J M Smucker Co (SJM) 2015 Q1 法說會逐字稿

Good morning and welcome to the J.M. Smucker Company's first-quarter 2015 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 up the conference for questions and answers after the presentation. (Operator Instructions). I will now turn the conference over to Aaron Broholm, Director Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to our first-quarter earnings conference call. Thank you for joining us today. Here with me on the call are Richard Smucker, Chief Executive Officer; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Chief Financial Officer; Mark Smucker, President US Retail Coffee; and Paul Smucker Wagstaff, President US Retail Consumer Foods. Steve Oakland, President International Foodservice and Natural Foods, is also on the line from another location.

Our prepared comments this morning will be organized as follows: Richard will begin with an overview of our first-quarter performance; 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 year.

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

Additionally, please note the Company uses non-GAAP results for the purpose of evaluating performance internally. Discussion on non-GAAP information is detailed in our press release located on our corporate website at JMSmucker.com. A replay of this call will also be available on the website. If you have any follow-up questions after today's call please contact me. I will now turn the call over to Richard.

Thank you, Aaron. Good morning, everyone, and thank you for joining us. With a record quarter of non-GAAP earnings per share we are pleased with the start of our fiscal year. I will begin with a few highlights for the quarter.

First, volume gains were achieved across a number of our major US retail brands and categories. In our Coffee segment volume was up 2% driven by the performance of our Folgers, Cafe Bustelo and Dunkin' Donuts brands. Lower price realization resulted in the decline in net sales for the segment and for the Company.

Within Consumer Foods volume gains were realized in several key categories including Jif peanut butter, Smucker's fruit spreads and Crisco oils. Total volume for the entire segment was in line with the prior year. As anticipated, volume decline in our International, Foodservice and Natural Foods segments, reflecting the prior year planned business rationalizations, which will be fully lapped by the end of the calendar year.

Second, as anticipated, significant improvement in Consumer Foods' segment profit, primarily due to peanut butter, drove operating income growth for the Company. Lastly, this combined with lower interest expense and fewer shares outstanding resulted in non-GAAP earnings per share increasing 11% to $1.34.

We are encouraged by these results in light of the challenging economic environment that persists. As we look ahead to the holiday period and the balance of fiscal 2015, we are optimistic and delivering another year of earnings per share growth. This is supported by our ability to manage our cost -- price to cost relationships, the expected contribution from innovation and new products, our strong marketing and merchandising plans, our ongoing investments to optimize our supply chain, and the strategic deployment of our cash flow.

Let me briefly comment on our recent announcement regarding our agreement to acquire the Sahale Snack business. This is an exciting enabling acquisition that adds a portfolio of innovative and on-trend premium nut and fruit snacks.

With the growing snacking trend Sahale provides a new platform for growth, complementing our recent innovation efforts within our Consumer Foods business where we have introduced several new snacking items such as the Jif To Go dippers. We look forward to completing the acquisition next month and welcoming the Sahale employees to the Smucker Company.

Also, supported by a strong balance sheet we believe we are well positioned to continue adding attractive brands and businesses to our portfolio.

In closing, we feel good about the start of the fiscal year and are encouraged to be moving beyond certain headwinds that we have spoken to you over the past few quarters as we continue to show progress across our businesses. We firmly believe with our commitment to our strategy, the strength of our leading brands, and our team's ability to adapt and execute we remain well-positioned for long-term growth. With that I will turn the call over to Vince.

Thank you, Richard, and good morning, everyone. We are pleased with our first-quarter results and these reflect solid volume performance across a number of our major brands, supported by pricing actions and the contribution from innovation. Also during the quarter we began to lap some of our recent headwinds.

Turning to the three business segments -- in US Retail Coffee we achieved a ninth consecutive quarter of year-over-year volume growth reflecting gains in each of our largest coffee brands. Volume growth in mainstream roast and ground coffee led to the Folgers brand being up 2% for the quarter on top of a 4% increase last year. Folgers Gourmet Selection K-Cups also realized solid volume gains.

Dunkin' Donuts coffee continued its momentum with volume up 3% against a strong 6% prior-year comp. In addition, the Cafe Bustelo brand had strong volume growth with double-digit percentage gain. The introduction of Cafe Bustelo branded K-Cups added to these results.

During the quarter Coffee segment net sales were impacted by lower net price realization. While we announced a 9% list price increase on the majority of our portfolio in June, pricing on committed promotional programs, along with continued price investment to remain competitive on shelf, temporarily delayed the impact. We expect full reflection of the price increase in the second quarter.

Coffee segment profit was 4% below the prior year's first quarter. In addition to comparing to a strong prior year result, other factors affecting comparability included a more favorable price-to-cost ratio in last year's first quarter and lower K-Cup profitability, as previewed on our year-end call.

As a reminder, we anticipated K-Cup margins to be compressed in fiscal 2015. We are encouraged by the initial contributions from new products and new distribution channels and our K-Cup business is on track to deliver our profitability expectations for the full year.

Also during the quarter we made the decision to discontinue the Life is good coffee brand. This resulted in a small charge to segment profit.

Shifting to the Consumer Food segment, overall volume was in line with a strong first quarter in the prior year. Gains in several key brands and categories were offset by declines in lower margin baking mixes and flour.

Looking at the performance within the spreads categories, volume for the Jif brand was up 4% on top of an 8% increase last year. This result reflects a balance of price brand support and innovation. Smucker fruit spread volume grew 2% behind gains in traditional varieties, as well as continued growth of our natural fruit spreads. Also within the brand, we remain pleased with initial performance of Smucker Fruitfuls.

Lastly, Smucker's Uncrustables frozen sandwich achieved double-digit volume growth in retail for the 10th consecutive quarter. The completion of our Scottsville manufacturing expansion provides the needed capacity to support our growth initiatives for this product line.

Our overall PB&J business is in the midst of the back-to-school promotional season. We are encouraged by the merchandising plans we have in place and the initial consumer take away that will ultimately be the key to our performance for the period.

In the bake aisle the Crisco brand continued its momentum with another quarter of strong volume growth. As soybean oil futures have declined to five-year lows, we have reflected lower costs in our pricing impacting net sales.

The primary soft spot in the Consumer Foods during the quarter was the Pillsbury brand. This reflects declines in the overall category and increased competitive activities primarily on flour and base cake items. As we enter the fall bake period we continue to focus our efforts on frostings and other higher margin products. We were also encouraged by the new Pillsbury audience to be launched and another solid year of holiday merchandising plans.

Segment profit was up 19% over the prior year. As expected, much of the increase was driven by improvements in peanut butter profitability. Prior year segment profit was negatively impacted by peanut butter price declines that were taken in advance of recognizing lower peanut costs. For the full year we expect peanut butter margins to now be more in line with historical average of the past several years.

Lastly, within the segment, as Richard mentioned, we are excited about the acquisition of Sahale Snacks and look forward to the contributions of Sahale towards growing our overall Consumer Foods business.

In International, Foodservice and Natural Foods much of the first-quarter segment profit decline was expected, primarily attributed to factors we discussed on our year-end call, including the weaker Canadian dollar as compared to a year ago and a higher run rate on trade spend in Foodservice coffee which will continue to impact our year-over-year comparisons until fully lapped beginning in the third quarter.

Our focus remains on growing the overall segment and we're encouraged by recent accomplishments, including: market share gains across most of our categories in Canada driven by innovation and merchandising; within Foodservice the ongoing conversion of our customers to our Folgers branded liquid coffee offering; in Natural Foods our integrated sales organization is driving expanded distribution opportunities for the TruRoots brand; and lastly, our partner in China, Seamild, continues to grow and positively contributed to our first-quarter results.

Overall for the segment we remain optimistic about achieving full-year sales and segment profit growth in 2015. In summary, we are encouraged by the start to our fiscal year considering the current industry dynamics and we look forward to executing on our back-to-school and holiday programs. We have a great team of passionate employees and, as always, we thank them for their efforts. I will now turn the call over to Mark.

Thank you, Vince, and good morning, everyone. I will start by providing additional color on our first-quarter results and then conclude with our outlook for the full year. Net sales decreased $27 million or 2% in the quarter reflecting a 3% reduction in net price realization primarily attributable to the Coffee segment.

The impact of lower volume, mostly resulting from declines in baking and business exits, was essentially offset by the contribution from acquisitions. And finally, mix added 1 percentage point of growth.

GAAP earnings per share were $1.14 this quarter, down from $1.19 in the first quarter of last year. Included in this year's GAAP earnings were $21 million of unallocated derivative losses compared to a gain of $5 million in the prior year.

The current year loss reflects a change in election effective this quarter to no longer qualify commodity and foreign currency exchange derivatives for hedge accounting treatment. Derivative gains and losses are now recognized immediately in earnings which may result in increased volatility in GAAP results going forward.

In conjunction we have revised our definition of segment profit and non-GAAP earnings to exclude these unallocated derivative gains and losses until the related inventory is sold. A Form 8-K was filed in July to recast segment profit and non-GAAP earnings for prior years to exclude previously disclosed unrealized mark-to-market adjustments [underrated] contracts.

Excluding hedging gains and losses and other special project costs that are defined in our press release, non-GAAP EPS increased 11% primarily attributable to three factors.

First, gross profit drove an overall increase in operating income. Gross profit increased $11 million or 2% reflecting lower commodity costs which were only partially offset by pricing. Favorable mix also contributed.

This resulted in gross margin improving to 37.8%, an increase of 150 basis points over the prior year. Partially offsetting this was higher SD&A driven by an increase in selling expenses primarily due to incremental expenses associated with last year's acquisitions and a charge related to the discontinuation of the Life is good coffee brand.

Second, lower interest expense contributed to EPS growth reflecting the interest rate swap entered into during the prior year. The year-over-year benefit of the swap will be lapped as we proceed through the second quarter.

And third, a decrease in the number of average shares outstanding resulting from last year's share repurchase activity.

Turning to cash flow -- cash used for operating activities was $8 million in the first quarter compared to a source of cash of $82 million in the prior year. This decline is primarily attributable to a greater current year use of cash for working capital needs reflecting higher green coffee costs and ending inventory as well as certain timing factors.

Adding capital expenditures of $49 million for the quarter free cash flow was $57 million negative. We continue to project capital expenditures of $240 million for fiscal 2015 reflecting an expected ramp-up in spending for the last nine months of the year.

With no changes in our earning guidance or CapEx from original estimates we were not adjusting our free cash flow target of $625 million to $635 million. That said, we are currently tracking above working capital levels necessary to achieve this goal. We will see a reduction in working capital from current levels as we move through the holiday period and plan to provide an update to our estimate following the second quarter.

We ended the first quarter with short-term borrowings of $470 million against our $1.5 billion credit facility. With the upcoming closing of the $80 million Sahale acquisition and seasonal working capital needs, we expect short-term borrowings to peak near $700 million in the second quarter and then decline during the remainder of the year.

As noted in our Form 8-K filed earlier this month, we entered into a $1 billion commercial paper program allowing us to take advantage of favorable interest rates and providing additional flexibility to meet our short-term borrowing needs. We are now in the market converting our existing revolved borrowings to commercial paper.

Considering the higher than anticipated level of short-term borrowings, yet at a more favorable interest-rate resulting from the CP program, we continue to expect net interest expense in the range of $65 million to $70 million for the full year. This range reflects our current projections and outlook for short-term borrowings and interest rates.

Let me conclude with our sales and EPS outlook. We now anticipate 2015 net sales will increase at a rate slightly less than the 5% guidance provided on our year-end call. Despite this modest decline we're maintaining our non-GAAP earnings per share range of $5.95 to $6.05. Sales of approximately $25 million associated with the Sahale acquisitions are included within our revised guidance.

As we invest in the business to support distribution growth we do not expect material bottom-line contributions from this acquisition in the near term. And with that we will open up the call to your questions. Operator, if you would please queue up the first question.

(Operator Instructions). Alexia Howard, Sanford Bernstein.

I wanted to ask about the outlook for coffee profits from here. You have obviously seen a rebound in the profits on the peanut butter side. Coffee input costs have been rising. It sounded as though last quarter you might have been expecting a little bit more of a bump in coffee profits (technical difficulty) this time. (Technical difficulty) list price increases kicking in next quarter, how does the outlook look from here? Thank you.

Alexia, this is Mark Belgya. I guess -- it was a little hard to hear your question, quite candidly, it was breaking up a bit. But I think what we would say generally across our businesses as opposed to getting into specifics of any three -- you'll recall at the end of the year we said that we expected our segment profits to be up in all three of our segments.

I think that is still a fair comment despite where coffee came in. I think what I would say is that we expect overall to be up consistently in total because obviously we are not adjusting guidance. I think the mix between the three segments may be a little bit different than what we expected out of the gate.

And then, can I ask about share repurchases (inaudible) acquisitions going forward and uses of cash? Thank you.

Sure. I think just to restate our order of preference of spending our cash, we have our general umbrella statement of 50% to shareholders, 50% to the business which we have held true to. M&A and finding the right strategic investment is clearly the number one use of cash. And as we made a small acquisition or will be here in the next quarter, would be our number one use.

But I think we've demonstrated that if there are not opportunities we still feel that buying back shares is a good use of our cash. And again, just to remind everyone, we sort of set a general guideline of a couple percentage points of outstanding shares which is about 2 million shares currently.

Thank you very much. I will pass it on.

Chris Growe, Stifel.

I had two questions if I could. The first one, when you talked last quarter and you gave your outlook for fiscal 2015 you talked a lot about some pretty aggressive new product activity across the Company. I am just curious, as you go through the different divisions, I guess the degree to which that benefited the quarter? Did you have a lot of these new products shipping? And I guess what sort of contribution do you expect from new products throughout the year?

Chris, this is Vince Byrd. I would say, yes, we are on target to still launch well over 100 new items this year. As you know, we have also done that over the past couple of years. I believe we actually had about $80 million of new products contribute in the first quarter that were not in the portfolio three years ago. And we can turn to the three presidents, but at this point we have not changed our innovation pipeline and what we plan to introduce.

And I think -- this is Mark Smucker, Chris. Just in coffee, we are very pleased with the lineup of new products that we have coming out. Obviously Bustelo in K-Cup is a notable one. But we do have new products in every segment and are launching a line of Folgers flavors that are -- it is basically coffee flavorings in a very small container that is essentially a new segment.

So, we are excited about what we have in the pipeline. As these things go during this time in the fiscal year it is a little bit early because shipments have just begun, but we are optimistic.

And, Chris, this is Paul. Just from a Consumer Food perspective I would just add on to what Mark said. And on the peanut butter side and overall we are excited about the snacking opportunity obviously with Sahale, but then also with Jif Dippers, a new product we launched on the Jif side which is doing very well out of the gate.

Our seasonals and our bold frostings on Pillsbury continue to do well and we are excited about the upcoming fall bake. And then Fruitfuls for the Smucker brands, again that is early launch, but we see some good results out of the gate and we are feeling comfortable that that is going to be a great line in the future.

Steve, do want to comment also on your areas?

Yes, certainly. I think similar to what Mark said on timing, many of the new items in IFNF, specifically Canada, are around the baking season. So those are really not impacting the business yet. We expect those to impact the business in the second and third quarters. And I think we will start to see the impact of Enray as we get later in the fiscal year. There is a lot of work on new distribution and new items from Enray. So we are excited about it but the impact has yet to be felt.

Okay, that was a great overview. Just one quick follow-up, maybe for Mark, on pricing in coffee. And I guess there was a recent K-Cup price increase. I'm sure you can't discuss that if you have not filed that yet. But I guess my question would be that as you look at the K-Cup business and you have seen some more aggressive promotional spending there, is that category likely to see a continued heightened level of promotional spending? Is that what is proper for your business to try and regain some volume (inaudible) there in K-Cups?

So, Chris, this is Mark. The short answer is, yes, there is increased competitive activity. From a pricing perspective I would tell you that the increased competitive activity is more around the frequency of promotions than it is around going deeper.

And so, I think that across the category you are just seeing more activity, but the relative pricing between brands remains more or less in line with our expectations just from being -- from rational. That said, you are right, we can't comment on our pricing action, but in light of the competitive situation we certainly will evaluate it.

Okay, thank you for your time.

David Driscoll, Citi.

First question is just simply on the guidance. Did the first-quarter results make your internal forecast? And if the revenues are lowered for the full year, what is the offset that keeps earnings unchanged?

David, this is Mark Belgya. That results in the first quarter were a little below where we had planned. But obviously it is early in the year. So, we have maintained guidance and what you're going to see is we're going to see some productivity gains we think through the course of the year. We're obviously looking at budgets.

There will be some marketing adjustments as well, but to that point you can imagine with 5.5% of our sales and marketing, you do the math. It is $300 million that a quarter into the year there is some flexibility as far as addressing it without impacting the businesses too strongly. So we feel pretty confident to get that. So it is a combination of those things that we will see flow through over the last three quarters.

Okay, my second question just goes to IFNF. I'm curious here also about the quarter and the year in terms of profitability and sales in this segment. In fiscal 2014 that segment had I think it is fair to characterize it as a bad year. And I thought you guys had indicated last quarter that F15 would be much better.

I think Vince said in his prepared remarks that he did expect full-year profitability to be positive, but of course that is not true in the quarter. So can you just walk us through a little bit here what is going to happen in this segment and how strong your confidence is in that profit forecast?

Steve, I will start and then I will turn it over to you for some details. David your points are well taken and we still hold true to what was said in my earlier comment about all three segments being up year over year.

Candidly last was a tough quarter for the segment. We do expect growth. I think as Steve will elaborate, certainly there were some things that happened that we are lapping. And we will see a greater benefit of that in the back half of the year, particularly around the trade spend in Foodservice. So, Steve, do you want to comment further?

Yes, certainly. The impact of this quarter was the Canadian dollar was the exits and the trade spend. And if you remember, we made those trade spend adjustments primarily in the third and fourth quarters. So those are flowing through the income statements in the first quarter against a quarter that didn't have those.

So as that volume normalizes, that trade spend volume normalizes I think we'll see favorability in the back half. We also feel very strongly that the merchandising programs, both in our Canadian business and in our Natural Foods business, are very strong for the back half. And we're seeing momentum in our Foodservice business on our Folgers liquid coffee business.

So we think the businesses are actually individually performing well. All of the noise should flush its way out by the end of the year. We will have the exits behind us. And we think we can make up, quite frankly, the currency impact and still show modest growth for the full year.

So if I just kind of repeat something. So second quarter is going to look a lot more like the first quarter here. And then third quarter and fourth quarter is where you would expect to see sizable improvements in profitability within your segment. Is that a fair characterization?

That is (multiple speakers).

Yes (multiple speakers) go ahead.

Well, that is similar to how we see it. I would expect the different -- the only difference in that, I would expect a little contribution from TruRoots and the Enray business in the second quarter.

Okay, I will pass it along. Thank you very much.

Mario Contreras, Deutsche Bank.

So this was the highest margin we've seen from the use retail segment in at least the last three years. I'm just wondering how sustainable you think this margin level is or should maybe some incremental competitive activity over the course of that year eat into that a little bit?

Hey, Mario, it is Mark Belgya. Yes, we clearly had our strong margins. I think it reflected -- probably most key was the turnaround in the peanut butter business. That has been the drag quite candidly for the last four or five quarters. Obviously even though coffee profit dollars were down they still maintained a strong segment percentage.

So I don't see dramatic changes. I think it's normal course -- as we move through the next couple quarters you do tend to see a little bit of margin because -- as our baking business plays a larger part because of fall bake. That, as you know, is a lower margin business, so I think you will see some pull down from the first quarter.

And then I think as you look forward it is going to become a bit of a function of what pricing does. Because, as you know, we focus on profit dollar growth. So if we were to see any kind of significant price movement increasing that top line that will moderate the margin accordingly.

All right, thanks. And then just one additional question. With respect to the recently announced Sahale acquisition, just wondering if you could talk a little bit about the long-term opportunities for this business? For example, it has a large C-store presence, maybe some opportunity to get some Smucker products through that distribution and vice versa, get bigger traditional retail distribution for Sahale? Thanks.

So, hi, Mario, this is Paul. And again, we are very excited about the Sahale opportunity. The stacking category, as you all know, is growing very significantly and they have a really unique portfolio of products that are very -- they are great obviously tasting products, but also they are positioned well, a little premium.

And their distribution is not full I would say, so there's opportunity for us to gain distribution in other channels. And then also, the learnings that we get from them we can also apply to some of our other brands. And so, although it is very early in the process as we stand today, we do feel very comfortable that there's going to be some great opportunity not only just with Sahale but some of our other brands. So we are excited with that.

Mario, this is Vince. I would only add that -- although much on a smaller scale -- it is not that too dissimilar to when we acquired the Folgers business. It had a very strong presence in the dollar channel where we did not have much distribution.

And if you look at Sahale, even where their merchandised in store and produce sections, etc., will be new for us. But we really think will be able to leverage our go-to-market strategy in maybe more traditional channels to really help grow that business in the future.

All right, great. Thank you very much.

Farha Aslam, Stephens.

Mark, you had mentioned briefly your cost savings programs that should kick in as the year progresses. Would you just remind us what the cost savings from your actions will be for this year and when those contributions will flow through?

Yes, yes. Farha, it is a combination. We said at the beginning of the year that we will have about $10 million of additional benefit from the full-year operations of our Orville plant and getting that kind of running smoothly. So that we continue to see. And that was in our original guidance, that continues.

I think in the other areas where we're going to cover some of the top-line shortfall that we spoke to will really be a function of focusing on the spending side and this holds true across our manufacturing facilities as well as our corporate function. So that would be the driver I would say of most of the production opportunity.

And again, it's early in the year, so it does allow the team some flexibility to look at where some spending that might not be as necessary as originally planned, that is where we will focus first.

And the second question is around coffee. Now that you've taken your price increase here in the second quarter, how are you seeing the promotional cadence flow-through versus competition? Is it in line with your expectations, greater or less?

It is Mark Smucker. It is in line with our expectations. As you know, part of the reason for -- obviously we take price to be transparent with our customers. Part of the reason we took it in the first quarter was to make sure that we had our pricing strategy set for the key holiday period.

So literally as we speak we are seeing pricing move on shelf both in our own business as well as all of the key competitors. And so, we would expect that relative price gaps, we will continue to manage and do a good job doing that. And so, overall I think the pricing across the category and the segments within it are in line with our expectations.

Great, that is helpful.

Matthew Grainger, Morgan Stanley.

So just first on coffee. Could you talk a bit about the outcome or the impact of some of the shelf resets that have taken place in the category during the summer, both on roasted ground and your K-Cup business? And then separately just on K-Cups, could you update us a bit on some of the efforts you have in place to expand distribution in alternative channels where you feel you're making progress currently?

Sure. So when you look at the share trends, which are positive, you look at the 12-week share trends sequentially, we've actually had some nice results in all of our segments. So K-Cup has stabilized and maybe increased slightly and then you look at premium and mainstream, those also have positive trends as well.

And we attribute that success to our obviously our promotional efforts, our brand support efforts. And we have seen that as shelf resets have occurred in the roast and ground space we have won. In fact, we have maintained the number of items on shelf versus competition in the premium space, some of the smaller or -- smaller brands would have lost. And so we clearly have been successful in that front.

On the K-Cup side it is a little bit more of a mixed bag. Clearly having Bustelo and some of our new items has helped us. And I think as we are still trying to study how that has impacted us, but I think overall we would say it is positive. And it just really varies by customer. And then, Matthew, you had a another question on K-Cup --?

Expanded channels that -- which club, etc., Mark.

Thanks, Vince. So in this expanded channels, we did talk last time about dollar, online and club and we have had some nice successes and all of that which has contributed to our success in the quarter.

Okay, great, that is helpful, thanks. And great ask a quick follow-up as well on Pillsbury. I can definitely appreciate placing the focus on higher margin products going into the fall. But your commentary didn't seem particularly optimistic on competitive dynamics or category growth in the mixes just sort of on a forward-looking basis.

Do you expect to see improvement in the business performance here over the next few quarters? And can you just speak to your comfort level around the plans and sort of the promotional and merchandising efforts you have in place going into the fall?

Sure, Matthew, this is Paul. So a couple things. I would say that we are optimistic on our business as far as the new items that we are planning on launching. We are trying to focus on some of the key trends that are occurring from a consumer perspective, things like simple ingredients and we have some products that we are coming out launching on that front.

Gluten-free items and our seasonal items continue to do very well. We clearly focus on our frosting category which is where we are the number one and also is profitable for us. There is about -- in the last year there's about 200 items that were launched in the banking category alone. And so that has added to some of the complexity of the category and some of the additional competitiveness that has taken place in that section.

And so, some of those new items have been more fad-related and more I would say not as relevant as some other ones. So we would hope that some of that would get sorted through and we would focus on more of the longer-term trends that our items we think are going after.

Additionally, we think about our merchandising for fall bake, we are in a very good position with the Pillsbury business. And when we think about oil, oil is looking fantastic. We had a very good quarter last year, we are in great quarter first quarter and we look good for fall bake. So when we think of our total baking business I think we want to include the Crisco brand as well as the Pillsbury brand. So again, we feel good about going forward.

Okay, great. Thanks again, everyone.

Akshay Jagdale, KeyBanc Capital Markets.

Good morning. A couple of questions on the K-Cup business. Can you give us an update on what your expectations are for K-Cup sales growth for 2015? It seems like the quarter, at least from where I sit, came in better than I thought on the K-Cup side. And you have some pretty easy comps, especially in the back half for that business. You mentioned your share trends have at least stabilized and you are getting some incremental base. And from what I know, the new carafe on the 2.0 is also going to be positive for your new product.

So can you just give us an overall update on sort of sales growth expectation, and maybe talk a little bit about the 2.0 launch and what impact that might have on your business?

Hi, Akshay, it is Mark Smucker. So I think we haven't really changed our outlook in terms of we do expect mid-single-digit volume growth on K-Cup. And as you look across the segment, shares are starting to stabilize a little bit. We have seen over the past 12 weeks some of the unlicensed growth has slowed somewhat. And you have seen the licensed player shares also sort of settle.

We did see, as I mentioned earlier, a small uptick in our share, and so we are encouraged by that. But, of course, we need to continue to support the business.

And then on 2.0, clearly we are confident that we are with the right partner. Our partnership with Green Mountain, as we've said before, has been fantastic, and we continue to be optimistic about that. We will play in all of the formats that the 2.0 machine will brew. And just believe in the consumer benefits that that new technology brings to bear in terms of flexibility and so forth.

Keurig has done a great job of building a strong brand portfolio and I think as you have seen in the segment, with good support the strong brands, leading brands, will continue to win.

That is helpful. And then any update on your relationship with Dunkin'? Obviously, the trends in the premium coffee side continue to be strong. So is there any -- can you give us an update as to where you stand as it relates to the K-Cup business potentially?

Akshay, this is Vince. As we've said before, our Dunkin' relationship is also equally very, very strong. We continue to work with them on the premium side, have introduced a number of new products. We continue to look at opportunities between our two companies for growth that would benefit both them and us. And there is really nothing new to report as it relates to K-Cups, but we are exploring a number of opportunities with Keurig between our two companies.

Just one last one on M&A. Can you give us an overall update on what you are seeing in terms of activity in the M&A space? It seems to me that obviously there's been a pickup in general in terms of M&A deals in the food space. You guys have obviously made some tuck-in acquisitions, so it seems to me that maybe valuations might be a little rich. Can you just help us understand the dynamics on the M&A side as you see them? Thank you.

Sure, Akshay, this is Richard. Basically I agree with everything you said. The activity has increased. We've been able to get a couple nice tuck-ins and enabling acquisitions which we continue to look for those opportunities along with bolt-ons and obviously occasionally some transformational.

But you are right, there's more activity in our space. And we are in a good position to play and that space because with a very strong balance sheet and a good currency in our stock if necessary. So other than that we are -- I think you are right on in the analysis of where the market is today. Mark, you might have a comment on that.

Yes, Akshay, the only other thing I would add is you kind of look at the transaction and you ask sort of what is different and what is driving some of these multiples and valuations maybe versus a few years ago. And I think the one thing you do hear quite a bit, and I know several of our peers have announced transactions -- this whole concept of buying down the multiples.

And so while you are seeing sort of this 11, 12, 13, 14 times being paid in the market, the ability of companies to take advantage of synergies and then also the step-up in basis is really allowing companies to do transactions that at end of the day, if they execute properly, do get them down to more traditional valuations.

So I think until the interest rate environment changes and there is evidence that maybe that strategy of executing on synergies doesn't play out, I think you will continue to see these heightened levels.

Thank you. I will pass it on.

John Baumgartner, Wells Fargo.

Just thinking about the retail consumer business, maybe you can speak a bit to what you're seeing in terms of the peanut better category. It looks as though some of the price promotion in the Nielsen data has really increased over the past four or eight weeks. So just in light of that how are you thinking about the competitive environment there and the immediate risk to your peanut butter profit plan as fiscal 2015 unfolds? Thank you.

Yes, hi, John, this is Paul. When we think about the peanut butter category, right now it is we feel our business is very good and we think about the back-to-school, we have great merchandising in place. The early consumer takeaway seems to be very strong which we are pleased to see.

From a competitive perspective we would say that all the players -- we categorize it that all the key players are really playing responsibly. It is competitive, there is no doubt about it. We are seeing some deals which you typically see around this time of year back-to-school. But overall we feel pretty good about the health of the category.

There is a lot of new items that are coming into the segment from not only us but other competitors and we feel that is going to overall increase the usage and consumption of peanut butter. And keep in mind, it's still one of the cheapest proteins out in the marketplace. And with some of the higher cost we have seen on the meat side of the business, meat side of the category, protein, we feel good about where peanut butter is going to play.

Thank you, Paul.

Robert Moskow, Credit Suisse.

A quick question on Jif. I thought in your opening comments, Mark, you said that -- or maybe it was Vince -- said that we now expect peanut butter to return to more normalized margins. Has anything changed regarding your outlook for fiscal 2015 or was that always pretty much your expectation? I think some people, including myself, I thought you might be able to overshoot on margins this year.

And then secondly, in the mix -- I think you said that the mix -- Mark, you did say that the mix would be different this year in terms of the segments and how they deliver profit. Are you thinking that coffee will be a little bit less than you thought in terms of profit contribution or is it International, Foodservice and Natural Foods that is going to be a little bit less than expected?

Yes, Rob, this is Mark Belgya. I will try to clarify and hit on both of your questions. On the first one, peanut butter, because of last year, probably actually the last six to seven quarters, was just much lower than the average than what you are seeing as a return.

Most of that profit gain in Paul's segment was due to peanut butter. And that was built into our expectations and I think the growth in the business, as he just said, is to continue, so we still say profitability. But that was the big step up.

And then in terms of just the overall profitability, your take is correct. I mean, we fell a little bit short on the coffee side, so the other two segments will continue to make up the difference to help it land at the original guidance for the Company.

Okay. I mean coffee had a very strong year, Mark, I remember you and I talking about this in fiscal 2014. So just broadly speaking, I think there is some concern that the big step-up in profits over the last two years, you and I talked about like a $100 million step-up. Can you still protect that step-up? Is that profit in the profit pool -- you expect to be able to hold onto that, there is no risk that that deteriorates?

No, we -- our expectation, and you have heard us say this 100 times, our expectation is to grow every business every year, and I'm not saying that blindly. But, no, we would expect to continue to maintain that portion of that overall profit pool. And as we look to the year we would still see some profit growth, just maybe not to the degree we originally had at the outset.

Got it, still growing. Okay. Thank you.

Jonathan Feeney, Athlos Research.

In keeping with tradition, a couple of questions. The first is how specifically are you thinking about the launch -- the timing of the launch of Keurig 2.0 with respect to how you are modeling profits in that Coffee segment? Is that a significant factor in your thought process?

And I would imagine there has been -- you've mentioned this in passing before, but there should be some inventory build and perhaps -- maybe that is affecting the timing of your profit expectations over the course of the fiscal year. That would be my first question.

And the second question would be on the M&A front. In a lot of great ways the history of Smucker has been written by big transformative deals, getting into new categories as you have talked about with investors and having integrated those who successfully.

When I look at Sahale Snacks, it's certainly a kind of acquisition you've done successfully. It is somewhat of a new category for you though, but rather small and sort of niche oriented.

So I guess my question around Sahale would be does this tell us -- does this mean that if you did a big transformative deal it would be in the direction of something like a Sahale Snacks? Or are sort of all options on the table as they have been historically as far as on the lookout for bigger deals? Thanks very much.

Hi, Jonathan, this is a Mark Smucker. I will start with your question on 2.0. Really the contribution this year is minimal. If you take into consideration that Keurig will be also selling 1.0 brewers alongside that. That aside, even if that were not the case it would take some time before those 2.0 brewers would make their way into a significant portion of households that would be meaningful across the business. And so, I would tell you that this year the contribution would be minimal.

And, Jonathan, I will -- if you are satisfied with Mark's answer, I will answer the one on M&A. This is Richard.

Pretty clear.

Good. We are -- obviously our strategy is to own number one brands sold in the center of the store North America. That allows us to play in a lot of categories that we are not in today. So if you are looking at transformational acquisitions, I think you could be confident that we were looking in a number of different categories that are beyond the current categories that we are in today. We weren't in coffee, as you know, six years ago. And we are now in coffee and it plays a significant role.

So we are not -- we think that there are several other categories that could fit very nicely. Now the Sahale acquisition is a nice fit and gets us into a snacking category in a small way to really learn that business. But we think that has some real legs for growth, as we have mentioned already.

But that is one category we weren't really -- we were dabbling in with some of our products. But now this gets us in a big way. But there are other categories out there that we do think would fit. So we hope that at some point in time there is something to announce. But nothing today.

Thank you very much.

Chuck Cerankosky, Northcoast Research.

When you look at the sales growth pressures in the quarter and some of it continuing into the year, what attention might be needed on expense control?

Chuck, this is Mark Belgya. Again, reiterating some of the points from a little bit earlier is that being one quarter in gives us a lot of flexibility in terms of looking in. And as you know, any budget has some discretionary funds in it. So right now the challenge across the organization is to look and we will implement changes.

We are not in a forced situation here. I don't want to come across as being that drastic, it is just being very prudent in cost management and using eight months of the remaining fiscal year to close a little bit of that gap and to maintain the guidance. But there are levers that we can pull and dollars that we can pull back on from a budget perspective.

Chuck, this is Richard. I'd just to add to that, we also haven't given up on our original top-line growth goals. We go back to our sales teams and say, hey, we were little short in the first quarter, how are you going to make up the difference? So it is not just bottom line, we have some levers we can pull to make sure we are hitting both of those.

Okay. And looking at the Santa Cruz brand where it had some volume contraction in the quarter. Anything going on there that is different from the overall organic category trends that might explain that or is it distribution related? Just curious about that brand's performance.

Sure, hi, Chuck. Steve Oakland. Chuck, if you remember, we made a conscious decision -- a large piece of the volume of Santa Cruz Organic was lemonade. And that lemonade was promoted across traditional grocery at very aggressive price points, 10 for 10 for organic lemonade. And two years ago we stepped away from that and we've positioned that brand more consistent with the way it is positioned across other categories and other beverages. And we've taken those price points up.

So really other than that, the Santa Cruz brand is very healthy today as is our -- we had a great quarter in traditional (technical difficulty) beverages. So if you strip the noise out from the lemonade change, actually we see growth in that business now and we see a lot of opportunities to extend it. As you know, it is in pouched organic applesauce, it is in peanut butter, it is in a lot of other categories.

All right, thank you much.

Jason English, Goldman Sachs.

Mark, on the last quarter conference call you kind of detailed the algorithm in terms of gross profit growth expectations, SD&A growth expectations as well as sales. Can you update us on your thinking on each of those line items?

Yes. I think that -- there's not going to be dramatic changes from original. I mean a little bit of the SD&A should improve just from the commentary that we have had as it relates to administrative type expenses and marketing, that's where that would fall out. But my gross profit comments earlier, there is a little bit of a mix shift when moving from coffee, but again, I don't think it is significant from our original expectations.

And again, keep coming back we still are at our original guidance. So I think you'll see a little bit of improvement on the SD&A side over the course of the remaining three quarters. And maybe just a little bit of erosion in gross profit, but hopefully we can compensate that based upon what Richard's comments were in driving some additional sales particularly in coffee.

When you say a little bit of erosion of gross profit, are you comparing that to the first quarter or are you suggesting that gross margins can be down year on year?

No, from my original commentary for the fiscal year. I don't have exactly the language. I know we didn't give specific basis points increases out of the beginning of the year, but I think we said that gross profit would be sort of in line with our income before tax expectations that was like 3% to 4%. I think that is still kind of what we are looking at.

Yes. You had suggested that gross profit would grow below sales modestly, suggesting a modest degree of gross margin compression year on year. It sounds like maybe that is still the case or it could be a little bit better. Is that fair?

That is fair.

And then in terms of sales, you were expecting volume growth for the full year, it came in a little bit light despite the price investment this quarter and obviously the expectations for price to ramp. How are you thinking about volume for the full year now?

Yes, if you look across the business -- and again, you always have to be a little careful because mix creeps into this because, as you know, in this quarter we had baking was down which is a large volume low sale dollar low margin business.

But I would say that we expected a modest increase at the beginning of the year and we probably see that tweaking down just a little bit to being flat. I mean we are talking about a percentage point basically. So closer to flat but, again, mix will come into play over the course of the year depending upon where that volume shakes out.

That is helpful. Thank you. I will pass it on.

David Driscoll, Citi.

Just wanted to ask a little bit about the Life is good brand and what happened there. So I mean, generally it is my view that launching a new brand is an expensive proposition, especially in a category that has got many, many, many brands in there. Just love to understand kind of why did this brand fail? What did you guys learn from the whole experience of launching the Life is good product?

Sure, David, it is Mark Smucker. I would start just by saying that the relationship with the Life is good folks is fantastic. And we really had a lot in common with those guys, they do a very nice job with their brands.

But at the end of the day we felt that coffee -- we did some research, we felt that coffee and their brand did well together. What we learned, although the products were very good products, what we learned is that the relevancy of that brand was very -- was decent on the coasts, so on the East and West Coasts, but elsewhere was the brand awareness was very low.

And so, we just saw good trial out of the gate, but pour repeat purchase because I think the consumer has a number of choices in that category. And that brand, unfortunately, just did not survive.

Okay. Final question for me, unrelated. Mark, can you just clarify for me, what is your marketing spending plan for the year? How much you think marketing will be up?

Well, obviously, David, we are still -- the teams are still working through it. I would suspect that we will be basically in line, maybe slightly above last year's spend. And again, just to reiterate, I have made this commentary on a couple quarters where we have adjusted marketing is that we are committed to marketing a good portion of it, but there is some flexibility.

And we underscore that we are quite comfortable with what we have on air. We did a lot of production last year so we got some great commercials that are still in the can to be run. So we are looking at those dollars that either had more flexibility or will not have a dramatic impact. But I suspect it will be right about last year's level, maybe just a tad bit above.

Super, thank you.

Akshay Jagdale, KeyBanc Capital Markets.

(Inaudible) for Mark. You mentioned a mid-single-digit growth expectation for volumes in K-Cups. You are at 8% growth this quarter, the category is still growing double-digits and your share is improving. So why is that not -- I mean I understand you want to be conservative, but is my characterization of it being conservative in light of the facts we have seen so far. Is that the right characterization or why should we expect 5% growth when your share is improving and the category is growing double-digit?

Yes, Akshay, I think the short answer would be that we are still in the process of filling the pipeline with both new products and some of the new channels that we recently got rights for, offset by some of the recent declines in the Millstone items.

Okay. So still -- there is a lot of moving parts and you need some time to get more visibility, is that a good way to think about it?

You have got it.

Okay. And then just overall on your guidance for the full year. So what came in -- so why did the coffee business margins or sales come in below your expectation? I mean, what were the drivers of that? Would that be pricing to cost lag K-Cup business? Can you give us some color on that and maybe an order of magnitude?

Akshay, this is Vince. I think we need to take a step back. I mean, we grew the coffee business 2% in the quarter coming off a strong quarter last year and we grew virtually every brand. And so, although, yes, we might have had even higher expectations, we are very, very pleased with where we started the fiscal year on coffee.

Again, roasted ground has grown for nine consecutive quarters and I think we are -- well, we are very, very pleased with that result. So, yes, it might've been slightly below our expectations, but if you take a step back and look at those results, we feel very good and I think we are positioned for the balance of the year.

Okay, thanks a lot. I will pass it on.

Robert Moskow, Credit Suisse.

I think people are saying to this call might want go back to the beach. But I'm going to ask a broader question about merchandising environment at retail heading into back-to-school and then also into the fall bake.

I've heard a lot of packaged food manufacturers lament the fact that merchandising has gotten overcrowded and that there has been a big shift to value channels and these have been kind of real limiting factors. Are you seeing those same issues as you head into this fall? And have you taken any steps to kind of -- to I guess compensate for it? How is this environment different from last year's environment from a merchandising perspective?

Robert, I think you are correct if you read what is going on in our industry and from what our peers are saying, there is a lot of merchandising activity and to some degree we are all competing regardless of categories. But we feel very comfortable, as Paul Wagstaff articulated earlier, with both our back-to-school activity. In fact, one could argue that we have more merchandising this year than we have had in the last few years.

And then secondly, as we look into the holiday period we feel very, very comfortable. We feel comfortable with our price points on -- across our portfolio. So there is no doubt that it is a challenge, but we can't use that as an excuse. We have leading brands and we need to make sure that we get our fair share of those opportunities and programs.

And you said you are very comfortable with those price points. Are those price points below where they were a year or two ago because the commodities are more favorable so that gives you that flexibility?

It is going to vary by each of the segments, as primarily Mark and Paul have articulated, because of where the particular commodity rests. And again, Crisco oil would be down, peanut butter may be up, etc., etc. We won't go back, we won't rehash them all. But it is going to vary.

Okay, thank you.

And we have no further questions at this time. I will now turn the conference call back to management to conclude.

We would like to thank everybody for being on the call and hopefully you can get back to your vacations if that is where you are. I can -- rest assured we are not going back to the beach in Ohio. Thank you.

Ladies and gentlemen, if you wish to access the rebroadcast after this live call you may do so by dialing 888-203-1112 or 719-457-0820 with a pass code of 5735316. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.