J M Smucker Co (SJM) 2010 Q1 法說會逐字稿

Good morning and welcome to the JM Smucker Company First Quarter 2010 earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the Company we will open the conference for questions and answers after the presentation. I'll now turn the conference over to the Chief Financial Officer, Mr. Mark Belgya. Please go ahead, sir.

Good morning, everyone, and welcome to our First Quarter earnings conference call. Thank you for joining us. 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 of Smuckers, Jif, and Hungry Jack; Mark Smucker, President of Special Markets; and Paul Wagstaff, President, Oils and Baking. After this brief introduction I'll turn the call over to Richard for opening comments and I'll 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've 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, our Director of Investor Relations. I would like to remind you that in both 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 risk 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 the Company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussions on non-GAAP information is also detailed in our press release and on our website. I'll now turn the call over to Richard.

Thank you, Mark, and good morning. Thank you for joining us. I would like to begin by summarizing the key highlights for the quarter. First, we delivered record sales and earnings for the quarter with Folgers contributing significantly to the overall results. Sales were up 58% and non-GAAP earnings per share were up 12%. Second, as consumers eat more at home, we benefited with broad based volume increases in nearly every one of our US retail categories. Third, operating margin significantly expanded, mainly due to the addition of Folgers. Many of our core businesses also experienced margin gains as commodity costs have declined from a year ago and finally, we are well positioned for this year's back-to-school and Fall bake and holiday periods with our first opportunity to broadly include Folgers in multi-branding themed events. We have new advertising lined up and new products to capitalize on our strong momentum.

Now let me provide brief commentary on each of our four business segments. During the quarter, growth in both the Coffee category and Folgers once again exceeded historical levels in large part due to the execution by our fully integrated marketing and sales team. The continued expansion of Dunkin' Donuts and the gourmet category and strong gain in traditional roast and ground led to the growth compared to last year. Segment profit in the quarter exceeded our long term expectations primarily due to lower green Coffee cost during the period and volume related to operating efficiencies.

At the beginning of this month we completed the last of our three key integration milestones transitioning the green Coffee systems on to our Oracle platform. We would like to again thank our employees for their continued efforts. These integration activities have been executed seamlessly with no major issues or concerns and we're on track to deliver the $80 million of synergies this fiscal year.

In the consumer area, performance for the quarter was strong as volume and sales increased for the Jif, Smuckers and Hungry Jack brands and the segments profit growth exceeded sales gains. We recently expanded our peanut butter capacity and are well positioned for future growth. This year we look forward to focusing on merchandising, marketing and rolling out new products for Jiff. We have started shipping our new Jif Omega Three and reduced fat Jif to go. In addition we recently introduced new commercials under the choosy moms campaign focusing on the brands core equities.

In line with eating at home and the back to baking trends our Oils and Baking segment delivered good volume growth with both Crisco and Pillsbury experiencing double digit increases. Sales for the segment were down modestly as planned price decreases, additional promotional spending and volume declines in canned milk more than offset the gains in baking mixes and frosting. You may recall that in response to declining commodity costs, we lowered oil, shortening and flour prices by approximately 13% this past January and canned milk prices by 7% in June. Momentum in the Pillsbury brand continued this quarter with volume up over 25%. In addition we benefited from new placements at a key retailer last year and our new products, especially easy frost, and brownie money its are receiving very good customer acceptance. This combination of new products, good merchandising programs and marketing investments gives us confidence in a solid Fall bake for the Oils and Baking category. Finally, sales in the special market segment increased 4% as the addition of Folgers more than offset unfavorable foreign exchange and volume declines.

In summary we delivered a strong quarter and are starting the year with good momentum. We are encouraged that commodity costs have declined and are comfortable that our pricing is positioned appropriately. As retailers are evaluating their product offerings, our strategy of owning number one brands positions us very well for the future. Further, our portfolio of brands fits the needs of today's value oriented consumers. The strength of these brands provides the ability to continue to generate long term profitable growth. I'd now like to turn the call back to Mark to have him review the financial results for the quarter.

Thank you, Richard. Sales were the record for a quarter again exceeding $1 billion. The growth coupled with expansion and operating margins across almost all of our businesses delivered record earnings. Sales for the quarter increased $388 million or 58%. Volume gains of approximately 8% across consumer and Oils and Baking were partially offset by decreases in special markets resulting in an overall volume increase of 2%. These volume gains were more than offset by recent price declines in Oils and Baking and an increase in promotional spending in certain categories. Excluding acquisitions and foreign exchange, sales were down 1% for the quarter.

GAAP earnings per share were $0.83 this quarter and $0.77 in the First Quarter of last year including restructuring and merger and integration cost. Excluding these charges in both years, earnings per share were $0.92 this quarter and $0.82 in last years First Quarter an increase of 12%. If you also exclude amortization in both years, earnings per share were $1.02 this quarter and $0.84 last year, an increase of 21%.

Operating income increased $109 million for the quarter excluding charges, and increased as a percent of sales from 11.4% to 17.6%, well above historical averages. Again, excluding amortization adds another 170 basis points to our operating margin.

Gross profit increased $198 million over the First Quarter of last year and was the primary driver of the increase in operating income. Gross margin improved from 31.3% last year to 38.6% this quarter. Folgers contributed over 90% of the increase. Folgers gross margin continued to be positively impacted by favorable green Coffee cost, mix, and volume related operating efficiencies. Gross margin for the remaining Smucker business improved by 170 basis points over the prior year, primarily due to overall lower commodity costs including diesel which allowed us to return margins more in line with historic levels.

SG&A expenses increased approximately $71 million mainly reflecting addition of Folgers but decreased as a percent of net sales from 19.7% to 19.1%. As expected, marketing expenses increased as a percent of net sales in the quarter in support of our brand equity initiatives including new advertising. Selling and corporate administrative expenses decreased as a percent of net sales reflecting the impact of leveraging the existing sales and corporate infrastructure and realizing synergies associated with the Folgers transaction. We have achieved all of the $80 million in synergies on a full year run rate basis and have included them in our full year guidance.

Looking at other key EPS components interest expense was up $8 million reflecting borrowings associated with the Folgers transaction. On June 1, we paid off $75 million of long term debt from available cash. We are currently in the process of securing a new $400 million, three year revolver which will supplement our existing $180 million facility. We expect to close the financing during the Second Quarter in time for the $550 million in maturities coming due in November. This new facility was factored into our guidance and is not expected to impact our original interest expense forecast for the year of $66 million.

The effective income tax rate for the quarter was 35.2% compared to 33.3% in last years First Quarter, reflecting the higher effective tax rate associated with the Folgers business and the net favorable resolution of previously open tax additions in 2009 compared to 2010. We continue to anticipate a full year tax rate of approximately 34%.

Let me now comment on our reportable segments. The US retail Coffee segment contributed $366 million to net sales for the First Quarter of 2010. Folgers and Dunkin' Donuts sales strongly out performed the prior year. Compared to the same three-month period last year prior to the transaction, volume was up 9%. Net sales for the same period were up as the volume increase and a favorable mix more than offset total price declines of approximately 7%, taking last October and December. The Coffee segment contributed $127 million to profit and achieved a nearly 35% margin. We still believe that segment margin under 30% is more likely long term but recognize favorable green Coffee costs could cause margins to be higher in the short-term. Additionally, we have modified our hedging strategies for Coffee and positions may now be longer similar to some of our other hedge commodities.

Sales in our US retail consumer segment were up 6% lead by 7% volume gain. Jif accounted for the largest portion of the increase but sales gains were also realized in fruit spreads, pancake mixes and syrup. Segment profit increased 12% reflecting sales growth, favorable product mix and supply chain efficiency.

Segment margin improved by 120 basis points compared to last years First Quarter. In the US retail Oils and Baking segment sales declined 2% compared to last year. Segment volume was up 8% with double digit gains in Crisco oils and Pillsbury flour, baking mixes and frostings. Canned milk volume declined more than expected in both branded and private label. This impact coupled with price declines taken this calendar year and higher promotional spending on Crisco led to the modest year-over-year sales decrease. Segment profit increased slightly and margins improved 50 basis points as lower commodity cost and supply chain efficiencies more than offset the higher promotional spending and planned increases in marketing across the segment.

Total sales in the special markets segment increased 4% as the addition of Folgers more than offset the impact of foreign exchange and volume decline. In Canada, foodservice and natural foods, volume declines were generally attributable to the current economic environment. While volume in sales and foodservice were down we continue to out perform the market declines in the hospitality industry. The profit in the special market segments increased 36% for the quarter due mainly to the Folgers acquisition along with lower commodity cost and operating efficiency.

EBITDA excluding merger related cost and adding back share based compensation expense as amortization was $233 million or 22.2% of net sales. Based on our First Quarter we are tracking toward our guidance of full year EBITDA of greater than $900 million. Let me conclude my remarks with a review of cash flow.

Cash used by operations was $26 million in the First Quarter compared to cash provided of $60 million last year. We expected a significant use of cash this quarter for the seasonal fruit and vegetable procurement to build inventories in advance of the Fall bake and holiday seasons and the additional build up of Coffee inventory in advance of the Atlantic hurricane season. We expect this build up to continue into the Second Quarter and then reverse in the second half of the year as we complete our seasonal periods. I would now like to turn the call over to Tim.

Thank you, Mark, and good morning, everyone. We had a record quarter with solid volume gains in US retail businesses and were able to leverage our top line growth into an even larger earnings increase. None of this would be possible without the dedication of our talented employees and we thank them for their tremendous efforts.

It is clear that the addition of Folgers has improved our financial position with significantly higher margins and increased cash flows. In addition, our early results are evidence that our ownership of Folgers provides significant long term opportunities for both the top and bottom line. While we continue to focus on leveraging the growth opportunities of the Folgers acquisition, we have not taken our eyes off our core brands and core businesses. We're making significant investments in building our brands through marketing, promotion, and research and development, to position us for the short and long term.

Let me share a few examples of some of our plans including cross branded, themed marketing events, new advertising and continued partnering with our retail customers. We recently ran a breakfast multi-brand merchandising event featuring Smuckers, Folgers and Hungry Jack, our first multi-brand event including Folgers since we acquired the brand. For Fall bake and holiday we have several multi-brand events planned featuring Folgers, Smuckers, Jif, Pillsbury and Eagle Brand.

In Canada we launched our Baking is Back promotion, an effective way to communicate with our consumers by bundling our brands and finally our team has worked on a record number of new television commercials supporting our brands, including elevating invisibility of the Folgers brand with consumers with new advertising emphasizing the brands core equities including the tag line, "the best part of waking up." New advertising in support of the Dunkin' Donuts business in retail channels, Smuckers commercials adding to the Classic boys campaign for jams and new Jif spots whose timing corresponds with the back-to-school period.

We are encouraged by our strong First Quarter performance and the momentum entering the Fall bake and holiday season; however we expect second half comparables to be more challenging. We will have the Folgers acquisition in early November and as you may recall last years Fourth Quarter Coffee performance was high. In addition, second half comparisons for oils and baking will be tougher as we lap the new placements at key retailers -- at one of our key retailers. With regard to our 2010 expectations we have not changed our outlook for the year. Net sales are expected to approximate $4.5 billion and income per diluted share excluding merger and integration cost is expected to be at the higher end of the $3.65 to $3.80 range. We are also maintaining our outlook on cash flow items that we provided you last quarter. As you look ahead we believe that the shift to at home consumption is a trend that we continue and we are well prepared. Our brands have earned the reputation of high quality and fair value and the strength of our brands provides confidence in our strategy as we move forward.

So in summary, first we had another record quarter in a challenging economic environment. Second, we have now completed our three key integration milestones related to the Folgers integration in less than one year and will realize $80 million in synergies in 2010. Third, we are well positioned with new products and amortizing for the important back-to-school and Fall bake and holiday periods. Finally we believe our strategy of owning number one brands positions us well for future growth. We thank you for your time today and are now happy to answer your questions.

Thank you, gentlemen. (Operator Instructions) Our first question comes from Eric Katzman of Deutsche Bank.

Hi, good morning everybody.

Good morning Eric.

I guess, well, first of all congratulations but my first question has to do with the multi-promo events. I guess although it's early and you're kind of going into the key season I'm just kind of wondering what kind of lift you're seeing by bundling the Folgers business with the other products versus let's say what you've seen in the past because I know when you added Jif and Crisco, you got quite a boost and I'm wondering if you at least initially see the same kind of lift?

Hi, Eric, Steve Oakland. Obviously it's early on those. We did have a chance to run our first breakfast promotion with Hungry Jack tying in both FSI and trade support with coffee, and I think what we saw is more merchandising. Those brands respond great to display and coffee allows us to get more display so we hope that will continue.

Okay, so at least initially you would attribute some of the performance, the strong volume growth that you saw in some of those brands to the initial co-marketing? Is that the way to interpret your comment Steve?

Yes, I think that's fair. I mean we're able to line those up. It's very efficient to purchase the media and it's very easy for the trade to get behind displaying for example, pancake mix, syrup and coffee and jams and jellies. That's a pretty simple concept for them and I think fits exactly what they're trying to do right now.

Eric, I just think that having the volume and the brand strength of Folgers helps us with our customers in terms of getting their attention. They like that brand. It's a great brand that they can merchandise and it just gives us more credibility and strength.

Okay, and I assume that based on most of the volume numbers you talked about outside of the specialty business that that signals most of the products gain market share, is that a fair statement?

Yes, this is Paul, Eric. I'd say that's fair with the exception of oils. Oils we did not gain market share over the First Quarter period. We had a competitor that had very aggressive pricing going on. That being said we still improved our volume but just not market share.

And then just more of a financial question for Steve or more Mark. Can you just kind of go over the comments you made about the $80 million of cost synergies, so you've achieved the $80 million or you're now at a run rate of $80 million if you were to annualize what you were doing today?

Sure. In the last couple quarters we have quantified on a full year run rate, so basically we have identified and will realize the $80 million through the course of the year so I would categorize it as a $80 million run rate that will be achieved by the end of the fiscal year.

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

Thank you.

We'll go next to Farha Aslam of Stephens.

Hi, good morning.

Hi.

Congratulations as well.

Thank you.

Just going into your Dunkin' Donuts brand coffee, what is the ACD now on Dunkin' Donut?

Hi, Farha, this is Vince. It hasn't really changed significantly since we had that came question the last quarter. Again, on the core skews it's going to be up in the 85 to 95% range. There are some flanker skews that are not anywhere near those ranges yet and then we're poised to introduced a new item towards the end of the fiscal year so I guess the way to think about it though on the core skews, it's pretty much where we want it to be but there's some incremental gains. The growth continues but it's capacity that we're working on as much as anything.

So (inaudible) had just a phenomenal growth this last year. Going forward kind of what type of a growth rate would you expect on that brand?

Well, it's a very good question. It's exceeded our expectations but we would certainly hope we could continue with double digit growth the next two or three year at a minimum.

If you look at your coffee margins you highlighted this year could be above that normal run rate of 28 to 30%. Kind of how much performance do you think there is in the year? For this year?

This is Mark. That's a little hard to estimate. We probably won't give a lot of detail. Obviously where the green coffee cost has been for the quarter will contribute a lot to the overall year. We're not necessarily in a position to say we're going to have that kind of results each of the next three quarters so the bulk of the increase is driven by this quarter.

Okay and then my final question is on the baking and oils and new retailer that you entered. Kind of if you could break down your volume increases generated by the expansion into that retailer versus your core, how can we think about just a better model going forward?

Hi, Farha, this is Paul. What happened is basically about a year ago August we entered an agreement with one of the key retailers and increased our position on shelf significantly for the baking items primarily cake and frosting, and so we're in the process of, we'll be lapping those numbers coming up in the Second Quarter and that did contribute significantly to our growth and that being said when you look at some of the other core customers that we do business with those numbers are also up in double digits as well so it's good growth all the way around. So we can model in continued volume growth for that baking business despite the business lapping? The increase in (inaudible)? Yes, I think the business will continue to grow. It won't be quite as high as what we've seen.

That's very very helpful. Thank you.

We'll go to Chuck Cerankosky of Northcoast Research.

Good morning everyone. Great quarter. I'm going to pass it over to Alex. He's got some questions and I may have a couple follow-ups.

Good morning, everyone.

Good morning.

Mark, I think this first one goes to you. If my math is correct it looks like you've expensed about $80 million of merger and integration charges.

That's correct.

Could you give us an update on how much you expect to expense in total over the course of the rest of this year and kind of the key of that going forward?

Yes, I think for the whole year we said we would be in the 30 million to $35 million range. Obviously that's a little front end loaded in terms of the fiscal as we have costs that are slipping into the first and Second Quarter. We're tracking towards that so I'd still say that's an appropriate range and again a little bit heavier in the first half versus the second half. It still continues to be pretty much the areas we talked about. It's employee cost related, training, some system transition, things like that.

Okay. It looks like the inventory build this year is a little bit heavier than it has been in the past so a couple questions on that. How much is coffee is pricing paying into that, do you expect greater volume in the second half and you want to secure some inventories now? What's going on or what's the logic behind that?

I'd say that from a dollar perspective if you look at base Smucker of a year ago versus this year, coffee is about the same amount and if you look at the cash flow, it probably drove about half of that net change in working capital which is about $175 million use. If you look at the base Smucker business historically, we've probably built inventories of about 25% from years end to the end of the First Quarter. The Coffee business is growing inventory faster so it's a more concentrated time period plus we're building for the Atlantic hurricane season so that's the difference between the base Smucker business and coffee. Just a couple of comments and maybe in advance of the question is that we also from the Smucker side, we benefited last year on some working capital components that we did not have the same benefit this year so inventory drove most but there was some last year that artificially drove that positive cash flow as it just didn't recur this year.

This question might be a little bit early, but I'm going to ask it anyway. I know in early June, you changed the pricing strategy around coffee going to a little bit better every day price and a little bit less promotion. How have retailers responded to that and what's the benefits around it?

Sure, it's been received very positively. It has been implemented by the majority of accounts and certainly most retailers like to have a better every day low price for their consumer so I'd say overall it's been very positive, however our major competitor at this point has not followed us.

You mentioned a couple times about supply chain efficiencies. I was wondering if you could just give a little more color around that. Is that a result of scale or other things you guys are doing as well?

It is scale, Alex. A couple things. Some of it is around diesel cost. Some of it is around volume driven, obviously with the good volume across the business our manufacturing facilities were able to maximize from that perspective and then there is synergies from the combination you'll recall over the last year we talked about synergies that are a result of the critical mass we can offer up on the COGS side so that was some of it as well.

All right.

And Mark I've got one with the refinancing or the new bank line within sight of completion. Any thoughts about the dividend here?

Well, as we've said, Chuck, we look at or the Board looks at the dividend annually in April. We took the dividend up in the First Quarter. I'm sure the Board will continue to look at that but no immediate news to any changes on that.

All right, and finally, when you're looking at these nice food at home trends any thoughts about that being a function of purely the economy or do you see something else benefiting from that -- or benefiting tha over the longer term?

We think -- this is Richard. We think it's going to continue. We think that it was probably driven initially by the economy although those trends we did start to see about two and a half years ago, three years ago so they started slowly, the economy accelerated and although even if the economy gets better we still think the trend will continue. All right, thank you very much.

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

Hi guys.

Hi, Jon.

Just had a couple of quick questions. Beginning with the guidance obviously you've reaffirmed the outlook for the year but the additional language around more likely to be near the higher end of the range given the strong start. Revenue still looks like you're expecting $4.5 billion in that range, so it would appear that you're looking for stronger margin performance. Can you just talk a little bit about where you're seeing it? I'm assuming this is largely related to Folgers in the segment operating margins there but is it a margin driven shift in the outlook towards the higher end of the range and what parts of the business are giving you confidence in that?

Jon, this is Mark. Clearly it's a margin, coffee driving the majority of it but with the lower commodity costs, we talked about this over the last couple quarters we expected to see margins return to historical levels and we're seeing that across all of our businesses and as we look out in the cost environment, it's too early to predict the end of the year and that was really some of the reasoning behind our guidance review but the costs are favorable and I think it's primarily margins and we've achieved the synergies or we will have achieved the synergies not that that was necessarily in doubt but we are going to achieve that $80 million so it's a number of things but I think you've identified the key ones.

That's probably 80% but the other side is that the top line has been very good and the momentum on sales per unit has been very good, slightly above our expectations on our plans, so there's some top line growth that we anticipate continuing.

Thanks, that's helpful. I guess one other little bit broader question. Given the strength of your brands and the number one, number two position that you hold, it just hasn't felt like private label has been as much of a head wind for you but I'm just wondering if you could comment a little bit about what you're seeing in kind of the private label space in your categories and whether you're seeing any of the trends there moderate going forward?

This is Tim. Just a general comment on that, Jon. I think typically what we've seen over the years is that our brands are compatible with private label. We always believe the consumer is going to have a choice so we think that our brands are really compatible so we overall are very responsible marketers so when we take share it's really more with our other branded competitors than it is with private label.

Well, just having the number one brand position as you know if private label takes more share, it's usually from the three or four brands and that's why our strategy of owning the number one brand is really important to us. Vince?

Yes, I would only add, I mean, you obviously see the share of market information and you know that private label has grown, but back to the strength of our brands for the most part we've been able to hold or gain share. A key component of that is we have to monitor all our pricing points to make sure we're providing value to our consumers every day.

Thanks. I guess one last question, I'll squeeze one in and pass it over. I know you guys have done a tremendous job within 12 months achieving the $80 million in run rate synergies that you initially identified for Folgers. At this point in time, do you kind of see additional opportunities that maybe weren't as apparent upon the initial close of the deal that would allow you to find ways to push that number higher over time?

Jon, this is Mark. A couple comments to that. One is as we've talked in the past, we build in no revenue synergies as part of the $80 million and clearly as you've seen the last two quarters of '09 and the First Quarter here we have benefited from that but to your earlier point of your question, the fact that we've integrated the business in under a year, the way we manage the business is probably a little different than maybe other companies with major acquisitions is that as we folded it in we really, you know, we're comfortable with hitting the $80 million but we don't consistently go tracking to see if there's more. What I will say is proof will be in the pudding as margins over time should be enhanced not only in Folgers in the coffee business but across other lines of our business, so we don't want to continually talk about synergies but we're going to continually talk about driving margin expansion.

Thanks a lot. Very helpful and congratulations on a great quarter.

Thank you.

We'll go next to Eric Serotta of Consumer Edge Research.

Good morning, everyone.

Eric.

Wanted to touch upon your comments about changing your hedging strategies a bit with respect to green coffee. If I remember correctly, you said that you'll be taking longer positions. I know the market has been volatile and generally moving upward recently. I'm just wondering what the reasoning behind your decision to increase your hedging terms or your hedging periods are and the risk that that poses when green coffee costs come down and your customers expect the typical price pass through.

Hi, Eric, this is Vince. Let me clarify the comment. We've done nothing to change the physical purchases of coffee. This is a bit of a technical issue but because we went from LIFO to FIFO, the layer was eliminated and just by definition that puts you in a longer position relative to your hedging strategy. We do not anticipate at this point necessarily changing the pricing transparency that is with the trade and that's been explained before, so I don't know that I would say there's anymore risk to the business or upside to the business. It's just that by definition we have a longer position of coffee by eliminating the LIFO layer. Like all commodities though, we'll obviously look to see where we're positioned and make the pricing changes up or down, during this particular period as Mark mentioned earlier we were in a favorable position but not to a point to enact a pricing change.

Okay, thank you for the clarification there. And given that spot green coffee costs were up in the quarter is it fair to say then and yet your margins benefited and yet you had some very nice above normalized margins, is it fair to say that you benefited from some legacy hedges or from some hedges that were already in place?

Absolutely.

Okay, and then, Mark, if I remember correctly in the second quarter of last year, you had something like $0.30 per share, of course that was on the old share base of mark-to-market losses that were in your numbers. Just as we look at the second quarter comps, just as we look at forecasting for the second quarter of fiscal '09, should we be, I know you can't tell what the positions are going to be at the end of the year -- at the end of the quarter but should that presence of those mark-to-market losses last year we a nice benefit or is there a, or are there offsets that I'm missing?

Well, you're right. The amount was as you suggested. I don't know if you want to call it a benefit, what I would say is that last years unfavorable hedge loss, since our hedge losses were a result of the market at the time and our position those did reverse out as we talked in the back half of the year, we would not normally project any kind of significant favorable or unfavorable hedging gains or losses and if so we would communicate that. So I'll live that to allow you to handle however you want to handle last year but there was a reason because of the commodity market at the time.

Okay, and were there any mark-to-market gains or losses in the first quarter? I know that these get resolved over the subsequent quarters in terms of COGS but were there any mark-to-market gains or losses in the quarter that just ended?

The mark-to-market on commodity was clearly immaterial for the quarter.

Okay. And then lastly, just circling back in terms of volumes you guys frankly seem to be one of the only food companies out there able to grow volumes in this environment, even some companies with portfolios that you would expect to be aligned with the food at home trend. I know that you cited distribution gains with a large retailer but wondering whether you could give some additional color as to why you guys are standing out in terms of volume performance in this environment. It really seems like a disappointing performance from the industry and maybe you have some insight into that.

Eric, it's hard for us to make judgment on the whole industry, hi, Steve Oakland. I can say we want to congratulate our sales team on execution. We had a chance to really layout the multi brand efforts that we talked about before. The efforts behind the peanut butter business. If you think about when we planned the peanut butter business you're working six months out with your customer and we were facing the PCA recall issues last year, so we put a lot of great plans in place and the team with all this on their plate did a great job executing. So I think it goes back to what we think is a core competency and that's execution.

And I would add, this is probably one of the first quarter that we've had an opportunity to significantly change the coffee business given how far our plans typically are in the marketplace and you also have to remember a year ago the formal owners would have been their end of fiscal year and they were going through the Hercules product transition but clearly, the focus of our sales and marketing efforts in the quarter made an impact on driving the business and we believe that will continue into the future.

Great. Well, good luck and I usually don't congratulate companies on a quarter but very nice quarter.

Thank you, Eric.

We'll go next to Ed Aaron of RBC Capital Markets.

Thanks, good morning and nice job on the quarter guys.

Thanks, Ed.

I wanted to ask more big picture about your approach to pricing. In US retail you had negative price growth there and obviously you got rewarded for it on volumes but you're really the only one of your peers that reported a negative price metric thus far and just your peers seem to think they are striking an appropriate balance and you clearly seem to be striking an appropriate balance on your end. I'm just trying to understand the tactical differences and how to think about them and why this balance makes sense for you whereas the opposite balance seems to make sense for some of your peers?

Hi, Ed, this is Paul. I can speak to the baking side at least and oil side. We feel that we did pass through the commodity cost declines that occurred last year back in January time period and we feel that we priced our cost very similar in the right balance with our pricing, and I think we've been rewarded for that, so that would be my response.

Our strategy, this is Richard. Our strategy is really to be as transparent with our customers and to gain credibility with our customers whenever possible and so we're very open with them and when there's a reason to go down in price, we do it. They understand it, we talk it through thoroughly with them, and when we have to go up in price, we do the same thing but I think we've been able to gain credibility with our customers because of that transparency.

Okay, that's helpful, thanks, and then back on Folgers, there was an earlier question about the synergies and I was also a little bit confused about how that was mentioned in the prepared remarks because I thought that you said that you're basically at that $80 million number right now, so I'm just struggling to understand why that is still an exit rate for 2010 instead of a number that will be achieved for 2010?

Ed, it's Mark. I think that you're correct. By the end of the year, we will have achieved the full $80 million. I think on the run rate discussion we had the last couple quarters is that as we went through the process of integration we obviously put $80 million out there with specific areas. As you go through the integration you can imagine some of those fall ons, new ones get added, so we were comfortable at the time as we incrementally added in the fourth quarter and or third and fourth quarter and commented I think last quarter was at $65 million. At this point of view now, we are clear with the $80 million where they're coming from and they will be in our earnings by years end and they will be obviously recognized throughout the next three quarters.

Okay. Thanks and then just following up on the previous question about your coffee input costs. What is sort of an appropriate lag time to think about if we're looking at the commodity and where that might flow through to the P&L with the change in how long you're hedging what's a reasonable lag time? So if pricing goes up in one month, is it fair to say that we'll see that in the P&L three months down the road, six months down the road, nine months down the road? What's the right way to think about it?

Ed just to clarify are you looking for like what the cover position is or how transparent the pricing is?

I guess I'm just trying to understand because you're hedging increasingly further out, so if we see a change in the commodity I'm trying to understand roughly when we'll see that change flow through your earnings.

Well, our position is -- it's going to depend on what our position is, and that can vary from now 18 to 24 weeks depending on the position we have at that particular point but to Mark's point, the way the pricing transparency work, you might see the pricing enacted much much quicker than that. So it just depends upon our position, what we have planned in terms of an upcoming holiday season, et cetera.

Okay, and my last question is just on the IRI data that came out yesterday you had really nice volume growth in both peanut butter and jelly. But the price growth was actually negative there and those aren't categories where I would think that the input costs necessarily go down year-over-year so just wondering if you took a different tactic with promotions in those businesses over the last month or two?

Ed, I think we've talked about in a previous call the one impact on the jam and jelly business that's been interesting on the economy is we've seen traditional jams and jelly volume grow. What I mean by that is strawberry jam, grape jelly, blackberry, orange marmalade, those things and we've seen some of our more expensive per unit items decline and that would be low sugar, simply fruit, those things, so we've seen the category shift more towards traditional jams, jellies and preserves. As you can see in the segment numbers it hasn't hurt our margins but it has shown a little bit of a shift so you've seen the tonnage grow faster than the dollars.

It does show how the consumer is thinking about it that they're looking for more volume and we have value offerings.

Right. And some of that has been merchandising with peanut butter. Obviously traditional items merchandise really well with peanut butter and we're off to a great back-to-school start.

Great. Thanks for taking my questions.

We'll go next to Mitch Pinheiro of Janney Montgomery Scott.

Good morning. Most of my questions have been answered. Just a couple of follow-ups. So related to -- well, you go to a more or less EDLP strategy in coffee or some of your skews. The fact that you are including Folgers now in your multi-brand promotion, so you're still promoting the brand, it just sort of coupled and tied in with your other businesses? Is that correct?

Let me just clarify. We are not going to an EDLP strategy 100% with the trade. What we basically did was take about a third or 25% of our trade moneys and put them into price. We clearly still have trade funds to promote during the key promotional periods, but again that will allow the consumer to get an every day better price then come promotional period time we're not going to go as deep as what we did previously because we've put those moneys into every day pricing but I just want to clarify, we haven't I'll say eliminated all promotional funding during key time periods.

Okay, and staying on marketing spending, how was marketing spending in this quarter and I think you said last quarter that you anticipate marketing spend to be in line, the growth to be in line with sales growth. Is that still the plan?

Marketing spending this quarter, Mitch, actually ran above sales and we would expect that to continue during the year.

Spending above the rate of growth of sales?

Right.

Okay, thank you. And then in the coffee segment, this is a time of year you get a lot of coffee aisle shelf set resets and any changes in the overall aisle relative to Folgers?

Yes, actually, I would say yes and it's positive. There's been a couple of major retailers make some changes based upon recommendations and we believe it provides better shopping section for the consumer. It's much much easier but each retailer is a little bit different when they look at their sets and their skews but we'll work with them wherever we can but there has been a couple very major changes that occurred over the last quarter.

Okay and last question is in the $4.5 billion revenue guidance, excluding, well, have there been any changes in sort of the mix, I think you said that the incremental piece of Folgers would be between 800 million and $850 million and I was wondering if that remains the same as well as what the sort of organic volume, non-Folgers volume base business is embedded in that number.

Yes, Mitch, I would say at this point in time for the assumptions we discussed last quarter are all still intact.

Okay. Thank you very much.

We'll go next to Ian Zaffino with Oppenheimer & Company.

Hi, great, thank you very much. I just want to dig a little bit deeper into the synergies you were talking about. I know you once mentioned this idea of category. I don't know here you are as far as progress there or if there's any other type of selling synergies you could point us to? Thanks.

Hi, Ian. Well again, those are evaluated from time to time and it's our objective to provide the retailer with as much category and shopper insights as we can. You just don't go in and ask a retailer, we want to now be your captain. You have to earn that and I think that over the long term, we have done that on our core businesses and in the majority between the spreads or in baking we've earned those rights and we're slowly doing that in coffee as well.

Okay, and is there anything else that you could help us understand about the synergies or what you intend to do there?

Well, Ian, this is Mark. I think just to reiterate a point that Richard made earlier is that from the critical mass that we have with the addition of Folgers, I think that we do have a very good relationship with our retailers and us owning the Folgers business I think our retailers are excited about that and with the historic relationship we've built we're able to take advantage of that and I think in some of the prepared remarks earlier we talk about the integrated sales and marketing team efforts. That's where you're seeing it. You're seeing a top line growth that we're talking about. That's what's driving it.

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

Thank you.

We'll go to Eric Katzman of Deutsche Bank.

Hi, thanks for taking the follow-up, gentlemen. I guess I have one comment and one question. Let's deal with the question first. Given how strong the volume growth is, you kind of noted that you have extra capacity in peanut butter. Should we expect CapEx to rise above what you previously thought based on utilization being tight?

Eric, it's Mark. I would say at this point we're always reviewing our CapEx but specific to the capacity, no. Those were projects that had been embedded in last years capital budget and some in spending this year so I wouldn't read anything more into that.

So what's the right number to use for CapEx for this fiscal year?

Well for right now, in total, we're I think we said $120 million. That might go up a little bit. We do have some projects on the drawing board that we're going to look at. We will probably update everyone next quarter.

Okay, thanks and then just a comment. I mean, it just strikes me, maybe Vince you can comment on this or Tim and Richard, but as you kind of move to let's say more of an EDLP strategy in coffee and the changes in the hedging policy or the accounting thereof, I mean, why are we focusing on margins in that business? I mean, shouldn't we be focusing on dollar EBIT rather than percentage margin? I'm just concerned that because coffee is obviously inherently volatile that as we try to estimate what you're doing in that business that you're probably managing it on a dollar basis and if the Street starts focusing on percentage margins that can create a problem. Maybe you've got the Dunkin' Donuts mix and the synergies so maybe I'm incorrect in thinking of it that way but it just seems to me that we may be headed in different directions by focusing so much on percentage margins.

Eric, I think you're exactly correct. Obviously we do look at margins but in the end it does come down to dollars and we look at those versus our volume rates and we will be focusing a lot on what the absolute dollars are and margins do vary as you pointed out from year to year primarily in some of our, not only coffee but also in some of the more commodity categories so just because our margin is a little higher right now that doesn't concern us long term because we're going to look for continued growth in dollars.

Because we always think volume is a margin friend.

Yes. We get the volumes we get the margins, we'll get the dollars.

Understood, okay, thank you.

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

Well, thank you very much for your interest and I just want to add that the team this year, this quarter has done a tremendous job and just to make one quick comment. We've talked a lot about the three major milestones which we've done a great job but there's been a number of other milestones we've hit that we haven't talked about so again thanks for the team, thanks for the interest and your great questions today. Have a great day.

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