J M Smucker Co (SJM) 2013 Q1 法說會逐字稿

Good morning and welcome to the J.M. Smucker Company's first-quarter 2013 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 requeue if you then have additional questions.

I'll 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 today. On the call with me are Richard Smucker, Chief Executive Officer; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Chief Financial Officer; Steve Oakland, President, International Foodservice & Natural Foods; Mark Smucker, President, US Retail Coffee; and Paul Smucker Wagstaff, President, US Retail Consumer Foods.

Following 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 our outlook for the full year.

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 encourage 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. We're pleased to start the new fiscal year with solid results after a challenging back half of fiscal 2012. Let me begin by summarizing some of the key highlights for the quarter.

First, net sales for the quarter increased 15% with all three business segments realizing topline growth. Two of our strategic growth drivers, acquisitions and product innovation, played key roles in achieving higher sales. Volume across most categories improved with total tonnage increasing 2% for the quarter led by strong performances from our coffee brands and peanut butter. Overall, results exceeded our expectations for the quarter.

Second, non-GAAP earnings per share increased 4% to $1.17 per share. Volume growth and mark-to-market gains were key drivers to this increase. We are pleased with this earnings performance particularly as we are lapping a strong prior-year profit comp in our coffee business.

Lastly, our cash from operations was a first-quarter record with an increase of $167 million. Our ongoing ability to generate strong cash flow provides continuing opportunities to enhance shareholder value. To that end, last month the Board authorized an 8% increase in the quarterly dividend rate payable in September.

Our first-quarter results reflect the progress that continues to be made on the key areas of focus that we discussed at our year-end call. As we have stated, these were designed to address both short-term challenges as well as further position the Company for long-term growth and include the following. Further building our brands through increased investments in marketing support; continuing to drive our innovation pipeline; optimizing price points to meet our consumer needs and address competition; capitalizing on our recent acquisitions and continuing to optimize our supply chain.

We are pleased with what we have accomplished in these areas. Vince will expand on these as he discusses the segments in a moment. We will remain focused on these priorities as we move ahead.

From an industry perspective, consumers clearly continue to feel pressed by the economy and we don't expect overnight reversals in consumer confidence. However, we are beginning to see some positive indicators in industry volume trends. While total US retail food and beverage volume has been soft for an extended period, the industry has seen gradual improvements from the 52-week to the 12-weeks to the four-week reporting periods with volume up slightly in the latest four-week period.

Moderating food inflation as a result of declining commodity costs has clearly been a factor in this improvement in the food and beverage volume. That being said, the impact of the current US drought will not be fully understood and realized by the industry for a number of months. We will be monitoring this area and adjusting as appropriate.

Overall while we remain cautious, we are more optimistic about the near-term than we were a few months ago.

In summary, we are pleased with the start of our fiscal 2013 and look to continue this momentum for the rest of the year. Our performance reflects the strength of our iconic brands, our ability to adjust rapidly, and the hard work and commitment of our team. We would like to thank all of our employees for their continued contributions.

I will now turn the call over to Vince for an update on our business segments.

Thank you, Richard, and good morning, everyone. I am pleased to report that each of our three business segments had solid starts for the year. Of significant note is the improvement we saw in our volume results compared to the last two quarters. These results reflect our team's commitment to the Company's key initiatives that Richard spoke to of brand building, innovation, optimizing our price points, capitalizing on acquisitions, and enhancing our supply chain.

Let we begin with the US retail coffee segment. Net sales increased 4%, driven by volume growth across our key coffee brands including Folgers, Dunkin' Donuts, and Cafe Bustelo and the continued growth of our K-Cup business. As expected, coffee segment profit declined for the quarter compared to last year's record first-quarter profit. As a reminder, the prior year's profit was partially timing-related due to a favorable pricing position in that quarter that preceded higher green coffee costs recognized in following quarters.

To a lesser extent, the reverse situation occurred this year as we expect lower green coffee costs will be recognized through the remainder of the year.

Let me now elaborate on the key initiatives as they relate to coffee. First, with respect to brand building, we previously discussed a number of initiatives planned for the year including new product launches and marketing investments, all of which remain on track.

Of particular note is the continued strong performance of our K-Cup offering. Once again the product line exceeded our expectations, delivering an incremental $31 million in sales growth for the quarter. As a reminder, this business does tend to be more seasonal than our traditional coffee business, particularly around the pre- and post-holiday season. Based upon the continued success of K-Cups, we are revising our projections and now expect K-Cup sales to grow approximately 60% in 2013.

Second, our efforts to optimize price points contributed to the volume gains. Specifically achieving price points within key threshold allowed us to grow Folgers core roast and ground volume during the quarter. This includes our Folgers opening price point offerings, which also benefited from efforts to further expand distribution of the product line.

In addition, our pricing and promotional strategy helped Dunkin' Donuts rebound and deliver 11% growth in the quarter.

Third, while much of the first-quarter growth of the Rowland brands was due to the incremental two weeks of ownership, our teams continue to work hard on positioning the Cafe Bustelo and Cafe Pilon brands for growth through expanded distribution, innovation, and marketing support.

Lastly within the coffee supply chain, we are nearing completion of the $70 million investment to expand our two facilities in New Orleans and are pleased that this multifaceted project will be completed on time, on budget, and on track to deliver the savings targeted for the initiative.

Turning now to consumer foods, net sales increased 15% primarily reflecting price and favorable sales mix. Reported volume was flat, however, excluding the impact on tonnage of the cake mix downsize project we discussed on our year-end call, segment volume was up 1% for the quarter, driven by the strong performance of our peanut butter business and Smucker's Uncrustables.

First-quarter segment profit increased $29 million over the prior year, most notably resulting from the peanut butter business and favorable mark-to-market adjustments. The higher peanut butter profitability was primarily due to price increases taken in 2012 to offset higher recognized costs along with volume gains.

Similar to coffee, a number of brand-building initiatives got underway for the consumer foods during the quarter. These include the reinstatement of our back-to-school promotional support this year, which had a significant impact on our peanut butter performance for the first quarter.

As a reminder, in fiscal 2012, we pulled our back-to-school promotions to manage the expected peanut shortage resulting in weak peanut butter volume in last year's first quarter. This was followed by a strong second quarter mostly attributed to consumer pantry loading in anticipation of a significant price increase.

Due to these prior-year factors, we expect second-quarter peanut butter volume to be somewhat soft versus the prior year.

In addition to peanut butter, our Smucker's Uncrustables sandwich had a strong first quarter this year, benefitting from the introduction of the new varieties and the recent investments we made to expand capacity at our manufacturing facility to meet the continued growth in consumer demand for this product.

We will also continue to focus on optimizing pricing strategies including addressing price gaps with competition. Recent actions include a 10% price decrease in our branded milk business effective in the second quarter.

Lastly within consumer foods, we began initial production of our new manufacturing facility in Orrville, Ohio last month as planned. Again, this $150 million project is on time, within budget, and we expect it to achieve its forecasted savings.

Turning to the international foodservice and natural foods segment, sales for the quarter increased 40% with the majority of the increase attributed to the foodservice beverage business acquired from Sara Lee. Segment profit increased 6% for the quarter.

Similar to consumer foods, segment profit was impacted significantly by favorable mark-to-market adjustments. Key initiatives in this business segment include first, a number of brand-building investments which are underway across our portfolio. These include new product launches such as new varieties of whole wheat Uncrustables for our school business within foodservice, two additional K-Cup products in Canada taking our count up to seven items in this market, and new innovative beverages within our natural foods division.

Second, we continue to look to capitalize on the foodservice beverage business acquired from Sara Lee. We remain focused on completing an orderly exit of much of the private label roasting ground business. We have made good progress on that front and the reductions will begin to be reflected over the next two quarters.

In addition, the performance of the core liquid coffee offerings continue to be strong as we begin to realize the benefits of the larger sales organization. Overall this business is performing in line with our expectations and we remain excited about its long-term potential.

As we look ahead across our three business segments to the upcoming holiday periods and balance of the fiscal year, we remain optimistic about achieving another successful year in growth. This is supported by several factors. We have lined up a number of quality merchandising programs across our various brands and categories to support the fall bake and holiday periods. We expect to see continued growth from new products. We will continue to focus on optimizing our everyday and promotional price points. We've seen a number of categories we participate in show signs of growth and finally, although there remains significant volatility in the commodity markets, we have good visibility into our cost structure for the upcoming promotional periods as a result of our hedged and contract positions.

Accordingly, we do not foresee the need to adjust pricing in our key categories as we look out through the end of the calendar year. Beyond this point, our teams will continue to reassess the need to adjust price as we proceed into the latter part of the fiscal year.

Before turning the call over to Mark, we want to make a brief comment about our share of market given the recent release of scan data from customers that were not previously included. In general, there was not a material difference in our market share and with the exception of Crisco, our 52-week dollar share either remained flat or was up across our key categories under this new reporting format.

With that, I would like to now turn the call over to Mark to discuss our consolidated results.

Thank you, Vince. Net sales increased $181 million or 15% in the first quarter. Approximately one half of this growth came from the incremental impact of the food-service beverage acquisition. The remaining increase was primarily attributable to favorable sales mix, net price realization, and volume gains.

GAAP earnings per share were $1 this quarter and $0.98 in the first quarter of last year including restructuring, merger and integration, and pension settlement costs. Excluding these special project costs, earnings per share were $1.17 this quarter and $1.12 in last year's first quarter, an increase of 4%.

The increase in earnings per share was the result of several factors. On the plus side, EPS included a $0.09 per share impact from the net change in favorable unrealized mark-to-market adjustments and a $0.04 per share benefit of share purchases in 2012. These factors were somewhat offset by an increase in interest expense related to last October's public debt issuance and a slightly higher effective tax rate in the current year.

An increase in gross profit led operating income excluding special project costs to increase $13 million or 6% for the quarter. Included in the results was a $20 million gain from unrealized mark-to-market adjustments on derivative contracts. This compares to a $4 million gain in the prior year.

A significant portion of the benefit in the current quarter is expected to reverse later in the fiscal year as the related contracts are closed and we purchase the physical commodities. Overall commodity costs were higher in the current quarter compared to the prior year particularly for peanuts and green coffee. We expect lower green coffee costs to flow through in the coming quarters.

Turning to cash flow, cash provided by operations came in positive at $167 million in the first quarter. This compares to a use of $58 million last year. The improvement primarily reflects a significant reduction between years and the use of cash required to fund inventory. The effects of lower green coffee costs and a reduction in inventories were the primary causes.

Capital expenditures were $46 million in the quarter and we continue to expect a full year spend in the range of $210 million to $220 million. With positive cash from operations in the first quarter, we now anticipate full-year free cash flow will be in excess of $600 million. Further, we do not anticipate the need to borrow against our revolving credit facility for normal operating requirements this fiscal year.

Let me now conclude by updating our full-year sales and earnings per share outlook for 2013. We continue to anticipate an increase in net sales of approximately 7% with much of the growth coming from the eight months -- incremental months of the foodservice acquisition. While we are encouraged by the fall bake merchandising programs that Vince mentioned and the retailer commitments to date, volume in certain categories such as oils and baking mixes will be challenged in this period. As such, our overall volume outlook for the year has not changed materially.

During the first quarter, we focused on getting the price right. In some instances we increased our trade support in certain categories to achieve desired price points and strength in merchandising; however, excluding the impact of the Sara Lee acquisition, our trade spend as a percent of sales was in line with last year. We anticipate this will continue as we progress through the fiscal year supported by expected declines in certain commodity costs, most notably coffee.

Considering these factors and the first-quarter results, we are cautiously optimistic in achieving the high-end of our $5 to $5.10 earnings per share range for 2013. This range continues to be based on approximately 110.5 million shares outstanding.

Before opening to the Q&A, let me reiterate that we are very pleased to have delivered a solid first quarter and we look forward to continuing this momentum through the rest of the fiscal year.

With that, we will open up the call to your questions. Operator, please queue up the first question.

(Operator Instructions). Eric Katzman, Deutsche Bank.

Thanks. Good morning, everybody. I guess the first question actually is balance sheet related. I noticed that, Mark, that you had well over $300 million of cash on the books. Is that -- that seems more than you normally hold. Is that what you were referring to in terms of not having to tap a revolver to fund your working capital through the fall season?

That's right, Eric. In June, we had indicated that we thought that we might actually have to tap here in the US primarily to fund our normal buildup of inventory. But we came into the year probably with a little inventory level than we had seen in past years so we were able to end the quarter positive and as you suggested, $300 million.

It is important to keep in mind, of our cash, about $100 million of that is in Canada so there's a little bit of an access issue to that but still, we are running much more favorable than we had expected.

Okay and then just maybe a more fundamental question. Can you just talk a bit about with coffee costs having come down quite a bit versus a lot of other commodities that are now moving up, what is kind of the competitive landscape in coffee? Obviously Kraft is going through some transitions with introducing Gevalia and Starbucks is trying obviously gain share and there's all kinds of questions around K-Cups. So maybe you could go into more detail around kind of the competitive landscape. Then I just have one other follow-up on coffee.

Sure, Eric. This is Mark Smucker. Overall you are correct. The category does remain a competitive category and the competitors that are out there are good. They are effective. Having said that, we still feel very optimistic about our brands, the activities that we've got in place, the fact that we have successfully managed some of these price points that were referenced in the script, and feel that going forward we are very well-positioned for the fall period.

I would also add that just from a volume perspective as we look forward, as we got into the quarter and looking at inventories, we also had some questions around are we reloading the customers? As we look forward and look at the shipments that we've had in the quarter, we are pretty confident that the trends that you see in the share numbers will continue.

Okay, I guess can you comment -- I guess it's maybe Steve, but can you comment on how much holding onto the roast and ground no margin foodservice side of the Sara Lee acquisition limited your profits in the segment or on a consolidated basis, and how that should affect things as we progress through the year and you exit those businesses?

Eric, Steve. I don't think it really limited the actual dollar numbers. It did affect the margins although some of that business is actually negative, most of it is probably more in the breakeven range, so I think what you'll see as we get through the next six months or so is you will see our margins improve dramatically in our segment and that will be the impact, a little bit of dollar profit. But I don't think it was material for the Company.

And I think if we step back and look at the Sara Lee transaction, we bought that from a company that was getting ready to split up and it became evident to us in the end that that transition with those customers just wasn't going to happen the way we want to have it happen. And so having us manage it over at this 12-month period, we think is the best thing for that business and for our relationship frankly with those customers going forward.

The systems are in place. We closed quickly. We got it all on Smucker's systems from May 1 so our team has a plan. More than half that business will be gone over the next six months and we have a plan for the rest of it primarily in the rest of the fiscal year.

So we think it was the right thing to do for the business and I don't think it hurt us dollar wise. It did hurt us margin wise.

Eric, this is Mark Belgya again. Just to kind of comment on that, if you do look at the segment's profit for Steve's segment, we are basically in line with our expectations from a dollar perspective that we spoke to in June but clearly the effect of it right now with that being a lower margin business, that is primarily what's driving the international foodservice and natural foods reduction period-over-period in margin percentage Steve indicated.

Okay, I will pass it on, get back because I need to.

One last thing, though. We did have a great first quarter in liquid coffee, so we won't typically comment on that kind of detail on a quarterly basis but we are really proud of the team given all the changes and there's some great new contracts signed, some big contracts defended, so the core of that business and why we bought it is in good shape.

Okay. Thank you.

Chris Growe, Stifel Nicolaus.

Good morning. I just want to ask a question first if I could about just to get some perspective on the EPS guidance and the way to look at that for the year. Obviously you had a strong outperformance this quarter. My question just more relates to if there's any impediments coming up that you foresee that could take away from some of the upside potential that came through in this quarter.

Chris, this is Mark Belgya. Let me just give you a couple of points. The first is that for those of you that have followed us for quite some time, it is pretty rare for us to move on our guidance for the year after just one quarter and that really is -- has primarily been due to the pending fall bake period. It is obviously very big to us.

You add into that obviously the volatility of the economy, the consumer, and the recent spikes in corn and wheat, so those are all I would say are more cautionary as opposed to concerns. But those all factored into where we landed in our guidance.

Okay, that's helpful and that's what I assumed. I just wanted to make sure that was clear. And then I did have one more follow-up question for you and that was you had talked last quarter about introducing some more -- or really pushing some more opening price point products. I just wanted to ask a general question across the business how mixed performed? I know it was positive in coffee. I guess I wanted to understand -- and I guess a lot of it is from the K-Cups -- beyond that, was there any detrimental mix in other categories because of that trend?

Chris, this is Paul. On the consumer food side, no, we really didn't have any other negative impact on mix. Mix was actually good for the quarter.

Okay, thank you.

Yes, and Chris, I would guess, this is Vince -- I would just add the margins or profitability of those items are in line with our core items, so it's not like we sacrifice profit when we focus on those items.

Okay, that's helpful. Thank you.

Ken Goldman, JPMorgan.

Good morning, everyone. Could you -- Mark, I know you don't give quarterly guidance but you did mention that we should expect the reversal of the mark-to-markets later in the year. Could you just give us some color on when that takes place so that we can model a little bit more efficiently?

Yes, Ken. It would be in the back half of the year. We are in pretty good shape from a hedge position to our fall bake. So as we get into those physical commodities later in the late third and particularly in the fourth is probably where you want to charge that to.

Okay, thank you. Then in your K-Cup guidance, which I think you are raising today, how much are you factoring in there the expiration of Green Mountain's patents and what that may mean for the number of players that potentially could enter the market at this point?

Sure, Ken. This is Mark Smucker. Let me just back up and sort of reframe the category. First, we had as you know a great year last year with almost $180 million in sales and the growth in the quarter this past quarter of course was also very strong. So as we said, the momentum continues. And it's part of our overall strategy of playing in all segments and I think we are the one national roaster who truly does play in every segment in the category.

That said, last quarter I think I was the one who said low double digits and after a lot of work by the team and looking forward on some of the issues that you raised, that's why we feel comfortable with the approximate 60% growth for the full year.

Having said that, we can't really comment of course on Green Mountain's patents but there have been a number of questions about private label entering the category or other as Green Mountain terms it, unlicensed participants. Overall we feel reasonably comfortable that we will be able to manage through that. Every category we play in has private label. Private label will continue to enter the category although I would point out that the barriers to entry for the unlicensed participants are relatively high so there are a lot of unknowns there and we wouldn't expect a significant impact on our business this fiscal although we do agree with some of the comments from our partner, Green Mountain, that ultimately over a three- to five-year period, the private label component would be somewhere in that 5% to 15% of the category range.

Quick follow-up. What does that exactly mean when you say that the barriers to entry are a little bit higher? What would prevent a large branded competitor for example from coming in and using a co-packer and taking some shelf space from you -- not that you're not going to do great but I'm just curious how that would play out?

I think generally it's capital costs. It's equipment and the time it would take to get that equipment up and running would be the primary reason.

Is there not a lot of capacity right now?

I don't think we know that. I think that in our world we're doing very well but it would be hard for me to comment because we just don't know.

Okay. Thanks, guys, very much.

Ann Gurkin, Davenport Investments.

Good morning. You made a comment this morning that you do not need to adjust prices through the end of the year, calendar year, in key categories. So should I interpret that as you feel good about where branded prices are versus private label in these key categories?

I think what we are commenting on is that we do not anticipate any further pricing action through the calendar year based upon the visibility of our cost. We will continue to execute on the second and third quarters primarily as we did in the first relative to our pricing and promotional strategy. So I guess the way to interpret that is that we don't anticipate any other pricing action other than that we implemented milk that will go in effect in the second quarter.

This is Richard. We adjust promotions as necessary as competitive positions deem important, but we are not planning to change prices.

Great, that helps. Any update on a strategy for the flour business? Any developments there we should know about?

Ann, this is Paul. At this point, no, we really don't have any updates on our flour business. So no.

Great. Thank you.

Jonathan Feeney, Janney.

Good morning, thank you. I wanted to talk a little bit about marketing spending. I think it seemed from some prior comments and presentation materials there had been -- I guess as a cadence of despite I think the gross profit numbers were ahead a little bit but the cadence of marketing spending was a little bit lower up plus 6% this quarter than I expected it to be up.

Is that in line with plan? Is there something that you saw that -- or did I just get that wrong or can you talk a little about that over the course of the year and how much that should be up year-over-year in your mind?

John, this is Mark Belgya. You're right, we were up 6% and about half of that was specific to the Sara Lee acquisition and actually was right in line with our expectations.

Beginning of the year we said that marketing was going to be up about 20% and you may recall that was made up of a couple components. There was some moving of trade spend that had been spent last year that was coming back into marketing. Obviously Sara Lee was bringing additional marketing. And then of course, just our organic increase to support existing new products.

As we looked out over the year originally, that was going to ramp up particularly in the second and third quarter. We still anticipated a good increase whether it will be the whole 20%, we will sort of evaluate that as we move through the year but we would expect to see a step up in the second quarter for sure.

Order of magnitude -- like I mean -- ?

Sorry, what was that?

Sorry, order of magnitude -- you say step up. When you say step up, you mean step up in the rate, right? So (multiple speakers)

As a percent of sales, we would -- dollars and percent of sales would be probably moving closer to middle teens, roughly.

Terrific. Okay, thank you very much.

Alexia Howard, Sanford Bernstein.

Good morning, everyone. Can I ask about the channel mix shift that several other companies have mentioned over the last few quarters? In particular I think you mentioned that you are trying to launch lower opening price point products here. We have seen dollar stores for example be very rapidly growing across the landscape and I just wanted to find out how you see your positioning in that growing area and if you are underexposed, how quickly you can close that gap? .

This is Vince. I will start the answer and I'll turn it over to Mark and Paul. But a couple points. First of all, clearly over the last two years or so we have seen somewhat of a shift in our business to club channel and/or dollar channel, the one exception being of course we lost some peanut butter business and a major club customer last year for part of the country. Clearly the Folgers brand when me acquired it was an avenue for us to further explore the dollar channel and that's what really has made that segment grew.

Secondly though as it relates specifically to our opening price point items, those are not necessarily only targeted at the value chains per se. Those items are also sold across many of our channels including traditional grocery stores. So it isn't necessarily a strategy of only having those OPP items as we call them for the heavy discounters.

But from a macro perspective you are correct. There continues to be somewhat of a shift to nontraditional channels and then of course, there's a very large account who is doing much better than they have maybe over the last couple of years and we are seeing a rebound with that customer.

Great. And then could I ask just a specific follow-up question on where you're at in the peanut butter cost cycle? It looks as though -- peanuts we know have come down a bit from their peaks given your forward contracting, I was trying to -- you had good profit growth there but it seems as though is more for pricing ahead of comp increases. Are you at that point yet or can you see the point at which those peanut butter or peanut input costs will start to come down year on year?

Alexia, this is Paul. When we look at the peanut business overall we look at -- their spot prices and they are coming down. However, spot prices are really more directional, so keep in mind that that isn't necessarily our cost and we do -- as you mentioned, we do enter into these long-term contracts with our shellers in order to manage our overall business.

But from a competitive perspective right now we actually don't want to share too much more detail on that and so I would like to kind of stop it there other than to say that we feel very good about our overall coverage. We know we are going to get peanuts going forward.

Great. Thank you very much. I will pass it on.

Ed Aaron, RBC Capital Markets.

Great, thanks. I just wanted to maybe draw in a little bit more to the drivers of the positive (inaudible) surprise in the quarter. To the extent that volumes kind of outperformed your own expectations, is it fair to say that was mostly driven by price gaps maybe coming in line faster than you expected? If so, does that raise any concern that maybe competitors will kind of get more aggressive in the months ahead?

Ed, let me start again and then we will turn it over to Mark or Paul or Steve. But clearly taking the learnings from our third and fourth quarter, evaluating our post promotional analysis and our elasticity models allowed us to implement those revised strategies in the first quarter and we will continue that through the fiscal year.

But I would say that it was a combination of not only getting price gaps versus competition right but it was also getting key price thresholds correct that obviously the consumer was responding to specifically in coffee when we went over a $10 average price point pretty much across the country.

The other thing I would suggest is that in some cases we've actually done a reduction in some trade spend areas to better manage profitability specifically in baking where we might've moved off a 10 for 10 strategy to maybe like a 4 for 5 strategy.

So I'm sure the competition will respond but I think we are in a much better place today and understand our models better than maybe what we had previously and we would feel comfortable as we go into the back half of the year.

Great. Thanks for that. Then Mark, can you just may be clarified the inventory reloading comment that you made? Where you suggesting that there was not a restocking benefit in coffee in the quarter? I'm just not sure that I understood it properly.

Yes, actually thanks for the follow-up. We saw in some of the pre-release materials just some questions about that so we are trying to address it. We talked last quarter a little bit about customers deloading somewhat in anticipation of a price decline and so the concern would be is some of the volume uptick a reloading of the inventory?

So the clarification is simply that we don't think it is. As we looked, we dug into that pretty hard to make sure that that wasn't the case and so as we look into the forward months and our shipment trends that we experience in the quarter, we feel pretty comfortable that the growth is real.

Thank you.

Scott Mushkin, Jefferies & Co.

Thanks, a lot of -- some of my questions have been answered but what I wanted to go back to was the original comments I think as the call gone about that the industry is getting better in the latest four-week data. So I guess our four-week data doesn't actually show that but I got some instant commentary from a lot of the retailers that I actually cover as well that they are not seeing that at all.

So I wanted to just poke at that a little bit and see what you guys are seeing, which seems to go contrary to even your largest customer that reported I think yesterday, they had a good July but if you look at their consumable sales, they really haven't moved all that much.

So I was just trying to understand what you guys are seeing maybe versus other people.

This is Richard. I think a couple of things. One is we have seen a number of our retailers report. I think volume is relatively flat but it's not down where if you were to have looked at the third quarter of last year, it was down quite a bit in the fourth quarter for us and the industry recovered, but it was still down. The first quarter although basically flat, flat is good. We are doing better than flat because we're doing better than the industry.

But we see a slight recovery. We do see a very, very cautious consumer out there. And we think that will continue into the months ahead until we get some stability in the market and the economy but we are seeing -- I wouldn't say robust recovery by any matter or means but we are seeing a little bit optimistic return in some of the step of our customers and we just think that any ray of light is good. And so we are pleased about that, but we think we will continue to do better than the industry.

Okay, I appreciate the commentary. I guess Ed kind of asked this question but maybe I will give it another turn on the coffee and some of the -- it seems like the turnaround happened pretty quickly and if you were going to -- is it the repositioning just worked better? Is that how you would have to summarize it? Is that how you would summarize it?

Scott, its Mark. I think it goes back to Vince's comment about managing the price points and it is not only about the gaps but the thresholds that we had crossed. Since we get asked a lot about elasticity in the models and so forth, it is a new learning for us. We saw what happened as we went above that $10 price point on red cans and conversely I think we are seeing the impact as it comes down.

So it was excellent execution by our team and getting the price points reflected quickly on shelves and as a result of that, you see as we've talked about the hourglass, some of the migration going back to the core from the opening price point and some of the premium areas, so our business smoothed a bit in the quarter.

Perfect, thanks.

Let me add to Richard's comment about the industry. I would just -- I think this was in the formal remarks as well. But obviously four-week data is going to vary significantly -- or can vary significantly but if we look at the categories of which we participate in, we have clearly seen that there has been an uptick versus some of the trends that we had seen in our third and fourth quarter.

Thanks, guys.

Chuck Cerankosky, Northcoast Research.

Good morning, everyone. If you could comment on sales mix and consumer confidence, maybe looking a little better and couple that with some of your new product developments and things like the organic natural area, Uncrustables, hazelnut spread, some of what to me sounds like you are pretty willing to go into more upscale or price of your products.

Sure, Chuck. This is Paul. I will speak to Uncrustables and hazelnut. We have seen a pretty significant increase in Uncrustables up about 25% and part of that is driven frankly by last year we were on allocation because of some capacity constraints we had at our facility. That has been changed. We put the new capacity it in. We're up and running again and we are seeing a real good response from the consumer on Uncrustables.

And then on hazelnut, that product, again that category overall, alternate nut butter category has grown quite substantially over the last several years and since we are the number one peanut butter business, we thought we should participate in that category.

So we have entered that. We are very confident and comfortable with what our products have done so far very early on in the cycle but overall, we feel good and the consumer response we think is strong.

I might add just in terms of what we have seen, we've talked about the hourglass effect and so certain items are doing well at the top end such as K-Cups, such as Uncrustables, which would be a little more higher price per unit. Those are doing very well. The opening price points are doing well. We said that the middle was squeezed so we are seeing that the top end -- there are some opportunities for higher-end products and we are seeing some good sales of those.

And that gets I think a little bit to Scott's question earlier. We are definitely seeing the top end do fine. We are actually seeing the middle come back a little bit. Our red can, which was really squeezed last year, we've seen that rebound

And so I think that gives us some of the optimism because where we said the bottom end of the hourglass is doing well and the top end was doing well, the middle was being squeezed. We are seeing a little relief in the middle right now.

Then lastly, you spoke to the natural foods business and as we know and we've seen the numbers, the natural food industry has rebounded. And the large retailers there are doing well but also the large natural or national traditional retailers all have a great set now for natural foods and those customers will be doing more and more important for our Knudson and our Santa Cruz organic brands. And you would have seen a lot of organic lemonade across the country in traditional retail this year.

So those items speak to what Richard talked about and I think they are as important volume wise to that retailer as they are positioning wise. Those upscale retailers want to have a natural and organic segment. We are leaders in our categories there, so we have been able to benefit from that.

Looking at some of these commodities that are under pressure from the drought, as well as the possibility of some commodities actually being in better supply, do you think after the calendar year, do you think you would be leaning more towards raising or lowering prices, all things considered and the need to maintain volume momentum?

Chuck, this is Paul. On the commodities in my area, consumer foods, we are seeing exactly what you are saying, some of the higher prices coming out of the drought stricken crops. Again through our fiscal year, we are covered and we really monitor very closely on a daily basis the overall crop conditions and we won't make those type of decisions until we get closer through the fall bake time period.

This is Richard. One thing I will comment on. I think that you will not see some of the huge increases in prices that you've seen in the last couple of years. If we had to take price adjustments, they will be probably modest at best but last year we took coffee down but we also took it up two years prior to that substantially and the same with peanut butter. We don't see those type of increases or decreases.

I guess, Chuck, I would just frame it in macro. Obviously from a supply perspective, peanuts and coffee are coming down but again, they are not down to anywhere near the levels where we were two or three years ago. Obviously know what's going on with the drought so again depending upon our positions and supply at the end of the calendar year or starting at a new calendar year, you would anticipate there could be some pricing action going up. But at this point, as Paul just said, we are in good shape through the calendar year and we do not anticipate any further action.

All right, thank you very much.

David Driscoll, Citi.

Good morning. This is Cornell Burnette calling in for David Driscoll. Congratulations on the quarter. Just had a couple of follow-up questions. Did I just hear correctly that in consumer you guys are pretty much completely covered on your commodity exposure for the rest of this fiscal year?

Cornell, this is Paul. It's through the rest of the calendar year we are covered.

Understood. Secondly, sticking with consumer and looking -- more focusing on volumes, obviously the environment is tough but I think the flat volume growth that you had in the quarter was definitely impressive. Going forward though I wanted to know what were some of the things that may prevent you from -- you'd mentioned earlier that you didn't increase your volume expectations from the year relative to where you stood before.

Going forward, I wanted to know what kind of keeps you from being a bit more optimistic on the volume side and consumer just given that in the second half of the year you'll be lapping some of the supply constraints that you had on the peanut supply last year and so I would expect that those volumes should be up nicely. And then some of the other businesses, you look like you have some good things in the pipeline as well.

Yes, I want to frame in the kind of back to school and O&D time period. From a back-to-school perspective, that would include primarily our fruit spreads and peanut butter business. We do feel pretty good. Keep in mind last year in the October timeframe roughly, we had a lot of buy-in. There's hoarding on the peanut butter side so we are going to be facing that coming up so that's kind of one we will watch out.

On the O&D time period, or the fall bake time period, we are going to see a little bit of mixed results there on our oils and our baking mixes may not be as strong just from a price point perspective and some of the things we are seeing with our competitors. But on frosting for example, we should have a very good business and actually milk should come back a little bit.

So I think there's going to be a little bit of mixed results on O&D overall but we feel very strong about back-to-school and our peanut butter business.

So then overall you do think that there is a good possibility this year that for the full year at least in consumer we could expect flattish or maybe even a slight pickup in volumes?

I think the other thing to keep in mind is we have a downsizing that took place on the cake business and so when you look at kind of the apples -- it will be a little apples to oranges comparison because we do have that downsize that took place and that's a pretty heavy volume product. So the comparables there will be a little bit more challenged.

Cornell, this is Richard. I'm glad you asked that question. It gives me the opportunity to always talk about this but I always think the volume is not a great measure of performance when you are looking in our businesses because we have huge weights in oils and in flour, which carry lower margins. And so if those businesses are down and all the other businesses are up, we might have a down volume overall company but we would be way up in profits and units. So we really have to look at our business category by category to see the volume trends and so I think that's one thing we want to keep a watch out here.

Okay, thank you.

Rob Dickinson, Consumer Edge Research.

Good morning. I just had a really just an easy question on cash flow again. Just I know Eric pointed out early on I guess there's an increase in your cash build. You pointed to having kind of record year-over-year improvement in free cash in Q1 and then you are also increasing guidance for the year. So I don't think I heard anything with respect to where the additional cash may actually be allocated. I think you still have almost 4 million on your buyback authorization, so if there's any color you could provide, that would be great.

Rob, it's Mark Belgya. You're right. We do have about 4 million shares still authorized. You will recall a couple quarters ago we exhausted the 10b5-1 program we had in place.

In terms of allocation, I think that we restated today that we are sticking pretty much to our capital expenditure, $210 million to $220 million. So with that locked in obviously acquisitions come as they do, but we are just going to continue to look at opportunities to enhance share value, shareholder value. I'm sure there's questions out there from a buyback perspective, we will continue to look at opportunities there. But again I think we think of it just because the dollar amount grew and we still kind of go back to the allocation we talked about often in the four buckets and we sort of stick to that over time.

So I wouldn't necessarily say just because we have an increase in cash that we are going to change that but we will certainly look at opportunities. I think as Richard mentioned in his scripted comments, we did take our dividend up for this coming September as well.

Okay, great. Thanks.

Farha Aslam, Stephens.

Good morning. First question is on peanut butter. The volume increase in the quarter, was it really driven by better back-to-school or how much did the reintroduction of new products help you? Kind of going forward, when do you expect to realize the lower peanuts cost? Is it already happening or is it going to be more back half of the year?

This is Paul and on your first part of your question, really there's several reasons why we saw the volume increase, back-to-school having those promotions back on was a significant impact. Clearly we did have the pipeline fill with some of the reinstated items that we had previously discontinued. There's eight of those. We also had some of the new product launches, the hazelnut, Jif To Go, etc. So those are kind of the main reasons, drivers for the volume increase.

And as we talked about your second part of the question really I feel like I've answered that already and I don't want to change from that very much. We're not going to really speak to from a competitive reason -- from a competitive perspective where we stand on our overall pricing other than to say we do have these long-term contracts with our shellers and we are going to get enough peanuts for that for our needs.

Okay, just to follow up on M&A, could you just share with us the landscape right now and what the acquisition picture looks like for Smucker's?

As you know, we have kind of a list, a wish list of brands out there that we think would be a great fit with Smucker's. The landscape has not changed a lot. There is some activity in terms of as you've seen several transactions take place recently. We think that we are going to see some brands come available probably in the next 24 months and we would be interested in some of those but I don't think there's been a big change in the last six months or so.

Thank you very much.

(Operator Instructions). Eric Katzman, Deutsche Bank.

Actually Farha just asked it, so I will pass. Thank you. Have a great Labor Day.

(Operator Instructions). Michael Gabovich, Glenrock Asset Management.

I was wondering since you set the promotions somewhat this quarter, do you expect Kraft to possibly increase their promotions? I realize the category has already become increasingly promotional. Spending has been up. What do you expect Kraft basically to respond given your kind of uptick here?

You know, it's difficult to comment on any competitor, any news or the category is good activity to help grow the category and at this point we are not in a position to really talk about any specific competition.

Okay, great. Thank you.

Thank you. I will now turn the conference call back to management to conclude.

We would like to thank everybody for being on the call today and again have a great holiday coming up. Thank you very much.

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This concludes our conference call for today. Thank you all for your participation and have a nice day. All parties may now disconnect.