J M Smucker Co (SJM) 2009 Q4 法說會逐字稿

Good morning and welcome to The J. M. Smucker Company's fourth-quarter 2009 earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company we will open up the conference for question and answers after the presentation.

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

Good morning, everyone, and welcome to our fourth-quarter 2009 earnings conference call. I'm the Company's Chief Financial Officer and I 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; and Mark Smucker, President, Special Markets, who are all joining us from New York. And with me today in Orrville is Vince Byrd, President of our Coffee business; Steve Oakland, President of Smucker's, Jif, and Hungry Jack; and Paul Smucker Wagstaff, President, Oils and Baking.

After this brief introduction I will turn the call over to Tim for opening comments. I will then review the financial results for the quarter, and Richard will provide an overview of 2010 and offer 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 of this call is available on the website.

If you have any follow-up questions or comments after today's call, please feel free to contact me or Sonal Robinson, Director of Investor Relations.

I would like to remind you that both in the prepared comments and during the question and answer period that follows, we may make forward-looking statements that reflect the Company's current expectations about future plans and performance. These forward-looking statements rely on a number of assumptions and estimates, and actual results may differ materially due to risks and uncertainties.

I invite you to read the full disclosure statement in the press release concerning such forward-looking statements.

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 website.

I will now turn the call over to Tim.

Thank you, Mark. Good morning, everyone, and thank you for joining us. As you saw in our press release, we had a very strong quarter with sales and earnings results much better than we expected when we spoke to you in February. I would like to open with a brief discussion of the fourth quarter's performance before I summarize the year. Mark will then take you through a more detailed discussion of the quarter.

Our strong financial results in the quarter were due primarily to four factors that were favorable to our forecasts. First, higher coffee sales. Second, better than anticipated sales across all base Smucker businesses.

Third, improved margins, primarily in coffee, driven by a combination of efficient trade spend and lower short-term commodity costs. And fourth, lower marketing and sales expenses. Certain of these benefits in the quarter are not expected to continue in future periods.

Higher than forecast sales provided most of the improvement, with approximately two-thirds of the sales' outperformance coming from Coffee. Easter, which falls in our fourth quarter, gave us our first opportunity to manage the Coffee business through a key promotional period. Our execution of the Easter program was extremely successful and exceeded expectations.

The combination of promotional programs, the impact of a fully-integrated sales team, and the on-air return of a classic Folgers advertisement proved to be a winning formula.

For some time the category had seen trend declines. However, in March and April Folgers experienced significant sales growth; and as you may have seen in the IRI data, the category volume grew at double-digit levels in April.

While this magnitude of gain may be difficult to repeat, this quarter's result in Coffee solidifies our belief in the transaction and provides evidence that our ownership of Folgers will provide significant opportunities. We believe that the continued shift to at-home consumption contributed to our strong performance and is a trend we are well prepared for and think will continue.

Families today are looking for comfort, consistency, and quality, and as a result turn to trusted products and simple pleasures. We believe our brands have earned the reputation of high quality and fair value, delivering consistently and helping mealtime become a special experience. The strength of our brands provides us the confidence we see moving forward.

Now I would like to review the key highlights for the year, a truly remarkable one for the Smucker Company. First, we completed the largest transaction in our Company's history when we added Folgers to our portfolio. In less than eight months, we have already accomplished the majority of our key integration milestones and are well on our way to realizing the $80 million in synergies.

Second, we achieved record sales and earnings for the year, with sales of nearly $3.8 billion and non-GAAP earnings of over $320 million, up 49% and 80% respectively.

Third, we generated record levels of free cash of over $330 million, more than tripling last year's level. We accomplished this in an environment where having cash and certain liquidity is much more critical to the day-to-day operations of the business than perhaps in the past.

And finally, as a result of the increase in our market cap related to the transaction, we were added to the S&P 500.

These achievements are especially gratifying considering the difficult economic climate our consumers have faced over the last year. Quite simply, we believe it comes down to the successful implementation of our strategy.

The complexities of completing the largest merger in our history, along with operating in this environment, would not have been possible without the exceptional talent and dedication of our employees; and we want to again thank them for their tremendous and continued efforts.

As we look to 2010, we are excited about a number of new products and marketing initiatives, which we've discussed recently at a number of conferences. Additionally, as part of our desire to be the leading share of voice in the categories in which we participate, we plan to launch new advertising for many of our key brands.

With the addition of Folgers, we are even better positioned to meet the needs of both our consumers and customers, fueling the strong momentum we achieved this year. We are confident that our strategy will continue to result in long-term growth and shareholder value.

I would like to now turn the call back to Mark to have him complete his review of the financial results.

Thank you, Tim. Higher than anticipated sales was a key driver of earnings-per-share exceeding our guidance. Sales for the quarter increased $479 million or 81%. Excluding acquisitions and foreign exchange, sales were up 3% for the quarter, primarily due to pricing taken in late 2008 and early 2009.

GAAP earnings per share were $0.80 this quarter and $0.67 in the fourth quarter of last year, including restructuring and merger and integration costs. Excluding these charges in both years, earnings per share were $1.02 this quarter and $0.73 in last year's fourth quarter, an increase of 40%.

Operating income increased over $130 million for the quarter, excluding charges, and increased as a percent of sales from 11.3% to 18.4%. Excluding amortization, our operating margin reached 20% of sales, well above historical averages.

We do not expect margins to continue at this level given the nonrecurring nature of certain items that contributed to the improvement.

Gross profit increased $217 million over the fourth quarter of last year and was the primary driver of the increase in operating income. Folgers contributed over 90% of the increase.

Gross margin improved from 30.9% last year to 37.4% this quarter. Adding Folgers drove much of the year-over-year improvement. In addition, Folgers' gross margin was favorably impacted by the strong sales performance, the efficient trade spend during the Easter period, favorable green coffee market conditions, and product sales mix.

Also, our higher sales volume allowed for favorable absorption of fixed overhead expenses.

While having much less impact, gross margin for the remaining Smucker business improved 90 basis points over the prior year, as pricing actions taken in the previous year continued to allow us to improve margins more in line with historic levels.

SD&A expenses increased approximately $63 million, mainly reflecting the addition of Folgers, but decreased as a percent of net sales from 20.1% to 17%. Corporate administrative expenses increased 33%, which was well below the increase in sales for the quarter. This reflects the impact of leveraging the existing corporate infrastructure and realizing synergies associated with the Folgers transaction. We estimate that to date we have achieved synergies of $65 million on a full-year run rate basis.

Overall, marketing expense as a percent of sales declined as increased spending for the base Smucker business was more than offset by declines in Folgers. We simply did not incur the expenses that Folgers had originally budgeted as we redirected our focus on plans to re-energize the traditional Coffee business. However, we did increase coffee advertising spending during the quarter.

Also, significant manpower was focused on integration activities. This year we expect incremental investments to support our new marketing initiatives.

Amortization expense for the quarter was $17 million, $14 million of which related to Folgers. During fiscal 2009, we recorded $33 million of amortization related to Folgers, down $4 million from the estimate we provided last quarter, reflecting final adjustments to asset value.

Looking at other key EPS components, interest expense was up $8 million, reflecting the borrowings associated with the Folgers transaction. Subsequent to the end of the year, on June 1, we paid off $75 million of long-term debt from available cash.

The effective income tax rate for the quarter was 33.2% compared to 30% in last year's fourth quarter. Last year's rate included benefits realized from the resolution of previously open tax matters. The effective tax rate for the year decreased slightly from 33.1% to 32.9% this year.

Let me now comment on our reportable segments. As detailed in this morning's release, we have realigned the reporting of our financial results into four segments. They are US Retail Consumer Market; US Retail Oils and Baking Market; US Retail Coffee Market; and Special Markets.

To assist in modeling, in our press release we provided quarterly information for fiscal 2009 and 2008 under our new segment structure.

Sales in our US Retail Consumer segment were up 5% in the quarter as Smucker's, Jif, and Hungry Jack were all up, primarily on pricing gains. Overall, volume was flat with modest declines in peanut butter and fruit spread. Volume for Smucker's Uncrustables was down, reflecting the impact of the FDA recall earlier this year and the current economy. These declines offset gains in Hungry Jack syrup, pancakes, and potato side dishes.

Profit increased 7% reflecting sales growth, lower marketing and selling costs, and the recognition of synergies.

In the US Retail Oils and Baking segment, sales increased 7% compared to last year, primarily due to price increases and volume gains in baking mixes, frostings, and flour.

Pillsbury had a very strong fourth quarter, up 50% in volume and dollars, primarily due to new placements at key retailers and softer comparables from last year. As anticipated, Crisco sales were down, reflecting the 13% price decline effective this past January, competitive activity, and gains by private label. You will recall that we expected significant competitive activity around Easter following our strong Fall bake.

Segment profit declined nearly $4 million as planned increases in marketing, primarily in support of Crisco olive oil, more than offset profitability improvements in the baking business and a better matching of prices to cost.

The US Retail Coffee segment contributed $413 million to net sales for the fourth quarter of 2009. Folgers and Dunkin' Donuts sales strongly outperformed the prior year.

During the quarter, the Coffee category reversed its downward trend, with Folgers exceeding the category growth. Compared to the same three-month period last year, prior to the transaction, our Coffee segment sales increased 6%. Volume growth of 16% more than offset the impact of price decreases taken over the last 12 months.

The Coffee segment contributed $151 million to segment profit and achieved a 36.5% margin, a level at which we would not expect to continue in future quarters.

Total sales in the Special Markets segment increased 25% due mostly to the impact of Folgers, Knott's Berry Farm, and Europe's Best acquisitions. These more than offset the impact of foreign exchange and declines in the foodservice, portion control, and natural foods volume.

Profits in the Special Markets segment increased 54% for the quarter mainly due to these acquisitions.

As part of our original Folgers pro forma information, we estimated a first full year EBITDA of $820 million or a 17.3% margin. In this definition, EBITDA excluded merger-related cost and added back share-based compensation expense as amortization.

For 2009 EBITDA, as defined above, was $668 million, reflecting only six months of Folgers, or 17.8% of net sales, exceeding our first-year pro forma margin target.

Cash provided by operations was $156 million in the fourth quarter. This raised the full-year amount to $445 million for the year, which more than doubled the 2008 amount. Subtracting capital expenditures, free cash flow for the year was $336 million compared to $103 million last year. As a result, cash and cash equivalents totaled in excess of $450 million at year's end.

Turning to 2010, key components affecting our cash flow in addition to income include -- capital expenditures of approximately $120 million or about 2.7% of sales; depreciation and amortization including amortization of share-based compensation of approximately $195 million; payment of $550 million in debt maturing during the year; dividends of $165 million based on current rates; and finally, merger and integration costs of approximately $30 million to $35 million.

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

Thank you, Mark, and good morning, everyone. With yet another record year, I would like to join Tim in thanking our employees. They have delivered these results while integrating the largest merger in our Company's history.

Since our earnings call in February, we successfully completed the second of three key integration milestones, with the transition of the manufacturing, warehousing, and administrative systems on to our Oracle platform effective May 1. We have achieved most of the key integration activities and are pleased to report that they have been executed seamlessly, and there have been no major issues or concerns.

This year, our focus in Coffee will be on the following areas. First, achieving the final major milestone expected to be completed in the fall of transitioning the green coffee system on to our Oracle platform.

Second, we will continue our efforts to reestablish focus on the traditional Folgers business, which makes up approximately 70% of the US Retail Coffee business. Achieving long-term growth in the traditional business is essential to growing the overall Coffee business and is our number-one priority for 2010.

Third, we will continue to capitalize on the gourmet coffee segment, with the fastest-growing segment of the at-home coffee business. We will emphasize growing the Dunkin' Donuts business in all retail channels. In less than two years since its introduction, Dunkin' sales now exceed $200 million on an annual basis.

And finally, we expect to achieve the $80 million synergy target by the end of this fiscal year.

While much of the organization's efforts this year will continue to be completing the Coffee integration, we will remain focused on our efforts to grow our brands, provide value to our consumers, and deliver on our purpose of bringing families together to share memorable meals and moments.

You will see this through product innovation, cross-branded theme marketing events, new advertising, and continuing partnering with our retail customers.

Now turning to our financial outlook, we expect net sales of approximately $4.5 billion. This represents an increase of 20% over 2009. Owning the Folger business for the whole year, compared to the six months that we owned it last year, is anticipated to contribute additional sales of $800 million to $850 million. Sales in the base Smucker business are expected to decrease by approximately 3%, primarily reflecting the full-year impact of price declines mainly in Oils and Baking. Volume is expected to increase by a little over 1%.

We expect non-GAAP earnings per share for fiscal 2010 of $3.65 to $3.80, ahead of our original June 2008 guidance of $3.62 to $3.72. Included in this range is approximately $0.40 per share of amortization resulting from the significant amount of intangibles on our balance sheet. Excluding amortization, our 2010 forecast will be $4.05 to $4.20 per share.

Based on these earnings, we anticipate EBITDA will exceed $900 million or approximately 20% of net sales, putting us nearly a full year ahead of schedule in terms of our EBITDA forecast. Key assumptions for the 2010 estimates include -- gross margin for the year at 250 to 350 basis points better than our 2009 full-year level. This reflects the impact of a full year of the higher-margin Coffee business and approximately $100 million in lower raw material costs, excluding green coffee. Most of these cost decreases were anticipated and have already been factored into previously announced price declines, primarily in Oils and Baking.

SD&A, including amortization, is expected to approximate 20% of sales. Marketing and selling is planned to increase in support of key Folger initiatives and new advertising for many of our brands.

Second, additional pension expense of $10 million is included.

Third, the full-year amortization expense is estimated at $73 million, with $66 million related to Folgers. This represents incremental amortization expense of $33 million due to owning Folgers for a full year. But it is $8 million less than what we forecasted last quarter, reflecting the final adjustments to our asset values.

Interest expense of $66 million is expected for the year. This reflects the impact of debt maturities occurring during the year along with assumed borrowings under our revolving credit facility. We expect a full-year tax rate of 34%.

Finally, we are basing our earnings range on weighted average shares outstanding of approximately 118.5 million shares.

As a reminder, the addition of Folgers magnifies the seasonality around the holiday time period. Based on current estimates, approximately 55% to 60% of our sales will fall in the second and third quarters, with the remainder split equally between the first and fourth quarters. Our working capital requirements lead our sales seasonality, with inventory buildup occurring in the first half of the year.

So in summary, we had another record year in a very challenging environment. Second, we completed the Folgers' transaction and in less than eight months have achieved a majority of our key integration milestones and realized most of the synergies.

Third, we generated record levels of cash and our financial metrics are well ahead of the targets that we set when we announced the transaction. Finally, we believe that our strategy of owning and marketing leading North American food brands and our ability to successfully execute on this strategy positions us well for future growth. As a result, we have increased our outlook for the coming year.

We thank you for your time today and we're happy to answer any questions.

(Operator Instructions) Eric Katzman, Deutsche Bank.

Good morning, everybody. Congratulations. Well deserved in a tough economy and a tough time.

I guess I wanted to ask a couple of questions on the Coffee business. Now that you've owned it for six, seven-plus months, can you talk a little bit about the $80 million synergy target? It seems like things are going quite well in terms of how you're integrating it. And also how the recent volatility since the quarter ended in Coffee is kind of worked into your assumptions on that business for all of fiscal 2010.

Hi, Eric. This is Vince. Well, a couple things. As I think we've mentioned in the script, first of all, we are well on our way to achieving the $80 million. A majority of those have already been achieved during the fiscal year on an annualized basis. There is a gap, yet; so we feel very comfortable that we'll be able to get there.

In regard to your second point, yes, there has been an increase. I assume you're talking about green coffee commodities?

Yes.

As you know, there is a situation in Colombia, which we took a price increase in the fourth quarter to cover those costs. We've also talked historically that the previous owner was pretty transparent about pricing. When it met certain thresholds up or down we would adjust prices accordingly.

Clearly, during the quarter we had a slight benefit from where green coffee sat; but as we look forward and you look at May and June, it took it pretty sharp increase, but is now settling down a bit. So we're still in that zone where I'd consider that no pricing is required.

Also I think you're aware that we had announced we're doing what we call a price adjustment with trade spend. We're also hoping that we don't have to take any pricing during this period of implementation which occurs at the end of this month.

Okay. Then just to talk about the core business, I guess I was a little bit surprised, given what a lot of other companies in the industry have alluded to as the center of the store being quite strong. Your volumes were pretty, I guess, flat on the core. I'm kind of wondering how much the edible oils and/or the peanut butter hit accounted for that volume being flat. Do you have those numbers?

Eric, I'll start, and Paul, if you want to jump in? As we saw last quarter, Eric, we saw the same thing this time. The volume in oils in particular did drive and sort of leveled out the overall Company volume. We saw significant growth, for example, in Hungry Jack in the potato and the pancakes area, which we have talked about is sort of return-to-home eating.

So the volume decline in oil -- peanut butter was somewhat expected, but it was actually better than we would have thought three months ago when we talked. So yes, I would attribute it primarily to the oils.

Eric, just in the fourth quarter as you may recall, for Fall bake we did have a very strong Fall bake for oils; and we anticipated that we would have a rather difficult fourth quarter. Typically if you win Fall bake you don't do as well in Easter, and so we were anticipating that.

Okay, and then last question and I'll pass it on. I think you just said that there was a $10 million expense on pension for this year. But did you mention what the cash contribution may or may not have been to the plan?

Sure, Eric, it's Mark again. We made a contribution of $30 million in April and that is factored in obviously to the numbers. The $10 million pension expense is incremental in fiscal 2010; so that is about a nickel to earnings. But we don't expect much of a required additional cash contribution in the coming year.

Okay, thank you.

Farha Aslam, Stephens Inc.

Hi, good morning. Congratulations again. Looking at your peanut butter, you had assumed that it would cost $0.05 to $0.07 in EPS. If you net it out, how much do you think it ended up costing you?

Hi, Farha; Steve Oakland. I tell you, our team did a great job. We were able to -- we actually spent the money we talked about, but we were able to offset some of that expense. We went on with a Trust Jif national television message. We were able to trade out some existing media inventory, which helped a lot, so that number dropped a little less than half. (multiple speakers) be a little less than half of what we initially had given you.

Okay.

We actually spent the money but we were able to offset a little more than half of it, let's say.

Okay, that's helpful. Then when you look at marketing spend, which was down for Coffee this quarter, but as you look into the timing of your marketing expenditures for next year, how would you have us think about it?

Consistent -- I will talk sort of from a flow and then, Vince, if you want to talk about maybe the absolute. From a flow perspective it does pretty much align with the sales. So as we talked about 55% to 60% of our sales will fall in the second and third quarter. That is pretty much the way one would expect to see the marketing dollars or marketing expense hit the P&L.

Because it's basically a ratio of sales.

A ratio of sales, right.

Okay. Then my final question for you, Mark, is really on your cash flows. Given that you have that big inventory build in the first half of the year and you also have about $550 million of debt coming due, do you plan to refinance that debt with new debt in the public markets? Or do you plan to use your bank lines? Could you give us some color on that?

Sure, absolutely. Well, we do have currently $180 million revolver that is untapped; so we do have that. But we're also in the process of looking at additional facility. It likely will be bank financed, and it will really pretty much serve as a backstop to our liquidity needs for the near term.

But we think generally that between our cash, the cash we will generate during the first six months of operation, and the $180 million, that should help get us through pretty much through November.

Okay. Thank you very much for your help.

Jon Andersen, William Blair.

Good morning. Congratulations on a terrific quarter. I was just wondering if you could comment a little bit on some of your larger categories and just the share trends there. Where you're gaining share, holding share, maybe seeing a little bit of erosion in share.

Sure, I'll start. This is Vince. Obviously, with the strong sales that we had in the quarter we saw a significant share gain. As I think Mark alluded to earlier, the category grew as well. So obviously we saw share gain over the last four- and 12-week periods.

And if we look at both peanut butter and fruit spreads, we will speak to fruit spreads first. I think the devil is sort of in the details there. You need to look at the volume share and the dollar share.

I think in some other calls we've talked about we've seen a little shift in our higher value items like Simply Fruit and sugar-free. That volume has shifted to traditional fruit spreads. Those are both great items for us, but we've seen the consumer go to the products that are a little lower cost per serving. So that has impacted the dollar numbers.

But if you look at the tonnage numbers, they are much better. So depending on the measure and if you look at a 12-week versus 52-week, you'll see measures where the fruit spread tonnage is actually up in share even though the dollars are down a little bit. And that reflects that shift in purchase patterns.

And peanut butter is still really tough to tell. If you remember we had a competitor out of the market for a year. They are back; and so there is a lot of noise in peanut butter. You see a lot of the players down because of their re-entrance in the category. So probably be able to speak to that better in the next period or two.

Hey, Jon, I'll speak to Crisco, the oil and the baking side, starting with Crisco first.

Obviously for the quarter we were down in some share. Again that was anticipated. As I mentioned earlier, we had a fantastic Fall bake and it's not surprising that for Easter and that time period we were down.

That being said, looking at the Pillsbury side of the business we had significant share gains on the cake as well as the frosting side. So on the baking piece we did very, very well.

Mark, I don't know if you're on the phone. You may want to comment.

Yes, the trends in Canada were similar to the US in that we did see some of the higher value products, the share would drop. But we have seen also that where we may have lost a little bit of share in the past to private label we're starting to see a little bit of that come back to us.

Terrific. I don't think inventory destock has been a significant issue for you in the past. But as you kind of consider your inventory levels at retail at present, could you comment on that? Do you feel like the levels are pretty solid now and that sell-in should be tracking sellthrough pretty closely?

Jon, you are correct that, A, we do track it for those that we have visibility to; and we have typically commented that that is not a material impact one way or another.

There was only one minor exception where a retailer chose to get some inventories back to maybe historical levels and has gotten a little light. But overall I don't think that that was a major impact across any of our US retail businesses.

With respect to Folgers, was the shift in marketing spending -- was that a surprise to you? Could you give us a little more color around what happened there and what to expect? It sounds like some of it is going to shift from Q4 into the first portion of 2010.

Yes, sure, and it was not a surprise; it was a conscious decision. But what we did is we felt that again we want to focus on our core red can Folgers' business. We actually increased advertising during the fourth quarter by about -- I think we shipped between $3 million and $4 million to really support that core business.

But given all the other activities that were going on as it relates to integration and the organization, we chose quite frankly just to put other activities on hold and did not -- and made a conscious decision not to spend those funds.

So we're probably as a percent of sales below where we will run going in the future.

Terrific. Last question. Can you comment at all on your plans for Fall bake? Pricing, cost, new products, the merchandising sets etc.

Hi, Jon. This is Paul. For Fall bake we're actually -- we feel positioned pretty well right now. We have our costs in line with our commodity purchases and as we've talked in the past we try to cover through Fall bake at this time period, which we are. We're in very good shape there.

We do have a couple new items that we've launched. One is a frosting item and the other is a brownie item. Both have actually seen very good acceptance with the retail trade. Both are shipping as we speak. So we're pretty confident about Fall bake.

Terrific. Thanks. Congratulations again on a great quarter.

Eric Serotta, Consumer Edge Research.

Morning. Hoping you could -- just for a little bit of housekeeping items here. Could you quantify what the delta in marketing spending was behind Folgers versus your expectation three months ago for the quarter?

And what sort of order of magnitude the temporary -- the timing difference between green coffee costs and price realized -- resulted in, in the quarter?

Eric, this is Mark. Without getting into specific dollars, what I would direct you to -- in our press release, in our reconciliation of gross margin to operating profit, we have a line item in there that is marketing and selling. If you see there, I believe the number was like 7.7% for the quarter. If you compare that to where we were on a historical basis or where we were through the first three quarters, that delta, if you will, you can kind of dollarize that. And that should give you a pretty good sense of that marketing.

Okay. Then clearly one of the broader strategic benefits of the Folgers acquisition was the increased scale that you would have with your broker sales organization as well as the increased relevancy to have with retailers in the center of the store and the better fixed cost absorption and overhead absorption that you would have as a Company, better operating leverage that you would get.

I know this was an unusual quarter in terms of Smucker and maybe it's too early to tell. But how are each of those pieces tracking versus your expectations?

This is Vince, Eric. I would say that they've exceeded our expectations as to where we are. Basically as you recall, on the day of the close our sales team took over selling the new Coffee business. You may recall that the [FCC] group had actually appointed Advantage Sales and Marketing as their national broker, which we had done about a year earlier. So that transaction was much more seamless than it would have otherwise have been.

I would say that our sales and marketing teams clearly executed beyond our expectation in terms of the Easter time frame; and then of course that drove efficiencies at the plants.

So the team is up and running. We feel very confident where we are. Again as you look from a macro perspective, as I commented earlier about synergies, we are well on our way to achieving those.

Okay, great. Thanks a lot. I'll pass it on.

Chuck Cerankosky, Northcoast Research.

Good morning. Splendid quarter, gentlemen. You talked a little bit about trading down in some of the categories. How about where you reduced prices, say, in coffee? I know oils was a bit of a problem, but coffee and some other categories, what was the consumer response in volume trend?

Well again, I'll speak to coffee. You know we are dealing with a category that was basically been flat or declining for about a 12-month period. But during the quarter, we actually saw double-digit growth during that period.

So whether that was driven by the price declines that had been acted over the period of time, or whether that was a result of -- I think probably more importantly -- the very strong Easter promotional period we had, but so I suppose consumers reacted positively overall to the pricing and promotional activity.

Chuck, this is Paul. I would just add on. On the flour side we did take a price decline and we have actually seen the volume increase due to that. So I think we have seen a nice response from the consumers.

How about following the Eagle price decrease?

We've just announced that, so that has just come out here in May. So I think it's a little early to see.

Okay. Just an interesting thought to see what consumers are responding to. Can you speak to volume shifts within your distribution channels among the different types of retailers during the quarter?

Well from a macro perspective I think it's fair to say we, like most CPG companies, you do see consumers going to alternative channels and seeking some of their shopper items. So I don't have the specifics of what that shift was during the quarter; but in general, that is a trend that is consistent.

Yes, some of our value retailers are having great years.

All right. Mark, kind of a house or an accounting item. That $9.1 million non-cash charge related to the divested Canadian business, was that -- how did that flow through? It was an expense item, but was that like a final adjustment to sales proceeds?

It actually was a non-cash item, Chuck, it's kind of funny; we expected that and actually talked about that a couple years ago. But as you might recall when we did that transaction, the individuals that were involved in the transfer of the business, we also transferred the pension liability. Once we got approval from the Canadian government we were able to formally transfer the liability and the assets.

With that there is an accounting charge that's called a settlement charge; and that is what you saw come through. It has always been intended to be part of our restructuring. The amount was in line what we expected; and again, it was a non-cash item.

All right, so you weren't sending anything back or anything in escrow. It just --?

That's right.

All right. Thank you very much.

Mitch Pinheiro, Janney Montgomery.

Hi, good morning. So when I look at the $800 million to $850 million sort of incremental Folgers sales, that is a wide range. I was just wondering what the difference is in terms of the spread between what you're thinking on the low-end versus the high end of that $850 million range.

Well, I think it's a combination of trying to predict category growth, trying to predict our share growth, and then of course pricing of green. So that's why the wide range.

Okay. So in terms of your everyday low pricing strategy, what you hope to shift to later this month, what is the downside? I know it's revenue neutral; but is there any element into that?

Well, not really, but let me just be very clear. We did not shift 100% of those trade funds to everyday price; but we did shift a fairly significant amount.

So what is -- the implications of that is that we will not be able to deal as low as has been done, I will say, over the past couple of years. Then it also depends on what competition does with this course as well.

But we believe it provides a better everyday value to the consumer and gets them not trained to just buy on deal, so to speak.

Does it help your manufacturing, the supply chain end of the business?

Yes, sure. There will be some efficiencies from that perspective, that you won't have maybe the peaks and valleys that you would have otherwise have had.

Okay. In terms of private label, Mark had mentioned that he saw private label I guess coming back or coming back to brands in Canada. Could you talk -- is there any other -- any significant shift in consumer buying patterns in the US in any of your core categories?

Well, I think we spoke to it earlier by category. I think in a macro perspective, private label has grown; but these things tend to go in cycles. In most categories with a couple exceptions we are holding our own or actually growing share. I think the one exception is the one Paul referred to earlier.

In fact in the oil business, obviously private label has grown significantly over the past year. We have seen a little bit of that slowdown in the recent four-week period, so we're hoping that is a trend.

Okay. A couple other sort of housekeeping things. In terms of depreciation and amortization, Mark, could you break down what those two items are?

Yes. I would say depreciation is about $100 million to $110 million; and the amortization including the restricted stock compensation expense would be the remainder.

In terms of the goodwill amortization adjustment, you mentioned, I think, Mark, $33 million of incremental amortization in fiscal '10. Is that the right number?

That's correct.

I thought the incremental amortization total would have been around $40 million. Is that (multiple speakers) for the year. But I mean incremental, on a full run rate basis?

Originally it was going to be -- when we talked in February it was about $44 million. The total was going to be around $73 million to $74 million. That total now is $66 million.

Okay, got it. In terms of the guidance, the overall sales guidance if you exclude Folgers -- if you said this, I apologize. But what would the pricing expectations be for the core base Smucker?

The pricing was primarily just in the Oils and Baking.

Right, from an Oils and Baking perspective we did take the price down in January on wheats, oil; and we are really covered pricing-wise through Fall bake.

So we would look at obviously how the commodities do until that time period and make an adjustment after Fall bake if needed.

And on the fruit spreads and peanut butter, there doesn't appear to be anything material. There will probably be something on raspberries when the new crop is out; but given the size of the other rest of the business, it will not be material.

Mitch, I think it is probably net-net, it's about a 2% to 3% impact for the total Company.

Okay. All right. Thank you very much.

Ian Zaffino, Oppenheimer & Co.

Hi, thank you. Good quarter. I know we talked a lot about the $80 million in synergies. But can we look past that maybe on the top line, what you anticipate from some of the selling synergies or some of the top-line synergies? I don't know if you could quantify that or at least give us some type of qualitative description? Thanks.

I don't think really we can. I think it's the effect of, again, the dedicated sales teams, a national broker, all of those things, leveraging our brands as it relates to key promotional periods, etc. But I don't think that we're in a position to say, well, that is going to contribute X amount of incremental sales as opposed to just our long-term position and guidance.

Yes, I think, Ian to Vince's point, we are holding pretty much to the $80 million. But I think as you work through the numbers and you see the strength of the overall operating margin of the Company, in my opinion that is really what speaks to the synergies of the combined businesses. I mean we elevated our operating margins significantly from pre-Folgers numbers; and I think we would rather just look at it that way.

Okay. Then the next question would be with the increase in guidance and the increase in free cash flow, how should we think about the free cash flow as far as your distributions back to shareholders? It seems like you have always pegged your dividend payout to your earnings. It looks like now you are trying to steer us towards a little more of a cash earnings numbers, which I think is the right thing to do.

I was wondering what you were thinking as far as the dividend attached to that. I know you have maturities coming up, but after that.

Richard, do you want to start on that one?

Sure. This is Richard, and our payout ratio is around 40%; and with these levels of earnings we're probably going to be able to raise our dividend rates as we go forward with a nice increase. But we usually do that in April every year, and we just had a little over a 9% increase this past April.

So we'll be looking at that again next year with our Board, and we feel pretty strongly about our ability to return some of that to shareholders.

Also, as you know, we historically have a good, steady program of repurchasing shares. Obviously with the reverse Morris Trust transaction we still have about another 18 months to wait before we can really get into that program again. But that 18 months passes pretty quickly.

Okay, great. Then as far as any acquisitions you're looking at, are you more in digestion mode right now? Are you looking at some tuck-ins or some enabling technology acquisitions?

This is Richard. We're always looking for acquisitions, and I doubt if you are going to see a transformational one in the short-term period like this last one. But we have our lines in the water as we always say, and you just never know when those are going to hit.

But most of those would be bolt-ons or you might call them tuck-ins. But we have nothing to announce at this time.

Okay, great. Thank you very much. Good quarter, again.

Ed Aaron, RBC Capital Markets.

Thanks. Good morning and let me add my congratulations as well. So you know it's kind of a high-class issue to have, but there is a part of me that thinks that a food company shouldn't really have like $0.40 earnings surprises really in either direction. I'm just -- I guess I'm trying to get my head around the level of visibility that you have for 2010 and just how you think about potential for variances to those targets.

Could you maybe kind of walk us through the forecasting process that you went through after seeing such a large, such a big positive surprise in the fourth quarter? Also maybe help reconcile; you had this like 8% long-term annual earnings growth guidance and the guidance for 2010 implies flat to down earnings. I know that there are some components of the fourth quarter that were not sustainable necessarily. But could you just maybe help us walk through that?

Yes, I'll start, and then Richard, if you want some comments at the end. I guess I would say, Ed, as we look into 2010 a key takeaway for you folks on the phone is that with the exception of green coffee all the systems now reside on Smucker's Oracle system. And historically if you go back and look over the last three years or so, we have been able to deliver earnings relatively close to the Street expectations. So although this was certainly a surprise quarter, I don't think that would be our traditional delivery.

Having said that, we went through the process for the coming year following our normal budgeting and forecasting using Smucker's systems. So we're quite confident that our visibility to all aspects, all lines on the P&L will be much clearer than they were in the last six months. You have got to remember we were operating under a hybrid of Smucker, Folgers, and Procter & Gamble systems. And although we felt very comfortable about the accuracy of the numbers at the end, we did not have the same level of visibility that we will have going forward.

So we have a much higher level as it's around the 2010 plan.

Mark, I will just add to that. If you just think about back in February or January when we look at the end of the third quarter for us, we were in unprecedented economic times. No one has ever seen certainly in our lifetime what has gone on. We also made the largest acquisition in the history of our Company.

So we took a cautious look at that and said -- no one really knew where the economy was going. We had a big acquisition and a number of moving parts. Obviously, the acquisition is fully pretty much integrated and we feel comfortable about that, and we have a clearer view of where the economy is going, at least for our industry. We know that people are eating at home more and going to comfort foods, and we are seeing those trends continue. So we're in a much more comfort level looking forward than we were four months ago.

This is Tim. Let me just add that also I think as we said we think this does vindicate the team really understanding and delivering on the strategy. However, as Richard said, in this economy we wanted to really be cautious. But the team really delivered and we have a tremendous faith in that team.

Just one follow-up. So that 8% long-term annual earnings growth target, would it be fair to say that if I were to back out some earnings from the fourth quarter to get to a base that would put your current -- your new guidance as an 8% earnings growth number, is that kind of how I should think about it?

I would say that's correct, Ed. I mentioned a couple expenses, or Richard did, that our pension and amortization. But I think that is a correct way to look at our growth.

Then lastly, the Special Markets division was pretty well ahead of what we were looking for. I know that there is about $100 million of Folgers in that number. Relative to your expectations, was that -- the part of that business that excludes Folgers, was that -- did that surprise you to the upside, too? Or did that all come from Folgers?

Actually, this is Mark Smucker. Thanks for the question. Really the Special Markets area, if you exclude all acquisitions -- so you've got, in there you have Folgers, Knott's, Europe's Best, and even some Carnation. If you back all of that out and just look at our core businesses, all of the businesses were healthy. Most of the businesses were up. Especially if you look in local currency, those businesses were up.

I will say that although we had been expecting a difficult time in our foodservice division as folks eat out less and more at home, we were very pleased to see that our numbers there came in basically flat; and we were expecting much worse than that.

So I would say across the board we were pleased with our base business in Special Markets.

Actually I lied. I did have one more question, just on the timing of the advertising spending. I think you mentioned on your last quarter call that you had planned to spend -- it was like a $15 million number for additional Folgers advertising in the fourth quarter. Is that essentially what got shifted into 2010? Or am I mixing apples and oranges there?

I think you may be mixing apples and oranges. I'm not sure what the $15 million comment was -- referred to.

But as I mentioned earlier we clearly increased advertising in the fourth quarter from what was originally planned by about $3 million to $4 million.

Just as a quick follow-up, I think on that, some of the $15 million wasn't necessarily an increase in the spending in marketing or advertising. It was a shift under Smucker ownership. So part of the commentary around what we chose not to spend was probably embedded in that budgeted number.

Okay, thank you.

Eric Katzman, Deutsche Bank.

Thanks for taking the follow-up. I have a few questions. I guess longer-term and maybe related to some of the recent questions, I know that with the goodwill amortization running through for the next whatever, 15 to 20 years, is there -- did you give consideration to new financial goals to reflect that?

So to the extent that you were talking about an 8% earnings growth, is that also related to either a cash earnings or an EBITDA kind of growth rate?

Eric, this is Mark. I think that the 8% growth rate still applies. We came out; we thought the best measure to factor in the amortization was the number that Richard gave. And that was simply adding back the Folgers amortization of $0.40 to our range. We considered a number including a cash flow, a free cash flow per share.

For a host of reasons, some we were just going to have a difficulty in communicating because of some rules, we felt that that was still the best metric. We think that answered the question in terms of people looking for something that excluded the amortization.

So -- again, Richard or Tim, please comment. But I think any growth expectation of 8% would apply either to our normal range or to our sort of adjusted EPS range.

Yes, I think once you reset, which we have reset at the end of this year, the growth rate applies to that new number. So you're right that our cash flow per share is usually much better than that, but I think that if the financial world or investment world looks at a multiple of EBITDA, which I think they are looking more at that, we have a very strong EBITDA.

Eric, interestingly enough I think when you run the numbers and look at a free cash flow per share you're going to get a number that is probably going to fall pretty much in that $4-plus range as well.

Okay. Then, just -- I know that we've kind of talked about this in the past in terms of mark to market kind of hedges and swings. You didn't mention anything in the quarter about that.

I'm just kind of wondering, one, how the mark to market stuff ended the year as a whole; and then how it affected the fourth quarter.

Well, the reason we didn't comment it for the quarter, it was an immaterial amount and obviously nothing compared to what we saw in the second quarter.

For the year, we were somewhat unfavorable; but most of that was driven and talked about in the second quarter.

Okay. Then last question and I'll pass it on. In terms of your hedges, I know a lot of your business is now, especially with the coffee, more of a pass-through business. So I assume people are going to start focusing more on volume as opposed to dollar sales given the pass-through.

But can you just talk a little bit more about hedges and kind of where you are on, let's say, some of the more non-pass-through businesses? Are you hedged out for six months, a year, or on a percentage basis? And how are you feeling about that given where the markets are today?

Steve Oakland. Maybe one of the large ones would obviously be peanuts, and it's obviously not exchange traded. We are the largest peanut buyer in the world. So our volume is very important to the major shellers across the US. Our contracts tend to be longer in that market just because of the fact that we need to be able to manage both our quality, our supply, and their overhead base. So we're quite long typically in those contracts.

And on, let's say, like -- are there any other -- do you consider everything else to be more of a pass-through, whether it's the Eagle stuff or -- obviously coffee is kind of probably just hedging out two months or so at a time.

Yes, Eric. Paul here. For example on Eagle, we do -- we look at purchase contracts on that milk. I think you don't go out as far on milk as you would on a wheat or on an oil. So for Eagle we are looking out several months, but we wouldn't go much beyond that. We would like to in certain cases, but right now with milk being very low, close to historic lows, very hard to get the farmers to agree to that.

But on wheat and on soybean we are contracted through Fall bake, which is what we typically try to do.

Eric, really the only major one left then would be fruit, and of course we're going through the fruit season now through really late fall. We typically have contractual agreements with growers and that is priced as the season progresses.

You only buy those once. I mean the crop comes in, so those typically are bought on an annual basis just because it's an annual crop.

And they are pretty stable at this point.

Okay. Thank you. I'll pass it on.

Michael Prober, Clovis.

Could you give me the growth rate for the Dunkin' business, please?

Very large.

Good.

It depends on what -- compared to what, what period. I think we mentioned it now exceeds $200 million in sales, $250 million in retail sales. I think it is running just under 30% for the year to date, if I'm not mistaken.

So year-to-date. That is calendar year-to-date versus calendar year-to-date last year?

I think that's quarter. Is that right?

Okay, this quarter versus last year, this quarter it was up 30%?

That's correct.

In your discussion of why margins were better in Folgers, you discuss one of the five things was mix. Is that just Dunkin' or is there other things going on there?

It's primarily Dunkin', although there are some other higher-margin items that contribute to that.

Is this the first time in how long -- I don't know the answer -- that Folgers actually gained share in a period?

You know, I don't know that I know that answer. I'm sure there have been four-week periods when they have gained share if you look historically. It has been some time, but honestly I don't know that off the top of my head.

Do you think it's anything specific that the Smucker's team in the trade did to gain share?

Yes, I think it's fair to say that our team should be able to take some credit for the execution elements that we referred to earlier. Conscious decisions about advertising; some key merchandising activities; the execution by both our sales and our partner Advantage. I think credit does go to that group.

It's a lot of good -- I call it good blocking and tackling, dotting the i's and crossing the t's. It is right in the trenches. And we have a great team both from a broker network and our own sales team.

Okay. Thank you very much.

Karen Lamark, Federated Investors.

Good morning. Going back to your assumptions on sales for fiscal 2010, you talked about price declines in Oil and Baking. But on Coffee, how much visibility do you have?

And sort of related to that, how much of the Folgers superior margins are sort of structural and therefore sustainable, as opposed to the benefit of leveraging the product across your infrastructure and your platform? Thanks.

Do you want to start?

Yes, I'll start. I guess I will start with the second part first. Karen, I think the best way to look at that is if you look at where coffee has delivered in the six months roughly that we have owned the business, it's around a 28% segment profit.

That probably is something to assume on a go-forward basis. So the delta between 36 and 28 would give you some sense of the difference.

And then as it relates to pricing, I mean there is tremendous visibility. As I mentioned earlier, depending on where the green coffee is sitting at any one point in time, when it reaches certain metrics up or down we move. So when you compare that to last year effectively there were three price decreases taken, two of those by the previous owner and then of course one by ourselves.

The only exception to that is we took Colombian coffee up during the fourth quarter as a result of the situation in Colombia; and we took that up 19% to cover costs. So it's managed on a daily basis.

And your competitors manage primarily the same way?

Yes, I think it's fair to say that the main competitor follows typically within a very short period of time as we lead in pricing.

Okay, thanks.

[Bill Leach], TIAA-CREF.

Good morning. I just wanted to ask you about your guidance. The midpoint of your guidance for the new year is $3.73 which is $0.04 lower than your operating EPS last year. Is that due to the fact you are expecting this quarter to be a very difficult comparison a year from now?

Well, certainly if you look at things -- I mean to repeat this quarter next fourth quarter would be difficult. I think we've given direction on how we see earnings and sales flowing through the four quarters next year. But to repeat the $1.02 this year would be unlikely.

Okay.

Also, the cash flow, Mark, is better. The $4.05 to $4.20 that we (multiple speakers).

Yes, Bill, I think the other thing as you're going through and modeling, I think a key thing to keep in mind is my earlier comment on operating margin, Richard's comment on free cash flow just dramatically above pre-Folgers' levels.

Okay, and to follow up on the previous question, you were implying that normalized coffee margins would be something like 28% on a full-year basis?

That would be the normalized segment profit, that's right.

Okay, thanks very much.

With that, that will conclude today's question-and-answer session. Gentlemen, I would now like to turn the conference back over to you to conclude.

Again, thank you for your interest today. And again I want to thank the team and really underscore the importance of going forward in this market, clearly we're excited about this acquisition that took place and we think that the results this year really underscore it was right for our strategy and the team is implementing the strategy correctly. So thanks a lot. Have a great day.

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