J M Smucker Co (SJM) 2010 Q2 法說會逐字稿

Hello. Good morning and welcome to the J.M. Smucker Company's second quarter 2010 earnings conference call. At this time, I would like to inform you that this conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation. Please limit yourself to two initial questions during the Q&A session and requeue if you then have additional questions. I will now turn the conference over to the Chief Financial Officer, Mr. Mark Belgya. Please go ahead, sir.

Good morning everyone. And well come to our second quarter earnings conference call. Thank you for joining us many also on the call from the Company are Tim Smucker, Chairman of the Board and co-CEO, who is joining us remotely, and with me today in Orville, are Richard Smucker, Executive Chairman and Co-CEO, Vince Byrd, President of our coffee business, Steve Oakland, President of Smucker's, Jif and Hungry Jack, Mark Smucker, President, Special Markets, and Paul Wagstaff, President of 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 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 Smucker's.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 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 risks and uncertainty. 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'll now turn the call over to Tim.

Thank you, Mark. And good morning everyone, and thank you for joining us today.

I would like to begin by summarizing the key highlights for the quarter. First, we delivered the highest quarterly sales and earnings results in our history. Sales were up 52%, mainly due to the addition of Folgers. Profits were up in each business segment. Non-GAAP earnings per share were up 21%. And cash from operations exceeded $210 million. Second, as we celebrate the one year anniversary of completing the Folgers merger, the coffee business performance continues to exceed our expectations.

Third, our strategy of owning number one brands positions us to perform well in today's economic environment, where consumers are eating at home more and placing even greater emphasis on value. We generally benefit as we did this quarter with volume increases across many of our retail categories. Fourth, operating margin continues to expand significantly, driven by the profitability of the coffee business. In addition, many of our core businesses also realized margin gains due to the lower commodity costs and synergy benefits. And finally, we continue to invest in our brands as evidenced by an increase in marketing expenses of over 70% for the quarter, partly in support of the fall bake and holiday periods.

Now, let me emphasize some key points on each of the four business segments. We experienced another strong quarter in coffee in both sales and profits. Our ongoing focus on the Folgers brand led to growth in traditional roast and ground. The continued expansion of Dunkin' Donuts coffee and gourmet also added to the growth of the business.

We have made tremendous progress in the 12 months we have owned the coffee business. We quickly achieved all key integration milestones, thanks to the efforts of our dedicated employees, which was really exceptional, and I want to really pay attention to what tremendous effort was put into by each of our employees. And also, we focused on opportunities to grow the brand. We recently completed two new commercials, which emphasize that Folgers is the best part of waking up. One of these spots is currently airing for the holidays with the other set for January. In addition, during the quarter we began airing a new television ad for Dunkin' Donuts coffee, emphasizing the exceptional taste that is now available where you shop for groceries. We are utilizing a wide array of marketing elements for our coffee brands and have several new products in development to grow our largest product category.

In the consumer segment, volume was essentially flat with gains in peanut butter, pancake mixes and syrups offsetting declines in fruit spreads. Sales in consumer were unfavorably impacted by the mix of products sold. In line with eating at home and back to baking trends, our Oils and Baking segment delivered good volume growth with both Crisco and Pillsbury brands increasing. Sales for the segment were down as expected, primarily on price decreases taken in various categories. Based on category data for the 12 week period, our Pillsbury frostings are now the number one brand in volume sales. This is a significant milestone for the business and is the result of our focus on product quality, innovation of new products, and marketing support.

We are now more than halfway through this year's fall bake and holiday periods. We have a combination of new products, good merchandising programs and marketing investments and we expect a strong finish to the remainder of the season. Finally, sales in the special market segment increased 15% due to the addition of Folgers. Volume gains were realized in Canada, primarily in the baking and pickles category. The food service and natural foods areas continue to be challenged mainly due to the impact of the current economic environment.

In summary, we delivered another quarter of strong financial results. The contribution from our coffee business continues to exceed our expectations. We continue to support our brands with record levels of investment spending, and new advertising emphasizing the brand equities. And with our strategy of owning number one brands, we are well positioned to meet the needs of both our consumers and retailers. I would now like to turn the call back to Mark to have him review the financial results for the quarter.

Thank you, Tim. Sales for the quarter increased $436 million or 52%, excluding coffee, sales were down 6% for the quarter. Volume was up 1% and was more than offset by a 7% decline due to price and mix, with price the key driver. GAAP earnings per share were $1.18 this quarter, and $0.94 in the second quarter of last year, including restructuring costs last year and merger and integration costs in both years. Excluding these charges, earnings per share were $1.22 this quarter, and $1.01 in last year's second quarter, an increase of 21%.

If you also exclude amortization in both years, earnings per share were $1.32 this quarter, and $1.03 last year, an increase of 28%. Last year's results included charges of approximately $24 million related to non-qualifying commodity derivatives, of which approximately three quarters reversed in future periods. Gains and losses this quarter were not material. Operating income increased $146 million for the quarter, excluding charges, and increased as a percent of sales from 11% to 18.7%. Higher amortization expense in the current quarter negatively impacted margin by approximately 130 basis points.

Gross profit increased $249 million over the second quarter of last year, and was the primary driver of the increase in operating income. Gross margin improved from 28.9% last year, to 38.5% this quarter. Coffee contributed approximately 90% of the increase and continued to be impacted by favorable green coffee costs, volume related plant efficiencies and product mix. Gross margin for the remaining Smucker business improved by nearly 500 basis points over the prior year, primarily due to the negative impact last year of the charges related to commodity derivatives. In addition, lower raw material and distribution costs this year had a favorable impact.

SG&A expenses increased approximately $83 million, mainly reflecting the addition of Folgers and increased as a percent of net sales from 17.8% to 18.2%. Marketing expenses increased more than planned, and at a greater percent than in the increase in net sales in support of our brand building initiatives including new advertising across many brands. Marketing and selling expenses totaled 10.1% of net sales compared to 9.6% last year. Looking at other key EPS components, interest expense was up $6 million reflecting the borrowings associated with the Folgers transaction. As scheduled earlier this month we paid off the $350 million Folgers bank debt and $200 million in senior notes assumed in the multi-foods deal in 2004. This was completed using a combination of cash and borrowings against our existing $180 million credit revolver.

Following the paydown, outstanding borrowings on the revolver were approximately $100 million. During the second quarter, we closed on the three year, $400 million revolver, but currently have no outstanding borrowings against this new revolver. The effective income tax rate for the quarter was 34.9%, compared to 33.4% in last year's second quarter, reflecting the higher effective tax rate associated with the Folgers business, and the net favorable resolution of previously open tax positions in 2009, as compared to 2010. We continue to anticipate a full year tax rate of 34 to 34.5%.

Let me now comment on our reportable segments. The US retail coffee segment contributed $445 million to net sales for the second quarter of 2010. Compared to the same three-month period last year, prior to the transaction, volume was up 5%. Folgers contributed three quarters of the growth with Dunkin' Donuts coffee accounting for the remainder. The coffee segment contributed $149 million to profit, and achieved a 33.4% margin.

We realized approximately $11 million in favorable plant overhead absorption during the quarter, due to six months of stronger than planned sales volume and lower operating costs. Additionally, green coffee costs remained favorable. We made decisions to further reinvest in the brands which offset some of the gross profit gains. This additional marketing supported our continued effort to re-establish the red can and support other initiatives behind Folgers and Dunkin' Donuts coffee. We continued to believe that current margins in the US retail coffee segment are in excess of longer term expectations. However, now that we've owned the business for 12 months, we believe certain factors have changed since our original estimate of 28%. The favorable margin impact related to mix along with decreases in overhead manufacturing costs have caused us to increase our longer term target to exceed 30%. As we said previously, our objective is to grow margin dollars. Therefore, any significant change in price up or down would have an impact on the resulting margin percent.

Sales in our US retail consumer segment were down 4%, primarily due to mix. As volume was flat for the quarter. Volume and sales gains were realized in peanut butter, pancake mixes and syrup. Volume and sales were down in fruit spreads due to mix Poe potatoes, Uncrustable sandwiches and specialty foods also declined. Segment profit increased 4%, mainly due to lower distribution and operating cost. Segment margin improved by 190 basis points compared to last year's second quarter.

In the US retail Oils and Baking segment, sales declined 9% compared to last year, primarily reflecting the impact of price decreases taken earlier this calendar year and higher promotional spending on Crisco oils. Segment volume was up 3% with Pillsbury and Crisco brands up 14 and 12% respectively. These gains were primarily offset by declines in canned milk. Segment profit increased 55%. The majority of last year's second quarter derivatives charge negatively impacted the US retail Oils and Baking segment. This year, supply chain efficiencies, including lower distribution costs offset an increase in marketing primarily in support of the Pillsbury brand and a lower contribution from canned milk.

Total sales in the special market segment increased 15% as the addition of Folgers and a 6% volume gain in Canada more than offset the impact of volume declines in the food service and natural foods business areas, which are still generally attributable to the current economic environment. Excluding coffee, special markets net sales would have been approximately 5% less than last year's second quarter. Profit in the special market segment was again strong, increasing 56% for the quarter, mainly due to the addition of Folgers and lower costs.

Let me now conclude with comments on a couple other financial metrics. EBITDA, excluding merger related costs and adding back share based compensation expense as amortization, was $289 million or 22.6% of net sales. Through the first half of the year, EBITDA at $523 million, meaning we are tracking well ahead of our previous annual estimate of a full year EBITDA of $920 million to $940 million. Last quarter I commented that we expected a significant use of cash to support working capital requirements in the first half of the fiscal year, and then reversed favorably as we complete key promotional periods. Cash from operations in the second quarter was a strong $212 million, bringing our year-to-date total to $186 million. We would expect this trend to continue during the second half of the year.

Turning now to our cost outlook for the remainder of the year, we are hedged on our key commodities of coffee, soybean oil and wheat until late third quarter to early fourth quarter of this fiscal year. We have recently seen some pressure on certain key commodities such as soybean oil and ingredients such as sugar and cocoa continue to rise. We will monitor both situations to determine appropriate future pricing actions. I would now like to turn the call over to Richard.

Thank you, Mark and good morning everyone. We had another record quarter with the fall bake and holiday sales starting off strong and good momentum going into the second half of the year. In support of our brands, we have made significant investments in advertising, incorporating both traditional and emerging media. As we have stated before, our Company's purpose is to assist families in coming together to share memorable meals and moments. We continually reinforce this message through our consumer communications, be it television, print, event marketing, public relations, or digital media.

For example, we developed a special on this topic which will air on NBC's figure skating series throughout the winter. In addition, over the last year we have produced 19 new television ads. Most of which are currently airing during this fall period. Tim mentioned the new Folgers and Dunkin' Donuts coffee spots that we have run. We have prepared three new Smucker commercials, adding to the Smucker's boys campaign, emphasizing the Heritage and quality of the brand. We continue to extend our choosy moms campaign for Jif peanut butter, emphasizing the importance of quality with this brand.

We continued our Crisco Olive Oil television advertising this fall. These ads have had a positive effect on the brand as a whole, elevating the brand perception across all of our Crisco products. And for the first time since we have owned the business, we have several new Pillsbury commercials on air, emphasizing our product quality, the breadth of our innovative offerings and featuring the iconic dough boy. Hopefully, you will see a number of our ads during the holiday season. Our multi-brand promotions are important, because they provide an anchor for our retail merchandising events with our customers across the country.

We recently distributed a nine page national FSI featuring eight of our brands. The FSI showcases the quality of our trusted family of brands, and is the first holiday overlay to include Folgers coffee. In addition, each major brand included in the overlay has television advertising support during the holiday season, supplemented with print advertising in over 60 national magazines. And finally, we are using digital communications for almost all of our brands. Consumers are responding well to our marketing efforts and we are seeing good performance from our portfolio of products.

We are very pleased with our financial results for the first six months of the fiscal year. As a result, we are comfortable raising our outlook for the year. We continue to expect net sales of approximately $4.5 billion. We anticipate income per diluted share excluding merger and integration costs in the range of $3.95 to $4.05, an increase from the high end of our $3.65 to the $3.80 range that we previously had. Amortization of approximately $0.40 per share is included in our forecast. Excluding amortization, our new forecast is $4.35 to $4.45 per share. Based on the expanded guidance, we anticipate EBITDA will exceed $970 million, which is ahead of our previous estimates.

We are maintaining our outlook on the cash flow items that we provided you in June, except for capital expenditures, which we now expect to be approximately $150 million. There are several factors we considered in looking at the second half of the year to determine our guidance. First, we are still operating in a very challenging economy, and as such, we remain cautiously optimistic. Second, we have just completed our first year of operating the coffee business. As a result, top line comparisons will now normalize with coffee included in both years. Finally, as a reminder, the charges related to commodity derivatives were generally reversed in the second half of last year, resulting in a favorable impact.

As you may recall, last year's fourth quarter performance was exceptionally strong, and we do not expect to repeat it. Although, we normally do not comment on quarters, last year's fourth quarter was higher than last year's third quarter, contributing 55% of the second half of the year's earnings per share. This is not our typical trend, so we expect this year to be a more normal pattern between the third and the fourth quarters.

In summary, first we had another record quarter in a challenging economic environment. Second, we are off to a good start in fall bake and the holiday period and are well positioned with new products and advertising. Third, we are confident in our prospects and have raised our outlook for the year. Fourth, we believe that our strategy of owning number one brands positions us well for future growth, and finally, we want to thank our employees for their efforts. We would not have been able to achieve our success without their talent and their dedication. Thank you for your time today, and now we'll be happy to answer your questions.

Thank you, gentlemen. The question-and-answer session will begin at this time. (Operator Instructions). Please limit yourself to two questions during the Q&A session. Should you have any additional questions you may requeue and the Company will take questions as time allows. Please stand by for the first question. We'll take our first question from Eric Katzman at Deutsche Bank. Please state your question, sir.

Good morning.

Good morning.

I guess my first question has to do with the comments, Mark, that you made about some creep-up in some of the commodities of late and I just wanted to get a sense from you as to, given your willingness to move pricing around more aggressively than some of your peers, how do you think it plays out if you have to go back to the trade and talk about price increases?

Eric, I think what I'll do is -- I'll have first of all Paul start us off on the oils. Because most of the impact we're talking is in his area.

Hey, Eric, this is Paul Wagstaff. Regarding oils, we have seen about a 10% increase in the cost of oil going -- since last time we talked, second quarter or first quarter. As you know, we are covered through our fall bake time period and that would be with all of our key commodities. As we looked at pricing, we are looking at pricing as a -- come first the calendar year, and that's typical what we would do. Again, I think we've been relatively transparent in all of our key commodities and how we price it with our customers so I think we would be comfortable if the commodities are at a rate that we need to make an increase or decrease, that we would do that.

Okay. And then is there any way to comment on some of the other inputs or is that just basically the same kind of situation?

Hi, Eric. This is Vince Byrd. As you know, we've commented earlier that we're out about 18 to 22 weeks on coffee. You probably have followed the market, coffee has increased from the first quarter to the second quarter and although we anticipate being in pretty good shape for the third quarter, we do anticipate some increases in the fourth. However, as long as that's inside or outside of our pricing guidelines, if we need to, we'll adjust price at that point.

Okay. And then I guess maybe just as my follow-up, within coffee you had gone to an EDLP type strategy. My sense is with 5% year-over-year volume growth that you continue to take share, unless the category's growing a lot more rapidly than I thought. Can you just kind of talk about the competitive landscape in coffee? Has Maxwell House followed your strategy and was there any impact to your business during the quarter because of that approach?

Yeah, let me again clarify for everyone on the phone. What we did is basically took a very significant portion of our trade spend and put it into everyday price. So if an account was actually already an EDLP account, there was most likely no effect. But if you were a high, low account, your everyday price was reduced, and then your promotional price may not be as deep as it had been historically. So that's the first point.

Secondly, as you know, we announced that and started to implement that back in the first quarter and our major competitor did not follow until about two weeks ago that we received confirmation that for the most part, they have followed that strategy almost penny for penny and that will be implemented as we understand sometime in our third quarter or after the beginning of the new calendar year. Did that contribute to our to growth? I would say that yes, it probably did. Folgers grew over 4% during the second quarter, as it did in the first quarter, and -- but I wouldn't contribute it all to that. I think there are a number of factors from our sales team, our marketing efforts, multi-branding promotional activities, et cetera, that probably contributed to that growth.

Okay. I'll get back in the queue. Thanks.

Thanks, Eric.

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

Thanks, good morning and nice quarter, everybody.

Thanks.

Thank you.

So if I look at the margins in the business, they're kind of approaching what is generally considered to be the upper limits of what has historically been sustainable margins for companies in your industry, and just curious to get your thoughts on whether you think this is about as good as it can get on the margin side in your business. And then if so, how do we think about your ability to comp against these numbers a year out from now?

Ed, this is Mark I'll start and you guys jump in where appropriate. Clearly, our margins have well exceeded -- and I know you haven't followed us for a long time but we had a target prior to Folgers of 15% operating margin and we felt at the time that was a good target for the size Company we are in. We've chiefly eclipsed that. I guess I would bring you back to the commentary we had since the first quarter we owned the coffee business and we continued to exceed those margins, between 4 and 600 basis points. So we are in a good spot.

Having said that, though, and I think as time passes we will come to the market with some sort of operating margin targets, but I think it's important that now we're going to take a step back and we will look at opportunities to drive margin expansion. I know the question was asked time and again last quarter about synergies and we kind of concluded the discussion there that we achieved the $80 million. But we're not going to stop and rest on our laurels there so we'll continue to look in our business units to see if there are opportunities to expand the margins. That's sort of the challenge of each of the Presidents and their respective teams tasks.

I would add, similar to what we said in the first quarter, I think Eric had picked it up, that the margin percents are going to vary depending on where the commodities lie at any one particular time. And given that commodities have come down, primarily in Oils and Baking and coffee, those margin percents are probably at the higher end of what we would expect, as those commodities increase and we tend to pass on cost increases as opposed to maintaining those margin percentages.

That's helpful. Thank you. Then also just on the base business side, so I was a little bit surprised that the volumes in that business weren't a little stronger, just kind of given what some of the sell-through data have shown recently. Could you maybe help me understand where that disconnect might lie?

Sure. Hi, Steve Oakland. I think you really have to be careful looking at just this quarter on the fruit spread business. If you know that our key merchandising period of back-to-school really straddles these two quarters, a lot of that volume will ship in July, will sell in August, so I think if you look at the fruit spread business over the last six months, you see nice volume growth. And even in this quarter, our volumes, our total consumer volumes were flat, but we've got nice volume growth. Now, having said that, we talked about the mix change. Okay? We are seeing two types of mix change, both in what products the consumer's choosing and where they're choosing to buy them.

We're seeing things like a 10-ounce sugar free item, we're seeing that consumer trade to an 18-ounce or 32-ounce strawberry item. Those 10-ounce sugar free items are very expensive per ounce. The traditional items are a lot less expensive per ounce. We're seeing the consumer move around within the category but year-to-date we've got nice volume growth. I think we're uniquely positioned, frankly.

We're in not just all of those segments but we're in all the channels in those segments. We're in all of the discount channels, we're in mass and club and all those places so we've been able to meet those needs. The consumer's moving around a little bit but actually we feel pretty good. It's been a long time since we've had the real volume growth in fruit spreads that we've had the first six months.

One quick follow-up. I think you mentioned that there's no change to the operating cash flow guidance. Any reason why that wouldn't kind of come up along the lines of what you were doing with the EPS guidance?

Ed, I think the point was, is I think you're referring to Richard's comments. We didn't change anything in terms of the components that we gave out to determine cash flow. But we're not suggesting that the cash flow number itself was the same. As we've said in the past and this is still true with our updated guidance, we still think that that EPS range, excluding the amortization is a fairly good proxy for a cash flow per share number.

Perfect. Thank you.

We'll go next to Scott Mushkin with Jefferies.

Hey, guys. So, I guess one of the things I wanted to try to poke out a little bit is whether this can kind of continue. I mean, obviously just extraordinarily strong results but I was wondering if you could just place it in buckets from a margin perspective. The commodities moving up and down, that will change the rate. If I was to look at the repeatable, what you guys are doing from a productivity standpoint as a percent of the better margins, if you guys could bucket it for me, I think that would be great. Hopefully that made sense.

This is Mark. I'll start here. I think that if you look at from the highest levels, if you look at it from a gross profit and an SG&A level, clearly gross profit is driving the over-delivery of income. Some of that as we said throughout the call and really throughout the last couple quarters is driven around the commodity cost but as we said, we also had efficiencies this quarter particularly in coffee, but across some of our other operational areas that we've been able to lower costs, and with the increased volume have favorable overhead absorption. So some of that will continue. Clearly the commodity will drive some of that. On the SG&A side, I would say that it's a little higher than we had originally directed earlier in the year.

Part of that is as we went through our synergies originally, we of course had to take some cuts on where we thought it would fall on cost of goods sold and SG&A. As it turned out we had a little more savings in the COGS area. That, too has driven the historical or that year-to-date gross profit, and a little bit less in the SG&A side which has driven a little higher SG&A for year-to-date and also going into the back half of the year. But I think, going back to my earlier comment on productivity improvements, we have -- the intent is to continue to drive profit dollars. So we realize that we have sort of set some high standards and we're going to continue to look at opportunities to improve margins in each of the business areas.

Would you think like 70% in commodities and 30% of the stuff you guys have been doing or is that way off base on the gross profit?

I would have to probably work through but I don't think that's way off because like I said before most of it's from gross profit and commodities do play a big part of that.

Great. That's perfect. Then also, not that I'm on the short-term, I just want to understand your comments on the comments that were made between the third and fourth quarter a little bit better. Seems as I look at the Street's numbers people are already assuming the fourth quarter is going to be a lot more muted compared to the third quarter and so I just wanted to make sure I got the meaning of what you guys were saying in between the third and fourth quarter.

Fair enough. I think if you look back and Richard made the comment that last year was certainly an anomaly in terms of the percent of the back half of the year profits between third and fourth quarter. The second and third quarter obviously are key fall bake and holiday promotional periods. The majority of the profits for the year fall under those two quarters, but I think if you just look back a year prior historically, we think that's a better reflection of what the back half will fall in terms of the third and fourth quarter.

Okay. And then can I just have one more and then I won't even need to get back into the queue. The spend that you guys are doing which is increasing, we saw that in the quarter, it seems like the whole, as we walk the stores, it seems like you're not alone there, and I was wondering first of all, how do you measure -- are you going to anticipate volumes to pick up as we move through the third and fourth quarter as the spend is increasing? Ask and how are you measuring ROI on the spend?

When you talk about spend, are you talking about spending with the retailer or spending through the increased advertising.

The increased advertising, sorry, the increased advertising.

Well, this is Richard. Obviously whenever we can and whenever we see the margins the way we are, we try to invest a little bit nor the brand in advertising. So we've taken advantage of investing behind these brands a little more than we normally would because we --

Scott, this is Paul Wagstaff. I'd also add that on the Pillsbury, again, we're advertising that brand for the first time in the bake aisle since we owned it and we would expect to continue to do that.

Just one last comment and again, I think maybe in a little deference to some of of our peers. We really do focus on equity, invest in the equity of our brands. We're not necessarily out there trying to get a period, we're certainly supporting our fall bake period but we really do invest in our brands and we expect that carryover to be more than the next three months.

Perfect. Thanks for taking my questions.

We'll go next to Farha Aslam with Stephens, Incorporated.

Hi, good morning.

Good morning.

In coffee, you had anticipated $800 million to $850 million in higher sales year-over-year this year. Is that number still good? And does that include the Canadian coffee as well?

Hi, Farha. This is Vince. It does not include the Canadian or food service or away from home coffee. It's just the coffee SBA.

Okay. And that's 800 to 850 still good?

I think it's probably in the range but we'll have to take a harder look at it.

Okay. And Richard, you had talked about the increased investment in marketing support for your brands. Is there a way you could quantify kind of what's included in your fiscal 2010 guidance in terms of increased A&P support for your business overall?

We were up -- probably Mark can cover that offline afterwards but we were up 70% in our marketing spend and our sales were up 53%. So you can just see that we made significant more investing in the brand than probably in a normal quarter. But as Mark said, this is throughout the year, it's not just going to be one quarter.

Farha, Steve Oakland. One other thing we are benefiting from this year, with the economic situation and the advertising and media purchasing environment, we've had great synergy. The addition of Folgers business has made us much more effective so those dollars that we're spending have really gone farther this year as well. So we've been able to do, as Richard mentioned in his opening comments, a number of new commercials. We've done a tremendous amount of that and we've been able to put them in places efficiently that have been hard to do over the last couple of years so we think that's going to have benefit but it's going to benefits over the long term.

And I think Scott asked the question, how do you do an ROI on that. And to be honest, it's a long-term ROI, it's not a quarter by quarter ROI but we definitely have seen it in long-term results and have seen it in market share over periods of years as opposed to periods of months.

Farha, this is Mark. Just as a -- maybe to draw a conclusion, your question on the marketing. What we do have is I think in the year-end disclosures we said that our sales and marketing as a percent would be about 10%. We had been running below that last year. And for the year, it's probably 10.1 to 10.2 and that would be the marketing.

That's very helpful. Thank you very much.

Go next to Mitch Pinheiro with Janney, Montgomery Scott.

Good morning, everybody. So first question is, when I look at the $4.5 billion sales guidance for the year, and so you subtract out the first half, looks like you're looking for sales to be down 4% for the second half, so is that right? And then B, is there -- how does that break down volume, price and are there any sort of underlying dynamics there that we ought to know about to help us understand?

Well, note that the $4.5 billion is a pretty rounded number. So we will be down depending on how you want to take that rounding. In terms of the volume price mix, we don't typically get into that. We would say that volume is probably somewhat reflective of was we saw in the quarter would be good. Pricing lapse in January for most of the baking. I don't think FX would have a significant impact, so that's -- I guess that's probably the three areas that we would comment generally on.

Okay. So just as a follow-up to this, with the -- in the core Smucker business, pricing was down about 7% in the quarter. So you're lapping pricing in January. Does that suggest that pricing could be lower, fall further, how do we look at that.

Hey Mitch, this Paul Wagstaff. We are lapping in January oil shortening and flour. Milk won't be until June of next year. We look at all of our pricing at the end of the fall bake time period so we won't make any decision on going forward with our pricing until after the holidays and obviously we watch the commodity markets closely on that. So at this point we don't have any announcements to make.

Okay. Second question is regarding your cash flow. And, looks like to be way above average free cash flow here and I know you're precluded from share repurchase I guess for about another year. So my questions are, one, is that in fact -- I mean, is share repurchase still at least a year away? And B, I mean, is there a possibility that you consider maybe a special dividend or anything extraordinary over your regular rate to return the extra cash?

Mitch, this is Mark again. This may sound a bit like an old record. First of all, we cannot buy back any stock until next November. It's a two year time period from the November 6 close date. November 6 of next year. The likelihood of a quote, special dividend is not very likely. That was part of the transaction and I don't want to speak for the Board in terms of the quarterly dividend but we've clearly stated our policy is to pay 40%. We typically do look at that dividend in April and we do realize the cash flow is significant so I'm sure the Board will take that into consideration. I would also point out on the buyback, we do have 3.7 million shares outstanding so in the event that it made financial sense to do that next November, we are positioned from having the shares available to repurchase.

Okay. All right. Thank you.

The next, Ian Zaffino with Oppenheimer and Company.

Hi, good morning, very good quarter. Question would be, you initially did the Folgers deal you talked about growing the red can business. You've clearly done a very good job of doing that. I guess the next would be Dunkin' Donuts. What are you doing there? I know you have a bunch of SKUs that you're looking to extend nationwide. And also, if you could talk about any type of single serve strategy you might have because that's sort of a good growth category. Thanks.

Hi, Ian, this is Vince Byrd. Let me take them in order. First of all, from an ACV perspective on our core Dunkin items, we were asked before, we're 75 to 80%. On the flanker items we're still in the 40 to 60% range and if you compare that -- so think about it as we have probably average about six SKUs per store, compared to our competitor who would have nearly 2.5 times that amount. That's why we still feel very comfortable that we'll be able to have double-digit growth, although becoming more difficult in the future. Our original blend happens to be the number one selling SKU in gourmet and happens to be in the top five of all SKUs sold in the coffee category at this point. So we remain very, very optimistic and we have a number of new items that are in the pipeline to introduce over the coming months. Secondly, as it relates to single cup is what I think your second question was, and I think you know that we have stated on previous occasions that it's our intent to explore all segments of the category and we are -- have nothing to report but we continue to watch that category. It's growing very significantly, although of course it's still a relatively small piece of the pie. But it's a category that we will want to try to figure out how to participate one way or another in the future.

So a little deeper here. How would you prioritize all three of those, whether it be red can, Dunkin expansion or new SKUs or single cup? What are you really focused on right now?

Well, I hate to say they're all priorities but to be honest with you, we have said from day one, if we don't grow red can we're not going to be able to grow the rest of the coffee business and fund the activities for the other business. I think we also stated before that the margins on Dunkin are very good and healthy and so that's helping fund other activities as well. But the number one priority was to make sure that we grow the core red can business and get that back on track and invest in some of the core equities of the best part of waking up, et cetera, and so we've done that successfully for three quarters but, again, we've only owned the business for one year so we still have a lot of work ahead of us. But all three are at the top of our list.

Okay. Great. Thank you very much.

Go next to Ken Goldman with JPMorgan.

Good morning. Congratulations. The question I have is on coffee. Mark, you talked about increasing your long-term target to above 30%. I'm just wondering -- I know it's a little early and I know you haven't owned the business that long, but if we do see Arabica staying at whatever it is, 169 per bag or whatever it is right now, can we see those margins staying above 30%. I know again you'll pass a lot of it through pricing as well but just in terms of modeling how should we think about that with coffee at the current price?

I think, Ken, it's going to go back to how high it potentially goes. We probably won't be able to maintain the margins that we're maintaining currently as a percent. Again, it's a dollar target that we're going to be shooting for. But I mean, clearly, we would hope that we would be able to keep those I'll say almost regardless of pricing at 30 or slightly above.

Okay.

But that will vary depending on how high the coffee market goes.

And then second question, this is a fairly picky but when you have a great quarter it's hard to find a lot of questions, your corporate administrative line was just a little bit higher than I thought this quarter. I was hoping you maybe get more synergies from the Folgers acquisition. 43.1, is that a reasonable number to use going forward or how should we think about that?

Well, I think -- Ken, it's Mark. The reason for it was is a couple specific things. We did record some additional compensation expense in the quarter and then some higher than planned expenses around some of our shared services like legal and tax and the like. As I said earlier on our SG&A or G&A in particular, we made some assumptions when we put the synergies out there and we talked earlier this year in our targets of SG&A of 20%, I think what you have there is pretty reflective from a dollar perspective. It might be up a little bit because typically we do see some timing where expenses come in in the back half of the year versus the front half. And then of course realize that with expenses or I'm sorry with sales being less in the second half versus the first, if you look at it just as a percent, likely will increase.

Thanks very much.

I'd like to make a point of clarification too on an earlier question around the coffee, the 800 to 850. That actually did include special markets coffee as well.

Next to Eric Serotta with Consumer Edge Research.

Good morning, everyone. Wanted to circle back on your comments earlier around pricing pass-through and some of your more commoditized businesses. You pointed out the rise in soybean oil costs. At the same time, looking at what's going on in the channel, seems like there's a good deal of competitive pressure out there from ConAgra, from store brands, obviously they'll have to move prices somewhat or take some margin hit, but what gives you guys the confidence that the historical pass-through mechanism or the historical ability to price in that business for commodities still holds in this environment?

Hey, Eric. Paul Wagstaff here. Yes, you're correct, there has been some competitive activity. I would like to point out on the Crisco business, even with that competitive situation, we have been able to grow the base volume by about 12% and we feel comfortable and confident going forward that with the retailers, we do think they understand, we've been veterans parent with them, with the commodity pricing that as they see costs go up and it hits a certain point or percent, we will pass the product -- the price through and we don't think there's any reason that they wouldn't accept that.

This is Richard. The other thing is we developed a long-term trust with our customers and we've taken our prices down just as quickly as the commodities have come down and I think they realize that, so trust is very important with our customers and we don't want to risk that trust. So we think we can -- if we need to, take the prices up when it's justified.

Great. And then moving on to another I guess somewhat related topic in terms of what you're seeing from your retailer -- Retail Partners. You know, some of your competitors have cited or some of your peers, not necessarily in the same categories, have cited SKU reduction that they've done to try to stay ahead of the curve in terms of anticipated retailer pressure on SKU reduction. When you look at some of your categories, whether it's fruit spreads or coffee, are you seeing increased pressure from retailers to optimize the product assortment that they're offering and if not, you know, are you expecting that? And if not, why not?

This is Vince Byrd. And then I'm going to turn it over to Steve Oakland. From a macro perspective you're obviously again correct that a number of retailers are looking at their SKUs and going through SKU reductions. It gets back, though, to owning and marketing number one food brands because even if our SKUs may be reduced, typically we end up being very favorable in those SKU reduction opportunities and whether our competitors lose fringe SKUs or they lose entire brands sometimes, so it ends up increasing the turn business in our case. In the cases where we don't have number one brands, there have been some areas that we have lost business. But from an overall perspective, we have netted out to be very favorable in that process. Steve?

Sure. Eric, we've seen that happen and obviously it's been very public. Several of the large retailers are doing that across categories. The Smucker's brand, the Jif brand have benefited from that, frankly. We're in all of those segments. We're in all of those retailers. And in most cases, we're their partner. We're their analytic partner or category captain so we're helping them do that. It's important that we take a category view of this, but typically if you had the shares that we have in those categories you're going to benefits. There's been a couple cases, potatoes and things where we've lost a few items, but the core red box potatoes have made up for that where we are number one. So I think it's made us feel better about our strategy, even better about our strategy.

Okay. Great. Good luck.

Thank you.

We'll go next to Chuck Cerankosky with Northcoast Research.

Good morning everyone. Great quarter.

Thanks.

In looking at a couple things here, what would you characterize as the most competitive categories going forward?

Chuck, I would probably -- this is Paul Wagstaff, I would say oil is one of our most challenging categories we have. Private label is the dominant player in that category. I think going forward that will be our challenge.

Any of the others that anybody else there might want to highlight?

I don't think any of us think any of the categories are easy, to be honest with you. I think if you just talk absolute size, obviously we're watching the coffee business every day. But I think all of us feel that we're watching the competitive activity on all of our brands.

Right. And you know, Chuck, even though something like fruit spreads might not have the competitive set, we challenge ourselves for real growth in those categories and so sometimes even though it's not the competitor, you're trying to get inside the consumers' pantry and on their table more often. Those can be challenges as well. I think we try to challenge our teams on all the businesses.

Excellent. Anything to talk about on instant coffee? You've got a nice market position in that, Starbucks might be legitimizing that part of coffee. Wondering what you can talk about there.

Yes, sure, that's a great question. First of all, we stated, I think any activity is good activity and obviously all of us are watching Starbucks' entry. It's still too early to tell. I think even for them, even with their expansion. But we have used the opportunity. We believe that our instant has been under-invested in over the past several years and we have a number of initiatives in that area to bring maybe improve the quality and packaging of that product. I would also say by emphasizing that category a little bit in the first six months, our business is up over -- is double-digit growth and so, again, it's one we're taking a look at and of course you can't ignore what's going on worldwide with the growth of instant.

Double-digit growth in Folgers instant in the first half of the year for you?

That's correct.

Sales or volume?

Both.

Sales dollars or volume?

Both.

Wow. Any thought on what's driving that?

Again, attention to detail by our team and our marketing efforts to say we need to focus on these segments and not focus on so much on things like opening price point segments.

Okay. And then Mark, any explanation why the CapEx guidance is up?

In terms of going from the 120 to 150, yes, it's basically, Chuck, when we put out our estimate at the beginning of the year, that was before we made the decision I think you guys are aware where we're bringing up the coffee and the rest of the oils team from Cincinnati. So we have a construction project in the works here in Orrville and it reflects that primarily.

And the last question, the softness in your organic lines, is that the customer pulling back or are you losing share to private label?

It's -- this is Mark Smucker. Thanks for the question. The organic business, just the industry in general is down and it is a combination of our customers being down as well as a little bit of strength on the private label side. But you will see the numbers in that industry are relatively sparse, to try to measure that on a rolling basis, but we have seen that even some of the private label businesses have been down. I would also point out that in our natural foods business, it is not entirely organic so there is a mix there within that business of sort of our all-natural beverages, as well as some of the organic stuff being down. And we would probably expect that business, that industry to continue to have some challenges. But I would say the light at the end of the tunnel is that we have seen -- there is a core organic consumer that is dedicated to that category and will not switch out.

Thank you very much.

Thank you.

Next to Bryan Carlson with Atlantic Investment.

Hi, guys, thanks for taking my question. I just had a quick question on food service coffee. I noticed that the -- in the quarter, food service coffee was around $43 million. And that's up quite a bit from Q1, I mean, maybe that's seasonal but it seems up from the periods last year during colder weather time. Can you just talk about what you're doing or what's driving that performance?

Yes, I would say, again, this is Mark Smucker. In the food service coffee area, we have -- that industry is highly fragmented so we've been really focused in the first year on just blocking and tackling. We've got a number of different brokers out there that sell the coffee for us, so we've actually spent a tremendous amount of time on, number one, training so that we can do a better job selling and we're starting to see the fruits of that, as well as also just focusing on the areas that we feel we can win. And some of those would be selling coffee into offices, similar to the one we're sitting in here in Ohio. As well as focusing on sort of the equipment and service business, again, in the areas where we think we can win and it isn't channel-specific, as much as it is focusing on the right customer partners.

As well as you've taken a look at the products that we offer and we've improved the product quality. We believe that there was an opportunity to raise that to be more consistent with what is offered at the consumer level.

Thanks, Vince.

You're welcome.

Can you tell me what the growth rate was for the food service coffee?

I'm not sure we would provide that.

I'm not sure we provide that. I think we -- we break out the coffee so you can see that as part of the special markets but I don't think we disclose that.

Okay. That's fine. Thank you.

Go next to Eric Katzman with Deutsche Bank.

Hi, thanks for taking the follow-up. I just had a question. I think you had mentioned that Crisco and Pillsbury were both up double-digit. Is that correct?

That is correct.

And yet the segment volumes -- that was a volume quote; right?

Yes.

And yet the segment volumes were only up I think -- well, not only, because it's very good performance, but up 3% and so I think you called out that the milk business was weak and I thought that that's about half private label, so I would have thought that that piece would have done pretty well. Is that what pulled down that segment's volume numbers?

Hey, Eric, this is Paul Wagstaff. Yes, regarding the canned milk piece, what's happening is again, with fall bake, our quarter falls right in the middle of fall bake. When you look at last year we had some promotions that are were going on in October that are this year going on in November. A decent amount of that volume decrease is due to timing of promotions. And then I would also say from a regional baking business, we had discontinued some regional brands here this past year and we're seeing the effects of that this fall bake.

Okay. And then a follow-up, just I don't know Richard maybe this is for you or Mark. The legality around the reverse Morris trust and the restrictions on the share repurchase for the next 12 months, does that also have any implications to additional M&A activity using equity?

No, Eric, it doesn't. It's just around the buyback.

Okay. All right. Thank you.

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

Thank you for taking the follow-up. Question for Vince. In your new Folgers pricing strategy, have you seen any change in the volume done on promotion versus non-promoted?

Well, I suppose we'll know better as we get through the O&D period or the holiday bake period because, again, our promotional price points that at least we are funding will not be as low as maybe has been historical. Now, as you -- I should just caveat to say, as you know, if you look at a lot of ads by key retailers, they're using some items as loss leaders, whether it be turkeys or whatever, and we're finding coffee is a drawer as well. But I think what it's doing is what we want it to do is to increase the everyday turn business and not be so dependent upon the promotional volume. But I'll probably be in a better position to answer that after the third quarter.

I would think at the time if you're buying in the red can, I would have assumed consumers would buy on the deeper discount and sort of only buy regular price when they run out or on more limited occasions. And, therefore, if you go to this strategy, it would seem to -- you would think maybe perhaps people would still wait for your promotion and then when you do get the regular full price customer, you're getting a lower dollar on that full price. But that -- you're not seeing that, obviously.

No, we're really not. And again, if you thing about a number of the major retailers are already basically on a EDLP approach anyway so there wasn't much change in what those consumers saw. We believe it's better to provide that consumer with an everyday better price than try to train them to always just buy it on deal.

Last question on Folgers is just the -- so when you buy a Company from Proctor & Gamble, clearly they have a certain machine that's focused on the top 80% of the accounts and maybe leaving the bottom 20, not ignored, but certainly not focused on. How much of your market share gains, your volume gains have come by providing attention to the bottom 20? And so -- and has same store sales, so-to-speak, been as robust in the top 80 as the bottom 20?

Yeah, I'm not sure that we know what the exact percentages are, but I think it's fair to say early on, we suggested that maybe some of the key food retailers were underdeveloped and then alternatively, some of the alternative channels were overdeveloped versus what Smucker business percentages looked like. And again, in a very short period of time, our team is able to focus on some of those retailers that maybe were underdeveloped to bring them more in line with Smucker's' overall business.

And let me just add to what Vince said. This is Tim. It's sort of a mindset with our Company. Every employee makes a difference but every customer makes a difference and every consumer makes a difference. And the more our employees understand that, our team understands that, that that's makes a huge difference in going to market.

Okay. Thank you for your time.

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

Well, let me just -- this is Tim again. Let me just thank you all for your interest and the time on the call this morning and let us all wish you many, many memorable meals and memorable moments over the Thanksgiving period. Thanks a lot. Have a great Thanksgiving.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation.