J M Smucker Co (SJM) 2008 Q3 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to The J.M. Smucker Company's third quarter 2008 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 questions and answers after the presentation.

I will now turn the conference all call over to Mr. Mark Belgya. Please go ahead, sir.

Good morning, everyone, and welcome to the J.M. Smucker Company's third quarter 2008 earnings conference call. I'm the company's Chief Financial Officer. Thank you for joining us this morning. Also on the call from the company are: Tim Smucker, Chairman and Co-CEO; Richard Smucker, President and Co-CEO; Vince Byrd, Senior Vice President, Consumer Market; Steve Oakland, Vice President and General Manager of our Consumer Oils and Baking business: and Mark Smucker, Vice President International; and Paul Smucker Wagstaff, Vice President Food Service and Beverage Markets.

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 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 contact me or Sonal Robinson, Director of Corporate Finance and Investor Relations. 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 Private Securities Legislation Reform Act of 1995. I invite you to read the full disclosure statement concerning such forward-looking statements in the press release. I also want to point out that the company uses nonGAAP results for the purpose of evaluating performance internally. Additional discussions on nonGAAP information is also detailed in our press release. With that, I'll turn the call over to Richard.

Thank you, Mark. Good morning, everyone, and thank you for joining us. I would like to begin by summarizing the key highlights for the quarter. First, we achieved strong sales growth in the quarter. Our Eagle and Carnation acquisitions contributed approximately one half of the growth, consistent with our strategic expectations. The remaining sales gains were led by our Smuckers, Jif, Crisco and Pillsbury brands. While pricing contributed to the increase, volumes were up across most of our brands.

Second, we increased our nonGAAP earnings per share by 10%, despite raw material costs that were up approximately $40 million over the same period last year. Third, we completed a successful fall bake in both the U.S. and Canada, realizing gains in sales, volume and market share. And finally, while we are attentive to cost management in this difficult environment, we once again increased marketing spending, demonstrating our focus on long-term brand building.

Let me briefly comment on our performance, starting with the U.S. retail segment. The segment experienced strong top line growth in the quarter. In the consumer area, the Smuckers, Jif, and Hungry Jack brands all contributed, and Smuckers Uncrustables remained strong. Of particular note, this quarter delivered good volume growth, one of our best quarters ever in terms of tonnage. Our spreads businesses continued to set new share market records, quarter after quarter. Fruit spreads and peanut butter continued to be a very strong combination. Marketing them together is appealing to our consumers, beneficial to our customers, and has strengthened both brands.

One of Jif's competitors who has been out of the market for some time aggressively moved to regain their lost share of market with significant trade and consumer spending during the latter part of the quarter, and we expect this activity to continue for the foreseeable future. While the dynamics of the category remain volatile, we have continued to gain share.

While the addition of Eagle contributed significantly to sales growth in the oils and baking area, we had another strong quarter from Pillsbury. Since our baking acquisition several years ago, you've heard us talk about the long-term actions we were taking to build the brand. Actions in the areas of reformulating and repackaging, new product development, focusing distribution on more profitable channels and providing significant marketing support. While we did not immediately realize sales and share gains, we knew that our strategy was sound and our long-term brand building focus would prove beneficial as a result of these investments. Therefore, the Pillsbury brand has realized four consecutive quarters of sales gains and has grown market share over that period.

Our steady stream of new products has also contributed to the improvement. We recently introduced Pillsbury reduced sugar cake mixes and frostings. They've been very well received by consumers and we are expanding our offering with new varieties. The ability to cross-promote in the baking aisle has also been beneficial for our brands.

Crisco's volume and share of market were flat in the quarter, while sales were up on higher prices. Pricing in the oils category remained volatile as soybean oil costs continued to rise, reaching their highest levels ever during the quarter. As a point of comparison, the current price of soybean oil has more than tripled since we acquired the business six years ago. We have implemented four separate price increases, totaling over 50% in the past 13 months. Based on soybean oil futures, we expect these costs to remain high and we plan to reduce cost and take price increases as appropriate.

Turning to our special markets, this segment experienced another good quarter in sales and their overall profit growth continues to improve.

In Canada, the Eagle and Carnation acquisitions added significantly to the top line growth and we also benefited from favorable exchange rates. Although we just closed the Carnation acquisition in October, we reached a key integration milestone this month, allowing Carnation products to be ordered, shipped and invoiced alongside other Smucker products. In addition, we were able to include Carnation in some of our fall bake campaigns, cross-promoting with Robin Hood. Results for Carnation have been strong, exceeding our expectations.

Foodservice also was a key contributor to the segment's growth, as sales were up in both the traditional and the schools channel. The business also benefited with the addition of Eagle.

In summary, we delivered a strong quarter. As we look ahead to the next several quarters, we expect most costs to remain high, but as always, we are committed to responsibly managing our business for the long-term. We expect the strong focus on our strategy to continue to generate long-term profitable results. I would now like to turn the call back to Mark to have him review the financials with you.

Thank you, Richard. Sales were up 27% for the quarter, and excluding the impact of Eagle, sales were up over 14%. This increase in sales was primarily attributable to price and volume gains, with foreign exchange and Carnation also contributing. As Richard noted, the peanut butter competitor that had been out of the market began to aggressively move to regain share in the quarter. Through this, Jif gained share and once again realized good sales growth, up 13% over the same period last year. This month marks a full year of the competitor's temporary exit from the market. Now that we have lapped the benefits we realized for the past year, we do not expect peanut butter sales to continue to experience the level of year-over-year increases we have enjoyed and are expecting to return to more historical growth levels.

GAAP earnings per share were $0.75 this quarter and $0.71 in the third quarter of last year, including restructuring and merger integration costs which were primarily Eagle related. Excluding these charges in both years, earnings per share were $0.79 this quarter, and $0.72 in last year's quarter, a 10% increase.

Operating income increased almost $8 million for the quarter, excluding charges, but declined as a percent of sales from 12.4% to 10.9%. Gross margin for the period decreased approximately 380 basis points, excluding charges, primarily reflecting lower margins in the Eagle business, the impact of higher soybean oil and wheat costs and mix of sales. The magnitude of the increase in milk cost and higher percentage of nonbranded versus branded sales contributed to Eagle's lower than average margins during the quarter. Looking ahead, we expect significant operating margin improvement for Eagle with a better sales mix, lower milk cost and synergies.

While the impact of pricing action across all of our businesses essentially offset higher raw material costs, they were not sufficient to maintain profit margins. However, consistent with our brand building efforts, our marketing costs increased 17% compared to last year. Corporate overhead expenses increased only 3%, well below the top line growth rate, as we were able to integrate our recent acquisitions essentially within our existing corporate infrastructure. As with our first two quarters, SD&A as a percent of sales declined from 20.8% to 18.5%.

Now turning to segment results. Sales in our U.S. retail segment were $502 million in the third quarter. Excluding the addition of Eagle, sales for the segment were up 13% as were sales in both the consumer and oils and baking areas, as compared to last year. In the consumer area, gains were broad-based as peanut butter, fruit spreads, potatoes, pancakes, syrups and Uncrustables all contributed. Sales of Uncrustables across all channels increased 25% for the quarter. Sales in the oils and baking business increased due to growth in baking mixes, flour and frostings and pricing actions, particularly in oils.

In the special markets segment, sales were $163 million for the quarter, up 26%. Canada contributed 3/4 of the increase, primarily due to the impact of the acquired Eagle and Carnation businesses and favorable exchange rates. Foodservice was up 8%, excluding Eagle, with gains in both the traditional and schools channels. Sales in our beverage business were flat compared to last year.

Our tax rate for the quarter decreased to 31.8%, from 33.1% in the third quarter last year, primarily as a result of statutory tax law changes and an increase in tax exempt interest earnings. For the full year we estimate an effective rate between 33% and 33.5%, compared to our current year-to-date rate of 33.9%.

In January, we announced the repurchase of approximately 1.6 million shares during the third quarter, at a cost of almost $83 million. This included 1.5 million shares acquired as part of a 10b5-1 plan. This latest repurchase essentially exhausted the shares outstanding under previous authorizations. As a result, the Board approved an additional five million shares for future repurchases at its January meeting. I would now like to turn the call over to Tim.

Thank you, Mark, and good morning, everyone. As Richard mentioned, we had another strong quarter with sales and share market growth across our brands, delivering good earnings growth. As you know, these are unprecedented times in terms of rising costs and related pricing actions, which make our results for the quarter and year-to-date particularly gratifying. It all comes down to execution of strategy, our attention to detail, and focus on building our brands for the long-term.

Last quarter, we forecasted a year-over-year increase in cost of $150 million and remain comfortable with that estimate. We have reduced costs where possible and taken price increases where appropriate. We remain enthusiastic about our growth prospects. We continue to support our brands as evidenced by the significant increase in marketing spending every quarter this year, compared to last year.

In addition, our new product activity remains strong. Our Jif Snack Nuts, a natural extension of the Jif brand, are doing well in test markets, and we continue to increase our distribution of Crisco olive oils, expanding our presence in this growing segment of the oils category. This quarter we launched whole wheat Smuckers Uncrustables and have extended our Hungry Jack brand into two new categories with the introduction of Hungry Jack frozen biscuits and Hungry Jack refrigerated potatoes. We are introducing Crisco canola oil fortified with omega three, capitalizing on the growing consumer interest in that ingredient. Finally, we have several new Smuckers toppings planned for this year's summer ice cream season.

Our momentum remains strong. We always take a long-term view of managing our brands, and remain confident in the opportunity for profitable growth that they offer.

So in summary, we continue to implement our strategy. Second, we deliver a record -- we delivered a record quarter with good sales, share and earnings growth. Third, we completed a successful fall bake. And finally, despite a challenging cost environment, we remain enthusiastic about our opportunities going forward. In tough economic times, the comfort, cost and convenience of a peanut butter and jelly sandwich gains even greater favor with our consumers. And our portfolio of brands are well-positioned as families look to time-tested foods at home.

On another note, we mentioned in our press release that we recently incurred -- had storm-related losses. Our Memphis warehouse facility operated by our distribution partner, DSC Logistics, was destroyed in the severe weather striking the Memphis area earlier this month. We expect insurance coverage to essentially cover our losses and do not expect this to result in a significant business interruption. However, the event has had a greater impact on our business partner. We extend our condolences to the individuals and families affected by this tragedy and we continue to provide assistance as needed.

As always, we thank you for your time today and are now happy to answer any of your questions.

Thank you, gentlemen. The question-and-answer session will begin at this time. (OPERATOR INSTRUCTIONS) Please stand by for our first question. Our first question comes from Chuck Cerankosky of FTN Midwest.

Good morning, everyone. Can you hear me all right?

Yes, Chuck.

All right. Thank you. In looking at the business here, especially with regard to price increases, I note in here you talk about the ability to generally offset higher raw material costs with price increases, but you weren't able to increase your margin. Can you talk about that a little bit? And are you perhaps getting into a period here where margins are going to be under pressure, but you can maintain traditional gross profit spreads as measured in dollars?

Chuck, this is Mark. I'll start off and then you guys can add in. It's clearly what you're suggesting, as these costs in the times that are certainly unique, we are trying to cover all our lost margin in dollars, and basically as we look at that, a dollar sales increase through pricing is covering $1 in cost. We would expect that over time that although we will be able to pass price and keep the dollars constant, our overall operating margin percentage will be decline or at least stay where it's at.

Alright. Where can you say private label is having its biggest impact as customers see higher shelf prices?

We pass the increases on oils in the 30% range and flour on the 23% range, so those are significant. Those are going to hit the shelf sometime here in the -- and I think that's what we'll see. Fortunately, our private label competitors are facing the same costs we are. They -- most of them don't have the benefit of the hedging organizations that we have. So I think we're all going to be in the same boat.

It's going to be really up to the consumer. Are they going to -- will these new price points make that big of a difference, but as ingredients become a larger percentage of your total cost, really not a lot of room for private label to reduce their margins or their other operating costs. I mean, really, some of these items, it's the raw ingredient right now that's driving the price.

Can you say that last part again? I'm sorry, I missed it.

I said that in some of these -- in vegetable oil or flour, some of these businesses it is the raw ingredients driving the new costs, the new shelf prices. So it shouldn't be much of an opportunity for private label to be more competitive than they have been in the past.

We haven't -- this is Richard, we haven't seen the spread between private-label and branded really change that much because of the factors that Steve mentioned. Basically everybody is in the same boat so the spread between private label and branded is very similar to what it's been historically.

I would say, Chuck -- this is Vince, sorry -- that if you look at the spreads business, the gaps have widened a little bit, but what tends to happen is just a lag and that's not unusual from history, and I think that's consistent with other categories. It tends to be a three-month to maybe a six-month lag of private label moving up.

All right. And you mentioned that the beverage category is flat. Are you seeing some customer pushback in that category?

Hi, Chuck. Paul Wagstaff. No. On the beverage side, while we are flat, I think overall there has been some minor ingredients shortages on organic apple, which has contributed to some of our slowdown or flatness, I would say, but overall we've been able to pass on prices to our customers.

Can you sort of quantify the benefit you had from the Canadian dollar being strong?

Yes, Chuck. Of the 14% top line growth, it's about 2%.

Two percentage points. So fairly minor. All right. Thank you very much.

We'll go next to Christina McGlone of Deutsche Bank.

Good morning.

Good morning, Christina.

Mark, could you also break out the price and the volume components of sales because it's great to see volume growing.

Let me just reconcile, Christina, for you. We said that without Eagle we were up 14% top line. Of that 14%, roughly 2% was foreign exchange, 2% was the effect of Carnation, so that left a base growth of about 10%. Roughly two thirds of that would be price, and the remainder, volume.

Okay. Thank you. And last call you had said of the $150 million incremental in commodity costs, that you would be able to recoup the majority of it with pricing, and it looked like your pricing trailed the cost this quarter. I didn't know if it was timing or if maybe you've changed the expectation of being able to fully recover that incremental cost.

It's primarily timing. Just the -- when price increases are going effective.

Okay. So we should see it catch up by the end of the year?

Yes.

Okay. And then would you be able to tell us how much of that $150 million is hedged, so basically how much visibility do you have on that?

Christina, this is Steve Oakland. All of our core commodities are hedged, wheat, soy, and anything that we're not hedged in we have fixed price contracts. And maybe to follow up on your previous question, milk is a little different in that it -- it's not -- no pun intended, it's not as liquid on the financial markets. It's a very thinly traded, class four milk that we use. So we probably get a little more exposure to volatility in that particular business, and you saw that we had had record high milk costs during the last quarter. The Eagle business really wasn't organized to hedge that. We will be going forward. So I think you can count on us. We don't do it speculatively. We hedge to cover our needs for the pricing periods ahead of us.

Okay, Steve. So when I look -- you're having a lot of fun these days, I'm sure. If I look at Minneapolis wheat, should I think oh, my God they're paying $20 a bushel or thinking okay at least through the year end or maybe through further than that, through spring break you're locked in at a lower price.

I think that's fair. Because of the supply chain and because of our customer commitments on Easter and all of those pricing periods, we would have that locked in well in advance of those periods.

It is an exciting time, it's an understatement. I mean, you can't even buy Minneapolis wheat if you need it right now. It closes at the limit every day. So we're not in that position. And you can't be in our business. We've seen competitors have disruptions in deliveries. But we just can't be. So you have to be covered for your promotional periods ahead of time.

Okay. And in terms of Eagle, I was surprised that there were higher costs associated with it because I thought you would have cost savings because of the integration of headquarters.

We did have all of those savings, but milk traditionally has -- class four milk has been $9 to $12, a hundredweight, and it went to almost $22 during the third quarter.

But I think you mentioned it in SG&A.

Yes, well, the offices closed, Christina, in the latter part of calendar '07. So we'll see those in earnest during the fourth quarter. But there was still cost as we were shutting that facility down.

Okay, so the synergies will flow in the fourth quarter.

That's right.

Okay. And I guess last question for Paul. The beverages moderation in sales, you attribute it to a shortage of apples. Is that -- how long will that persist?

That will persist through the remainder of this year. We feel that we'll get that crop back going into next fiscal year. But overall our sales have been pretty good. We've had timing issues with one of our large customers as far as their order pattern and that will pick up in the fourth quarter.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Farha Aslam of Stephens.

Hi, good morning.

Good morning, Farha.

Hey, traditionally this is the time of year where you kind of start looking at next year's fall bake, and congratulations for a good one this year. When you look at the soy and wheat costs, kind of how are you thinking about next year's fall bake and how do you think pricing will go there?

Hi, Farha. There's no question if you had to price fall bake today, we're looking at 30% differences from a year ago. Some core items, individual items will be up $1. I mean, a bottle of vegetable oil, right at 48 ounce, which is the bulk of the category promotion, will be up $1.

I think our customers recognize that pricing at this point may not be prudent and we may -- most of our largest customers understand what's going on in the markets and we're -- we are literally as we speak working with them to put plans in place so we can manage around that, hopefully. And commodity markets go down harder than they come up, traditionally. Will that be next year? I don't know. But we've got to be positioned to work with them either way.

Okay. And then when you look at your market share in Crisco, was your market share in Crisco up this quarter?

No, no, it wasn't. And you really in these cost environments, we're really doing this sort of three dimensionally. We're looking at the consumer demand, what is our position and then how do we translate that into price. And there's a lot of volume opportunities right now. But they're just not prudent and we're in Crisco for the long term. We've had probably two years of very tough costs. We're still doing great in olive oil and in spray and all the things that we deem strategically important. We'll market those items over the next year. But on the core vegetable oil business we're really managing that through the commodity turmoil and we're doing it to just be prudent, versus cost, versus our position, versus the promoted volume.

And I think it's great that you're managing for profitability, especially given the tough environment. But do you think it's because you're choosing to just pull back and manage for that profit level, or do you think it's that consumers are going to the shelves and just seeing that $1 increase and saying wow that's too much of a price hit for me and I'm going to trade down to private label?

A lot of those haven't happened yet. I mean, the biggest pieces haven't happened yet. Obviously, there's some of that. Our private label retailers are going to face the same costs, though, and in the meetings we have with them, they're as challenged as we are going forward. So I think we'll see -- I do think we might see size migration. We may see some things go down. We're starting to talk about that. And we're positioned well to do that. We've got the broadest portfolio of offerings in the category. So we may see 32-ounce instead of 48-ounce, those types of things. So it's unchartered water, clearly.

So you put through a 30% price increase in Crisco?

For March 10th.

For March 10th. And have you heard that competitors have followed so far?

The entire industry appears to be.

The entire industry. Okay. And could you, Mark, maybe, just share with us some of your cost savings, you've said you've taken down costs as much as you can. Could you maybe detail a little bit, kind of what those amount to, so we can just kind of think of how you're offsetting these commodities for next year.

Yes, Farha. When I talk about that, most of those costs are in the corporate administrative area. As we added these acquisitions as we said in the past, we're able to use our infrastructure so we've really not had to add much headcount for additional, additional expenses with those folks. So we've been able to maintain from a dollar amount a pretty consistent corporate amount, but that's probably where the biggest savings. We're certainly looking at some opportunity some of our facilities to improve efficiencies there. We've recognized some of that to date as well. But that's proved well in the past where we've improved productivity and seen cost reductions there. It really is across the organization. I wouldn't say we have any one significant restructuring program in place to go at costs..

All of our plants have what we call Smucker quality-management systems programs in place, which are long-term programs, but some of them are starting to pay dividends in terms of getting lower -- more throughputs through the plants, we've seen great opportunities there. So almost every element of our company has some sort of cost savings program in place.

Okay. And my final question is on the share repurchase program. You've increased your share repurchases up to that five million. Do you have any thoughts on how quickly you would like to execute that going forward?

I think, Farha, as we've done pretty consistently over the last three years, it is obviously at our discretion. We look at the market conditions. We look at our opportunities for other uses of cash and it really comes down to that. I think we said in our release, of the previous five million shares, that was repurchased over about a three to three and-a-half year window. Not saying that's necessarily going to be the case for this. But we really do look at the other options and then make that decision when appropriate.

Great. Thank you very much.

We'll go next to Eric Serotta of Merrill Lynch.

Good morning.

Hi, Eric.

You guys didn't comment on your full year guidance or you didn't provide any full year guidance, particularly in relation to your long-term 8% target. Looks to me like you'll be getting a nice benefit from the lower tax rate. Could see that adding about three percentage points. But what are you looking at in terms of overall EPS growth for the year and then sort of core EPS growth if we adjust for the tax rate?

Eric, this is Richard. We historically as you probably know, we don't give guidance other than to say that long-term, our long-term growth rate is 8% top line and 8% or better on the bottom line. So we have been very I think consistent in not giving specifics.

Okay. And then your marketing spending I think you said was up 17% year-over-year. Could you give us an idea how much your marketing spending has been up year-to-date and then could you put that in a bit more context with - your sales were up 27% in the quarter, so your marketing as a percent of sales were down. I know there's been a lot of mix shifts with the business with perhaps some less marketing-intensive businesses coming out, perhaps some less marketing-intensive -- like perhaps some less marketing-intensive businesses coming in. But what's the appropriate level of marketing as a percentage of sales and how have you been tracking that?

Sure. Let me take a crack at it, Eric. You were right on the 17% sales increase or marketing increase for the quarter. That's pretty consistent with what we've seen year-to-date. If you look at that in comparison to the top line growth, of course we have a lot of acquisition in there. Particularly with Eagle, keep in mind that a good portion of that business is private label which of course is not heavily marketed. So that marketing percent of that business would be much less. So from sort of a high level, that -- I don't have the numbers right in front of me but I would guess that our marketing is probably at or maybe even a little greater than our overall growth once you back out the impact of the private label side of Eagle.

Okay. And could you give us any color in terms of marketing mix between sort of the core fruit spreads and peanut butter business and some of the other businesses, the baking -- and the oils and baking in particular?

Sure. Obviously I think it's fair to say that we spend more consumer marketing on our leading brands at this point, being the Smuckers, Jif, versus maybe some of the baking and oils brands at this particular point, although we've increased those marketings pretty significantly since we've acquired them.

Okay.

And, Eric, we won't have marketing spend increase as quickly as we're having these commodities increases. After these things settle down over some period of time that we get a run rate, what's the cost and the net sales impact of these commodities, then we'll see marketing maybe equilibrate. We're just trying to keep up pricing with raw ingredients, not let the ingredient costs hurt us as we ride this thing up. And we won't follow that on the commodity businesses.

One other thing, Eric. This is Tim Smucker. Just keep in mind, our philosophy is long-term, so we stay the course, and continuity and consistency are much more important than quarter-to-quarter ups and downs. So we use all the marketing mix, but it's a long-term brand building. I think you've heard us talk before, one share point a year, that's what we're striving at. And so it's more continuity over a long period of time than it is quarter-to-quarter as we look at marketing spend.

Sure. And just a follow-up question on peanut butter. Your share performance was certainly quite impressive, particularly given how aggressive your competitor was in terms of promotional activity in the quarter.

As we look to the fourth quarter, if I remember in the year-ago period you sort of had a bit of a windfall of, if I remember correctly, $10 million to $15 million in sales from your competitor being out of the market. You also had a bit of a margin benefit from pulling pack on merchandising activity as -- and promotional support as peanut butter was effectively sold out. Would you expect to see a return to both -- I know you said a return to normal levels of sales growth for that business, but also a normal level of merchandising and promotional activity in that business going forward?

I think that was well-stated.

Okay. Thank you very much.

We'll go next to Jon Andersen of William Blair.

Good morning.

Hey, Jon.

I was wondering if you could comment a little bit on some of the new products that you touched on briefly in the prepared comments, specifically where you are with respect to the roll-out of Jif Snack Nuts, Crisco olive oil, maybe comment on the ACV and whether those products are meeting your expectations and where they go from here.

I'll comment on the Jif Snack Nuts. It's a relatively small test through sort of north central United States and it's still very early. But we are in the process of supporting it with TV advertising and trade and other consumer marketing. So - and the early results are encouraging, but it is truly too early to tell at this particular point. But I would guess the ACV is around 10% or something in that neighborhood.

If we look at Crisco olive oil, we started in a test in Texas and Florida. We've gone through the southern U.S. and this fiscal year we're rolling into the Midwest. And the results are good. They vary by customer. That is still a fragmented -- more fragmented industry than most of its size. And so we're encouraged by it. We've got new packaging. We've got a number of new things coming and we plan to continue to expand it.

And then on the Hungry Jack brand, I think Tim mentioned both the refrigerated potatoes and the frozen biscuits, they're also in a small test market to try to make sure we're successful before we roll those out and those are in a couple of key markets herein the Midwest.

And in Canada, this is Mark Smucker, we had two significant efforts against new products. The first was the launch of our Robin Hood frozen muffins, three SKUs and the relaunch of our reduced -- what had been reduced sugar to now a no-sugar-added product in Canada and early indications are that both are going very well. The customer acceptance has been good and the indications on the consumer acceptance seem to be good. So we're pleased with that in Canada as well.

Great. Thanks. And in terms of Uncrustables it sounded like you had another strong quarter, I think you mentioned up 25% across all channels. Was there similar strength across retail versus foodservice or schools channels?

Actually, retail was a little stronger in the quarter than foodservice. I believe retail was up about mid-30s%.

That's right. Foodservice was up in the mid-teens and foodservice we are in the process of launching the whole wheat Uncrustables. The retail side has just done that and foodservice will be launching that in a month.

Great. Then last I guess for Mark, the gross margin percent decline in the quarter, I think you attributed to three things. Obviously the raw materials, soy oil and wheat, Eagle, milk costs and then mix of sales. Can you elaborate a little bit more on the mix of sales, how much of that drove margin decline and will that ease going forward?

Well, I think it will ease. Maybe I'll sort of spin it a little differently. The gross margin decline, I would say, a little more than half of that was specific to Eagle and of course that's Eagle and then there's also a little bit of mix within that and then probably another third of it was due to the effect of the cost increases across the company. So the net of that would be more of the mix. But certainly more than half of it was specific to Eagle during the quarter.

Great.

And as I mentioned, Jon, we do expect that profitability both at the gross margin level and the operating margin level to improve over the third quarter going into next quarter.

Okay. Thank you.

Gentlemen, I will now turn the conference call back to you to conclude.

Thanks a lot for everybody's participation today. I think as Christina said this morning, these are the times that we have a lot of fun during these periods, and clearly these are challenging times, but I think it's important to note that we are really extremely proud of our team. This is the time when people really are putting in a tremendous effort as they always do, but particularly in unchartered waters. But we're really extremely proud of our team and thank them for the great progress that we're able to report today. Have a great day.

Ladies and gentlemen, if you wish to access the rebroadcast after this live call, you may do so by calling 1-888-203-1112, or 1-719-457-0820, with the pass code of 3196264, or by accessing the website for a downloadable MP3 format. This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect