J M Smucker Co (SJM) 2010 Q4 法說會逐字稿

Good morning and welcome to the JM Smucker Company's fourth quarter 2010 earnings conference call. At this time, I would like to inform you this conference is being recorded and that all participants are in a listen only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation. 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 welcome to our fourth quarter earnings conference call. Thank you for joining us. 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, Jiff, and Hungry Jack, Mark Smucker, President of Special Markets and Paul Wagstaff, President of Oils & Baking.

After this brief introduction, I will turn the call over to Tim for an overview of the year. I will then review the financial results for the quarter and Richard will provide our outlook for fiscal 2011 and closing remarks. At the conclusion of these comments, we will be available to answer your questions. If you have not seen our press release, it is available on our website at smuckers.com. A replay of this call is availability 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, who was recently promoted to Vice President of Investor Relations. I'd 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 companies 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 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. Good morning, everyone and thank you for joining us. Before we get into the results of our fourth quarter, I would like to share some of the highlights for this past year as well as provide an overview of activities around our major brands. First, we concluded the most successful year in the history of our Company, achieving a number of financial performance records. Sales reached $4.6 billion increasing 23% over the prior year while non-GAAP earnings per share of $4.37 were up 16%.

As a reminder, the Folgers merger closed November 6, 2008, and as a result, the first two quarters of its operations were incremental to fiscal 2010. Operating income continued to expand significantly, lead by the incremental coffee sales and higher profitability in the coffee business.

In addition, our three other segments realized margin gains and our overall operating margin reached 18% excluding charges. We generated over $700 million in cash from operations providing opportunities to create additional shareholder value through acquisitions, dividends, share repurchases, and capital investments.

Second, we celebrated the one year anniversary of the addition of Folgers. We achieved all key milestones, delivered the targeted synergies, and introduced new products. The business has exceeded our initial projections.

Third, we invested in an unprecedented level of television, print and digital advertising with spending increasing from $77 million to $130 million in 2010. This served to strengthen core brand equities across our entire portfolio of brands and positions us well for the future.

Finally, we announced the largest restructuring and capital investments in our history, plans to streamline our coffee and fruit spreads operations in order to enhance the long term strength and profitability of the businesses. Our successful performance relies on employees that are focused on a shared purpose and implementing a clear strategy, owning and marketing North American food brands which hold the number one market position in their respective categories. This strategy serves us well with our consumers, customers and our shareholders.

Now, let me provide some commentary on each of our four business segments. Our results from Folgers and Dunkin' Donuts coffee have exceeded our original forecast at the time of the merger. Consistent with our strategic rationale, Folgers has created scale as we have increased our presence with customers and capitalized on multi-brand marketing and merchandising opportunities.

During the year, we invested heavily in the coffee brands with both advertising and new products. We created 11 new commercials this year including two supporting Dunkin' Donuts coffee. Four of these commercials aired in fiscal 2010 with the remainder to be aired in fiscal 2011.

To help celebrate the 25th Anniversary of the Folgers Best Part of Waking Up jingle, we recently held a contest where we asked consumers across America to create their own version for a grand prize of $25,000 and a chance to be in a future Folgers commercial. The winner was announced at a live event earlier this month and the contest has been the most successful in our companies history, having achieved over 225 million impressions to date.

Dunkin' Donut coffee was successfully launched in the fourth quarter and has already reached a four week ACV of 40%. We will be introducing a variety of Dunkin' Donuts seasonal items during the upcoming year which embody coffee flavors for the Fall and Spring seasons. In line with our priority to revitalize the Folgers core roast and ground business, we increased support of our black silk offering and relaunched special roast.

Lastly, our coffee brands are entering the fastest growing segment in the at home category. Our K cup offering is being met with great customer acceptance and will be in stores by early Fall. To further strengthen the coffee business over the next few years as part of our restructuring we will be investing $70 million to streamline the coffee supply chain.

Turning to the consumer segment, volume, sales, and profitability all improved for the year with gains across most businesses. We continue to support the brands with marketing up 8%. The fruit spreads category we invested in new advertising with the classic voice campaign, continue to offer consumers a wide variety of choices and expanded our Smuckers Orchard Finest Premium fruit spreads this year. As part of our restructuring, we also announced plans for investing approximately $150 million over the next three years to build a new state-of-the-art manufacturing plant here in Oreville.

In the peanut butter category, Jiff remains the number one brand and we increased our share of market this year with support of advertising, public relations, and digital communications. Our new Jiff Natural, which further strengthens our leading position in natural peanut butter, is receiving strong consumer response. We are very excited about the relaunch of Jiff To Go, as we believe the new size and packaging provides the consumer more options in our effort to liberate peanut butter from the jar.

The focus on Hungry Jack strength in the breakfast category and simplify the portfolio, we divested our potato business. We remain committed to the Hungry Jack pancake mix and syrup businesses which experienced double digit volume and sales growth for the year.

Our oils and baking segment delivered volume growth lead by the Crisco and Pillsbury brands. The combination of new products, merchandising programs and marketing investments contributed to the gains. Sales for the segment were down as expected, primarily on price decreases taken last year in various categories and higher promotional spending; however, segment profit was significantly improved. This year, we aired our first national television advertising for Pillsbury, generating good consumer response. As you know, product innovation is important in the baking category.

This year, consumers will find even more varieties of Pillsbury cookies, brownies, cakes and frostings to choose from. In addition, we recently launched the categories first ever nationally branded sugar free cake mix and frosting. We are confident that this innovative product gives consumers the great taste that they have come to expect from Pillsbury.

Finally in the Specials market segment, coffee continues to drive growth in Canada and the foodservice businesses. Sales and profitability increase for the year with favorable foreign exchange contributing also to sales growth. The Canadian team continues to focus efforts on growing its portfolio of number one brands through a consumer and customer marketing programs. The declines in the foodservice industry have slowed and our foodservice business continues to outperform the market driven by coffee and the rebound of Smuckers Uncrustables in the schools channel. Natural Foods, while down for the year in volume and sales, saw a year-over-year improvement in the second half of the year.

In summary, as we celebrate another record year, we want to thank each and every employee. They are committed to our basic beliefs as the guidepost for achieving our strategy, creating a culture of doing the right things and doing things right. We are proud that our Company was once again recognized by Fortune Magazine's 100 Best Companies to Work For and we know this is a testament to our employees. I would like to now turn the call back to Mark, to have him review the financial results for the quarter.

Thank you, Tim. I want to reiterate Tim's comments about the great year we had. We started out with a good first quarter and we were able to keep the momentum going throughout the year.

Let me now provide you with specifics related to what turned out to be a strong fourth quarter. This is noteworthy given the very good fourth quarter we had last year. Sales for the quarter were equal to last year but finished better than anticipated. Excluding the impact of divestitures and foreign exchange, sales decreased 1% for the quarter primarily due to decreases in oils and baking and the expected volume declines in coffee.

Strong sales for Smuckers, Jiff, and Hungry Jack pancake mixes and syrup in the consumer segment partially offset these declines as overall volume for the quarter was down 1%. GAAP earnings per share were $1.01 this quarter and $0.80 in the fourth quarter of last year. Excluding charges, earnings per share were $1.07 this quarter and $1.02 in last years fourth quarter, an increase of 5%.

The quarter benefited from a substantially lower tax rate and included a pre-tax gain of approximately $13 million from the sale of our potato business. Gross profit increased $31 million to 40.2% of net sales from 37.4% last year. Lower manufacturing and raw material costs primarily soybean oil, flour, peanuts, and certain fruits favorably impacted this quarters gross margin.

SG&A expenses were up approximately $48 million and increased as a percent of net sales from 17% to 21.5%. The majority of this increase is due to a $33 million increase in marketing expense with most of the increase in the retail coffee segment. We made a record investment in advertising for the quarter in support of our largest brands. Also, as you may recall, there was limited recognition of Folgers marketing expense in last years fourth quarter.

Last year, the organization and shared services structure necessary to support the combined businesses was not yet complete. As a result, this years general and administrative expenses are higher reflecting the full model to support the coffee business and our larger company.

In addition, costs of pension, Information services, and digital communication initiatives increased. And finally, the current quarters SD& A included approximately $2 million of expense related to ceasing production at our West Fargo plant in April. This plant manufactured a small portion of the Uncrustables product which was consolidated into our Scottsdale, Kentucky facility.

Operating income excluding charges declined $6 million for the quarter and decreased as a percent of sales from 18.4% to 17.9%. The increase in gross profit and the one-time gain from the divestiture of the potato business was more than offset by the increase in marketing and other SD& A expenses.

Below operating margin, we benefited from a lower tax rate in the quarter. Our full year tax rate was 32.4% lower than originally expected. Adjusting year-to-date tax expense to this rate during the year-end closing process resulted in a 27.9% tax rate for the quarter.

At this time, we would not expect such a low tax rate in the fourth quarter of next year. The decrease in the full year rate was primarily related to changes in our deferred tax rate. While changes in deferred tax rates are not uncommon, due to the companies significant amount of intangibles, small changes in that rate have a large impact on both tax expense. In addition our higher pre-tax income allowed us a greater benefit from the US manufacturing deductions than originally planned.

Let me now provide details on our four segments. In the US, retail coffee segment, sales declined 1%. We indicated throughout the year that we did not expect to repeat last years fourth quarter coffee results where volume was up 16%. While this was the case, coffee performance exceeded our plans. Dunkin' Donuts continued its double digit growth and Millstone realized gains, but these increases did not offset the anticipated decline in the Folgers brand compared to an exceptionally strong fourth quarter last year. As a result, overall coffee volume was down 4%.

Favorable product mix and lower promotional spending partially offset the volumes decrease. Coffee segment profit declined 15% with margins decreasing to 35.2% to 30.3%. While product mix had a favorable impact, the sharp increase in marketing expenses, primarily advertising, more than accounted for the decrease in profit dollars. Since the swing in marketing expense between third and fourth quarters of last year make the comparison of margin between years difficult, it might be helpful to focus on the second half of both years. Margins increased from 28.2% in the second half of 2009 to 30.9% in the second half of 2010.

In our US retail consumer segment, volume and sales were both up 5%. Volume gains were realized in peanut butter, fruit spreads, uncrustables, pancake mixes and syrup. Peanut butter volume in particular was exceptionally strong up 13%. Excluding the divested potato business in both periods, volume and net sales increased 8%.

Segment profit increased 20% mainly due to lower raw material costs and favorable product mix associated with the strong peanut butter sales. Segment margin improved from 22.8% in last years fourth quarter to 26.1% this year.

In the US retail oils and baking segment, volume and net sales for the quarter declined 10% and 12% respectively compared to last year. Decreases were realized in flour, oils, baking mixes, and frostings. With the strong performance we usually exhibit in Fall bake, we have come to expect a competitive reaction during Easter bake. During these periods our strategy is to profitably manage our business.

While we expected fourth quarter to be down, the competitive environment in the baking and oils category was more intense than historically seen. For the year, volume, profit, and margins were all up for the segment.

Despite the decrease in sales, segment profit in the quarter increased 49% and profit margin improved from 9.5% to 16.1% primarily due to lower cost on certain raw materials notably soybean oil and lower manufacturing cost. Sales in the special market segment increased 8% aided by a strong Canadian dollar. Excluding the impact of foreign exchange, sales declined 1%. Volume gains of 4% were realized in the segment as most categories in Canada including coffee achieved volume growth as did our Natural Foods and Smuckers uncrustables and foodservice.

Traditional portion control volumes declined which is still generally attributable to the current economic environment. The impacted segment volume growth was more than offset by price declines and increases in promotional spending primarily in Canada.

Profit in the special markets segment increased 4% as higher sales were partially offset by an increase in certain selling related expenses. Margins declined from 19.4% to 18.7%.

Our Balance Sheet remained strong as we ended this year with $284 million in cash. While down compared to last year, it is important to remember that we repaid $625 million in bank debt and senior notes over the course of the year. Cash from operations in the fourth quarter was $205 million bringing the year-to-date total to $713 million.

With capital expenditures of $137 million, free cash flow for the year totaled $576 million. We also saw year-over-year improvement in our working capital metrics as working capital excluding cash and current debt decreased to 10% of sales.

As we reported in our earnings release, we took advantage of the favorable interest rate environment and issued $400 million in senior notes fully maturing in fiscal 2026 with an interest rate of 4.5%. We will begin pay down in fiscal 2021. Related interest expense on a full year basis will be $18 million although fiscal 2011 will be a partial amount as we funded on June 15.

Based on a total borrowed position of $1.3 billion and our 2010 full year adjusted EBITDA of slightly over $1 billion, our leverage ratio increased slightly to 1.3 times within our desired range. As you know, we remain restricted in our ability to repurchase shares based on the transaction structure of the Folgers merger until the two year anniversary this November.

We believe that share repurchase is an attractive alternative for delivering value to our shareholders and will consider future actions once the two year limitation expires. As a reminder, we have approximately 3.7 million shares currently authorized by the Board.

Turning to 2011. Key components affecting cash flow in addition to income include total capital expenditures of approximately $235 million of which $95 million relates to the coffee and fruit spreads restructuring project Depreciation and amortization, included in the amortization of share based compensation of approximately $210 million. This amount excludes non-cash charges related to merger and integration and restructuring activities.

The payment of $10 million in debt maturing this September, dividends of approximately $190 million based on our current rates, and finally, total merger and integration and restructuring charges of approximately $100 million of which $35 million to $40 million are cash related.

One final comment concerning our segment reporting for fiscal 2011. While our four reportable segments will remain the same, we are modifying the calculation of segment profit to even better reflect decisions of segment management with the corresponding financial results, most notably in the area of intangibles. Since acquisitions are a key part of our growth strategy, we believe it is appropriate for segment profit to include amortization of intangibles and any impairment charges related to assets in each of these segments. These were previously excluded from segment profit but rather, reported as separate line items in the reconciliation of segment profit to income before tax.

Gains or losses on disposal of assets and certain other previously unallocated and expense items will also be included in the individual segments but are not expected to be material to the overall segment performance. On an ongoing basis this change impacts the coffee segment more than the other segments due to the relatively large amortization expense related to that business.

Based on our 2010 intangibles amortization expense of $74 million, approximately $65 million related to the coffee segment. It is important to remember though that amortization is a non-cash item. I'd now like to turn the call over to Richard.

Thank you Mark and good morning everyone. I would like to join Tim in thanking our employees for delivering yet another record year. This year we clearly exceeded our long term objectives after several years of cost increases and related pricing to offset these, raw material costs declined somewhat, combined with productivity improvements and efficiencies, operating and net after-tax margins increased.

The incremental Folgers business also added to our overall growth. The economic environment has been challenging, but our strategy of owning number one brands provides growth opportunities and we continue to invest behind our brands.

As you know, we believe in running our business with a long term perspective. We have managed through many different environments and keep our focus beyond the next quarter and even the next year. As an organization, we remain dedicated to investing in our brands and continuous improvement in our operational practices and cost structures.

As Tim noted in his opening remarks, in March we announced plans for the largest capital investment in our companies history, investing in the long term strength and profitability of our coffee business and fruit spreads businesses. While this is the right strategic direction, it was a difficult one because of the impact on many of our employees as a result of the planned future closing of four manufacturing facilities.

The key milestones shared upon announcement of the project remain on track. Upon fully completing the project we expect to realize annual savings of $60 million. While savings will step up each year in line with the production at the new facilities, we expect fiscal 2015 to be the first full year of realization. Included in our fiscal 2011 expectations are approximately $5 million of these savings.

Our strategy to own and market North American foods brands, which hold the number one position in their respective categories, allows us to remain committed to our 6% sales and 8% plus earnings growth objectives. We expect to achieve these goals through a combination of core brand growth and acquisition. This does not mean that we will achieve these specific results every year but we have exceeded them over time, with an earnings per share compounded growth rate of 16% over the last 10 years.

Turning to our outlook for fiscal 2011, we expect to see a more normalized organic growth rate with net sales increasing approximately 3%. Pricing and mix are expected to contribute 2%, while overall volume is expected to be up 1% excluding divestitures. All core categories are expected to be up, although we are making planned reductions in lower margin baking items. We also anticipate the competitive pressures which picked up in the second half of fiscal 2010 will continue.

We expect 2011 non-GAAP income per diluted share in the range of $4.50 to $4.60 and average increase of 4% over our 2010 non-GAAP income per diluted share of $4.37. Our 2010 base includes both impairment charges of $12 million and an offsetting gain of $13 million on the sale of the potato business.

Amortization expense of approximately $0.40 per share is included in our forecast, including, excuse me, excluding amortization, our forecast would be $4.90 to $5 per share. We anticipate adjusted EBITDA excluding restructuring and merger and integration costs to approach $1.1 [million](Sic -- See third quarter transcript) up over 4%. We expect free cash flow of approximately $500 million.

Keep in mind that we will be spending approximately $95 million this year in capital expenditures related to our restructuring project. Key assumptions for the 2011 estimates include approximately $70 million in raw material net cost increases or 2% of our cost of goods sold primarily in coffee, sugar, milk, diesel, and soybean oil.

During the past week, coffee costs have hit historic highs. We are closely monitoring this situation but have not factored these recent cost increases into our current estimates. To help offset the impact of higher costs, we increased prices for coffee in May. In addition, we recently raised prices on most of our baking items and milk. Peanut butter price declines have been announced to reflect lower peanut costs. We continued to be transparent in our pricing to maintain the trust that we have built with our customers over the years.

We expect SD&A excluding amortization to approximate 19% of net sales. Net interest expense of $65 million is expected for the year, including interest on the additional $400 million in new senior notes. We expect a full year tax rate of 32.5% to 33% and finally, we are basing our earnings on a weighted average share outstanding of approximately 120 million shares. This share forecast does not factor in any repurchases that might be made after November.

So in Summary, our performance for the year was very strong. In addition to our record results we increased our dividends by 14%. Second, advertising reached record levels increasing our support behind nearly every one of our brands. Third, we celebrated the first anniversary of the Folgers merger, completing the integration and realizing all of the cost synergies.

We are well ahead of the targets that we set when we announced this transaction. Fourth, while the economic climate remains challenging, we expect to grow sales and earnings in 2011 by offering real value to our customers and to the consumer. And finally, we believe our strategy and our ability to execute along with the efforts of our dedicated employees positions us well for future growth. We firmly believe that the best is yet to come. We thank you for your time today and now would be happy to answer your questions.

Thank you, gentlemen. (Operator Instructions) Our first question will come from Eric Katzman with Deutsche Bank.

Hi, good morning everybody.

Eric.

Good morning.

I usually have a tough time saying congratulations but I think it's necessary at this one.

Thank you.

So, I guess my first question would have to do with just kind of the overall environment. Obviously there's a lot of concern out there with what Wal-Mart is doing, a number of the companies that presented at our conference in Paris earlier this week were really having difficulty with Wal-Mart's approach in terms of kind of doing stuff on their own. I know it's sometimes tough to talk specifically about individual retailers but can you just kind of maybe talk a little broadly about the environment, the pricing actions at retail and kind of how that's affecting your fiscal 2011 outlook and then I have just one follow-up on coffee.

This is Richard, Eric, and thank you. I think what we can say is that as we said in our script is that the last six months has become more competitive just in the marketplace. We've seen more pressure to offer deeper deals across-the-board and we've factored certainly some of that into our forecast for next year, but as the year goes on we're just going to have to be responsive, I think we've also said that we're pretty transparent on our pricing, how we go to market and so we think that gives us certainly some credibility with our customers but that's not to say that it hasn't been probably the most competitive environment that we have seen so we're just going to have to monitor that throughout the year.

And let me just add, Eric, this is Tim. As we said in our script, this is -- the economy is still new territory for everybody and all of our customers understand that and I think that we're all learning to -- what the new normal is and that's why we think we are positioned well with products that are family products and in this economy we think that will bode well for us, and we work well with all of our customers in developing those kind of relationships.

Okay, thanks for that and then just as a follow-up, obviously, you're moving ahead in the single serve with Green Mountain. What happens with Red Can and Dunkin' Donuts is obviously more important given the scale of those two but I'm just kind of wondering to the extent that this is a single serve launch, it's important for the long term. Can you give some sense as to how much money you're spending behind that, Vince, and is that in some way impacting the consolidated outlook for profit growth in 2011?

Good morning, Eric. This is Vince. First of all, let me just say that the initial reception from the trade has just been outstanding in terms of us getting involved in the market so we're very very pleased with the initial communications with our customers. What we are clearly going to support the launch including TV advertising which I believe will be the first brand to have television advertising when a K-cup offering, but most of that is not I'll say all incremental. That will be maybe need some reshifting coming from some of the other brands in this case, Eric, and so I would say that it's not properly driving outlook issues. It's growing so fast, the market overall in K-cups, we're just very optimistic about how big this business can potentially be longer term.

Okay, I'll pass it on and get back in the queue if necessary. Thank you.

Thank you.

Thanks, Eric.

Next we'll move to Farha Aslam with Stephens.

Hi, good morning.

Good morning.

And congratulations.

Thank you.

Richard, you had mentioned that the economy is impacting your business. Could you just share with us in the economic downturn kind of did you think your businesses benefited from the downturn or was a negative mix too much of offset the benefit and kind of if we're seeing sort of a measured recovery how you're thinking of how your brands are going to perform and kind of remember how you had that mix issue in jams and jellies where people were trading down to the more value offerings, how that's progressing?

Well, this is Richard, and to start out and other people can chime in here, but we would much rather see a robust economy, even though some of our brands have benefited, such things like peanut butter which are low cost protein items usually do better in a down economy but overall we're all better off if the economy is robust and grows. We have had shifting among our brands and I'll let Steve talk a little bit about that in just a minute but we have to be I guess fleet of foot, we have to put money behind the items that will do better during a tough economic time than our normal brands or normal items, so with that let me turn it over to Steve.

Sure, hi, Farha.

Hi.

I don't know that we can say jam and jelly are the economic leading indicators but we're really encouraged to see those higher valued segments bounce back and they really flattened out in the third quarter and they are up in the fourth quarter and those are our sugar free Simply Fruit, low sugar items are up in that quarter and then we referenced peanut butter, we also saw nice growth in the new items in peanut butter, the natural business, the Omega 3, those segments so for what that is I think it's nice to see the consumer return to those higher value items.

Farha, this is Mark. One over arching comment is that I think we've said this periodically throughout the recessionary period but one of our desires was to continue to invest in the business and just by the simple fact of the numbers we've talked in terms of advertising, the new products that we've talked about not just in Steve's area but across the Company just clearly indicates that we're a stronger organization coming out and have, we're ready to face as the economy over time rebounds with great new products and great new advertising as well.

Thank you.

This is Mark Smucker. I would just add quickly that in the two areas that we saw some struggle in the special markets area which was the natural and organics as well as the foodservice area, I think over the last two quarters we've seen both of those businesses start to come back as well as the industry where in the organic segment, for example, we had historically seen double digit growth. It's still growing but not at double digits and then the foodservice industry in 2009 the numbers looked like it was down about 6% and the expectation is that it will be down this year only about 1%, so clearly those declines have slowed.

Thank you for that and just one quick follow-up. Could you just give us some more color on the amount of your pricing actions, for example, in peanut butter and in some of your baking items?

Sure, Farha, hi, Steve. We reduced peanut butter effective July 1 by 5% roughly across-the-board.

Farha, this is Paul. On the baking items on milk we've taken a price increase of around 4% to 5%, on our frosting and cake mixes also a price increase around 4% to 5% and those were effective this month.

Thank you very much.

Ken Goldman of JPMorgan. Please state your question.

Hi. The $12.9 million gain on sale, if we wanted to exclude the full impact of the sale from your P&L, we would remove the $12.9 million gain. What would we add back? Is it about the same in asset writedowns? I was a little confused by how that was written in the press release.

No, it's $13 million Ken would be the gain and about $6 million was just miscellaneous asset write-offs so it nets down to roughly $7 million.

Okay, and then can you talk a little bit about green coffee cost? I know you mentioned it's not in your guidance for 2% COGS but give us a little color if you can on what you're seeing out there, how likely you think Arabica and Robusta beans are to stay at these levels and so forth? It's a little harder for us to tell. It's the silly season, exactly what's real and what's not out there.

Hi, Ken. This is Vince. Well as we all know coffee over the last week has basically gone up very very significantly. I think it's fair to say that it's not driven by crop sizes or supply. It's more driven by fund activity and behavior, probably the only minor exception to that is Columbia continues to have some supply issues but it's primarily driven by fund activity. Regardless of what is driving it we will take a look at pricing actions once we hit certain metrics. I think you know that we communicated previously we were somewhere between 18 and 26 weeks depending on the variety and once we meet those certain thresholds if it doesn't come back down, we will action or lead another price change.

Okay, is it fair to say based on your comment that it's more fund activity than fundamentals that you would expect if there is a price change, for that price change to be down then?

No. Let me restate. The latter part of your statement is correct. It's primarily driven by fund activity, not by fundamentals but would hope that it would go back to the levels that it was basically where we were projecting to be for our last price increase. Unless it goes below those levels we would not take a price decline.

I'm sorry, I didn't mean price in retail. I meant the price to you, the cost of the green coffee beans. Would you expect them to go down at this point based on what you said?

Well, we would think so but there's a lot of things going on in the marketplace and it's difficult for any of us to predict what the market is going to do based on fund activity and other things, so we would hope so but we're going to have to monitor it because regardless of what's driving the increase, once it reaches certain thresholds we're going to have to probably take some action.

Okay, thanks.

Next, Ed Aaron with RBC Capital Markets. Please state your question.

Good morning, everybody. Congrats on a great quarter.

Thank you.

I just wanted to focus in a little more on the gross margin. If you look at it on a sequential basis it was up about 250 basis points which is a pretty strong increase. Relative to last quarter, what were the biggest incremental changes on a sequential basis because I actually would have thought the coffee cost would sequentially have gone up a little bit.

Well, certainly other things affect that, Ed. This is Mark speaking. As we look across our businesses, I think in Paul's area and oils and baking we saw improvement in the effect of, well really across most of our manufacturing facilities but we were favorable from what we would deem as overhead absorption which is just basically lowering manufacturing costs. I think the increase in the business across the business during the latter two or three months allowed the production to absorb some of that additional fixed overhead cost so that helped. As we've said across most of our business we had lower cost. We continue to benefit from some of the synergies we've talked about in terms of freight and the like so I can understand the question that the gross margin is driven a lot by the size of the coffee but clearly saw growth in most of the other business units from a gross margin perspective.

And then just on the coffee commodity specifically for the portion of 2011 where you have visibility into your cost, do you expect much lumpiness in terms of your coffee costs from quarter to quarter?

Probably not.

And then just one more if I could. The external sell-through data that we tend to see tends to be a little bit more predictive for Smucker than other companies so but this quarter sales that you reported were a bit better than what that data would have suggested. Is there anything that you can speak to that might have accounted for that in Q4 in particular?

This is Vince. I was surprised by your comment that we're more predictable in coffee, as we've mentioned previously, it only measures about 50% of the total sales because we do so much business in I'll say non-measured channels, and it's a little bit higher, the rest of our businesses but not that much greater.

Yes, and the peanut butter business, this is Steve Oakland. The peanut butter business has been as we've spoken to in previous calls very very strong in some of the other not well measured channels.

So your sales do reflect the sell-through, the actual sell-through, it just sounds like non-measured channels were better?

Yes, that's fair. We wouldn't say there's any load in this at all.

Okay, thank you.

Alexia Howard, Sanford Bernstein, please state your question.

Good morning, everyone.

Good morning.

Hi. Just wanted to ask a little bit about uses of cash. You mentioned that acquisitions as being a core part of your strategy several times in the prepared remarks. Obviously you've also got the waiting period until November before you can do share repurchases and then we look at the $400 million of notes that you recently issued. You mentioned that those might be used for general corporate purposes. Is it more likely that those would be used internally or you'll sit on the cash until you can do the repurchases later in the year or are acquisitions still very much on the cards and particularly with respect to acquisitions could you talk to us a little bit about the criteria that you'd use specifically around the financial criteria, what kinds of product categories you'd be interested, would you consider going overseas or is it more likely that you would target domestic opportunities and what kind of scale might you--?

Ms. Howard?

Hello there.

Please stand by. Again, please stand by while we reconnect our speakers. Once again, please stand by. We'll be reconnecting with our speakers momentarily. Again, everyone please stand by. And for our speakers, you have reconnected. Alexia Howard, please state your question.

Hi, Alexia this Mark Belgya, we apologize. We're not quite sure what happened but we're all still here.

That's perfectly okay. I didn't think it was that controversial a question. No problem.

I actually think I heard the question, in terms of the uses of cash and whether it was internal or externally, is that correct?

That's exactly right.

Okay, well, I guess first of all in terms of it I'll just repeat for the benefit of the audience that we prioritize our uses of cash with acquisitions, dividends, capital expenditures, and stock repurchases as appropriate and I think at this point, with the $400 million we placed clearly the environment was such that it was extremely favorable to go out into the market and I would just say that we will continue to look at acquisitions. If the right opportunity came along between now and November and it made strategic sense and financial sense we would certainly pursue that. I don't think we're sitting around waiting for any date. Obviously if nothing transpires between now and November as we said we believe that stock repurchases are a great way to return value but it really is just a matter of looking at each of those uses and the opportunities that present themselves over time.

That's great and then in terms of the kind of acquisition targets in terms of the kind of product categories, the kind of geographies, the kind of financial criteria you typically adhere to, could you just give us a little bit of color on how you think about that?

Well, this is Richard and obviously, our strategy of owning number one brands in North America, that would be our first focus so we would look for branded products that are number one. We look at them in three areas, we look at strategic and those would be the larger ones, we look at bolt ons those that would be just a nice add to one of our brands or our categories and then enabling acquisitions which are usually smaller in nature, such as uncrustables and snack and waffles were enabling acquisitions so we look in all those buckets but we're pretty specific in terms of those have to fit our strategy and then financial criteria, the key is we will walk away and have a number of cases if we're going to pay too much even if it's a good strategic fit, we will stretch a little bit for the strategic acquisitions but we usually pay a pretty reasonable range of multiples of EBITDA when we make an acquisition.

That's wonderful. Thank you very much. I'll pass it on.

Thank you.

Judy Hong with Goldman Sachs. Please state your question.

Good morning.

Hi, Judy.

My question is on coffee and just getting a little bit more color in terms of the performance of both Folgers and Dunkin', you've talked about Folgers being down which was expected in your comments but maybe speak a little bit to the competitive environment in terms of Folgers and then just how you see that playing out for the balance of the year, and then on Dunkin', looks like growth is still pretty healthy there. You've talked about introducing some of the seasonals this year. Is this kind of a shift to more seasonal versus flavors? How do we think about Dunkin' and the expansion into some of the new skews going forward?

Sure, Judy. This is Vince.

Hi, Vince.

Let me, okay we'll talk about the year we just completed and then we'll shift to the second part of your question. First of all, as Mark in his comments made reference to, we had some shift in some marketing expenditures between our third and fourth quarter but let's just frame it in and put it in perspective. If you compare the last six months of this year versus the prior six months, the overall coffee business grew 4%, operating margin grew 14%, and yet we increased our marketing by $15 million or 37%, so we were in a very good place for the last six months of the fiscal.

As Mark also mentioned though, a year ago, because of some shifting in merchandising, we grew the business 16% in volume so we knew we weren't going to repeat that in the fourth quarter specifically. There's a lot of activity or noise as it relates to pricing because as you know, we took our DDF to our list price in our first quarter last year, our main competitor followed us in the last half of the third quarter this year, so but net-net, if you look at it, we enjoyed an every day lower price on the shelf but with promoted activity our competitor was clearly well below us, and so as a generic comment, they were below us during that time frame, and continued it.

Now, as we fast forward to your comment about Dunkin', first of all, we are all charged as business unit managers to grow part of our growth for new products and so we have a pipeline of not only new products on Folgers but Dunkin' and et cetera, and we as you know introduced Dunkin' Turbo earlier this year and that's already at two weeks at about a 40% APB. We're going to come back in the Fall with what we call seasonal but I wouldn't think about that as that's a shift in our mind set. We still think that there's a tremendous amount of growth with the core items, whether that be just more shelf space or as we expand the distribution primarily to the West. Did I cover all of the questions?

Yes, but just in terms of following up on Folgers, just the fact that your competitors, the promoter prices are below your every day prices. I mean, how is that impacting the brand and how do we think about kind of that sort of the price differential?

Yes, sure. Well, clearly, the price point that's being achieved by a very large customer is affecting our business and will affect it in the first quarter but we remain confident that we're still going to be able to take those funds and make that volume up with that customer or other customers, so we're certainly not giving up on anything at this particular point but I think with all brands that are in those featured activities with the number one customer that's having a disruptive effect within the industry.

Okay, thank you.

But we still remain confident in investing in the brand and new product activity we have coming down the pike that we'll be able to grow Folgers.

Okay, thanks a lot.

Mitch Pinheiro with Janney Montgomery Scott. Please state your question.

Good morning. I missed any comments if you made any regarding the size of your Dunkin' Donuts coffee business now.

Sure. It's as you know retail as you can read it's well over $300 million on our basis, it's just under $250 million.

$250 million. And what's your average SKU's and what are your plans for fiscal 2011 to either increase that or maintain that?

Yes, well again, two things. For the top couple of skews, our ACV is around 80%. We still have a lot of room on some of the flanker items which average below 50% and then as I just commented, Dunkin' Turbo within a very short period has about a 48 DB, and then we're coming back with the three seasonal items later in the year so I think the bottom line is the team is still poised to grow that business double digits this next year.

Okay. Have you discussed K-cups for Dunkin' Donuts?

Well, nothings really changed from the last conference call. Our initial focus is going to be on Folgers Gourmet Select and on Millstone.

As it relates to Folgers and the growth has been clearly coming in the specialty side of the coffee business, so is that something that you just expect to continue, even excluding the K-cup phenomenon, so are you going to do anything different in terms of support for Folgers of your premium brands or are you going to throw a lot of marketing support behind the Red Can?

Well, first of all, we've obviously enjoyed a lot of growth from Dunkin' but apples-to-apples, we've grown both the overall coffee business by 4% and the Folgers brand itself grew by almost 4% in tonnage year on year and as we have said, we must grow the Red Can as our number one priority and so a lot of the marketing that we invested in was referred to earlier in TV advertising that's in the can is supporting the Red Can business and so certainly that is our charge to grow Red Can, and if you look at all of the activities over the past year, one of the key things we did was shift some emphasis from the previous owner of emphasizing what's called opening price point to more what we would have called the classic last black silk and then our special roast where so again that might have a volume impact but it's supporting of the core Folgers brand, as well as the instant segment which is up very nicely this year.

Let me just add to Vince, this is Tim, what Vince said on the coffee category across our whole business. We have to start supporting the core brands and building the brands long term and if we do that well then we have the opportunity to add new products and acquisitions and so in the coffee, right out of the get go, we bought the business, our first emphasis was on the red can and we've done a great job of doing that and the amount of money we've put this year for advertising for next year is supporting the major core brand, and that's across all of our businesses.

Okay, when you look at the margin in the Folgers business, granted coffee prices have spiked and I know you've taken your 4% price increase, would you expect gross profit all things being equal today to be flat with last year?

Yes, I think with the pricing and reasonably in line with this year as I think you'll see across the Company.

Okay, last question just revolves around the baking SKU's. Will that have a material impact on your volume in sales?

Explain baking--?

I thought you were purging some of your lower margin baking SKUs. Maybe I misheard that.

Oh, no you're right. What we're looking at is we're purging some of the lower margin items and we'll have an impact on our volume, yes it will.

I mean--?

It will have an impact right now we're thinking about a 1% impact on the total overall Company volume.

On volume but it's a favorable mix shift, Mitch.

Sure, I just wanted to get a sense so when you provided sort of I think your price in mix, I forget what the price in mix was, about 2%, and 1% volume, that 1% volume includes the purging of these lower margin items, is that correct?

That's right, so it would be 2% without that.

Okay, perfect. Thank you guys.

Jane Galfon with Barclays Capital. Please state your question.

Hi, good morning.

Hi, Jane.

As we've talked about the competitive environment and just the promotions that are heating up over the last six months, I guess how are you thinking about the response you have to come back with and budgeting that into the fiscal 2011 sort of top line process? So I'm thinking about this 1% underlying volume gain that you've projected what have you also built in from kind of a trade promo standpoint in order to achieve that or another way to put it is if I think about your price mix assumption of two if I exclude pass through pricing, what would that look like?

This is Mark, Jane. Maybe I'll just start generally is that I think in our 2011 forecast, I would say there's nothing dramatically different from a support perspective but last year as we commented in each quarter in various parts of the business that our trade spending particularly in Paul's area was pretty significant so I think that the plan at least this point in time based on what we know is certainly adequate to support and I think Vince as he mentioned we talked about coffee we'll continue to evaluate any needs going forward but we feel at least as of right now the forecast would include what we need.

Okay, thank you, and then maybe moving down to the corporate margin line, clearly this year you've made a major stride in getting to that kind of 18% level. We spoke around the third quarter conference call about your hope to maintain that into fiscal 2011, it seems like the guidance that was introduced maybe incorporates a little bit better than that if I think about leverage to get to that 5% of the top end of the EPS range, so I guess what's changed? I know you're undergoing the supply chain restructuring and so on. Do you have any more visibility or confidence and what's driving that to achieve maybe more margin expansion into next year?

Well, I think there is a little bit of leveraging clearly from the top line growth and I think it's just the ongoing efficiencies that we're recognizing. Going through the first full year with Folgers and the larger Company there's a little bit of a learning curve but we constantly challenge that side of the organization to identify and we actually have sort of internal targets within the corporate functions to try to help deliver some of that and I think what you're seeing now is a little bit of the benefit coming through so whether that's truly corporate function areas or areas such as distribution, we're all challenged to try to drive that down and you're starting to see that.

Thanks very much and just if I can, a quick follow-up. If I think about the flow of volume, I know there was a reference to maybe the first quarter won't look as great but do you have a sense of what you expect that to look like at the corporate level as we look through the quarters of fiscal 2011?

Yes, I think that the key point here is as you would imagine most of those costs are fixed costs so if you kind of just use a full year, I think it's a fair assumption that from a dollar perspective it will be fairly even. Clearly as we have our larger sales quarters in the second and third percent that percent will drop but from a dollar I think you can assume somewhat even across the four quarters.

Perfect. Thank you very much.

Scott Mushkin with Jefferies. Please state your question.

Yes, hi, this is actually Mike Otway in for Scott.

Hi.

Good morning. A quick question. I guess kind of coming off third quarter call, it seemed that you guys are maybe a little more cautious and kind of was there anything that kind of surprised you in the quarter because obviously it looks like you didn't need to be kind of given the performance in the quarter so was there anything that changed or anything that specifically that kind of was above your expectations, et cetera?

Well, this is Steve. If you remember a year ago there was a lot of negative media and a lot of impact on our peanut butter business and we had just come out of the PCA recall and we really, it was very difficult to forecast how much peanut butter was going to rebound and I think our peanut butter business and the consumer came back to that very strong fourth quarter this year so we probably were conservative on how much of last years number was the consumer, how much of it was our incremental trade spend, our incremental advertising so with all of that noise it was difficult to forecast.

I'd just add too to that is just that it's the overall economy. I think still I think we're all learning as we said in the beginning of the call how to work in this new economy so I think it's wise and prudent to be cautious and that's what we're doing and we're cautiously optimistic.

Okay, I appreciate that, and then quickly just as a follow-up, some of the I guess some of the pushback that we've gotten lately is that despite owning some number one brands there a little more commodity based and so I think kind of given the back drop and the climate kind of the concern would be holding margins over the next few quarters and into fiscal 2011. I was just hoping you could comment on that briefly. Your thoughts on kind of your ability to hold margins.

Yes, this is Mark Belgya. And I think you've heard us say this before. We've been managing commodity costs for 100 plus years. But that aside, I think part of the key with the brands is you cannot disconnect the ability to price and the leadership that having a number one brand brings to us so it's been demonstrated with our recent moves in price, we are able to address that. As you work your numbers based on our forecast you'll see we're holding pretty steady margins so hopefully some of the concerns that were expressed probably in certain folks minds about some portions of our business to grow margin we've addressed those and just to reiterate we'll continue to monitor the cost and react accordingly.

And this is Richard. I think as we said earlier, most of our categories that we're in and the brands that we're in are pretty good values for the consumer, so people aren't spending a lot of excess money on these categories or brands so I think they do provide a value even in a tough economy, so it doesn't mean that we don't have to be competitive and we will be but I think we're pretty well positioned.

Perfect, I appreciate you taking the questions.

Chuck Cerankosky with Northcoast Research. Please state your question.

Good morning, everyone. Mark, if you look at the restructuring charge of $0.55 to $0.60 excluded from the guidance, how much of that do you expect to be non-cash this year?

It would be about, we said the cash charges will be $35 million to $40 million, so $60 million plus.

$35 million to $40 million?

Would be cash.

Cash. And with the recent increase in the dividend looking forward now, what would we expect to be an annual rate of gain tied to earnings growth or what kind of pay out ratio are you thinking about now and included in your answer I'm looking for how you're looking at the non-cash amortization expenses?

Well, I think, Chuck, as Richard said we did increase our dividends in April by 14% which we think is pretty healthy. We continue to underscore the 40% policy. I think that the amortization we continue to look at is part of the EPS base that we use. You've got to be a little careful because particularly as we go through the restructuring there's clearly charges that will be excluded for GAAP purposes similar to what you could say amortization would be but there's cash tied behind it so I think that the EPS that we speak to which the Street basically speaks to that the non-GAAP is probably still about EPS measure to apply that 40% to and that would drive our policy going forward and again we typically evaluate that in the April time frame and the fact we do that holding to that roughly 40%.

All right, thank you and congratulations on a great year.

Thanks, Chuck.

Our last question today will be a follow-up from Eric Katzman, Deutsche Bank.

Thanks for taking the follow-up. Just quickly, I guess Mark, the $9 million of intangibles that's being rerouted up into the segments, the $9 million that you didn't quantify as going into coffee. Is that in special because of the Folgers stuff that flows through the special markets?

The $9 million impairment?

No, wasn't it, I've got to check my notes but I thought you said that, hold on, on the intangibles, the move up into the segments, you had said--?

I've got you. It's the difference, the remaining $9 million or whatever that is just spread across the other segments and that's to the point the relative effect that is significant on the coffee and then the others are just spread across the other three segments.

Okay so they are kind of spread evenly or roughly? Okay it doesn't matter, I've got it. And then Richard just as a follow-up to the productivity comment you made, so just so I understand the program, so you've got obviously somewhat additional CapEx as well as the cash cost of the restructuring charges flowing through the cash flow statement this year but in terms of the productivity from the program, that's not actually likely to start flowing through until fiscal 2012, is that what you had kind of indicated?

That is correct and the plan for next year is just $5 million.

For next year, you mean fiscal 2012 or this year, fiscal 2011?

Fiscal '11.

Okay, so just $5 million of savings?

Correct.

So another way to think about it is fiscal 2011 is kind of a year where you're spending more on advertising and obviously going up against a pretty excellent year in fiscal 2010, you have cash going out for the restructuring but you aren't getting any benefit from that yet and so obviously without acquisition, so this is while it's a strong number in terms of the growth, that kind of explains let's say the moderation and then you're also not assuming any share repo benefit either.

That's correct. Both of those are correct.

Okay, thank you.

Thanks, Eric.

We do have another question in the queue, Scott Mushkin with Jefferies. Please state your question.

Hi guys. I know my associate Mike was asking questions before. I have just one follow-up for you. You guys, I got a little bit of mixed message on I think you said it was the most competitive climate you've seen ever, Wal-Mart is being very disruptive but then I also thought I heard you guys talking about that consumers are willing to trade up into some higher value items, so I'm just trying to kind of bring that all together. Where are we, where is your thought on where we're going vis-a-vis the consumer? Is there enough trade off that that's giving you confidence that we're kind of out of the woods or it's really not reached that level, it's just gotten a little bit better but the other things are disturbing you more?

Scott, this is Vince. Let me take a step back. I think when we talk about the environment and the economic situation, it's really about I think we commented in this on our third quarter, what our customers are doing to drive foot traffic to their stores and each of them has different strategy but some of those activities are much more deeper than maybe what we had seen historically.

So typically with our number one brands and the strength of our brands we're obviously willing to participate in the levels that we can but we typically are not going to win with the price gain and so whether it be Folgers or Jiff or Smucker because of the strength of those brands, we don't believe that it's necessarily fit for our category before for our long term growth to be in a price gain situation so I think when we referred to the unprecedented economic times that's a factor that we're taking into account here, and so it doesn't have anything to do with what we believe is the strength of our brands and the amount that we're investing in marketing to support our brand. It's just a matter of the amount of activity and I probably use the word disruption throughout some of our key customers.

Yes, I think, Vince just to follow-up on that, just back to the new normal, I think that the visibility with information that we have access to in terms of the consumer and our customers have access to is more rapid and more rich than we've ever had before and then to a sense it's sort of a new way of working together, so as we all focus on the consumer together, we're connecting our information better in a standard way and leveraging it so that we can provide the right value to the consumer and I think in this economy we're going to see this for a long time to come and I think it's an opportunity for all of us to grow to the benefit of the consumer long term.

Okay, and the comments about the disruptions, I mean we've gotten concerns back. You've seen things like 40 ounce Heinz ketchup sold at $1.00, obviously Maxwell House has been promoted like crazy. What's the stock up effect? Is there a concern growing in the trade that this is going to really disrupt just almost manufacturing cycles and other things or has it not reached that level?

This is Richard. We've seen historically big deep discounts and over time they usually level out to a certain degree. Tim did mention it's kind of a new normal but I think that we have long term growth plans based upon each one of our brands and we're not going to change our marketing mix significantly and our support of those brands over time and any one quarter may be up or down. We've seen that before specifically in baking and we've seen it occasionally in coffee but over four quarters it usually levels out.

All right thanks for taking some follow-up questions from me. I really appreciate it.

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

Okay, well thank you very much. Thank you to all of our callers, we really appreciate it. It's a great year. Thank you to our employees and for the tremendous year and thank you for being with us today. Have a great day.

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