J M Smucker Co (SJM) 2009 Q3 法說會逐字稿

Good morning. Welcome, ladies and gentlemen, to the JM Smucker Company third quarter 2009 earnings conference call. (Operator Instructions) 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 call over over to Mr. Mark Belgya. Please go ahead, sir.

Good morning everyone and welcome to the JM Smucker Company, third quarter, 2009, earnings conference call. I'm the company's Chief Financial Officer and thank you for joining us this morning. Also on the call from the company are Tim Smucker, Chairman of the Board and Co-CEO, Richard Smucker, Executive Chairman and Co-CEO, Vince Byrd, President of our coffee business, Steve Oakland, President to Consumer Business area, Paul Smucker Wagstaff, President Oils and Baking and Mark Smucker, President Special Markets who is joining us remotely. 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. Please note that we have enhanced the financial tables included in our release and hope you find the information helpful. A replay of this call is available on the web site. If you have any follow up questions or comments after today's call, please feel free to comment me or Sonal Robinson, Director of Investor Relations.

Certain statements in this presentation and during the question-and-answer period that follows may relace 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 the 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 and on our web site. With that I will turn the call over to Richard.

Thank you, Mark. Good morning, everyone. Thank you for joining us. Since we closed the Folgers merger on November 6, many of our quarter-over-quarter explanations will reflect the coffee business. We understand the addition of Folgers makes comparisons to last year more difficult. But it emphasizes the impact the coffee business will be bringing in terms of scale, margin improvements, and cash flow.

With that, let me begin by summarizing the key highlights for the quarter. First, we achieved record sales for the quarter. In fact it marked our first billion dollar sales quarter in our history. While Folgers contributed significantly to the quarters top line increase, sales in our base business were also up. If you exclude all acquisitions and the impact of foreign exchange, sales on our base business increased 6%. Second, we saw significant margin expansion, particularly at the gross margin level due to the addition of Folgers and improvement in many core categories. Additionally, both operating and EBITDA margins increased significantly over last year's third quarter. Third, non-GAAP net income more than doubled from $45 million to $100 million. Non-GAAP earnings per share were up 11% as the increase in income were partially offset by additional shares outstanding related to the Folgers transaction. Fourth, these earnings translated into record cash flow from operations. Fifth, we completed a successful fall bake in both the US and Canada, contributing to strong quarter-over-quarter gains in profitability. And finally, the Folgers integration is progressing as planned. We appreciate the commitment of all of our employees both in combining Folgers and maintaining their focus on our core businesses.

Let me now provide some commentary around our businesses. In the consumer area, the Smuckers, Jiff and Hungry Jack brands realized sales increases over the prior year, much of the increase was due to pricing although Hungry Jack once again realized volume gains in pancake mixes, syrups and instant potatoes, our fruit spreads and peanut butter volumes were down 3% on a combined basis. As most of you know, the peanut butter category has been under pressure since early January. IRI data for the period ending January 25th indicated the category volume declined 22%. To date our brands have experienced a lesser decline. From the onset, we aggressively communicated to our consumers that none of our products were involved in the recall and they could feel comfortable about Jiff and Smucker peanut butter products. We ran ads in USA today and 100 major newspapers and aired national TV commercials reassuring consumers that Jiff is the brand to trust. We believe these messages are starting to reach the consumers but it will take some time for the category to return to a more normal pattern.

Turning to oils and baking, this business area had its largest quarter ever in both sales and operating margin, with Crisco, Pillsbury and Eagle Brand milk all up. Strong merchandising programs coupled with investments in marketing and new products contributed to a successful fall bake period. In particular, the canned milk business acquired in 2008 realized strong profit gains as a result of a better matching of pricing and milk costs along with production efficiencies. In addition, we continued to see gains in Pillsbury where the business has benefited from improved execution of our fall bake programs and greater involvement from our retailers. Due to our performance during fall bake, we anticipate a competitive reaction for the Easter bake period, primarily in oils. Consistent with our strategy to profitably manage the category, we will provide marketing and promotional support where appropriate during the Easter season, but not take short term actions that would impact our long term profitability.

In the special market segment, sales increased 17% with the addition of Folgers, Europe's Best and Knott's Berry Farm contributing to most of the gain. These increases more than offset the impact of unfavorable exchange rates, volumes declines in beverage and the traditional portion control food service business. In summary, we delivered a strong and record quarter. We are particularly pleased with our margin improvement and the conversion of earnings to cash. With some relief in commodity market prices and pricing in line with our costs, our sales gains resulting in more profitable growth than we were able to realize last year as costs were rapidly rising. Folgers contributed significantly to the quarter, not only with sales, but improved margins and increased cash flows. We anticipate many more opportunities going forward. I would now like to turn the call back to Mark to have him review the financial results in more detail.

Thank you, Richard. Sales for the quarter in creased $517 million or 78%. Folgers contributed $469 million with Europe's Best and Knott's Berry Farm adding another $23 million. The weaker Canadian dollar reduced sales by $16 million. Excluding these items, sales were up 6% for the quarter broken down as follows: pricing accounted for approximately 13%, more than offsetting a reduction in volume and mix of 7%. Much of the volume decline was in the oil and flour category and was anticipated due to significant price increases taken since the prior year. GAAP earnings per share were $0.68 this quarter and $0.75 in the third quarter of last year including restructuring and merger integration costs.

Merger and integration costs were $33 million or $0.20 per share this quarter and primary consisted of employee-related costs and transitional services expenses related to the Folgers transaction. Excluding all restructuring and merger charges in both years, earnings per share were $0.88 this quarter and $0.79 in last year's quarter an increase of 11%. Gross profit increased $206 million in the quarter and gross margin improved from 29.4% last year to 33.9% this quarter. The addition of the higher margin Folgers sales drove much of the dollar increase. Gross profit on the base Smucker business improved 17% or 260 basis points. As pricing actions taken over the last 12 months helped offset higher costs, primarily soybean oil, peanuts, wheat and fruit.

Compared to last year we are better positioned in terms of matching price with commodity costs and margins have once again started to improve allowing us to recover margin lost over the past couple of years. Last quarter, rapid declines in the cost of soybean oil and wheat caused the recognition of mark to market charges of approximately $24 million on nonqualifying commodity hedges. We expected a portion of these hedges losses to reverse going forward not as the mark to market reversal of the charge but rather as lower cost of goods sold. We estimate that a majority of the mark to market amount was recorded in the quarter as reduction of cost of goods. Most of the remainder will flow through cost of goods sold next quarter and the rest will be returned to the consumer through price decreases taken in January on oils and flour.

SG&A expenses increased approximately $90 million reflecting the addition of Folgers but decreased as a percent of net sales from 18.2% to 17.9%. Marketing expenses more than doubled in the quarter with the addition of Folgers. Smucker's base business also increased marketing at a higher rate than sales growth mostly in support of Crisco olive oil which had advertising on air during the November through January time frame. As we noted in our release, amortization expense increased significantly during the quarter, reflecting the preliminary valuation of the intangible assets associated with the Folgers transaction. The additional information-- amortization, rather, reflected the (inaudible) of purchase price to finite live intangible assets and some adjustments to amortize the (inaudible). The purchase price allocation work is still in process and as a result future expense may vary from the amounts recorded. We plan to have the allocation completed by the end of our fiscal year. Based on preliminary values, we recorded $19 million in amortization related to Folgers in the quarter, $11 million higher than previous estimates. Assuming the the same amount is recorded in the fourth quarter, we expect $22 million or $0.17 per share of additional expense for the year. This adjustment does not impact our previous EBITDA or free cash flow estimates as the amortization, of course, is a noncash charge.

We estimate depreciation and amortization to range between 125 and $135 million for fiscal 2009, up from original estimates of 100 to $115 million. Operating income increased almost $96 million for the quarter, excluding charges and increased as a percent of sales from 10.9% to 14.3% even including the additional amortization expense. This margin would have been 170 basis points higher or 16% excluding amortization. Let me now comment on segment results where we have added a third segment to report the US retail coffee business. Away from home coffee results are included in the food service business area for the quarter. Canada results which were not material to the quarter were included in US retail. We expect to report Canada results within the special markets segment in future periods. Sales in our US retail segment were up 9% in the third quarter. In the consumer area, sales were up 9% with increases across almost all brands.

In the oils and baking business area, sales also increased 9% compared to last year primarily due to price increases and volume gains in baking mixes, frosting and canned milk. US retail segment profit increased 39% in the quarter with much of the improvement coming in the oils and baking area. The segment margin improved from 15.8% in last year's third quarter to 20.1% this year. This marks the highest segment profit for US retail in the last seven quarters. The US retail coffee segment represents the domestic sales of Folgers, Millstone and Dunkin' Donuts branded coffee to retail customers and contributed $443 million to net sales and $90 million to segment profit for the third quarter of 2009. Sales on a pro forma basis increased 4% for the quarter as growth in Dunkin' Donuts contributed to net sales and margin growth. Total sales in the special market segment increased 17% due mostly to the impact of acquisitions.

Profits in the special markets segment increased 7% for the quarter. Starting with Canada, net sales in US dollars were flat with last year, as the addition of Europe's Best, acquired in March of 2008 and pricing offset unfavorable foreign exchange impact. Canada also realized gains in Smuckers and Robin Hood brands. In the food service area, the addition of Folgers and Knott's Berry Farm contributed most of the growth. These were partially offset by negative trends in away from home dining. Finally, sale were also down in our beverage business as the premium natural beverage products in our portfolio were particularly hard hit in the current economic environment. Looking at other key EPS components, interest expense was up $11 million, reflecting an increase in the borrowings of $750 million, associated with the Folgers transaction. Our effective income tax rate was 31.8%, consistent with last year. Weighted average shares outstanding for the quarter in creased from 56.8 million to 114.6 million as a result of Folgers transaction. This brought the year-to-date weighted average outstanding shares to 74.7 million.

There are two other financial measures on which I would like to briefly comment. First, the cash from operations. Due to addition of the Folgers business, the conclusion of the fall bake cycle and the strong earnings from our base Smucker business, cash provided from operations achieved a record $280 million for the quarter, nearly doubling last year's amount. As a result of the strong cash flow generated this quarter, we now have $360 million of cash and equivalents on hand at the end of January. Second, as part of our original, Folgers investor presentations, we estimated a first full year pro forma EBITDA of $820 million or 17.3% margin. This EBITDA estimate was based on the combination of Smucker and Folgers stand alone businesses and full recognition of synergies. In this definition, EBITDA excluded merger-related costs and added back share-based compensation expense as amortization. We are pleased that for the third quarter, EBITDA as defined above was $215 million or 18.2% of net sales, compared to $92.2 million or 13.9% in last year's third quarter. Both measures for the quarter are tracking ahead of the levels included as first year pro forma targets and gives us comfort in our original estimates. A reconciliation of GAAP earnings to EBITDA is included in our press release.

Before turning the call over to Tim, I would like to provide an update to synergies. You will recall at the time of the Folgers announcement we targeted synergies of approximately $80 million. These synergies represented our estimate of costs that could be eliminated by combining the Folgers business into Smucker compared to Folgers operating as a stand alone company. The majority of these costs were in the SG&A area. We remain on track to achieve the $80 million in lower run model costs compared to the stand alone model once fully integrated. To date we estimate we have eliminated $50 million in full year cost on a non-GAAP basis partly through cost reduction and primarily through cost avoidance. We expect to achieve all synergies by the end of fiscal 2010. I would now like to turn the call over to Tim.

Thank you, Mark. And good morning, everyone. The addition of Folgers this quarter has once again dramatically changed how the Smucker company looks, not only in companies of sales and profits, but more importantly in term of growth opportunities for all of our brands. We look forward to updating you on our progress in future quarters. As Richard noted our base business particularly oils and baking had a very good quarter. During last week's Cagney conference, we summarized our key accomplishments related to the Folgers integration, and commented that integration is progressing as planned.

We have combined two organizations with the majority of the previous Folgers' management team joining the Smucker team providing continuity, depth and knowledge. We want to thank all of the employees who have helped us to get to this point. We also want to recognize those involved with our biggest integration accomplishment to date, which occurred at the beginning of February. We successfully completed customer facing, the first of three primary integration milestones. We combined the coffee inventories into our distribution centers and now Folgers products can be ordered, shipped and invoiced with other Smucker brands. We also transitioned Folgers trades fund management to our best in class [sebol] system. In short we transitioned from P&G systems on to our oracle platform for the majority of customer-related systems and processes. This is accomplished in less than three months after the closing the deal demonstrating our ability to implement one of our three core competencies. Further, it allows us to exit portions of the transition services agreement.

The remaining two integration milestones relate to transition of the coffee plant systems to our oracle platform expected to occur this May and the transition of the supply chain activities related to sourcing of green coffee expected to occur in the fall. Let me now provide an update to our outlook. First, as Mark noted, we are on-- still on track to deliver our original pro forma EBITDA numbers, for the first full year of integration of Folgers. The update relates mostly to items we would expect to affect the fourth quarter, but, with minimal impact on next fiscal year. We estimate sales for the year will range between 3.6 and $3.7 million this reflects the impact of anticipated competitive activity in oils, pressures on our peanut butter business and price decreases. We have also adjusted our income for diluted share before restructuring and merger and integration costs, to be in a range of $3.15 to $3.30, primarily due to the following items. First, as Mark mentioned, we have updated amortization expense based on the preliminary evaluation of Folgers' assets and expect additional non-cash amortization expense of $0.17 per share.

Second, we expect an impact in the range of $0.05 to $0.07 per share related to peanut butter. The peanut butter impact applies not only to retail branded peanut butter but also Smuckers Uncrustables and our portion control products. Our estimates include additional promotion and advertising support for the brands through this period. Third, we are impacted by a higher percent of Folgers' marketing occurring during the period of Smucker ownership than previously forecast. We anticipate the incremental impact to be in the range of about $15 million. Based on this range of estimated earnings per share we projected adjusted EBITDA for the year of approximately $600 million or 16.4% of sales. This compares to last year's full year adjusted EBITDA of 700 -- excuse me of $371 million, 14.7% of sales.

Before closing I would also like to take the opportunity to address the importance of brand trust. Quality, as you know, is one of our five basic beliefs of our Company. And our commitment to quality is the reason that our consumers have confidence in all of our products. They know that each jar of our peanut butter will be both safe and delicious. We are confident our stringent quality assurance practices insure the safety of our products. We recognize that as the category leader, we have a special responsibility to aggressively reassure consumers about our category and our products. As noted, we continue to communicate directly to our consumers with this message and they continue to trust in our commitment to quality and safety.

In summary, we are pleased to have closed our first quarter with the Folgers' business and look forward to completing the integration and taking advantage of the many opportunities that is are available ahead of us. Second we delivered solid sales and earnings in the quarter with the strong fall bake. And finally in the face of a difficult economic environment, we believe that our brands and categories are well positioned. More than ever, we believe number one brands provide a strategic advantage and with the addition of Folgers, approximately 75% of our projected sales will come from number one brands. We understand the level of uncertainty that exists in the market today, and we remain cautiously optimistic in our view of the near term We remain very positive of our long term prospects. We thank you for your time today and now are happy to answer your questions.

(Operator Instructions). Please stand by for the first question. Our first question comings from Eric Katzman of Deutsche Bank.

Hi. Good morning everybody.

Hi, Eric.

I guess I have a few questions. First, did I hear you correctly that you have about $3 of cash on the books, $3 per share?

Yes, we have $360 million, that's correct.

And the, does the fiscal, is the fiscal fourth quarter, is that normally a positive cash flow quarter, or a use of cash?

It is usually a net positive Eric. It is not a large one way or the other. Basically we will start procuring fruit and start building inventories in the first quarter of next fiscal.

So I guess, is that-- you signaled based on the EBITDA numbers being greater than, or adjusted EBITDA numbers being greater than target. Is the cash that you're generating, that you have actually put on the books above your plan?

Yes, it is. And as Richard, I think said, the EBITDA is definitely targeting, now granted the quarter is a large quarter but it is ahead of plan. We expected, I think I made mention last week at Cagney, with the completion of the fall bake and then the absolute cash flow from Folgers. So yeah, it is above.

Okay. And then, in terms of the, the assumptions for the fiscal fourth quarter, are you already seeing, let's say more aggressive competition in edible oils? And that is what is leading you to assume that I think it was Easter was going to be a tough market? Or is this just pure anticipation and you haven't really seen that much of a change in the market to date.

Hey Eric, Paul Wagstaff here. To answer your question, we have seen competitive response already in the-- for the fourth quarter in the oils area, and it is pretty aggressive.

Okay. And then is any of the sales change forecast a function of coffee pricing and the pass through, I mean I guess the last two moves you've made in coffee have been down.

Hi Eric. This is Vince Byrd, and the answer is yes. As we commented last week, there have been two price declines taken, one right before we closed the deal and then we took one about ten days after we closed. Those would be in the 6 to 8% range. Neither one of those would have within anticipated when we put out the original number.

Great. And Vince, the, the additional $0.08 of advertising and, I guess promotional spending behind Folgers. At Cagney, you kind of indicated that competition was acting pretty rationally within the category, especially since you took ownership I guess Kraft was pretty aggressive before the close of the deal. Have you seen something recently that has become tougher or is this part of the long-term plan to reinvest in the business?

I think you nailed it, Eric. It is more about the long term. It is not about competitive activity going on currently.

Okay. I will pass it on. Thank you.

Thanks, Eric.

We'll go next to Farha Aslam of Stephens, Inc.

Hi. Good morning. Could you just detail the amortization change, and give us a little bit more detail on what was the cause of that and why the numbers varied from your original expectations.

Yes, we can. Well, first of all, as I said, it is a preliminary value. We will finalize that at the end of the fiscal, but just to turn the clock back, when we put out our preliminary financials around Folgers, we had approximately $1.1 billion in intangible assets, outside of goodwill, and made a certain assumptions about amortizable life and also if they would require amortization.

As we have gotten into valuation, during this quarter and literally sort of hot off the press right at the end of the quarter, we got into more details and basically what we found was there are certain intangible assets, identifiable intangible assets, that are being established that do require amortization and in some instances it is actually a little bit shorter lived than we originally anticipated. So it really is a function of there's just more amortizable intangible assets than we had originally estimated and a little bit of adjustment on the shorter life.

Okay. And then, when you're looking at your $200 million or so decline in guidance of sale, could you break that out a little bit in terms of how much is due to the decline in commodities and therefore you are giving back pricing, how much would be maybe the peanut butter hit? And then how much would be the additional promotional activity that you are seeing?

Yeah. Just to kind of step through from our original estimate 3.8 to $4 billion because it ties in a little bit to the question that Eric asked. As we had the first round of coffee and some other minor changes, we sort of worked our way down from the high end of that 3.8 to 4.0, and moved down lower. As we got to this quarter then, with-- with Paul's comment on the oils, with the additional coffee, and then with the oils and flour price declines that we took in January, that is kind of where we crossed over that threshold from 3.8 into our current. I don't have the break out. I would say that probably the majority of it is price declines across oil, flour and coffee, and the anticipated oils that we'll see likely in the fourth quarter.

Oils and flour dropped 13%.

Right.

So that affected you know, four months of our last, last part of the year.

Two other things, Farha, exchange rate, they backed off about 30 to $40 million of sales because of the weaker Canadian and then the last item which of course is news is anticipated, some anticipated loss on peanut butter. So it is a combination of those four or five items that moved the target down.

Okay. And general commentary, as you are seeing the economy and consumer develop, at Cagney you were fairly confident about your ability to maintain pricing in the face of declines and commodity costs. The recent activity you have seen in the oils category for Easter, are you seeing it in any of your other businesses, and are you concerned about the level of promotional activity at the grocery store?

Hey, Farha, Paul here. And, no I think that's typical for this time of the year to see those type of pricing challenges that our competitors have out there. So I think we are pretty comfortable and I don't think we are seeing that pressure in other parts of the business.

Okay. Thank you very much.

We will take our next question from Chuck Cerankosky of FTN Capital Markets.

Good morning everyone. Just one more quick one, Mark, on the amortizations. Are there any offsets going on here as this amortization charges go up, if you are finding assets in one category, does it pull them out of another category that maybe say depreciation goes down.

I don't think on the fixed asset side, Chuck, the fair value adjustments were in line with our expectation. Basically what you are seeing is where we are adding these assets that require amortization for all intents and purposes coming out of goodwill which, of course, is not amortized.

All right. So just allocation thing.

Yeah, the fair value of the fixed asset, the preliminary valuation is pretty much in line with our original estimate.

All right. Now, as the depreciable lives decrease, does this mean, in a year or two we might see a fall off in-- in these amounts and these charges.

No. When I said that, we had assumed the pre-lengthy lives consistent with our policy around 20 years. The adjustments we are talking about are ten years. So not a one or two year impact.

Got you. All right. But it is not cash.

That's correct.

With the nice cash build that we see at the end of the quarter, any interest in approximate paying down debt faster?

Well, we have $650 million coming due, and obviously in this environment to have cash on hand is a good thing. Our first pay down of debt will be in June. So, we are currently looking at our options, but we have $650 million on the table this year to consider for pay-down.

Okay. Great. Where is private label having the biggest impact across your products.

Hey Chuck. This is Paul. I would say the biggest area is in the oils, base oil business. They have picked up significant ground on a volume percentage basis. . That is where we are seeing the biggest impact. That being said our Crisco brand is still doing fairly

Now how about in a category like peanut butter we've had these recalls, is Jiff gaining share?

Hi, Chuck, Steve Oakland. Our jiff business is holding up within the category pretty well. Our declines are significantly less than the category, and we have a number of both consumer and trade events in for the next two months, and we feel like this is an opportunity. I think we can take some share. We are really proud of the Jiff business and I think there are some customers we can reach that we haven't reached before.

All right. Thank you very much.

(Operator Instructions). We will take our next question from Eric Katzman of Deutsche Bank.

That was quick. I guess you haven't really commented on the inflation outlook. Maybe you could talk a little bit about that, what you think fiscal '09 comes in at and then maybe if you can are willing to give a view on fiscal 2010.

Eric, this is Mark. I will start and you can jump in. In terms of this fiscal our costs are going to track a little bit better than we originally thought. I think last quarter, we were at $140 million for the year. We are going to probably be just a little bit better than that. That reflects the lower costs.

We talked about last quarter we expected particularly in our oils and baking, we that you come through this quarter. We expect that to continue. The markets below $0.30 per pound range right now. So we think that, you know, that will stick for a while. That's going to benefit us. I don't know, guys in terms of other cost projections I don't think we are seeing significant really significantly moving up or down.

Oil is effect resin which has been in our favor obviously to help offset some costs, coffee is in pretty good shape as we stand here today.

The more important thing is that we are not chasing it with price anymore. We have our pricing in place. And so if we have to work at any direction it is not significant. Finally we have good credibility with our customers in terms of when we take a price increase it is truly justified and when we have reason to take price declines, those are justifiable. So, but next year I think with commodity costs down, pricing will be pretty stable.

Okay. And then maybe you've answered this question in some of the categories already, but could you just kind of run through maybe some of the other businesses and say whether you are gaining share both in dollar and volume terms? Or losing share.

Sure. If we look at spreads and peanut butter, it is difficult to look at peanut butter, so much noise from a year ago. If you remember, our competitor came back a year ago in the first quarter and there was all kinds of noise there. They're down significantly this year.

You know, private label is up a little bit. We are up as well, not quite as much as private label but that is really a-- in the last month or so. So, I think if you look at the trends on the quarter, our shares are stable. So peanut butter I hate to comment on because there's just too much noise. Fruit spreads, we are up our in dollars, we are off a little bit in tonnage and that's consistent I think with all of the brands in the category. A little bit of mix change, some of our traditional fruit spreads are very strong. That's encouraging frankly in this economy.

I think a general comment, this is Richard. A comment is where our brands are number one in the category, we are definitely doing better than our competitors, especially our branded competitors. Where we have number three brands or so that is a little more challenged, but we point out most of our brands are number one in the category. I would add to that, Pillsbury cake mix and frostings are both growing up in volume and dollar share. We are seeing some real nice gains there.

Okay. Thank you. And is there any adjustment that we should make for the tax rate or your ability, I guess it seems like your ability to pay down debt is pretty quick , so is there anymore leverage we might assume on interest expense, maybe capital expenditures? Is there any change there in terms of the

Yeah. I guess just on CapEx, Eric I would go with our original assumptions, I don't really see any significant change on that. In terms of tax, we might see just an ever slight increase, we are 31.8-- or 32.8, I'm sorry, probably around 33, but again nothing material there, and from a-- from a pay down and debt, and an interest assumptions, I don't think I would suggest any kind of change now. I don't see any pay down of any sort occurring until next fiscal, of course we will provide a little more color on that in our next call but I think probably all of the previous assumption are still fair.

Okay. Thank you.

Uh-huh.

We will go next to Jon Anderson of William Blair.

Morning.

Hi, Jon.

I was just wondering if you comment at first a little bit on sale-in versus sale through in the quarter and whether you saw those two measures in alignment, relative alignment and whether there were any destocking activities that impacted your business in the third quarter and expectations looking out to the fourth quarter?

I can speak to the consumer business. I think if anything, the retailer is cautious. So their inventories are tight. So, if there's any of that it is behind us, I think. Obviously everybody is, everybody is up in the air on what exactly demand will be. Will there be different mix in the grocery store, so I think our retailers inventories are tight. I don't think we should expect any future inventory issues on our business.

I think Steve's to comment to add on what Steve was saying. That also reflects our long term focus on our consumer promotions and that we really have developed a relationship and a trust of their brands with our customer, if they're not buying if what they don't need and we are honest with them to not buy in. That has really been helpful. We've had minimal impact on what is called destocking.

Terrific. With respect to peanut butter just coming back for a moment, the nickel to $0.07 impact, is that, you anticipate that to be fully-- to be fully impacted in the fourth quarter, and is there an expectation that this could persist beyond that, kind of given your experience?

It is for the fourth quarter, that is our best estimate, the consumer ultimately will make that decision. But we do think that our message is starting to reach out, we hope that-- that the right message is out there, and over the next three or four months it should settle out, if there is a change we will certainly update you on the next call.

Terrific. I guess last Mark on the synergies, the $80 million in cost synergies that you originally identified.

Yep.

Related to the Folgers transaction, did I hear you say that you kind of hit a $50 million run rate already on that and just trying to get more color around that.

Yes. You did hear me, and what we mean by that of course we have not incurred $50 million through any financials yet but we have identified either cost avoidance dance or cost reduction, a full year amount of $50 million. And let me just give you an example because I think it speaks volumes. If you look at the original run model of Folgers and let's say that there was a particular area, position that was included in the Folgers run model, some sort of cost that is redundant in our company, we of course never absorb that costs, never will, so we are counting that as a full year synergy. That's where the $50 million come from, it's primarily SG&A. We're still working on identifying and implementing some of cost of goods sold opportunity.

Great. Thank you very much.

We will take our next question from Mitch Pinheiro of Janney, Montgomery, Scott.

Hey. Good morning.

Morning.

I just wanted to make sure I understand the full-year guidance. So the $3.15 to $3.30 per share range includes $0,27, $0.28 of the noncash amortization?

Yes. That's right.

So if I add -- I'm sorry. If I add $0.28, $0.11s in Q3 and $0.17 in Q4, I come up with a guidance range of 3.34 to $3.58; is that correct.

Let's see, Mitch, there's $22 million so on a full year EPS basis that amounts to $0.17 a share. So, if you go to the high end of our range, 3.30 add back would be 3.47. So if I follow your math I think it is 3.32 to $3.47.

Okay involvement that is $0.17 includes the third quarter number?

Yes.

Okay. So it is $0.17 in total.

That's correct.

Okay. Second question is on share count, is that going to be about $118 million for Q4.

That's correct.

Okay. The mark to market charge, did that $24 million flow through cost of goods sold.

Some of it, yeah. It did flow through, not the entire $24 million. We are estimating something more than half of that. It comes through as a lower cost on the

Right.

Actual physical contracts. You are seeing that (inaudible) Some of that will come through in the fourth quarter but also some of it is funding the price declines that we went effective with last month.

Okay. When I look at the EBITDA margin of 18%, was there any, how does that look for the fourth quarter? Is there any seasonality to that that would boost it this, in the third quarter, or should we expect that kind of run rate in Q4.

No, that probably is a little seasonally adjusted to be higher. Of course our second and third quarters are largest because of fall bake and now coffee adds to that. So I would think that it would be something less. But just to frame that in, when we looked at our pro forma we expected margins in the 17% range. So, that gives you a little bit of a sense of how the averaging might work out.

Okay. On the coffee business, so, if I-- if I heard you correctly, total price declines are in the 6% to 8% range; is that correct.

That's correct.

How have volumes in coffee performed in relative to the price declines?

The category is clearly down a percent or so if you look at the syndicated data and we are pretty much in line with that. We are benefiting from a mix of a higher Dunkin' Donuts sales, and lower Millstone and away from home sales.

And how much was away from home in the whole Folgers business.

It is relatively small, it's less than $100 million, I believe, or right at $100 million.

Okay. And then final question, is as it relates to the-- you did a good job explaining the sales differential from your prior guidance. The Canadian-- you said the Canadian dollar the exchange rate effect is 30 to $40 million. That's for the full year?

Yes, and most of that was the back half of this year.

Okay. Okay. And the majority of the decline-- of this whole decline is in the pricing on oil, flour and coffee; is that correct.

That's correct, yes.

That's the majority of the basically.

Overall.

Got you. Okay. Thank you very much.

Our next question is John McMillin of Lord Abbott

Good morning, everybody.

Hi, John.

Mark your stock is down 7% premarket, people don't like surprises particularly in your kind of stock. I just wonder how this accounting or the estimate for goodwill could be that far off. I agree it is much to do about nothing, it's noncash but when did you find it out, did you contemplate telling people at Cagney?

Found out, John, during our closing process during the quarter. And, the way it came about is that, as I mentioned, the valuation work has been done and got into the specifics, we've identified certain assets that require the amortization. But it was during our closing process.

it must have been a lot of assets that required it. The plants-- basically, this was a lot, I mean it is twice the is size of what people thought or you thought. So was it twice the amount of assets, was it one -- can you give us more color what caused the big change.

Yeah our original intangibles assets were about $1.1 billion. That was what was in our planned financials. As we stand today, the intangibles that have been identified are between 1.3 and 1.4 billion, there are two specific assets have been established around technology and contractual relationship that as we have gotten more familiar with the business and gotten to the valuation of these assets realized or evaluated they should be set up as separate assets not included in goodwill or anything like that. Those are the primary assets that are driving the additional amortization.

Thanks a lot.

We'll go next to Chuck Cerankosky of FNT Capital Markets .

Thank you. Couple things. Can you give us an update on Uncrustables especially if you see in other varieties picking up the slack that the peanut butter skew is getting for that?

This is Mark Smucker here. Uncrustables is doing pretty well. Obviously we are expecting some downturn from the peanut butter issue. But the good news is that the sales have been pretty solid and the business continues to be profitable.

Can you give us a comment on sales and volumes in the quarter?

In the food service area I can can speak to that. Volumes were basically flat for the quarter because we did see a few school districts pull out of Uncrustables temporarily in the last-- basically in the last month.

Okay.

As far as the retail market is concerned, if you remember the peanut butter media really hit the middle of January, so the impact on the third quarter on retail Uncrustables was small. It is easy though to think it will have a little challenge in retail Uncrustables this next quarter. A lot of the communication that has come out from the FDA, et cetera is that national brand retail peanut butters are not affected. But there are some 1800 items that is are affected. So, obviously it is going to take us a while to get our message out that Uncrustables is clearly not part of that. So we do expect probably the first month of the quarter or so to be soft. But we don't expect a long term hit on Uncrustables.

Okay. And finally, are you seeing any channel shift between mass including supercenters, warehouse clubs, and traditional supermarkets as consumers buy your products but adjust to the economy?

Yes. The value channels are doing well across all products and all brands, whether it is club or dollar or mass they're all doing very well.

Thank you.

Chuck, just in general, we are seeing some shifts in our business, some are up for example Hungry Jack pancakes, Hungry Jack syrups, Hungry Jack potatoes are all up because those are comfort food people eat at home more. On our fruit spreads, our traditional fruit spreads are solid, in fact they are up slightly. But our low sugar and Simply Fruit which costs more per ounce are seeing a decline in volume. So across our line, we are seeing a shift, fortunately we have a number of lines that are doing well during this time and others that are more challenged than others. One very positive point is coffee is a very solid category during tough economic times. And obviously that's a good addition right now.

All right. Thanks a lot.

We will take our next question from [Michael Keating] of (inaudible).

Hi, good morning. I have a question I want to expound on something Tim said earlier I get the $0.05 to $0.07 a share in peanut butter and the higher amortization expense but what I want a little more color on is when you say a higher percentage of Folgers marking costs that were incurred during the period you guys owned it, what does that mean that $15 million, is that recurring or just a one time.

I will let Vince or Mark take that one.

I guess a couple points. I'm going to start and I'll let Mark talk in a minute. We are basically spending the marketing that was originally in the pro formas that were presented to us and what we built into the plan. What we basically have, if you think about it is a shift in the marketing-- the timing of it is when it was incurred before we closed and the amount that will be incurred after we close. So the marketing budget basically remains the same for the entire fiscal year, but there's a shift of those dollars from what I'll say benefited the previous owner to what we will then incur in the back half.

Mike I guess to your other point, it is if you will a current year only impact because next year we will obviously have the full year in the budget. Assuming no major increase in the budget will remain relatively constant.

We shouldn't include in in the run rate, it is more of a one time.

That's right. This is just a flip between the two ownership periods.

Thanks.

Our next question comes from [Tom Maher] of Lord Abbott.

Ah, yes. Just on the amortization question, can you give us a sense in fiscal 2010 what we should be expecting on a quarterly basis?

It would be the same, Tom, that we are seeing now. So it was $19 million. The only thing that I would caution again is that next year,of course, we will have our weighted average shares outstanding for year will reflect 12 months of the outstanding amount. So, the EPS impact actually will be a little less but the dollar amount will be about $19 million.

Terrific.

-- a quarter. Again just to reiterate, we are still working through that and will have any update at our fourth quarter call.

Understand it may change. Thank you.

We will go next to [Eric Sarrat] at that.

Morning.

Hi, Eric.

Mark, last quarter, you mentioned that there could be a significant impact from the write up of acquired inventories as required under GAAP accounting-- GAAP purchase accounting. You said that you'd identify the amount if it was material, although you said that it would be included in your on going numbers, not in merger-related costs. Just wondering, could you update on was there a material impact there, how much was it, and was that included in the merger-related costs or is that something separate?

Sure. You have you have a very good memory. We did incur that as part of our opening balance sheet. We did take a $12 million adjustment to cost of goods sold. That ran through our normal cost of goods sold, not to restructuring-- or to merger integration costs and that was all because of the write up in inventory to fair value. So it pretty much came in at amount and timing exactly as we thought.

Okay, and was that in the pro forma numbers that you had put out in terms of pro forma EBITDA and was that in your EPS guidance, or is that something that-- separate from that?

There was an estimate of course, that would-- that guidance was put out last June was obviously well in advance of our view but there was some estimate of that.

Okay. And then you haven't adjusted your fiscal 2010 guidance yet. It seems like there should -- clearly the incremental amortization will be recurring in fiscal 2010, maybe you will-- depending on the timing of, as consumers get to the market with peanut butter-- get back to the market in terms of peanut butter, maybe you can see a month or so of carry-over. Are there any moving pieces that since the last call-- of course there are a lot of moving pieces,but are there any pieces that in aggregate that we are missing that would cause you to change your fiscal 2010 outlook beyond what I identified.

Eric, the one that comes to mind. It is real easy to think of down size. I would only put it in the frame this is an additional item that we know of from an expense standpoint. We will give more direction on your next call but as we spoke at Cagney, I think you probably have heard from other food companies, pension expenses due to the market performance over the last 12 months is going be up assuming no significant turn around between now and April 30th. That's the one item. We're really not in a position yet to quantify that But that would be the only additional item for consideration-- but again I put that into context that it is just one known down item.

Sure. And --

Eric, this is Richard. I would like to add to that. If you just saw the quarter we ended, the was a fabulous quarter. All of our businesses are solid. Some brands are up a little bit more, some product lines are down a little bit more but as Tim mentioned we are well positioned and we see no fundamental changes. Our cash flow projections are all right in line. We are actually ahead of the cash flow projections that we had on, with the Folgers acquisition on a 12 month run basis. So, although we are not giving guidance for next year at this time, we see no fundamental change to our business that would change our outlook. Things are solid.

Terrific. And clearly, as a couple of people alluded to earlier, the amortization as a noncash item and should be something we are are looking through anyway but just lastly in term of being at a $50 million run rate versus your $80 million total estimate in terms of synergies, do you see possible upside to that-- the $80 million.

I guess I would say at this point we still feel really comfortable with the $80 million.

Okay. Great. Well, good luck with everything. Thank you.

Thank you.

We will go next to Eric Katzman of Deutsche Bank

Hi. Thanks for taking all of the follow ups. The it looks like some of the companies in the industry have been proactive about taking the cash, putting it into the pension assets and therefore reducing the possible swing of expense. Do you have the ability to do that, or are you overfunded so that it couldn't be tax effective to put the cash in.

Eric we will look at that. As a matter of fact that's one thing we are looking at right now. I would say that would not have a material effect because going into the year we were fully funded. All be it, we are short on assets to liabilities but funding up really doesn't give you the P&L effect that maybe other companies would.

Okay. There was a previous question regarding the spending on Folgers. I know that you know your long term oriented, but is it-- is it incorrect to assume that the out performance this quarter given that amortization expense was kind of unexpected by everybody. So the core business was actually better. Is it wrong to think that you are taking roughly $0.10 of higher amortization expense this quarter and plowing that back into the Folgers business in terms of higher advertising and promotional spending in the fourth quarter?

Not yet. But no I guess that would be, we haven't been able to make changes that quickly. So the answer is no.

Okay. Thank you.

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

Thank you very much for the, all the interest in the call. Again we feel we are very optimistic about the results we had, the cash is better than we thought, which is tremendous. And going forward, clearly, the fact that we have 75% of our business in number one brands and the basic beliefs of this company are what stand us well in this kind of economy. Thank you very much for your intention, your interest and your support. Have a great day.

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