging strategies change because it seems like it is a different ballgame now?

There is two things. Canola oil may be more impacted than soy based on the use of canola both in Europe and the United States for biodiesel products and we are already seeing a premium built in there. We are fortunate. We are a refiner as well as a packager so we can take delivery right of the board. We can take delivery from the big agra conglomerates. We have a lot of opportunities there. And we are also the leader. We have seen the elasticity of that brand and we've seen the ability to transfer price through the transparency there. So we think it may have different dynamics with the soy canola pricing etc. but we don't see any supply shortage for soybean oil. We may see just gross sales prices go up.

George Askew, Stifel Nicolaus.

Richard, you commented when you were referring to your long-term goals, made some comments about operating leverage essentially saying EPS 8% or better as I recall the phrase. Can you just revisit that for a moment and reminder us what you stated there?

Well that is true. As we grow sales and as we get some of these operating efficiencies in line over time we would expect to be able to leverage our sales growth. And if you look back over a five, 10, 15 -- in fact we did just recently looked at our growth rates for five, 10, 15, 25 and 45 years since we have gone public in 1959. And any of those periods we have achieved that 8% growth rate or better. So we know we can do it over time. As we said this year sans an acquisition, we are in the high commodity cost area. So we think we can get these stable mid single digit growth rates even and hopefully with some price increases too if we can get those through, but we are facing some headwinds on commodity costs this year.

Okay, so just and I hate to beat a dead horse here but to the extent there are no acquisitions, you are able to achieve a 4% at long-term top line growth, then the 4% bottom line is the correct number?

Well, it's 8% long-term growth rates.

Excluding acquisitions.

Right. Right. Excluding acquisitions it is 4% on core business.

On the top line?

Right.

And on EPS? Excluding any acquisitions?

Excluding acquisitions, our core growth rate is 4%.

And I'm sorry core on sales I know, EPS also?

Well EPS also but also we would like to be able to leverage that a little bit too.

Sure.

And I think we can.

Good. Thank you. I appreciate the comments on the complexity of looking at breaking out volume price and mix on the business as it stands given the complexity and the multiple categories but if you just look at the consumer strategic businesses within U.S. retail excluding oils, can you break out just looking at that one segment, breakout what those components are on volume price mix?

George, this is Mark. On which segment were you referring?

Well just looking at the consumer strategic businesses ex consumer oils, in other words, fruit spreads, peanut butter, just looking at kind of those base core businesses which you break out a top line number for us in the release but can you break out a price volume mix just for that segment?

I guess I would just refer -- again pretty much back to my earlier comments, George, is that Vince commented on what type of price increases and of course those went in over the year. And I think that we'd prefer to just consistently talk to whatever the overall growth is.

Okay. And then new products, you mentioned they were at a record level. Remind us how you measure that as a record level. Is it a percent of sales and what was that number? Or is it number of launches? What metrics are the right metrics there for you guys?

We actually measure, well we have several measures but basically it is a percent of sales and as you know as we have said strategically, 1% of our growth is to come from new products and we're consistently exceeding that. But it is basically a percent of sales, what are they are contributing in that particular year.

And what was that number this year?

It was more than 1% this year.

You can't be more specific?

This is Tim, George. I think we just have to go back to the long-term guidance that we talked about is 8% long-term and that is made up of basically 3% core business, 1% new products, and 4% acquisitions and that really is how to look at the business and as Richard said over the last 45 years, we have been able to beat that and there is some leverage there. That is why we talked about without acquisitions this 4% top line and we do think that the bottom line there is some leverage ability there. But it is better to look at it long term. That is I think the best way that we look at it. I think that is the best way to answer it here.

Great. And just one last question. On new products you mentioned the fruit spread sugar free line with Splenda, organic fruit spreads extensions as well. Can you give us a little more picture of what we should expect on new products during the course of the year?

Sure. Some we are public with and some we are not but those that we are public with, the ones we mentioned in fruit spreads, we have a new convenient Jif product called Jif To Go which is smaller 2 ounce cups on Uncrustables. I think Richard or Mark commented about two new varieties that we are launching and testing. On the Hungry Jack brand, we have a number of couple of packaging innovations in terms of receivable pouch packs and I think that is probably --.

And the organics --

And the organics which we mentioned earlier both in fruit spreads and in peanut butter.

And in juices.

And then Steve you can comment on --

In the oils and baking business last year we brought out the -- Ultimate Dessert Kits, Ultimate Muffins and put those into really limited distribution. I think we know which ones of those, which flavors really work and we can expand those this year. We have got obviously olive oil in a small part of the country in a test in Florida and Texas. We're going to expand that where that work is going on right now. And we changed the spray container. We did a packaging innovation there where we have -- we took the cap off and there is a neat new spray nozzle, a little click and lock spray nozzle. Those are being expanded nationally. Those have pretty good distribution now actually. So, we have got some things that we incubated last year in some smaller distribution and we feel comfortable taking it more nationally this year.

Excellent. Thank you.

Chuck Cerankosky, Keybanc Capital MacDonald. Sir, your line is open. I will check that line for you gentlemen. (OPERATOR INSTRUCTIONS). Fred Speece, Speece, Thorson Capital Group.

Can you make any comments I guess we have to wait for the 10-K for the segment margins, can you talk about the margins of the two groups?

Just in general terms, I think that you have seen what items have affected the Company, primarily the higher costs throughout the year were felt both in the U.S. retail through obviously the oils and baking and the consumer area. And then in Canada as well which is a similar business both on the retail side and of course they are impacted on their commercial side. So I think both are probably affecting directionally the same way.

Bob Simonson, William Blair.

Two questions for you Mark. Should -- the press release talks about you bringing the tax rate, accrual rate down to 33.5. Did you say that is a good number for this year?

For 2007, Bob, we would suggest using something around 35%. A part of what we received in '06 was considered a onetime benefit if you will.

Okay. So use 35?

Yes.

And then your fully diluted shares in the fourth quarter were down on an average base about $1.4 million. Where did they end and assuming no further repurchases of shares, what is a good number for share count for this year?

I would suggest using approximately 57 million shares. That would reflect full year of this past year's purchases and then some issuance of equity plans.

And Richard, when you put your budget together for your top line and then more importantly for your growth in profits being roughly comparable this year, what did you assume for the key commodity and fuel costs? Did you assume you would get some benefit or they would get worse on average or just on the raw costs of your business?

Well, as we said they are going up. We looked at when we could possibly take price increases to offset some of those. But for part of the year we're going to have to absorb some of those cost increases by the time the price increases would go into effect, we won't be able to recover all of that.

So is it correct then that there might -- to get the earnings to move up on a pre-tax basis -- let's say about in line with sales that there might be some erosion in the reported gross margin but hopefully that would be offset by a lower expense ratio?

Actually, Bob, I would look at it that we would expect because of some of the other items I talked to earlier that gross margin will hope to protect and that is where obviously all the commodity costs are hitting at. And as we did in this past year, we will continue to challenge what we would call discretionary spending which is more in the SG&A area.

Very good. Thank you.

Chuck Cerankosky, Keybanc McDonald.

Good morning. Sorry about that. Can you talk about where sales might go on the Uncrustables product line this year?

This is Paul Wagstaff. We are expecting to have double-digit growth again for the Uncrustables venture and that is both on the consumer and foodservice side.

Should we expect to see additional -- assuming the SKU count own remains about the same, would you expect more product facings on the supermarket shelves?

Yes and as in fact, as I mentioned earlier, we're actually launching some new items which will increase the facings. We are also increasing in some cases the 10-pack. The four-pack did pretty good distribution if you look at it nationally, it's over 90%. So there is maybe more limited opportunity there. We have had a very good couple of runs with the club segment, our 18-pack and that is doing very well as we speak.

Okay. That's helpful. Thank you.

Karen Lamark, Merrill Lynch.

My questions have been answered. Thanks.

Bob Cummins, Shields & Company.

There has been a lot of back and fourth discussion about acquisitions and I think you said that you are assuming about a 4% addition to sales each year from acquisitions. I don't think you have done an acquisitions since Multifoods which is two years ago although obviously that was a very big one. But I'm just wondering if that 4% would consist say of a 1% here and 1% there by acquiring a productline? Or whether you would be willing to entertain other large acquisitions where the 4% in effect would take care of several years of projected growth?

Well it could be all of the above or all of the below. Probably more likely it would be smaller acquisitions in terms of product lines. It could be an enabling acquisition, a small business. We look at all of those things and we looked at a number of product lines. It would be less likely to have a large Multifoods type of acquisition but that is not out of the realm of possibility.

And would you say at this point that if something interesting came along you are prepared to step up to the plate or you are going to wait awhile before considering another large move?

This is Tim. Depending upon the opportunity, we are certainly ready to do that and so if the timing is right and the brand is right, we have and continue to look at those opportunities. And as we said before we think we have the platform in order for us to do that.

Eric Serotta, Merrill Lynch.

Just a quick follow-up here. You had before mentioned in response to I think it was Christina's question distribution gains. At the time of the Multifoods acquisition you made the comment that their distribution in some traditional channels was not where you wanted it to be. Would you say that the distribution of the former Multifoods products are at where you need to be or do you still need further work to go to get them where you need to be in the year ahead?

Hi Eric, Steve. I would say we have made significant progress on core Pillsbury and Hungry Jack items but there are still a couple of nice opportunities and then there is always getting the item mix right within accounts and we are working on both of those. We've made significant progress but there is a little way to go.

Okay. And finally, with all the moving pieces related to cost, input cost, could you gives us a sense as to in percentage terms what your overall input actual incurred input costs were for fiscal '06 in aggregate and what you are looking at for fiscal '07? At least a percentage range?

You are talking about a percentage increase?

Yes, for fiscal '06.

You know it varies significantly by category. Steve, you might just give an example of oil costs, what they have changed between last year.

Yes. Soybean oil futures for example if you were to buy them today versus maybe when we bought them but if you bought them today it could be as much as $0.05 a pound on a $0.25 versus $0.21 or (multiple speakers) a pound.

Sure. Maybe if we pull out soybean oil as one of your clearly your most volatile commodity -- if we were to look at the other major core commodities, fruit, wheat, energy and packaging, sugar, could you give us a sense -- peanuts -- could you give us a sense in aggregate where they were up excluding the oils piece?

We look at them product by product, category by category and I am sure if we went back we could add them all together but we price them by brand, so it is hard to give you a single number.

Thanks anyway.

Gentleman, that does conclude our question-and-answer session. I would like to turn the conference back over to you for any closing or additional remarks.

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