J M Smucker Co (SJM) 2012 Q1 法說會逐字稿

Good morning and welcome to the J.M. Smucker Company's first-quarter fiscal 2012 earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company we will open the conference up for questions and answers after the presentation. Please limit yourself to two initial questions during the Q&A session and re-queue if you then have additional questions.

I will now turn the conference over to Sonal Robinson, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to our first-quarter earnings conference call. Thank you for joining us. On the call from the Company are Richard Smucker, Chief Executive Officer; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Senior Vice President and Chief Financial Officer; Steve Oakland, President, International, Foodservice, and Natural Foods; Mark Smucker, President, U.S. Retail Coffee; and Paul Smucker Wagstaff, President, U.S. Retail Consumer Foods.

After this brief introduction I will turn the call over to Richard for opening remarks. Vince will then provide an update on our business segments, and Mark will close with additional comments on our financial results for the quarter and outlook for the full year. We will then open up the call for questions.

During the call today, we may make forward-looking statements that reflect the Company's current expectations about future plans and performance. These forward-looking statements rely on a number of assumptions and estimates, and actual results may differ materially due to risk and uncertainties. I invite you to read the full disclosure statement in the press release concerning forward-looking statements.

Let me also remind you that the Company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is detailed in our press release located on our website at Smuckers.com. A replay of this call will also be available on the website.

If you have any follow-up questions or comments after today's call, please contact me or Mark Belgya. I will now turn the call over to Richard.

Thank you, Sonal. Good morning, everyone, and thank you for joining us. Let me summarize some of the key highlights for the quarter.

First, our sales for the quarter increased 14% over the prior year to $1.2 billion, as sales were up in all three of our reportable segments. Net price realization was the primary driver of the increase, following pricing actions taken in nearly all of our categories to offset higher raw material costs. Volume was down, while mix of products sold was favorable.

Our strategic growth drivers, including acquisitions and new products, also played a key role in top-line growth. Rowland Coffee, acquired in May, contributed 2 percentage points of the quarter's net sales increase. Additionally, the ongoing strong performance of Folgers Gourmet Selections and Millstone brand K-Cups also contributed 2 percentage points to sales growth.

Second, non-GAAP earnings per share increased 8%, as higher sales more than offset the increase in commodity cost. Earnings per share also benefited from shares repurchased in the last half of 2011, which contributed approximately $0.05 to the quarter's results. Offsetting these items was a higher effective tax rate in the current quarter.

Third, following a 17% increase in dividends paid in fiscal 2011, the Board recently authorized a 9% increase in the quarterly dividend, payable in September. These actions once again are evidence of our continuing commitment to deliver shareholder value.

Lastly, we seamlessly completed the transition of our executive management structure that was announced in March. With the strength of our leadership team and our dedicated employees, we are well positioned for continued success.

We are satisfied with the results for the quarter, in particular the continued share of market growth for most of our brands. However, we are not content with volume declines. As a result, we continue to adjust our plans as necessary to meet the needs of our consumers and our customers.

As we navigate our way through unchartered economic waters, we continue to believe that our strategy of focusing on leading brands, combined with excellent implementation in the marketplace, will continue to yield long-term, sustainable growth. I will now turn the call over to Vince for an update on our business segments.

Thank you, Richard. Let me begin with the U.S. Retail Coffee segment. Net sales increased 27% in the quarter, primarily reflecting the price increases taken during the past year. Our K-Cup product offering continued its strong performance, contributing 6 percentage points of the sales growth, while the Rowland Coffee brands acquired in May contributed 5 percentage points.

Segment volume excluding acquisitions decreased 8% for the quarter, with declines in both Folgers and Dunkin' Donuts brands compared to a strong quarter last year. While volume was anticipated to be softer due to the significant level of price increases, the magnitude of the decline was more than we had anticipated.

However, we are encouraged that our coffee business continued to gain share of market in the quarter. Coffee segment profit increased 25% for the quarter, with pricing actions taken over the past year more than offsetting higher green coffee costs. A portion of the segment profit growth is timing-related, as favorable pricing positions that benefited first-quarter results precede higher green coffee costs that are anticipated to be recognized in upcoming quarters, primarily affecting the second quarter.

The benefit of unrealized mark-to-market gains on commodity contracts also reduced the impact of higher green coffee costs. As announced earlier this week, we decreased prices by 6% on the majority of our coffee items in response to moderation in the green coffee futures market, which is expected to result in lower costs later in the fiscal year. The timing of this pricing action allows us to target key price points and positions us well as we enter into the Holiday period.

While commodity costs continue to be volatile, we remain committed to investing behind our brands and our supply chain. Marketing expense increased in the quarter due to the addition of Rowland Coffee business and the continued support of our coffee brands with all elements of the marketing mix. Coffee product innovation remains strong, as we recently launched several new items that build on our single serve strategy, including Folgers Instant stick packs and two new varieties of K-Cups.

We are working towards a seamless integration of the Rowland Coffee business with customer-facing and distribution network activities targeted for the end of the second quarter. As we continue to learn this business we are pleased with the initial results and remain on track to deliver $0.05 accretion targeted for 2012.

Lastly, the restructuring project is progressing well, with the expansion of the New Orleans coffee facility on schedule to be completed by next summer.

Turning now to the U.S. Retail Consumer Foods segment, net sales increased 2% as price and favorable sales mix more than offset a 3% decline in volume. As noted in our press release, volume was down across all categories in the Consumer Foods segment, while profitability declined as net price realization was not sufficient to offset higher raw material costs. An unfavorable change in unrealized mark-to-market adjustments also contributed to the decline.

Let me provide some additional commentary on the dynamics within our key categories. In peanut butter, we proactively managed the 2010 peanut crop availability with temporarily rationalizations on selected items and a reduction of first-quarter promotional activities, which contributed to a volume decline in the quarter. The inability to cross-promote also limited the growth of our fruit spread business during the quarter.

While the first quarter was somewhat challenging for peanut butter, our outlook for the full year is positive. The actions taken have allowed us to build inventories to a level where we can support a ramp-up of promotional activities as we conclude the back-to-school period and head into the Fall Bake and Holiday season. In addition, we are pleased with the continued rollout of our Jif To Go and the ongoing success of our Jif Natural peanut butter.

As we preview the upcoming 2011 peanut crop, we expect significantly higher peanut costs as we progress through the fiscal year and anticipate taking further pricing action to offset these costs.

Turning to Crisco, we continue to see aggressive competitive activity within the base oils category. While this has led to some volatility in our oils business, we are effectively managing the competitive environment with a focus on everyday price points. Specific to the quarter, a large portion of the volume decline was related to our shortening business, which we plan to address over the balance of the fiscal year.

In the milk category, commodity costs have continued to increase since year-end. And given the intense competitive set, rising costs have been difficult to recover through pricing, primarily on our private-label business.

The baking category also continues to be challenged with commodity cost increases. Since we do not typically lead pricing actions in the baking category, our ability to recover costs has been impacted for our Pillsbury brand. Our focus remains on product innovation and positioning the business for a successful Fall Bake and Holiday period. We are also encouraged that key retailers have increased their support of various Fall Bake activities, including the expansion in the number of bake centers.

While the overall segment volume was soft, we are encouraged to have maintained or grown market share across all channels in each of our key categories -- peanut butter, fruit spreads, oils, baking, and milk --in the latest 12-week period ended in July.

Let me conclude my remarks with International, Foodservice, and Natural Foods segment. Excluding the favorable impact of acquisitions and foreign exchange, net sales increased 7% as price increases and mix more than offset a 1% decline in volume. Volume gains were realized in Santa Cruz Organic Beverages and Bick's Pickles, but were offset by declines in flour. Segment profit grew 9% in the quarter as net price realization more than offset higher raw material costs, the unfavorable impact of unrealized mark-to-market adjustments, and a 5% increase in our marketing expenses in support of our brands.

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

Thank you, Vince. Consolidated net sales increased $142 million or 14% in the first quarter reflecting a 13% impact of net price realization across many of our categories. Volume declined 3% while sales mix was favorable. The recently acquired Rowland Coffee brands contributed approximately 2% to net sales for the quarter, while the impact of stronger Canadian dollar added 1%.

GAAP earnings per share were $0.98 this quarter and $0.86 in the first quarter of last year, including restructuring and merger and integration costs. Excluding these special project costs, earnings per share were $1.12 this quarter and $1.04 in last year's first quarter, an increase of 8%. Earnings per share reflected increased operating income and the benefit of share repurchase activity in the last half of 2011. These factors were partially offset by a higher effective tax rate in the quarter.

Operating income, excluding special project costs, increased $10 million or 5% for the quarter reflecting an increase in gross profit. Despite some moderation in the commodity markets near the end of the quarter, significantly higher raw material costs were recognized in COGS, which was up 19% in the current quarter. Cost increases were led by green coffee, flour, and soybean oil. As expected, price increases taken over the past year offset higher costs but did not result in gross margin gains.

Included in first-quarter results was a $4 million benefit from unrealized mark-to-market adjustments on derivative contracts. This compares to a $7 million benefit in the prior year. While the impact of unrealized mark-to-market adjustments was not material on a consolidated basis, as Vince indicated the impact by segment varies.

The increase in gross profit was partially offset by a 7% increase in SG&A expenses reflecting higher selling and general and administrative expenses. The acquisition of Roland Rowland added to our SG&A expenses, as we will incur incremental costs until the integration is completed later this year.

Total marketing expense was down a modest 1%, primarily reflecting a transfer of funds to trade promotion in support of our Consumer Foods business.

The effective income tax rate was 33.2% in the first quarter compared to 31.3% in the prior year. The effective tax rate in the first quarter of last year benefited from a favorable federal income tax determination related to a prior year, a higher domestic manufacturing deduction, and lower state income tax expense. We continue to anticipate a full-year effective tax rate between 33% and 33.5%.

Turning to cash flow, cash used by operations was $58 million in the first quarter compared to a use of $27 million last year. The increase was driven by higher working capital requirements, specifically the impact of commodity cost increases on higher inventory levels that were partially due to the additional buildup related to our supply chain restructuring project.

During the first quarter, approximately $307 million was borrowed under our revolving credit facility at an average rate of 1.5% and remained outstanding as of the end of the quarter. Borrowings were used to fund the Rowland Coffee acquisition as well as working capital needs.

With the normal build in inventory in advance of the Atlantic hurricane season and to support the Fall Bake and Holiday promotional periods, we expect to draw additional funds on the revolver during the second quarter, but anticipate paying down the majority of the revolver borrowings by the end of the fiscal year. Last month, we amended our revolving credit facility, increasing the borrowing limit to $1 billion and extending the term to July 2016.

Capital expenditures were $68 million in the first quarter, tracking toward a full-year range of $250 million to $275 million. Continue to anticipate free cash flow of approximately $450 million in 2012, somewhat contingent on our year-end inventory balance.

Subsequent to the end of the quarter, we repurchased nearly all of the approximately 500,000 common shares remaining under our current 10b5-1 plan, utilizing $37 million of cash. An additional 2.5 million shares remain available for repurchase under previous Board authorizations.

Let me conclude by updating our outlook for the remainder of the fiscal year. We still expect net price realization to drive significant top-line growth in 2012 as compared to last year. The impact of the recent coffee price decrease and first-quarter volume is expected to lower our sales growth by a few percentage points below the 20% we originally guided to in June.

With the recent market decreases in certain commodities, most notably coffee, we now anticipate year-over-year cost increases as a percent of COGS will also be lower than our initial guidance of 25%. As a result, we continue to expect non-GAAP income per diluted share to be in the range of $5.00 to $5.15, including amortization expense of approximately $0.50. Although we generally do not comment on quarter estimates, we want to reiterate that the second-quarter results will be impacted by the timing of coffee costs hitting our P&L.

While the first quarter benefited from our price position relative to recognized green coffee costs, we expect this trend will reverse in the second quarter, as higher green coffee costs will be realized along with the impact of coffee price decrease. As always, we manage the Company with a long-term perspective and remain confident in our ability to deliver on the full-year guidance. While volatility in the commodity market and uncertainty in the economy continue, our focus will not waver from our strategy and building our brands for the long term.

In closing, let me say that we remain confident in our employees' ability to execute in this challenging environment, and we thank them for their continuing efforts. Thank you for your time today, and we will now be happy to answer your questions.

(Operator Instructions) Eric Katzman, Deutsche Bank.

Hi, good morning, everybody. Barely had time to think of my questions. Okay.

I guess you made some comment about the peanut butter inventory or supply position limiting production, as well as its influence on jam and jelly. Is there a way to quantify that?

And how does that play out during the rest of the year? Because I guess those are two pretty profitable businesses within the portfolio. Then I will ask my second question after.

Hi, Eric. This is Paul Wagstaff. And yes, just to take a step back and explain what happened, we wanted to make sure that we were proactive in managing the 2010 peanut crop, which we knew was not a very good crop. We wanted to make sure that we had the availability.

So what we did is we temporarily discontinued eight of our items to focus on our core 18-ounce and crunchy and creamy products, to make sure that we had those products on shelf during the Summer first quarter. In line with that, what we decided to do is basically reduce our first-quarter promotional activities. We made sure that we had enough inventory build in our warehouse, which we do have right now. And that basically led to some lower volume in peanut butter as well as in our jam and jelly business, because we couldn't cross-promote with peanut butter.

So, where we are now is we have inventory levels that are solid. We feel that we can go back and support the rest of the back-to-school as well as getting into our Fall Bake time period. And we feel very good for the full-year projection that we're going to be in great shape on both peanut butter and spreads.

Okay. But is there -- so there isn't really a way to quantify how much you feel that that held the quarter back?

Eric, this is Mark Belgya. I would say that if you look at the profitability shortfall in Consumer Foods, it probably was just about 15% to 20% of the dollar decrease in the overall segment.

Okay, all right.

They are down about $14 million, $15 million, so it is about a fifth of that.

Okay. Then just to follow up, obviously the decision to lower the coffee prices got a fair amount of attention. I guess Sara Lee at least; they are a European business, but they showed that unfortunately elasticity has shown up in coffee, and you saw that.

So how much of the price cut in coffee is just a function of the elasticity being worse than you thought, versus just let's say more competitive conditions within the category, and you wanting to be a leader and go first?

Hi, this is Mark Smucker. I think that as it relates to the decrease, it has more to do with how we price to our position. We don't feel necessarily that the decline was more than was anticipated. We always talk about the elasticity models and that we tend to beat those. But clearly we were a little disappointed with the results.

But we do think that this price decrease positions us very well going into the Holiday period and that, although there may be some margin compression in the quarter, we do feel comfortable in terms of recovering penny profit and then positioned well going into the back half of the year.

Okay. All right, I will leave it there and pass it on and get back in the queue. Okay, thank you.

Farha Aslam, Stephens.

Hi, good morning. Vince, just going along with the elasticity question, you had mentioned volumes were weak in the quarter. Could you just share with us which segments outperformed your expectations and which ones had more pressure?

Well, I will start; but I will turn it over to Mark and Paul. I think as we just alluded to and alluded to in the formal remarks, coffee was lower than we would have anticipated. Paul has already explained the peanut butter and fruit spreads really don't have much to do with pricing elasticity; it's more about the availability and the ability to cross-promote.

Probably shortening and baking would be the other two that were the key ones. I will ask the other two if they support or have any additional commentary.

This is Paul and I would agree with Vince. On the shortening side of the business we took a price increase in the beginning of the year and that had an impact on our volume. On the baking side, as we are not typically leading price increases in that category, we weren't able to recover some of the cost increase on a couple key areas.

Yes. This is Mark, I would echo Vince's comments. We feel obviously very good about K-Cups. And in the mainstream channel, I think as well we may have seen some shifting of volume around in the category; but we still feel pretty good obviously about our share position.

That's helpful. Then going into the rest of the year, you guys had commented that you are going to seek to shore up some of those volume declines. Given that the economy is quite weak, do you anticipate further promotional activity is needed? And are you concerned about matching pricing with increasing costs?

I will go first. This is Mark. In coffee, one of the key reasons that we took a price decline is because we felt that that was really the right thing for the consumer. Clearly we will be focused on our promotional spending as we go into the next several months; but the bottom line really is that the price decline was necessary and is important to consider in light of -- and balancing that, what we might spend in trade versus what we really hope the consumer should see the price on shelf.

And this is Paul. I think in the other categories on peanut butter, fruit spreads, baking, milk, etc., we do have some levers that we are in the position to pull to make the back three quarters of the year better.

Thank you very much.

Jason English, Goldman Sachs.

Good morning, folks. Thanks for the question. Quick question on Dunkin' Donuts. I think this is the second consecutive quarter you have had a low double-digit decline. Can you flesh that out for us, what the drivers are, and whether or not you expect that to persist?

Sure. I guess I would start by saying that we still feel great about the business, and we think that there is upside to the business. The performance this past quarter was driven by a couple things.

One, the timing of some promotional activity that we had experienced in the prior year, it wasn't repeated this year. We may get some of that back in the second quarter.

Then just we were not enjoying the price advantage that we had been versus one of our key competitors in the gourmet segment. So I think that obviously had some impact.

But again going forward I think we are well positioned going into the Holiday period, and we feel good about how we will be able to reflect those prices on shelf versus competition.

Just to clarify that last comment, you feel good about how you are going to be able to reflect the price position. Are you suggesting that you are going to try to widen out that price gap again?

Well, we hope to. I think that depends on how we manage that with our customers. And it's obviously going to be very dependent on how our retail customers reflect that price. But I would say we were optimistic.

Well, this is Vince. And what, if any, response we get from the competitive set.

That's right.

Sure, sure. This time last year, you guys were outperforming measured channel, your volume, by quite a bit. Now we are underperforming. Is this a factor of any inventory shifts in the pipeline? Or is this a factor of what may be happening in some of the unmeasured channels?

Are you speaking specifically to Dunkin' Donuts or coffee or (multiple speakers)?

This is coffee overall. Sorry, I should have clarified. In specifically volume.

Yes, so as Mark indicated, where some of the shortfall occurred in the quarter tends to be in some of our nonmeasured channels, if you will, and so probably had a greater impact this quarter than it has had historically. Quite frankly some of that was price-point driven, that we hit some thresholds that I think the consumer has responded to.

But as Mark indicated, with our price decline, we should be able to address that going forward.

Thank you very much for the answers. I will pass it on.

Ed Aaron, RBC Capital Markets.

Thanks. Good morning, everybody. I wanted to ask first on K-Cups. The volume contribution there was maybe a little bit lower than I had expected. I am just wondering if you think that retailers are maybe taking a little bit more of a cautious approach just with the new competitor coming into the market shortly. Any kind of thoughts there?

No, actually. I think we still feel very optimistic about our K-Cup business. We are the first national brand to launch in the category, and we still are bullish and believe that there is significant upside, as well as feeling good that we are positioned well going into some of the key competitive activity that we will experience in the second and third quarters.

Great, thanks. Then on peanut butter, just can you maybe talk about the competitive dynamics there a little bit? There is a new competitor coming in; and then we have heard some talk about your main competitor not getting all the price through that they had intended. I am just wondering if either of those things has any effect on how you view your ability to perform in that business this year.

Yes, Ed, this is Paul. From a competitive perspective, yes, we know; very well of aware of the new competitor on the block.

I think again what happened in the first quarter is we delisted temporarily these eight items. We allowed our competitor to come in and pick up some of those slots. So we are well aware of that.

We understand our other key competitor has been aggressive in promoting. We also maybe understand that may be pulling back a little bit, so that would be expected from what we understand in the peanut crop.

So from our perspective, again, we did what we felt was the responsible thing in the first quarter. And we feel very well positioned going into the next three quarters.

Thanks. I will jump back in the queue. Thanks.

David Driscoll, Citi Investment Research.

Thank you, good morning. Could you discuss the coffee volumes for the category? Then I would also like to hear your thoughts on exactly what is going on -- or as much as you can -- on why the volumes are down.

What I specifically mean here is, certainly it's some price elasticity; but do you know which consumer is it affecting? Is it affecting your loyal consumers who drink multiple cups a day? Or does -- this disincentiving new consumers from coming into the category? This question would relate to the future in terms of how easily it is to regain these volumes, assuming that coffee prices continue to decline.

I think -- let me speak to your first question first. In terms of the category as a whole, I think as you look at -- I think you guys probably have these numbers. But the category is down slightly. On a 12-week it is down 1 in volume; but again we have been doing very well from a share perspective, particularly in the mainstream segment.

I think I understand your second question. You are asking which consumers are either hurt or benefited from the shifts in segment?

Let me rephrase. So volumes are down in coffee and then the question is, who are we losing here? Are we just losing -- is it that second or third cup people aren't drinking, and that is how you see a decline? Or is it we have just users that normally might have come into the category and you're just simply not attracting them because of the very high prices?

This is Vince. Let me -- let's take a step back and a macro perspective what is going on. You have continual shift growth of the gourmet segment versus the mainstream segment, roast and ground. That continues, and you have a lot of activity obviously between us and a couple of competitors.

Secondly, you have -- although still small -- a growing segment of single serve, primarily as it relates to K-Cups, which adds dollars but doesn't add a lot of volume per se because of the ratio. So those two phenomenons are going on.

The third thing is that some consumers are in fact trading down from maybe some of our -- like our Classic Roast to what we would refer to as our opening price-point offerings. Custom roasts and those type of things.

So I think the consumer is in fact -- you have higher-end consumers still attracted to the gourmet or single serve category; and you have some consumers, quite frankly, that are trading down because, again, our retailers are trying to reach price points that they were unable to do with more of our Classic Roast.

With our recent price decline and where we are going to place our emphasis, we believe we will be able to get that back. There is no impact, though, from a profitability perspective because all of those basically contribute equally. But there is no fundamental change other than that over sort of a macro perspective.

Okay. That was very helpful. Thank you.

Scott Mushkin, Jefferies & Company.

Hey, guys. Thanks for taking my questions. Just wanted to go into coffee a little bit more, probably beating this dead horse a little bit. But I just wanted to understand the price decline, the motivation behind that.

Was that really the fact that green coffee cost had come down? Or was it mostly motivated by the volume concerns? And you're -- I also got that maybe you are looking to offset some of this by some anticipated hedging gains or hedging benefits to fund this price decrease. Or did I misinterpret that?

I'll start, and I will let Mark or Vince chime in. This is Mark Smucker. I think first of all, the main driver of that decrease is it is the right thing to do in terms of getting to key price points through the Holiday period.

Yes, you are correct that some green coffee costs are coming down. We have the ability to participate in some nominal degree in some of the downward movement of that, even though we are looking at burning through some of our higher-priced inventory.

However, I think it is a combination of the factors that you mentioned, but at the end of the day it really is driven by trying to be collaborative with our customers and trying to help them get to the price points that we believe the consumer can afford.

Okay, that's perfect clarification. The other thing I wanted to get in on or talk about a little bit is the idea that maybe the retail trade has built some inventories in anticipation of all the price increases. There is a possibility that some of the volume weakness you are seeing is a, I guess, run-off of some of the inventories that perhaps were built in the channel. Do you have any thoughts on that as you have gone through this big bubble of cost and everything?

This is Vince. I would say that we probably did experience a little bit of that in peanut butter on our last price increase. Other than that, actually we see some retailers that are decreasing inventory levels, given the actual costs of the commodities themselves. But -- yes; so I guess that is how we respond.

Okay. Then the final question and I will yield is -- any update on the China acquisition search? I know you guys mentioned this at CAGNY, and I just wonder if you have any update for us. Thank you.

This is Steve Oakland. I can speak to some of the efforts in China. A couple things.

We continue to do research in the markets in China, and to understand both the categories and a number of the companies in those categories, and understand how those markets really work mechanically. So that will position us to be there in a meaningful way here sometime in the future.

We will have an office open in Shanghai later this fall, and we are starting to put a team together. So we are excited about that and we are trying to get ourselves positioned to be meaningful there. But we are not going to do anything until we feel like we have got a firm foot on the ground.

Thanks very much.

Jon Andersen, William Blair.

Good morning, everybody. Thanks for taking my questions. I wanted to just talk about Dunkin' Donuts for another minute. Could you provide a little more color on where you stand today from a distribution perspective with Dunkin'? Maybe how many SKUs on the shelf, and what the opportunity is over the next few years.

Well, this is Mark again. In terms of the total Dunkin' as it relates to our distribution, we have got in the upper 80%s ACV distribution. So we are actually pretty well positioned.

Now, if you look at some of the newer items, they might be slightly below that. But we are still in the upper 70% in terms of ACV in some of the recent launches.

Now, total SKUs, we have got probably about a dozen SKUs, which is significantly fewer SKUs than our key competitor would have. But we do benefit at this time of year from some of the seasonal and flavored coffees that we launch in that category. Those in the past have performed very well for us.

So, bottom line, distribution is getting there. We are pretty far along that path, and then counting on some of the seasonal items to continue to drive volume in the second quarter.

That's helpful, thanks. I guess just a couple quick follow-ups, perhaps for Mark. The previous revenue guidance for 20% growth for the year, if I back out the 6% price reduction on coffee I am getting to about a 2% impact to sales for the year.

So are we now saying something in that upper teen range? Or how much is maybe the incremental impact from volume? What is the right way to think about that?

Well, I think that as I said in my prepared comments, I think we just said it would be a couple percentage points below the 20% we guided to. That does factor in obviously the 6% decline and then with some thought on volume contribution.

But I don't think we would necessarily be specific to give you a volume or price. But just take it a couple percentage points below the 20%.

Terrific. Thanks a lot, everybody. Appreciate it.

Robert Dickerson, Consumer Edge Research,

Thank you. I guess a couple questions. First question, just a follow-up to the last question. As sales are going to be a few percentage points lower, was there any additional guidance for what you think COGS may be? Because obviously sales can come down by a few basis points or a few hundred basis points. But relative to where input costs are probably in the back half of the year and what you said, that you continue to hold penny profit, it would seem as if your operating profit growth, which frankly is all I really care about, should be healthy and continue to hold.

Yes, well, we would expect a couple percentage points decline in sales, that it would be a little bit more that on the COGS side. So I think we just said we were at 25% in June, so you're kind of getting down into the lower 20%s range.

So essentially, though, for every -- whatever the ratio is. But for whatever -- for any incremental reduction in your top-line growth it seems as if you are actually having a little bit more reduction in your COGS growth. So net-net, I just want to be clear that we are all very focused, super focused, on the top line; but it does sound as if -- and also inclusive of your comments earlier -- that your outlook so to speak for profit growth, even though you haven't given us one, internally doesn't seem to be changing too much? I mean, it may be better.

Well, you can make the judge on the profit being better. But that's right. If you think about it just from our general approach on price changes, clearly on that we have talked about it more on the way up in terms of protecting penny profit.

So yes; I mean, we are seeing costs, expected cost increases from higher peanut butter or higher peanut cost and would expect to lower the price and sort of offset the margin. There is always going to be a little play as it relates to the timing. But generally I agree with your comment.

Okay, thanks. I will pass it on.

Chuck Cerankosky, Northcoast Research.

Good morning, everyone. I want to ask one of the big-picture questions. When you are looking at the consumer condition right now, how are food shoppers manifesting a slow growth economy, the high unemployment, when they are shopping for Smucker products?

What are you seeing regarding trading down within your brands, trading into private label, what they are doing with sizes? And how are the retailers maybe collaborating by promoting private label?

Hey, Chuck, this is Vince. As I mentioned earlier, clearly -- well, first of all if you look at our wide range of products, we believe we offer value across our full range, regardless of the segment. As you all know, peanut butter is one of the lowest cost of protein in the industry.

So overall, and you think about as we said before, to brew a Folgers pot of coffee at home it is still less than $0.10 a cup, compared to the alternative. So in a macro perspective we feel that we are very well positioned.

Having said that, as I mentioned earlier, because of some of the price points, retailers are looking for either smaller sizes to promote; or in the case of coffee there has been some shifting to again what we would refer to as our opening price-point offerings.

Again that is driven by the retailers and/or the consumers. That is not a shift in our promotional emphasis within the industry. But I guess I will leave it at that, unless Mark or Paul wants to add any additional commentary.

I would only add -- this is Richard -- on the private-label side, at least in our categories we continue to gain market share in almost every category that we are in. So even if private label may be growing a little bit, it is not growing at our expense.

Thank you very much.

(Operator Instructions) Eric Katzman, Deutsche Bank.

Yes, thanks for allowing the follow-up. Two detailed questions. I guess one for Mark on the -- do you have a change in the net interest expense for the year? It came in a little less than what I had thought for the first quarter.

Is there any change there? Or is the working capital going to offset whatever cash flow benefits that provides?

You know, Eric, I don't think it will be material. It might be up just a little bit because I think we will carry inventory. So we will be borrowing maybe a little bit longer, but I don't think it is material on your modeling.

Okay. I don't recall any comment on the productivity program. I think you were suggesting as much as $0.30 or more a share of benefits this fiscal year. Is that more second-half weighted? I assume so. But just can you clarify that?

Yes, well, I think -- in Vince's prepared comment he might have spoke to the coffee. But our projects, which are primarily around our fruit spreads operation here in Orrville with the new construction and also with the New Orleans coffee facility, it is stepped up. I think I have used that term over time to getting ultimately -- I think what we said, about $65 million to $70 million. But we have recognized about $25 million within the run rate over the course of this year, of this current fiscal year.

Okay.

I'm sorry, that was consistent with what we said in June and that is included in our guidance.

Okay, and then just last thing. Any changes on the category management designations in coffee? I know that that is something you have been targeting, given your breadth of products. Have you made strides there? Could you detail anything?

Eric, this is Vince. There is nothing significant to report. We have had a couple of wins, if you will. Also we are becoming more and more relied on to be a validator of certain information. But nothing significant to report.

Okay. I will pass it on. Thank you.

Ed Aaron, RBC Capital Markets.

Great, thanks. Just a quick clarification question on the coffee price decreases. It's obviously a pass-through category. But you seem to talk about it as a decision that was somewhat driven by consumer right now. The reason I ask about it is that Arabica has bounced back somewhat meaningfully this week and is actually only a few cents lower than where it was when you last raised price.

So I am just wondering whether you might -- if there is a consumer issue that you're seeing, if you would be slower to take price up again if the commodity does continue -- starts to move higher.

I would say the short answer is no. But again, I think it is driven again by getting to the right price point through a price reduction rather than through necessarily increase in trade. I think the key driver and why we are comfortable in doing that -- despite where our commodity costs may be -- is that by getting to those key price points, again, we feel that we will be able to drive some volume and make up that penny profit that we may have missed in the second quarter.

Fair enough. Thank you.

Robert Dickerson, Consumer Edge Research.

Thanks for the follow-up. Just a quick question, just on capital structure. I know you mentioned on the call that you had a number of levers you could potentially pull in the remainder of the year or the back half of the year. You are obviously a bit credit-light right now, so to speak.

So I am just curious. It seems like -- you didn't call it out, but it seems like you did buy back probably about 1 million shares in Q1. And with where your stock price is right now and your leverage capability and what have you, do you -- could you foresee potentially any incremental buyback at least in Q2? Or is that -- you are just basically staying mute on that?

Hi, Rob. This is Mark. A couple thoughts or comments. We did buy back about 0.5 million shares here at the end -- or after the end of the quarter, during the month of August. So you will see those reflected modestly through the rest of the year on our weighted shares.

The effect that you are seeing as you compare, for example, this quarter's weighted shares to a year ago was more the effect of what we bought in the back half of fiscal 2011. So that clarifies the change in shares.

In terms of going forward, we have 2.5 million shares that the Board authorized in January of this year. As we have said, we have four buckets of cash deployment. On the growth side we have got CapEx and we have got acquisition. And on the shareholder return side we have got dividends and buybacks.

We really do look at those four uses of cash pretty evenly. Clearly we have been able to take advantage and have repurchased shares over the last two years at a pretty reasonable price. We will continue to look at the opportunity to do that.

But as opportunities from acquisitions -- obviously that is part of our growth algorithm -- we will take that into consideration at times. So at this point I wouldn't say we're going to be active in the market; but we will clearly consider it as one of the uses of our cash through the rest of this fiscal and into next year.

Okay, perfect. Thanks a lot.

That is all the time we have today for questions. I will now turn the call back over to management to conclude.

We thank you for your time and interest today. Just in summary, we still feel very solid about the year. We felt that the first quarter was a solid quarter.

In light of taking a number of price increases, our volume held up fairly well. And in areas where it was a little short, we have plans to make that up for the remainder of the year.

Our plans are to come right in where we said we would at the beginning of the year. So we are still feeling pretty good about the market. So, thank you for day, your time.

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