J M Smucker Co (SJM) 2011 Q1 法說會逐字稿

Good morning and welcome to The JM Smucker Company's first quarter 2011 earnings conference call. At this time I'd like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation. Please limit yourself to two initial questions during the Q&A session and requeue if you have additional questions.

I would now like to turn the conference over to the Chief Financial Officer, Mr. Mark Belgya. Please go ahead, sir.

Good morning everyone. Welcome to our first 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, Jif and Hungry Jack; Mark Smucker, President of our Special Markets; and Paul Wagstaff, President, Oils and Baking. After this brief introduction, I will turn the call over to Richard for opening comments. I will then review the financial results for the quarter and Tim will provide closing remarks. At the conclusion of these comments we will be available to answer your questions. If you have not seen our Press Release it is available on our website at Smuckers.com. A replay of this call is available on the website. If you have any follow-up questions or comments after today's call, please feel free to contact me or Sonal Robinson, Vice President of Investor Relations.

I would like to remind you that in both the prepared comments and question and answer period that follows we may make forward-looking statements that reflect the Company's current expectations about future plans and performance. These forward-looking statements rely on a number of assumptions and estimates, and actual results may differ materially due to risks and uncertainties. I invite you to read the full disclosure statement in the Press Release concerning such forward-looking statements. I also want to point out that the Company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is also detailed in our Press Release and on our website.

I'll now turn the call over to Richard.

Thank you, Mark. Good morning, everyone, and thank you for joining us. Let me begin by reviewing our results for the quarter which continued our consistent and positive trends. First, our sales for the quarter were comparable to last year. Several key categories realized volume growth including coffee and peanut butter which contributed to a favorable sales mix. Second, Coffee, our largest segment, had a solid quarter and came in stronger than we originally expected during our year-end call. Third, non-GAAP earnings increased for the quarter with earnings per share up 13% led by increases in operating profit and reductions in our effective income tax rate. Fourth, our continued investment in the brands, new product offerings, the pricing actions taken to date and our planned promotional activities have positioned us well for the back-to-school and fall bake holiday periods. And finally, the significant investments we are making in our business, including the project to streamline our coffee and fruit spread supply chain, will allow us to continue delivering long term growth and shareholder value.

Our quarter results occurred during a challenging economic environment, demonstrating the strength of our brand and the importance of a consistent focus on our strategy. Our focus is long term, yet we have a culture where teams adapt quickly and adjust tactics as necessary. While aggressive pricing can be seen in a number of the categories in which we participate, we will respond rationally and with a long term view of the health of our brands and our categories.

Now let me provide some commentary on each of our four business segments. In our Coffee segment, sales were up over a very strong first quarter last year and momentum in this business continues. We are supporting the Coffee brands with all elements of marketing including advertising, consumer promotions, and public relations. Seven new commercials will air this year including advertisements supporting Dunkin' Donuts Coffee, Folgers Black Silk and the recently relaunched Folgers Special Roast. Our cake cup offerings continue to meet with great customer acceptance and will be in stores in the second quarter. Folgers Gourmet Selections and Millstone cake cups will be supported by a strong marketing program including advertising. Dunkin' Turbo Coffee, which launched late last year, continues to gain distribution, increasing to a 12 week ACB of 55%. And the new Dunkin' Donuts seasonal items are on track to be launched this fall. Finally, as previously announced, in response to green coffee cost, which reached a 12 year historical high during the quarter, we took a price increase averaging 9% earlier this month on most of our US retail coffee products.

Turning to our Consumer segment, net sales and volume were essentially even with last year, excluding divestitures. It is important to note that we achieved these results despite strong performance last year. Also, certain key promotional activities that occurred in the first quarter of the prior year have been shifted to later quarters this year. In the peanut butter category, we will be airing new advertising to support the relaunch of Jiff To Go. Also, consistent with our ongoing focus on price transparency, we took a 5% price decrease on our peanut butter products in the first quarter, reflecting a decline in peanut cost. In the fruit spreads category, we continue to invest in our brands as new commercials continue in the classic boys campaign will be aired during the upcoming key promotional periods. We also continue to see momentum in the Smuckers Orchards Finest Premium Fruit Spreads products which were launched on a national basis. The national rollout of Smuckers Snack'n Waffles in retail continues to provide us an exciting handheld platform. All of these actions position us well for the back-to-school period.

In our Oils and Baking segment, aggressive pricing by competitors negatively impacted both sales and volume for the Crisco and Pillsbury brands. Planned rationalization of lower margin products also contributed to the decrease for Pillsbury. We recently announced a list price decrease for our oils business to narrow the price gap on shelf and to provide the consumer with a lower everyday price for our Crisco products. We continue to focus on product innovation and providing consumers with more options for our Pillsbury brand. Our recent launch of sugar-free cake mix and frosting has been met with good customer acceptance. In addition, we will continue to offer new varieties of Pillsbury products including the upcoming launch of seasonal items with a Halloween theme. This combination of new products, merchandising programs, and narrowing the price gap in oils gives us comfort as we enter the fall bake period.

In the Special Market segment, volume was up slightly, led by the natural foods and export business. This increase was partially offset by volume declines in Canada. Excluding the impact of foreign exchange, sales were down 3% due primarily to price decreases and the timing of promotional spending.

In summary we delivered a solid quarter and a good start to the fiscal year. Our successful performance continues to reflect a culture where our employees understand our vision and our strategy and consistently execute.

I would now like to turn the call back to Mark to have him review the financial results for the quarter.

Thank you, Richard. Overall, net sales for the quarter were equal with last year. Increases in the US retail Coffee segment were mostly offset by declines in US retail Oils and Baking and the impact of the divestiture of our potato business. Favorable sales mix and foreign exchange were positive contributors, helping offset a 3% decrease in volume driven by declines in the Oils and Baking category in the US and Canada. Pricing actions initiated during the quarter did not have a material impact on the results. Also included in last year's results were approximately $3.5 million in industrial fruit sales that are no longer categorized as revenue.

GAAP earnings per share were $0.86 this quarter compared to $0.83 in the first quarter of last year including charges related to restructuring and merger and integration activities. Total charges were up this year reflecting costs associated with the restructuring project announced earlier this calendar year. Excluding these charges, earnings per share were $1.04 this quarter and $0.92 in last year's first quarter, an increase of 13%. The quarter results benefited from a lower tax rate when compared to the prior year. Gross profit excluding charges increased $12 million to 39.9% of net sales from 38.6% last year. Included in gross profit were unrealized mark-to-market gains on commodity contracts of approximately $7 million. Gross profit benefited from a favorable sales mix as a larger percentage of total sales came from the coffee, peanut butter, and fruit spread categories which generate higher gross margin. The impact of raw material costs was mixed as higher green coffee costs were offset by lower costs for peanuts and certain fruits.

Most of the gains in gross profit flowed to operating income as SG&A expenses were up 1% compared to the prior year and increased as a percent of net sales from 19.1% to 19.4%. Overall, operating income excluding charges increased $10 million for the quarter and improved as a percent of net sales from 17.6% to 18.7%. The effective tax rate for the quarter was 31.3% compared to 35.2% in last year's first quarter. The lower rate in the current year reflects benefits realized from an increased deduction relating to the US manufacturing activities, along with lower state income taxes and a favorable federal income tax determination related to a prior year. We anticipate a full year effective tax rate between 32% and 33%.

Let me now provide details on our segments. As a reminder, although our four reportable segments have not changed, we have modified the calculation of segment profit to better reflect the decision of segment management with the corresponding financial results, most notably in the area of intangibles. We issued a Form 8-K last week providing the quarterly segment profit for fiscal 2009 and 2010 under this new calculation.

In the US Retail Coffee segment, net sales increased 7% primarily as a result of volume gains. Growth in the Folgers brand, along with continued double digit growth in the Dunkin' Donuts brand, resulted in an overall coffee volume increase of 5%. This increase is on top of a 9% volume gain in last year's first quarter. Coffee segment profit increased 1% due to volume gains and a price increase offsetting higher green coffee costs. Segment margins were 30.4% in the prior year compared to 28.4% in the current year reflecting these higher green coffee costs.

In our US Retail Consumer segment, reported sales were down 4% while volume declined 3%. Excluding the divested potato business, net sales and volume were essentially flat when compared to a strong first quarter in the prior year as volume gains in Jif Peanut Butter, Smuckers Snack'n Waffles and Hungry Jack pancake mixes and syrups were offset by declines in toppings. As Richard mentioned, certain promotions have been moved to later in the year resulting in a slight volume decline in fruit spreads for this quarter. Segment profit increased 8% mainly due to lower raw material cost, improved profitability related to Smuckers Uncrustables, and favorable product mix. These were partially offset by additional investments in segment marketing. Segment margin improved nearly 300 basis points from 22.7% in last year's first quarter to 25.6% this year. The divestiture of the low margin potato business also contributed to the margin improvement.

In the US Retail Oils and Baking segment, net sales and volume for the quarter declined 11% and 12%, respectively, as the competitive and promotional environment experienced in the Oils and Baking category at the end of last fiscal year continued. The planned rationalization of certain low margin baking products also contributed to the sales decline. Segment profit in the quarter decreased 12% and profit margin declined by 20 basis points. The decrease in segment profit was primarily driven by lower net sales and higher production costs partially offset by the favorable impact of unrealized mark-to-market adjustments on commodity contracts.

Sales in the Special Market segment were flat. Excluding the impact of foreign exchange, sales declined 3% primarily driven by price decreases and the timing of promotional spending. Volume increased 1% as gains in natural foods and milk, condiments and coffee were partially offset by declines in flour, oils and foodservice portion control. Margins in the Special Market segment increased from 13.4% to 17.4% as a result of favorable sales mix, lower supply chain costs and the positive impact of unrealized mark-to-market adjustments. EBITDA, excluding restructuring and merger and integration cost, was $248 million for the quarter or 23.7% of net sales compared to $233 million or 22.2% of net sales last year. Based on first quarter results we are tracking towards our guidance of full year EBITDA approaching $1.1 billion excluding charges.

Let me conclude my remarks with comments on cash flow. Cash used by operations was $27 million in the first quarter of 2011 compared to a use of $26 million last year. As a reminder we expect a significant use of cash for working capital during the first half of each fiscal year for seasonal fruit procurement, the build up of inventory in advance of the fall bake and holiday season, and the additional build up of coffee inventory in advance of the Atlantic hurricane period. We expect the generation of cash to accelerate in the second half of the year as we complete our key seasonal periods. Capital expenditures are still expected to approximate $235 million despite only $27 million in the first quarter. As we previously stated, we expect use of cash this year of approximately $95 million for capital expenditures related to the coffee, fruit spreads restructuring project. This will primarily occur in the second half of the year. Finally, cash charges of $35 million to $40 million related to our restructuring project are expected for the year.

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

Thank you, Mark, and good morning everyone. As we've stated over the years, we believe our strategy of owning leading brands in North America is a solid, well understood strategy. It is one which has provided us the framework to achieve our growth objectives. We believe in running our Company with a long term perspective. As an organization, we remain committed to investing in our brands and continuous improvement in our operational practices and cost structure.

In March, we announced the largest capital investment in our history to streamline our coffee and fruit spreads supply chain. The estimated expenditures, annual savings, and overall timeline related to the project remain on track. We plan to break ground on our new manufacturing facility in Orville later this fall and are actively working to expand our coffee capacity in New Orleans.

We are currently in the key back-to-school period. We have solid programs in place supporting our fruit spreads, peanut butter and Smuckers Uncrustable sandwiches and are anticipating a strong finish to the season during the second quarter. We are encouraged by our first quarter performance and remain confident about the remainder of the year. For fiscal 2011 we anticipate an increase in net sales, slightly ahead of the 3% growth indicated in our original outlook, due primarily to the impact of recent pricing actions. We continue to expect non-GAAP income per diluted share to be in the range of $4.50 to $4.60 including amortization expense of approximately $0.40 per share. We are also maintaining our outlook on various cash flow items that we provided last quarter including depreciation, amortization and capital expenditures.

As we look forward we feel positive regarding the plans we have in place and the tactical measures we have implemented. Due to our hedged coffee position relative to price, we would anticipate strong results in the second quarter. However, we have held to our original guidance range for the year. We believe this is prudent as we monitor competitive activity and consumer response to our pricing actions. We will be in a better position to adjust guidance if appropriate following the next quarter. At that time we will have completed our back-to-school period and be in our fall bake and holiday season.

In summary, first, we had another strong quarter. Second, we will continue to adapt our tactics to insure we are well positioned for the current environment but our focus will not waiver from our strategy and our long term health of our brands. Third, we feel confident in our ability to deliver on the earnings guidance provided. Fourth, we continue to invest in our business and our brands through marketing and product innovation. And finally, we want to thank our dedicated employees for their continued committment to our culture of doing the right things and doing things right.

Thank you for your time today and now we're happy to answer any of your questions.

Thank you, gentlemen. (Operator Instructions). And we'll first hear from Eric Katzman of Deutsche Bank.

Good morning, everybody. Okay, I guess my first question has more specifically to do with the coffee business. To the extent that the input has gone up a lot, you've taken pricing. Have your major competitors followed on that price increase, and are you seeing any -- while it's probably pretty difficult because you're small in the single serve -- are you seeing any kind of elasticity either with single serve or with maybe some trading away from Dunkin' to lower cost Folgers?

Good morning, Eric, this is Vince. Let me start with the pricing action that was very well received, and probably expected when we announced in early August. I think it's public information that our major competitor did follow on mainstream. It's also public knowledge that our main competitor in the gourmet segment did not follow, and they have a press release in regard to the resulting impact of that. The pricing is now just, I'll say being reflected on shelf in terms of the everyday price in both cases. The key that we'll be watching during the second and third quarter though are the price points during the key merchandising periods.

In terms of pricing elasticity and volume impact, obviously we run models like everybody else does, but that really will depend upon the price points that the products are being merchandised. And I think it's fair to say that our team will be monitoring those very, very closely, and we will respond where we need to in a responsible manner.

And in terms of single serve, I would say that we haven't seen any movement away from that at this particular point. That category continues to grow very, very significantly, and we really haven't seen much trading off from gourmet at this point. The gourmet segment continues to show nice growth, including our Dunkin' brand which was up about 15% in the quarter.

Okay, thanks for that. And then I guess a follow-up, maybe a broader question for Tim or Richard. There's a lot of questions about the government's approach to the tax policy on dividends. You have a lot of cash, a very strong balance sheet. The assumption has been that you're going to be purchasing a lot of stock. Is there any thought to changes in, given if rates go up on dividends, is there any change that you would think of in terms of how you would use the cash flow to give back to shareholders?

Eric, this is Richard. We look at our capital structure frequently, and we do take into consideration the government policies, so that isn't a subject that we haven't talked about. We've talked about it, but we haven't made any decisions at this point. And our plan would be to, whatever we do would be the right thing for the shareholders' value long term, whether that's something changed in the dividend policy or buyback of stock, which you know we will be able to do after November because that's the two year time period. So we'll look at all of those things, but we haven't made a decision yet.

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

Our next question will come from Alexia Howard of Sanford Bernstein.

Good morning, everyone. Hi. I just wanted to focus a little bit on the retail Oils and Baking sector. Looked as though the volumes were down fairly heftily, double digits, and pricing was pretty flat. I'm curious about the promotional dynamic in there. Were the volumes down mainly due to competitor activity? And if so, was that promotional activity funded by retailers or the competitors, and are you seeing any relief on that in the last month or so?

Hi, Alexia. This is Paul Wagstaff. And first thing, I just want to state the obvious. The Oils and Baking team wasn't happy with the results for the first quarter. Clearly we want to do better. That being said, our long term strategy we still feel is accurate. We think it's good. And again, we manage the total Oils and Baking category as a whole on the long term.

From a volume perspective, on the oil side, we did see significant competitive pressure in the category, and we do see that that was a main driver of why we had a lower volume. On the baking side, we also had some significant competitive pressure, but there was also some planned declines in some of our lower margin items. We discontinued some items, for example in flour, which is a very heavy item, so big volume. We had some planned declines there.

As far as going forward, we would anticipate it to be continuing from a competitive standpoint, but we feel we have pretty good plans in place to address that.

Great. Thank you very much. And just moving on to the coffee segment, did you get any benefit or any significant benefit to volumes this quarter from the shipment of the cake cups this quarter, that I know are really going to hit next quarter? And if so, how material was that volume benefit?

There were no cake cups shipped in the first quarter, and that will all begin in fact within a week or so, so there was no volume as it related to that. I would like to go back to your previous question, that you asked Paul, about the funding. I think it's fair to say from a macro perspective there was a lot of disruptive pricing that occurred during the quarter, and I think the answer to your question is that's being funded by both competitors and retailers. It's just not one or the other.

Great. Thank you very much. I'll pass it on.

Ian Zaffino of Oppenheimer.

Great. Thank you. Just more of a theoretical question here. Now that you, I think you have done a great job in coffee, and I think that you've really established yourself as a great brand there. Is there an opportunity for you to move away from the old Proctor & Gamble pricing ways, where you've trained the channel to look at green coffee and expect an increase or decrease depending on where it goes, in that is there an opportunity to raise prices above and beyond what green coffee might go up, and if it goes down, maybe being able to hold pricing and hold margins? Thanks.

Well, I guess I would answer to some degree we have already moved away from previous practices, primarily because of the way it's managed from an inventory LIFO/FIFO perspective. We tend to be a little bit longer, but I think it's true to our fundamentals that we are always transparent with our pricing with our customers, and this isn't about margining up or margining down. It's about taking it when we feel we need to, that reflect those costs to accomplish our overall margin objectives or profit objectives for that fiscal year.

Okay, all right, thanks, that was really my only question.

Jane Gelfand of Barclays Capital.

Good morning. Just a question on how you're feeling about how the first quarter panned out versus how you're seeing Fall bake's merchandising getting set. You talked just two months ago about this being the new normal, and among the toughest environments that you've seen in your long careers, so I guess now you should have a little bit more visibility, given the merchandising you set ahead of time for Fall bake. Do you feel like the first quarter was the toughest quarter that you'd expect from a promotional standpoint this year, or is Fall bake going to be just as competitive, and potentially as volatile?

Hi, Jane. This is Paul Wagstaff. From an Oils and Baking perspective, obviously we've had some significant competitive activity since the fourth quarter of last year in my area. And I would say that we would see some of that continuing through the Fall bake time period. That being said, we want to be competitive, and we've taken a price decline in our oils business to address some of the gaps on pricing on shelf, and we think that is going to help address the issue going through Fall bake.

This is Richard. Just from an overall standpoint for the industry, there's no doubt about it, everybody is trying to gain customers, and there's probably more promotional activity than we've seen historically. We see that continuing, and I think that's why we say that we're willing to adjust our tactics, not our strategy. We feel very comfortable with our strategy, but we will and have adjusted tactics as we need to, to adjust to the market. But I think we're well positioned to do that, what we call responsibly, so that we still deliver our results. So it is kind of a new normal, but we think we're well positioned for that new normal.

Thanks very much, that's helpful. And just as a follow-up, as we think about the reset in some of the price gaps in oils and baking, how does that show through on the profitability line? Last quarter we had some very similar dynamics on the top line, but clearly profit was up in the double digits. Here it's down this quarter. So, as we think about the impact of that price reset, how do you expect the segment operating profit line to trend for the rest of the year?

I think the key is, we manage it for the full year, and we have a lot of different budgets that we're managing to go towards our overall fiscal year margin goal, so I think we're positioned pretty well to manage that.

Thanks very much.

Next we'll hear from Ed Aaron of RBC Capital Markets.

Thanks, good morning. A couple on coffee. The reported sales numbers were surprisingly strong relative to some of the external retail data that we saw during the quarter. And I know you didn't announce the price increase until after the quarter ended, but did you perhaps see any inventory load into the channel in anticipation of those higher prices?

No, Ed, this is Vince. We clearly timed that announcement so that there would not be any forward-buy in the system, and I can assure you that there was no load in the quarter for that. That was a conscious decision that we made.

But I want to go back to your point about what you see in the syndicated data information. I would say we share your concern, but as we've said before, those syndicated providers measure only about, actually less than 50% of our total volume. And so the real numbers are, we actually grew coffee during the quarter fairly significantly, 5% on units and 7% on sales. And as you look at the syndicated information, you know it doesn't show category growth or share growth.

I will say that we did anticipate that our major competitor was going to have a gain during the period because of the pricing where they were, and in some cases, as I think Ken Goldman reported, they were below private label levels. So we did anticipate some share reflection, but again, it doesn't reflect the bigger picture of the growth that we've had with the brand.

Okay, thanks. And then just a follow-up on the earlier question about price elasticity in the category. You haven't owned Folgers long enough for us to really study that, but presumably you have a history of those numbers that goes back longer than what we can see. Based on that longer period of history, what would you assume is maybe just a historical rule of thumb for how much volume would be expected to taper off relative to the magnitude of the pricing actions that you've taken?

We have obviously have our models and look at that, but as I said earlier in my comments, it really is going to determine what the key price points are of our competitors, and where we feel we need to be to be competitive. And so, it wouldn't be fair for me to try to quote a number at this point.

Okay, thank you.

Next we'll hear from Farha Aslam of Stephens.

Hi, good morning. On several occasions you've mentioned your long term strategy, but willingness to adjust tactically. Have you gotten new tools that you can better respond to the market, or is it a new strategy that you are quicker in tactical changes? And how long, and can you give us some examples on those tactics?

I'll probably turn it over to Steve in just a minute because he's doing a lot for back-to-school right now, and Fall bake. But most of our tactics are what we do on our promotional activity on a quarter by quarter basis, and the levels of promotion, the types of promotion that we do. We also adjust advertising schedules to be at the right time. As Paul also mentioned, we have a number of buckets in terms of our marketing and promotional budgets, and we'll adjust those up or down as needed. And that is, as Vince mentioned also earlier in coffee, we'll have to look at what the pricing points are during the holiday period, and we'll adjust, and we can do that pretty quickly if we see certain customers in certain regions that we need to make promotional adjustments on.

But Steve, do you want to talk--?

Sure, hi, Farha, it's Steve. If we look at back-to-school, for example, the syndicated data doesn't reflect the fact that we had shipments up, for example, in peanut butter. And we're really encouraged by that because a number of our largest customers have moved their back-to-school event into August, away from July last year. So, we sort of got some dry powder there, we got some events. And we're far enough into August that we see those shipping.

But what we mean by that is, we can stack customer-specific marketing funds, we can stack our national promotional events, and we can stack our trade events, frankly. And our customers are looking for a little more bang, and when we have to do that. We're trying to avoid the deep, deep discounts, and we're blessed to have a team of both national account folks. We've got advantage nationally helping us with that. And it just requires us to get all those things lined up, and I think we're nimble enough in the way we're structured, we're able to get those things lined up quickly so the retailer feels like they can put something on their front page that's a little louder than maybe normal.

That's helpful. And just as a follow-up, could you talk to the Uncrustables business? What's the size of it, and how the manufacturing improvements are affecting profitability of that business?

A couple things. One thing that we didn't catch in the script as we were reading it, Uncrustable volume is getting back to more historic growth trends. And so we saw the Uncrustable business bounce back at the end of the fourth quarter, and we had a robust first quarter with it, so it's great to see those trends back. The whole wheat has just taken off. Quite frankly, we thought whole wheat Uncrustables would be the answer. They've been slow to catch on, but that's no longer the case. We're making them as fast as we can. And there's no question that a single plant footprint is much more efficient for us. So all those things added up, it's growing both in foodservice, and it's growing in the consumer business.

Great. Thank you very much.

Scott Mushkin of Jefferies & Co.

Thanks for taking my questions. I just wanted to get back to Vince, and your comments to Ed's questions about coffee, because it seemed like you've been given the activities and the alternative channels with one of your competitors. It seems, maybe I'm wrong, that you were a little surprised that your volumes were as robust as they were. So I'm just trying to dive down in this. If we look at the measure channel, which is obviously scanner data, we saw declines. We also know what was going on at Walmart, which is probably another 25% to 30% of the market.

So in 80% of the market, we have a pretty good idea that coffee volumes were tough. So I'm doing the math, and the other 20% has to put up numbers that are just head-scratching. So I'm trying to understand, if you guys have visibility on why volumes were so good, and where those volumes are going, or are people just drinking a lot more coffee? It's kind of a head-scratcher since Kraft talked about volumes up strong double digits.

Sure. I don't know if I can add much more than I said earlier. You're correct. We're concerned about what's being reflected in syndicated data, but I will say this. When we knew that a major customer were going to be very, very aggressive with some price points, and we anticipated that we may be short on volume, back to our ability to implement, we went to some rest of market and tried to do what we could in a responsible way to make up part of that volume. And hence, we actually exceeded our expectations in the quarter given where we thought we may be in the end of the fourth quarter of last year.

Is rest of market, is it traditional retail? Where would the volume go?

It could be everywhere, but it would be alternative channels, so whether you talk dollar class of trade, convenience, drug, military, on and on -- if I didn't say, club, all of those other channels. But there was also, our grocery business actually turned out to be very, very strong given our ability to change some of our tactics during the quarter.

Is there like a delay here? In other words, some of the negative two, one, we saw in the fourth quarter was reflective of what was going to happen to you, or is there some timing issues here, as well?

It could be, but although, it seems to be -- we've had this issue before. But yes, it could be.

Okay, so it sounds like you're kind of scratching your head a little bit too, or is that wrong?

No, I think that is fair, a little bit. I think we are scratching our head given what we know that we are actually delivering.

Okay. And then I know there's also -- thank you, that was very good -- the coffee profitability, I think it was mentioned just quickly that there's hedges that are going to help coffee profitability quite a bit in the second quarter. Is there any more detail around that?

This is Mark. I guess the only other additional detail, we have said in the past that we hedged for basically between 18 and 22 weeks, so clearly we're covered over that period at a certain cost, and we price to a certain cost, as well. So it's just basically the difference of the price you position and the cover position that will generate that margin.

In the second quarter, Mark, would that be expected even with, let's say, Maxwell House gets promotional again, the elasticity of demand is not what we think? Is it just baked in, that coffee profitability is going to be up almost no matter what happens to the end markets at this stage?

We had certainly factored in some potential competitive responses, and what might be necessary from spending, and we still believe the margin increase is still there.

And I have one final one, and then I'll yield. Did anyone make any question about marketing spend in the quarter? Was it up, down? Maybe I missed that. I don't know if you have any thoughts.

It was fairly comparable in the percent of sales with last year's first quarter.

Okay, great. Thanks, guys. Thanks for answering my questions.

Ken Goldman of JPMorgan.

Good morning. In scanner-measured channels, your biggest branded competitor in jams and jellies just saw nearly a 20% drop in sales year on year in a category that otherwise seems to be doing fine. So I'm not really seeing anything that would be driving this. You look at their prices, they actually seemed to rise significantly less than yours did over the last few months, and they don't seem to be promoting any less.

So I'm wondering if there's been any changes you've seen in any competitor strategies, or retailer strategies in this category. I'm not really asking you to comment on any competitor or retailer specifically, but maybe you could just shed some light on the industry dynamics right now?

Sure, hi. Steve Oakland. That is odd for the jam and jelly category, any of us to move that dramatically in one quarter. I can speak for our business, and I mentioned it in the previous comment. A number of our back-to-school events were moved into August from July last year, and I can assume that.

The other thing that we've done, and we spoke in the script to the favorable mix, we've also put much more focus on our strawberry business than our grape business. And as you can imagine that provides much better dollaring for us, better margins for us, and we also think it's a great place where our brand is so strong. So it is not because we've gone out and taken the grape jelly business, so I really can't speak to why their numbers are the way they are, unless their key customer events are pushed back later into the year, as well. That's the only thing I can think of.

As a ferocious eater of peanut butter and jelly, I'm disappointed in your strawberry strategy there.

Well, we have grape available. You just might have to pay a little bit more for it.

All right, all right. And I'm curious about the overall innovation environment right now, both for you and in general for food manufactures. With all of Walmart's forced SKU rationalization over the past two years, and given the back to basics approach of both consumers and retailers, maybe there hasn't been a lot of room on shelves for new products. But now that Walmart has reversed course, they're going back to this more branded merchandising focused strategy, I'm wondering if there isn't a more welcoming atmosphere for new products right now.

You guys mentioned some innovation today. My guess is there's a lot of manufactures that have a backed-up R&D pipeline right now. So is it a fair assessment that maybe we can expect new products to be a bigger driver than they recently have, or is it too early to say that? And I'm asking both about Smucker and the industry as a whole.

Ken, I will start, and let the others comment,as well. From our perspective, you still have to have an item that's going to appeal to a consumer, and be able to spend for it to be successful long term. You are correct about the overall SKU rationalization environment. Many of the SKUs that were eliminated during some of the major reviews have actually been added back very, very significantly. I don't know whether that necessarily makes the hurdle higher for new products or not.

We have been successful with virtually every one of our product categories, where we believe we're bringing a consumer value and a proposition to the retailers, they tend to go in. If there's one thing that's probably changed over the years is that they may only take them during certain periods of time when they are reviewing their set, and so that's something that we're all very, very sensitive to, and they all tend to be on different cycles.

And, Ken, this is Paul Wagstaff. On the Oils and Baking side, we did launch over a dozen new items this past year, and actually we've seen some very good acceptance of those items, the two Q1 sugar-free frosting and cake mix as well as some cookies, so that's actually a nice bright spot in our baking business.

This is Richard. I just think there will continue to be emphasis on good and good for you products, whether it's ourselves or anybody in the food business, because I do think there's a real emphasis on people wanting to eat healthy. It's still in the media, and we still push out on that, so I still think it's strong.

And this is Tim. Let me just add that, also, as we're positioned in many of our brands, in fact most of our brands as category leaders, one of the things we look at first of all is what's the right set. And sometimes we're the first ones to recommend some SKU recommendations, and add good for you products in there. So we've been really active in that area across all brands.

Thanks very much.

Jon Andersen of William Blair.

Good morning. Thanks for taking my question. I wanted to just touch on the outlook for the balance of the year. Obviously you're off to a strong start with a solid first quarter. And if I run out the growth for the subsequent three quarters, it looks like you'd be expecting a low single digit EPS growth from here on out to get within that range. Again, given what you said about pricing actions in coffee, profitability in that business in the second quarter, what sounds like a strong set of innovation in back-to-school and Fall bake programs, is there a certain element of conservatism here?

I'm just looking for a little more color on why that outlook would have been maintained at this point versus maybe taking it higher from here. Thank you.

Hi, Jon, it's Mark. I will just point everyone back to Tim's comments because I think that really tried to capture our view. While we certainly see some upside in the coming quarter, as we've talked there are some key areas, the competitive pressure is expected to continue. So we just think it's a little premature to just assume that that will go down.

So I think your point of conservatism is probably fair, in that when we get through the next quarter, clearly we'll have our back-to-school behind us, we'll be into Fall bake, we'll have a good read on that, we'll have probably a little better sense of maybe where some of the commodities are headed. And if appropriate at the time, we'll adjust guidance, but right now we think keeping within our range is appropriate.

Terrific, and one quick follow-up. Just on the cake cup opportunity, can you talk a little bit about the timing of the introduction, how many SKUs we're talking about, and have your expectations for supporting that piece of the emerging piece of the coffee business? Thank you.

Yes, sure. I suppose without giving away too many secrets, we have six SKUs, three in Folgers Gourmet Select and three in Millstone. The acceptance overall has been probably at or exceeded our expectations. As I mentioned earlier, we're going to ship next month, and should be on shelf by end of month. And we have a full complement of support for the launch, including a new television advertising campaign. So we're very, very excited about the prospects of that business.

Thanks. That's very helpful. I appreciate it.

Chuck Cerankosky of Northcoast Research.

Good morning, everyone. Wondering if you could comment on what you're seeing the consumer doing as you look at the mix of first quarter sales, not only in terms of what products were moving relative to the fourth quarter, but also things like sizes. You mentioned the Uncrustables doing better. That's a nice indication, but perhaps you could give us a little bit more across the board?

This is Richard. I might turn it over to Steve. I think we said this a little bit last year. We see it continuing in the sense that they're concentrating more on our base products.

And Steve, you can see that more in your business probably than others. You might just comment on some of the others.

Chuck, we had a good peanut butter quarter. We had a strong traditional fruit spreads, and what I mean by that is regular strawberry preserves, strawberry jam, grape jelly. Large sizes do well, but quite frankly, some of those channels that are doing well right now tend to sell those sizes, whether it be club, whether it be dollar, whether it be one of the mass channel. And those channels, quite frankly, the consumer is going there right now. So I'm not so sure if it's the consumer to shop at channels that sell large sizes or their desire to buy large sizes.

The other thing, though, if you look at the absolute opposite of that, our Orchards Finest product, candidly we were conservative with that initial rollout. It's a premium product. The best fruit we buy, 100% sugar, small size, expensive. It continues to exceed the numbers we thought it would, and we're continuing to roll it national, so that's on the exact opposite of that trend. So you've just got to be flexible, and have the products for each different channel and be able to put them there.

All right, thank you very much.

Robert Dickerson of Consumer Edge Research.

Hi, guys. A couple easy questions, just to clarify. I know Q4, I think you said for the year your expectation was raw material costs were going to increase about $70 million. Is that still on track?

No, that clearly has increased with the cost of coffee increasing. We're probably looking at something almost 2.5 times that.

Okay, that's what I thought. And then also for the back half of the year, as you go into Fall bake, expectations on an increase in marketing spend, obviously in Q1 you said your spend was about the same as you saw in 2010, year-over-year. Would you expect that to continue, or would there be potentially some increase in marketing?

I think that, as we said, marketing spend as a percent of sales were 6.6% this quarter, same as last. I think our marketing spend all in all will be pretty comparable. And I've got to remind you that last year was a record spend in marketing, so to spend at that level is a significant statement, and we should be near that number.

Yes, I completely agree. And then also, obviously I know a lot of people are asking about your Oils and Baking segment, and what's happening there, it's very competitive. We obviously know what's going on at Walmart. I'm just curious, I know you have a strategy in place, but going forward, if we're looking at volumes and what the trends have been in the actual segment, obviously they're weak, and I'm just curious, what do you think gets those volumes back up essentially outside of just having to drop price? That's one.

And then two, you're doing a lot better in coffee, and there's obviously a lot of margin benefit there. I'm just wondering at what point do you look at Oils and Baking as a segment for the total Company, and seeing that as potentially holding back some of the value in your overall business?

Hi, Robert, Paul Wagstaff. To answer the first part of your question, what brings some of the volume back. We've looked at this over the years, and clearly when we get our price on shelf right, and that means it's at our competitor level, we see significant volumes gain come back to us. So I would say that prices is clearly the driver there.

Paul, let me just add to that. When we think of our brands, all of those brands are icon brands. Pillsbury and Crisco are great brands. And it's not just one product in that category. So Crisco is made up of oils, shortening, sprays and olive oil. And that brand together is a very, very strong brand, as is Pillsbury in frostings and mixes and cakes, powder, flour. So clearly those are great brands, and they continue to be, and we continue to support them long term.

Okay, thank you very much. I'll pass it on.

Eric Katzman of Deutsche Bank.

Hi, thanks for taking the follow-up. Somewhat related to the last question, Tim and Richard, from an industry perspective it seems like the pretty deep promotions really haven't resulted in volume growth. And I think whether it's that aspect hurting the food companies and their stock performance, and the retailers suffering from deflation and a lack of volume response, maybe you could comment on, again broadly thinking about the industry, what do you think, where has the volume gone?

And then, two, do you see, even though you're calling for the promotional levels to maintain themselves as we progress through the rest of the calendar year, do you see the coming inflation as likely to instill more discipline, and eventual pricing through retail?

Eric, this is Tim. Let me just take an overall comment first. As you know, we take a long term view of the business and the economy. We're in a global environment, as we all know. And I think everybody -- consumer, our customers, our competitors -- are looking for balance. And to us, our consumers are looking for value, and research that we have shows that they define value as, what I get for what I pay, and I value products and brands that reflect my values. And so we have been and are committed to giving our consumers, our customers and our shareholders that balance, and that value through our consistent quality products, through transparency as we deal with our consumers and our customers.

And with that, we think that long term we earn our trust every day with our consumers, and then that helps us fulfill our purpose of providing memorable meals and moments with our consumers. So that's a global perspective, and we think that that's been consistent over the years and will be consistent going forward. There are going to be fluctuations in volume here and there by quarters, but we think that we're responsive and flexible, and do have the tactics and the quivers to address those issues.

I might just add to that is that we always say responsible promoting, and I think, Eric, you had a good point. A lot of these deep discounting have not driven the category growth. Categories have not grown because of the deep discounting. So we're willing to participate, but we are only willing to participate to a level that it makes sense for the category and for the customer. And our tactics, we're trying to do them responsibly, really to build the business, as Tim said, for the long term and not just go after these short-term volume hits.

Okay, and then just a follow-up for Mark. I'm trying to remember back when we had a lot of input cost inflation, I think it was the Company's policy to basically not really disclose the dollar amounts for mark-to-market adjustments. I noticed that this quarter you were pretty specific on what impacted gross margin. And with this run in input costs, it seems to me, and especially saying that your hedge position in coffee is pretty favorable in the second quarter, that there's going to be more mark-to-market gains in the P&L. So are you going to identify those going forward, or is it just going to be the regular course of business because, as you know, most of the other companies in the industry basically pull the mark-to-market changes out of their P&L.

A couple comments, Eric, on that. I think, first of all, we provide the information, and I think we have been on both sides of that. A couple of years ago we had a fairly significant, and for a couple quarters following that, we included in our release, in our communications, and in other quarters we haven't. To some degree, just as we would on anything else, it is a bit of a degree of materiality, so part of it is just how much.

But I think in these times, particularly as we've seen run up in some of the wheat and a little bit in soybean and clearly in coffee, that it is the expectation that those are out there and we feel it's good disclosure to have it. Our philosophy is, and the reason we include it, is that hedging is clearly a part of the business, and there's a lot of things that go into what generates that. And we think putting the numbers out there is beneficial to you and to the investors, and they can treat it as they will. But I don't think it's any significant change in our philosophy, as far as it being in this quarter.

And then just to follow-up on that, so in the $4.50 to $4.60 of operating earnings for the year, you're just basically assuming that by the time we end up with the year, these mark-to-market gains or losses are going to net out, and that that $4.50 to $4.60 is including whatever volatility that accounting requires?

That's right, because right now what you're seeing basically is that's the market for the commodities as of the end of July, and if things hold, then that cost will flip. But you're correct, we've not built any assumptions of any significant gains or losses in our guidance.

Okay, thank you.

Jane Gelfand of Barclays Capital.

Hi again, thank you for the follow-up. Just a quick question. Mark, on the last quarter's call, we talked about your assumption that the trade spend budget that's netted from gross sales really wouldn't go up a whole lot year on year, despite the fact that it was a more aggressive kind of promotional environment. So clearly we're talking a lot more about tactical moves, and the continuation of some of this aggressive behavior into the next couple of quarters. So how much did promotion take away from the top line in the first quarter, and how do we expect that to trend through the next couple, and through the rest of the year?

Jane, this is Mark. In terms of the quarters, it really wasn't very significant. I think it held true to pretty much what we said at the end of last fiscal, in that it wasn't going to be dramatically different. More on a macro approach to the remainder of the year, and again it's tied back to, again, some of the comments around our guidance, is that we're going to continue to monitor the competitive activity, and we'll react as necessary. And as we head through the next quarter, we'll have a better sense of that. But I think it's just more of a wait and see, and as everyone has said, we're going to be rational in what we do, but there may be times that we'll have to address certain categories with those additional promotional dollars.

Okay, thank you.

Ken Goldman of JPMorgan.

Thanks. Given the success you've had in coffee, would you ever consider getting even larger and expand into other shelf stable beverages? It's my understanding that maybe some tea brands, for example, might be for sale. And without asking anything specific, of course, I'm curious whether tea would even fit with your strategy, or are you more comfortable looking to grow more on the food side right now?

This is Richard. I'll just speak broadly. Our strategy is to own number one brands sold in the center of the store. We really don't comment on individual categories in that regard. We look at a number of different categories, and we'll continue to do that, but it really does have to fit that overall broad strategy. Sorry I can't be more specific.

No, that's okay. And I know the call is running long, but just a general question about consumer products. It's my understanding that Walmart, the new regime has not been happy about all of the out of stocks it's been experiencing. Possibly they're willing to accept higher inventory levels in exchange for fewer out of stocks. Is this something that's consistent with what you're seeing out there? And if so, is it possible maybe this could lead to a temporary almost retailer driven trade loading, if you will, or is this not likely to happen?

Ken, I can't say that we have seen that, and have not heard that that's the case, so if it's going on we're not aware of it.

Okay. Thanks very much.

Ed Aaron of RBC Capital Markets.

Thank you. Just a follow-up for Paul on the oils business. The pricing environment and the results this last quarter were similar to what happened last year, where you had your main competitor promoting aggressively in a period where you tend to maybe lay low a little bit because you don't view it as your prime season for that business. So in that respect it seems similar to last year, but you seen maybe a little bit more concerned than you were a year ago about that continuing. And I'm just wondering, when you think about this business right now versus a year ago, why do you maybe seem to have a different view of the Fall bake season and the pricing environment for that period, than you seem to have had last year at this time?

Yes, hi, Ed. I think one of the things that's different versus last year is, this competitive activity we've been seeing has really, it started at the end or during fourth quarter of last year and it's continuing. And I think that's longer in a duration than we've seen previously, so it seems like there may be slight change in some competitive activity and their strategies. So it just adds a little bit of the uncertainty to our upcoming Fall bake, and what we're anticipating from our competitors, so that's really the driving factor.

Fair enough, thank you.

Lucas Klein of Putnam Investments.

Hi, guys. Just a couple of questions around coffee profitability. Is there any way that you can be more specific for us about what you're looking for in terms of the level of profitability for coffee in 2Q? And then you had a 30% to 31%, I think, long term margin target out there for coffee. Obviously that changed a little bit with the amortization reclass to that segment. So can you just tell us what the latest thinking is about reasonable long term margins in that segment? Thanks.

Hi, Lucas, this is Mark. In response to your first question, we really aren't going to provide any specifics around the quarter estimates. That's just not something that we would normally do.

In terms of longer term, it's a question, and to be quite candid, I'm surprised it really took to this part of the call. But we have been pretty open since we bought the business that we had set some specific margin targets, but we always had the caveat that that was assuming no significant price changes. That clearly is no longer the case, so we really don't anticipate putting a margin percentage out there. We just aren't sure that's all that meaningful. But the expectation is we would continue to grow the business in line with our other business units.

From a Company perspective, we expect to grow our operating income roughly 6%. That comes from both the businesses as well as the corporate administrative functions, and so they will shoot for targets that are going to help contribute to that.

Great. Thanks a lot.

Okay, well, thank you very much for all of your interest, and the questions today. And again, thanks for all of our great employees for their committment to our consumers and our shareholders, so thanks a lot. Have a great day.

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