J M Smucker Co (SJM) 2013 Q3 法說會逐字稿

Good morning and welcome to the J.M. Smucker Company's third-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 have additional questions.

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

Good morning, everyone, and welcome to our third-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 and Natural Foods; Mark Smucker, President, US Retail Coffee; and Paul Smucker Wagstaff, President US Retail Consumer Foods.

Following this introduction, I will turn the call over to Richard for opening remarks. Vince will then discuss results for our business segments and Mark will close with additional comments on our financial results for the quarter and our outlook for the full year.

As you may know, the Company will be presenting at the CAGNY conference next Tuesday, February 19. We look forward to updating you on many of our key strategic initiatives at CAGNY. Therefore, our prepared comments today will be shorter than usual.

During this call, 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, and good morning, everyone. Thank you for joining us on this call. Also look forward to seeing most of you next week at CAGNY.

We entered the important holiday season positioned for growth in many of our categories and are pleased with the continued momentum that we have seen in our Company. Our proven strategy of generating growth through brand building, innovation, acquisitions, and productivity initiatives allowed us to deliver another quarter of sales gains and strong earnings growth. Let me summarize some of the key highlights of the quarter.

Net sales increased 6% led by our strategic growth drivers of acquisitions and product innovation. Looking briefly at our three segments, coffee volume increased slightly in the quarter due to the strong performance of K-Cups. The Cafe Bustelo and Pilon brands also achieved double-digit growth during the quarter. And Folgers was modestly impacted by the canister constraint that we discussed last quarter.

Consumer Foods net sales were up 4% as a result of increases for the Jif and the Smucker brands. Overall, reported volume declined slightly but was up 1% excluding the impact of the cake downsizing and some planned rationalization.

Finally, our International Food Service and Natural Foods segment achieved significant sales growth reflecting a full quarter's contribution from last year's foodservice coffee acquisition. In addition, continued growth in natural beverages and a favorable sales mix also contributed to their results.

Non-GAAP earnings per share grew 20%, driven by three main factors. First, a substantial increase in coffee segment profit reflecting the timing of lower commodity costs. Second, profit growth across the International Foodservice Natural Foods segment, and the impact of the share repurchases over the last 12 months.

Lastly, cash from operations continued to be strong in the quarter and increased to $684 million for the first nine months of the year, an increase of 46%. During the third quarter, we completed our important fall bake and holiday period. With the combination of solid merchandising programs and pricing insights gained from last year's holiday season, we are pleased with the execution of our promotional strategies and while certain categories performed better than the others, we were encouraged by the results and view the holiday period as a success.

As we look ahead, we are cautiously optimistic as to the economic environment. We are encouraged by stronger food and beverage industry demand including total edible volume trends as measured by Symphony IRI. These have improved sequentially from the 52 to the 12 to the four-week period. We have seen a similar pattern with our consumer take away trends improving over these same periods.

We are further encouraged by our ongoing investments in our brands and our businesses. We expect to introduce approximately 90 new products this year. Our New Orleans coffee supply chain initiatives were completed this quarter and our fruit spread project remains on track and on budget.

We look forward to sharing many of the details with you, including several new product launches planned for this year when we present at the CAGNY conference next week.

In summary, we had a record performance in our third quarter and our year-to-date results. This reflects a continued commitment to our long-term strategy of strengthening our leading food brands and our ability to execute. We believe that we are well-positioned as we look ahead.

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

Thank you, Richard, and good morning, everyone. Let me begin by reinforcing that our momentum through the first nine months of the fiscal year reflects the ongoing commitment to the five key areas we outlined at the outset of the year, which include further building our brands through increased marketing support and innovation; executing pricing leadership; continuing to optimize our supply chain; capitalizing on our recent acquisitions; and focusing on sustainability.

With that, let me provide further commentary on the performance of our three business segments. I'll start with the US Retail Coffee segment, where volume was up 1% for the third quarter. As we discussed on the last call, the supplier-driven constraints for the coffee canisters were expected to have a modest impact on third quarter volume for the Folgers red can business. This scenario played out as expected as our coffee volume was negatively impacted by approximately 1 to 2 percentage points primarily in our opening price point line.

Overall our team did a tremendous job strategically manage demand based on product availability and minimizing customer disruption and the total financial impact on the Company. Given these challenges, we were encouraged by our roasting ground results for the quarter. Our most recent four-week share of market within mainstream segment is also encouraging, gaining 2 share points.

We are pleased to report that the canister issue is now behind us, enabling us to build inventories to more desirable levels to support the business.

Our K-Cup business delivered another strong quarter, with sales up $30 million over last year's third quarter, an increase of 50%. The growth rates for this business remain significant but as expected are moderating from the percentages realized earlier in the year. For the full year, we continue to expect K-Cup sales will approach $300 million, an increase of almost 70% over fiscal 2012.

Turning to our other key coffee brands, Cafe Bustelo and Pilon both achieved double-digit volume growth in the quarter continuing their strong performance from the first half of the year. Dunkin' Donuts volume declined slightly in the quarter, reflecting increased competitive activities. However, we remain pleased with the brand's performance with volume up 6% year-to-date.

Coffee segment profit increased 27% for the quarter primarily due to the timing of lower recognized green coffee costs. Keep in mind we took a price decrease in May ahead of anticipated lower green costs. The majority of these lower costs were recognized during the third quarter and in part offset the unfavorable impact from earlier in the year. While this resulted in fluctuations in our profit between quarters, the price to cost relationship through the first nine months of the fiscal year was essentially neutral on the coffee segment profit.

As we look ahead, considering the decline in green coffee costs in our current cost outlook, we expect to take additional pricing decline in the near future. We will issue a press release announcing any coffee pricing actions once effective.

Turning to Consumer Foods, peanut butter and food spreads both had solid quarters in volume with the Jif brand increasing 17% and Smucker's fruit spreads up 9%. You may recall that last year's third-quarter peanut butter volume was negatively impacted by the significant level of consumer buy-in that occurred during the second quarter in advance of a 30% price increase. On a year-to-date basis, Jif volume is up 5% despite these elevated prices, reflecting the resiliency of the category.

Last month we implemented a 10% price decline on the majority of our peanut butter products. As previously discussed, we are covered by longer-term contracts for peanuts; therefore elevated peanut costs were recognized in the third quarter and are expected to continue in the fourth. Although price decreases were passed along in advance of recognized lower peanut costs, we believe our actions appropriately reflect our role as a category leader.

As we move into fiscal 2014, we believe this price decline achieves our price two objective based upon our anticipated cost structure over the course of the fiscal year.

Turning to the Smucker's brand, as previewed last quarter, we have taken a variety of actions to address price gaps on shelf for our fruit spread business. These include price declines on selected items and increased promotional activities. These price adjustments appear to achieving their intended results as volume for Smucker's fruit spreads was up 9% in the quarter. In addition, Smucker's Uncrustables achieved another strong quarter with volume up 38% supported by distribution gains and product introductions.

In the bake aisle, volume for our Crisco brand was up slightly for the quarter. As anticipated, we saw a solid holiday performance at a number of key retailers helping offset the impact of not participating in the bake center of our largest customer.

Finally, Pillsbury brand volume was down compared to a strong third quarter in the prior year. As expected, part of the decline is due to the ongoing effect of our cake mix downsizing as well as a change in our promotional strategy we employed. Both impacted year-over-year volume comparisons for our cake mixes but continued to improve the overall profitability of this business.

Let me now turn to International Foodservice and Natural Foods segment. Much of the net sales increase in the quarter was attributed to the nearly $60 million of incremental sales associated with a Foodservice acquisition which lapped in early January.

We remain pleased with the performance of the liquid coffee concentrate business as we enter the second year of ownership. We are executing our plan to exit the private-label roasting ground portion of the acquired business and anticipate this process will be virtually completed by the middle of next fiscal year. Overall, the acquisition has delivered better than planned segment profit for the first three quarters of 2013.

Excluding the impacts of the acquired business, net sales and segment profit were up for the segment as the base business also performed well during the third quarter. While overall volume was down, this was primarily driven by a decrease in our Canadian flour brands. Our coffee business in Canada continued its growth behind the strong performance of K-Cups. The combination of these two factors provided a significant sales mix benefit for the segment in the quarter.

Finally, natural beverage achieved double-digit volume growth for the quarter, continuing their momentum from the first half of the year.

In summary, as we enter the final quarter of the fiscal year, we are encouraged by the performance of our business and remain confident in delivering another year of growth. We continue to make great progress on our key initiatives and believe this positions the Company for long-term growth.

I would now like to turn the call over to Mark to discuss our consolidated financial results.

Thank you, Vince. Net sales increased $92 million or 6% in the third quarter, primarily driven by the two months additional contribution of the Foodservice coffee business acquired last January.

Sales mix continued to be favorable in the quarter, reflecting volume growth in K-Cups and peanut butter. This helped offset slightly lower overall volume and net pricing.

GAAP earnings per share were $1.42 this quarter and $1.03 in the third quarter of last year. Special project costs as defined in our press release and reflected in GAAP earnings once again declined on a year-over-year basis as the underlying restructuring activities wind down. Excluding these costs, earnings per share were $1.47 this quarter and $1.22 in last year's third quarter, an increase of 20%.

Operating income excluding special project costs increased $33 million or 14% for the quarter, reflecting a $59 million increase in gross profit. Overall commodity costs were lower in the current quarter compared to the prior year as declines in green coffee were only partially offset by higher costs for peanuts. In addition, the profit contribution from the acquired Foodservice business and mix contributed to the increase in gross profit.

SG&A expenses were up 12% in the quarter. This reflects higher G&A expenses primarily driven by increased incentive compensation and employee benefit costs.

Marketing expense was also up in the quarter. For the full year, we now expect a low double-digit increase in marketing expense. While lower than our initial estimate, we remain comfortable with this level of spending as we have consistently been on air supporting our key brands with TV advertising and continue to increase our digital marketing activities. The effective income tax rate was 34.1% in the third quarter, bringing the rate for the first nine months to 33.8%. We now anticipate the full year effective tax rate will approximate 34%.

Turning to cash flow, cash provided by operations was $324 million in the third quarter, bringing the full-year total to $684 million. This compares to $469 million through the first nine months of last year. The increase reflects the higher current year income and a net decrease in working capital, among other factors.

Capital expenditures were $48 million in the quarter for a year-to-date total of $147 million. We now expect a full-year spend of approximately $205 million to $215 million.

Let me conclude by updating our full-year net sales and EPS outlook for 2013. We now anticipate annual net sales to increase over 6% compared to 2012. Volume for the fourth quarter is expected to be flat with the prior year. Additionally, any impact of anticipated pricing actions for coffee are factored into this guidance.

We are bringing up the bottom end of our previous guidance range for non-GAAP income for diluted share and now expect it to be in a range of $5.17 to $5.22. We are cautiously optimistic in achieving the high end of this range.

Our guidance is based on approximately 109.2 million weighted average shares outstanding for the purpose of calculating annual EPS. No shares were repurchased during the quarter and as such the number of current shares outstanding remain at 108.5 million.

Last month our Board increased the Company share repurchase authorization by 5 million common shares, bringing the total currently authorized to approximately 6.9 million. And lastly, with nine months behind us, we continue to project free cash flow will exceed $650 million for the full year.

In closing, let me reiterate that we are pleased with our performance through the nine months of 2013, which reflects our focus on the five key priorities Vince spoke to earlier. We would like to thank all our employees for their dedicated efforts as we track towards delivering a record year of sales and earnings.

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

(Operator Instructions). Eric Katzman, Deutsche Bank.

Good morning, everybody. I guess first question, Vince, you talked about the 1% to 2% hit kind of in line with what you thought on Folgers. Folgers is a very profitable business for you but you said that -- I guess the team kind of somehow managed that, so are you saying that profitability wasn't limited at all by the fact that you had a 1% to 2% volume hit on that entry-level Folgers?

Eric, this is Vince. That is correct and I would also say that there was some compensation from our supplier that helped to offset that.

Okay, so they gave you some compensation for the fact that they weren't delivering on target?

That's true, yes.

I didn't hear you mention as part of the coffee profitability, the productivity initiatives and what's been going on in New Orleans. Maybe you could -- was there anything there and how do we think about the savings coming from that piece and how it impacts the coffee line going forward?

This is Mark Smucker. The supply chain optimization project in coffee is essentially complete and the savings that we expected to realize we have realized and we are basically through that project.

Eric, this is Mark Belgya. Just to add to that, we have not defined of the total $70 million that we've assigned to the overall restructuring, we have not went in to how much is coffee, how much is fruit spreads. But as Mark suggested, most of the savings have come through for coffee. They are probably a little bit of a spillover but most of those will be realized by year's end.

Okay and then last question and I will pass it on. Richard, I guess we have heard from two companies now in the industry, Kraft really early this morning about some inventory, trade inventory issues in deloading and McCormick, they are a little more specialized obviously, but they also talked about it. You didn't mention it at all.

Are you seeing anything from retailers maybe in categories that you are not in or are your categories just somehow performing better in terms of consumption so the retailers didn't need to cut back? Maybe you could just help frame that a little bit for us.

Eric, this is Richard. Your answer was really right. We haven't seen it in our categories this year. We actually saw it the prior year but not this year in the categories that we are in. I'm not -- I can't speak to their categories. Maybe the retailers have some deloading on their categories but we did not see it this year.

Okay, see you in Florida.

Alexia Howard, Sanford Bernstein.

Good morning, everyone. Can I ask about the Dunkin' Donuts brand? Obviously the volumes were down 2% this quarter. Are you seeing increased competition in the premium end of the roast and ground space? How is the shelf space and distribution developing on that brand? Maybe some comments around that.

Sure, Alexia, this is Mark Smucker. I would say generally the category is very competitive right now and we are again competing in all tiers of that segment, if you will. We are of course pleased with the results that we've seen for the year and I think as both Richard and Vince mentioned in the formal remarks, we are encouraged by the latest four-week trends. Obviously it's only four weeks but we are encouraged to see that some of that consumer takeaway is ticking up a little bit and so we believe that that bodes well for the Dunkin' brand.

Great and then maybe as a follow-up, there wasn't much mentioned in the press release around what's going on with Crisco. I was just curious about where that is in the input cost cycle and how that's developing?

Hi, Alexia, this is Paul Wagstaff and we had a decent fall bake for Crisco. We were not participating in one of our key retailers, our largest retailer in the fall bake, but that being said, we were able to grow the business by 1%, so we feel it was pretty decent.

Okay, great. Thank you very much. I will pass it on.

Ed Aaron, RBC Capital Markets.

I wanted to ask about K-Cups. Sounds like your kind of outlook hasn't really changed at all but just you've had a little bit of time to assess changes in the competitive landscape, and I'm wondering if it's all played out kind of right as you expected or if there have been sort of any surprises in kind of what you've seen from your competitor set there so far?

This is Mark Smucker again. I would say it has played out generally as we expected. We talked in the last couple of quarters about the deceleration of the growth and that has been more or less as we have expected. As you can imagine there are more players in the category than there were say a quarter ago but really we held our share. If you look at our dollar share on K-Cup versus the prior quarter, although we may be down slightly on the year-over-year, versus the prior quarter we are actually up slightly.

So bottom line, we are very pleased with our results there and we think that the category is still trying to settle out in how that will affect the total business going forward.

This is Vince. I guess I would add a couple of points. First of all specifically it is playing out. There have been some quality-related issues with the unlicensed participants that probably are affecting those results. And then I think the other thing we need to keep in mind is as the stores continue to expand their shelf space, obviously we hope that we are growing the overall pie but I think there will also be a continual shift of how much of those K-Cups are purchased through what we would call traditional retail channels.

That's helpful, thank you. Then just a quick follow-up for Mark. The corporate G&A number this quarter was a little higher than where it has generally run and where I was expecting. Was there anything sort of unusual or nonrecurring that might have played into that?

This is Mark. The most specific item was -- and it was in my comments, it was around incentive compensation. As you know, our original guidance this year we had it 5 to 5.10 and of course we have taken it up for a second time so we are running ahead of where we expected. Conversely last year was sort of the opposite situation, so that range of adjustment to incentive-based compensation was a primary driver.

Just to be clear, there was basically a true up from -- relative to kind of Q1 and Q2 where you had to catch up on your accruals?

That's exactly right.

Thank you very much.

Farha Aslam, Stephens.

Good morning. My question is regarding your commentary that volume trends in grocery and your business have been improving and particularly the last four weeks were strong. What do you think is driving that? Is that consumer confidence, your ability to offer better value to consumers with commodities coming down? Could you just give us more color? Is there something that you've noticed that is particularly stronger in your business versus the overall industry?

This is Richard. A couple of things. One is we are actually seeing the consumer be a little more confident and therefore spending a little more. If you look at the actual numbers for last four weeks, the industry was up about 2.8% in tonnage, which is one of the biggest increases we have seen in a four-week period and we are trending that way also.

Also our pricing actions, last year we thought some of our pricing points were not where they should be versus our competition and we did a lot to adjust that in the last 12 months or so. That has certainly helped our volume.

Okay, then just as my follow-up, we've seen a lot of M&A happen in the industry over the last few weeks. Could you just comment on what you are seeing in the M&A picture? Have you seen kind of brand opportunities come to market recently?

This is Richard again. I can't say we've seen brand opportunities come to market in the last few weeks but certainly there's more activity in almost every industry. You look at the low cost of interest today, people could go out and borrow really at low rates and put that money to work. So we are expecting to see more M&A activity. We think that's positive for us because that helps us -- that helps shake brands loose when those transactions take place, so we see that as a positive for our long-term acquisition strategy.

Okay, just as one addendum to that, kind of the pricing you are seeing, are you -- with the funding costs we have seen sort of an inflation of multiples, are you comfortable with the multiple things are trading at? You have an amazing balance sheet so we're just trying to figure out your kind of efforts to put your cash to work.

This is Mark Belgya. We've talked historically for transactions sort of that 7 to 10, 8 to 10 times EBITDA. Obviously some of the transactions that have occurred recently in the food space has run north of that and I think it just reinforces the importance of strong brands. So I think you know, you have followed us a while and understand our diligence as we look at brands and we still think that's a reasonable range. We'll continue to challenge ourselves particularly when we're looking at strong brands.

But we realize that right now you are seeing some higher multiples and that may play out but we still -- I think as Richard mentioned, we are still very comfortable with our acquisition strategy long-term.

Okay, thank you very much.

Ann Gurkin, Davenport.

Good morning. I wanted to follow along that same line of discussion and I'm curious if you are still reviewing product lines in your portfolio for potential disposal?

This is Richard again. We always look at that although right now we are pretty comfortable with the categories that we have and the brands that we have. That doesn't mean we will never make a transaction if it makes sense but right now we feel pretty comfortable. We would rather add than detract from our brands, so hopefully we would have an acquisition sooner than we would have a divestiture.

Perfect, perfect. I don't know if you care to comment at all, we have had a change in ownership in the peanut butter category and are there any implications? You certainly have the dominant share. Any strategy change we should look for or any comments at all on peanut butter?

Hi, Ann, this is Paul Wagstaff in. I don't think there's any strategy change from our perspective. We respect Hormel very much. They seem to be a very good manager of brands and we would hope to see that continue, so we feel no change in our strategy.

Perfect, thank you.

Akshay Jagdale, KeyBanc Capital Markets.

Good morning. Thanks for taking the question. First question just on your guidance for the fourth quarter implies a deceleration in growth across the board. So what -- can you just help me understand what's happening sequentially that makes EPS growth slow down from the levels that we've seen so far this year especially the last few quarters? And similarly what's -- why should margins not continue to go up especially given what we are seeing on the commodity side on coffee and peanuts?

I'm just -- I know that it's probably some level of conservatism which you usually always have but trying to understand, you're making a lot of positive comments but fourth-quarter guidance seems obviously relative to consensus below what we were expecting.

Akshay, this is Mark Belgya, a couple things. First of all, I think we have the last couple quarters we've been pretty specific in our discussions around where we are in terms of long-term peanut costs so we think that that will have some effect in the fourth quarter. Overall commodity costs of coffee are stabilizing as well. We still expect a very strong gross profit margin percent but we see those two things sort of affecting the gross profit side of things.

In terms of the SG&A, I think as Ed might've mentioned earlier on the call, dollars were up in absolute measures for the quarter. That level of spending for the most part is a bit of a fixed overhead amount, so because the fourth quarter top line is a smaller dollar amount versus the second and third quarter, SG&A as a percent will be up as well. So and then tax rate of course we're expecting to be a little higher sort of below the line.

So in summary, I'd say it is those three or four things that are probably driving our guidance. So, Rich, I don't know if you have any --

The only thing I will add is that the third quarter was an easier comparison than last year's fourth quarter, which was a very strong quarter, so you have that to consider also but basically the fundamentals of the business, the trends are very good.

Okay, great. Just to follow up on coffee, sort of a bigger picture question. Being the largest coffee company obviously in the US, I'm curious to know how do you think the category is going to shape up maybe a year or two down the road from perspective of the mix of the shelf? So I believe two years ago at CAGNY, you had put up two charts that I thought were interesting saying roast and ground roughly 47% of the category, premium 31%, and single-serve 22% and clearly you are way more indexed towards roast and ground with 66% of your sales I believe coming from that particular category.

That's changed but I'm curious to know how you think of it a few years down the road like where do you think the premium and single-serve end of the category will be in terms of percentage of total pie?

Okay, this is Mark Smucker. I think you will see next week at CAGNY, we will comment a little bit more on this but generally speaking premium is growing as of course K-Cup is growing and mainstream will probably have modest declines going forward. But our goal of course is to continue to play in those segments and if a segment is experiencing a modest decline, we want to make sure that we are holding or growing our share.

Okay, just a follow-up on the single-serve side. We have talked and you mentioned the quality issues today. One of the major brands that was supposed to compete with Folgers has come into the market. Can you just characterize what you are seeing in terms of the pricing in the single-serve category specifically? What are you seeing? There is some promotional activity right now and what is your expectation going forward?

This is Vince. I think it's playing out exactly as we had anticipated. There are basically three tiers of pricing and we sit in the middle of those tiers and we are -- the unlicensed participants are about where we expected them to be. So it will ultimately probably be a three- tiered pricing category.

Okay, great. I'll pass it on. Thank you.

Chris Growe, Stifel.

Good morning. I just had a couple questions for you if I could just to follow up on one earlier. I wanted to be clear on the sales growth guidance, it sounds like you are incorporating some potential moves in coffee and I think the sales growth guidance is a little below where you had it last quarter. Should we assume that just -- was it anything based on this quarter or is it more based on what you see in the fourth quarter that led to that slight decline?

I think it's basically the effect of potential pricing. That's the biggest play on that. We mentioned also the volume is going to be flat year-over-year which I think might be down just a bit from what we directed on previous quarter and then we're going to continue our exit of the private label roast and ground, so a combination of all three of those.

Okay, I also had a question for you with regard to your price mix in the quarter. I guess really I'm trying to break this apart. You had pricing down in the quarter I would bet across your business. Mix, it looks like it was pretty positive and then I'm curious about promotional spending as well and how that fared in the second quarter -- third quarter, sorry.

Chris, what I would say is that pricing was basically down a point. Mix was up plus 4, acquisition would be plus 4 and then volume is down 1. That's how we would get to the 6% growth.

Okay, then promotional spending then, is that expected to stay higher? I guess in relation to that with your advertising forecast for the year a little below what you expected earlier, is that getting pushed in the promotion? I'm just curious how those two are playing together.

Well, the promotional thing I don't is significantly different than what we are expecting. I think just to be clear, we talk about promotions just sort of trade spend versus marketing and just on marketing even though we are projecting sort of low double digits versus the 20% for the year, we do think marketing will be up for the Company in the fourth quarter pretty significantly.

Okay, thank you.

Chuck Cerankosky, Northcoast Research.

Most of my questions have been answered but I was wondering if you could just talk about Foodservice specifically within that International and Foodservice segment, how volumes are trending there and how the consumers behave in there. It sounds like you got a little life at food at home but let's talk a little bit about food away from home from your perspective. Thank you.

Chuck, Steve Oakland. There's a lot of moving parts in our Foodservice business. As you know, we doubled the size of that business with the Sara Lee coffee acquisition and then we took on some pieces of business that we knew we wouldn't have for the long-term. So let me give it to you sort of by business.

We are very encouraged by the liquid coffee business and we have yet to be able to do what we think we can do this year with our brands, with our technology, and our agreement with Douwe Egberts. So we think although it rose -- although it is up year to date, we think it can get better than that as we go forward. So that's great.

When it comes to traditional Foodservice, that business is soft in volume just marginally. And if we think about the core casual dining customers, the places where our brands really work well, I think we've seen their macro numbers off a percent or two and our business would mirror those industry trends.

So we feel like we are holding or gaining share. Our margins are doing well and we are doing at least as well as the industry and then the coffee will be the platform that we will grow off of into the future.

Thanks, that's very helpful.

Jonathan Feeney, Janney Montgomery.

Good morning, thank you. Just one question. Given the strength particularly you had some significant improvement in operating profit and a huge improvement in one of your businesses. Why the decision to shoot a little bit lower? Great in marketing spending, great growth year-over-year but it seems like you changed the plan a little bit. Is it -- is that you just don't think it's as effective or what's behind that?

Jon, I will start and then anyone jump in, please. I think as I said in my prepared comments, we put 20% out at the beginning of the year and that was based upon the Sara Lee obviously incremental base growth on our marketing and then the reclassification of what was trade spend last year back into marketing.

As we went through the year, we are quite pleased with our on-air activity, all our brands are being supported. Obviously as you go through things, some of it is just due to efficient spending quite honestly. We've been able to recognize that through the year but if anyone else wants to comment on the quality and the amount we are on-air, but feel pretty good about it.

I guess just following up, is it -- I've always kind of wondered about this. Isn't more better or do you -- I guess couldn't you do just that much more if you'd been more efficient or do you reach a point I guess in the saturation curve where you just make a judgment that says hey, we don't want to spend any more right now maybe because of how it lines up with innovation or isn't that right?

This is Vince. So I would comment that philosophically we believe that we have to be the supporter of our brands and the categories. You know we've talked historically about -- we have a greater share of our voice in most cases than our share of market, so we support our brands and those categories for the long-term. We just think that's the right thing to do.

Now in any one quarter, any one fiscal year, the presidents all have levers that they can pull if they need to be sharper on price points or not necessarily, and so at time to time can shift funds from marketing to trade if need be but that's not the case if you look at the entire year where our marketing investments are going to go up.

So -- but we haven't reached a point of saturation if that's your question. If you reach a point of we are out of any TV commercials, we obviously produce more and continue to support those brands.

Okay, thank you very much.

David Driscoll, Citi.

Great, thank you. Good morning, everyone. I wanted to just talk about K-cups for a few minutes. The first observation I would make is that you guys deserve certainly congratulations. By our data it appears that you have nine of the top 20 SKUs within the K-Cup market in grocery, so terrific job.

My question really is a longer-term question. I sometimes feel like these earnings calls -- and I'm probably guilty of this myself maybe a little too short-term-oriented. I would really like to go against that right now and say long-term is this K-Cup opportunity just an enormous opportunity? I think you said this is a $300 million business. Within say a five-year window, what do you think this is? Is this a $1 billion business? Could this be fundamentally someone's entire investment thesis on Smucker's given the rate of growth and the profitability of that particular market?

David, this is Mark Smucker. We do think there's significant growth potential in K-Cup. We believe that it's here to stay. We think Green Mountain has done a great job with the system. I probably wouldn't give a longer-term number but I do think that we continue to see significant upside. Even as we are seeing the growth decelerate, we still think with new entrants, whether they're licensed or unlicensed, that is going to grow the category and we just need to make sure that we continue to as we grow the pie that we continue to maintain or grow our share of it.

Can you comment on the margin structure of this as related to your overall coffee operation? I believe that you are showing incredible gains within coffee. It stands to reason that this is margin-accretive to your coffee margins. Is that correct?

I think we've said in the past and it still holds true that the margins in K-Cups are more or less in line with our total coffee business and our goal again is to continue to grow profit dollars not necessarily margin.

Okay, maybe my final question on this then is can you just talk about then the factors that cause such an enormous improvement within the coffee margins? From a modeling point of view these giant changes are reasonably tough to deal with accurately so can you guys help us out a little bit understand the changes that contribute to the margin improvement?

Yes, I think in the script we talked a little bit about just the timing recall of our price decline in the beginning of the year with the head of the moderating green coffee costs so it really is timing as we realize coffee costs versus what our pricing is in the market.

So that factor trumps the K-Cup issue, is that what you're saying?

Yes.

This is Mark Belgya, David. Yes, that's right. Obviously K-Cups contributed an incremental $30 million. You can do the math on the contribution but the costs -- cost and price to position that probably was the bigger contributor.

Thank you.

Andrew Lazar, Barclays.

Good morning, everyone. Richard, as you guys tend to think of things in a bit of a longer-term timeframe, this question I'd be curious on your perspective on it. From an industry standpoint, are you surprised that maybe some of these kind of hundred year old plus companies are for lack of a better term kind of throwing in the towel, if you will, in making these large strategic changes, whether it's splitting up or Heinz selling itself yesterday. Sort of doing that when the going gets a little tough on the fundamentals rather than maybe taking numbers down, making the proper investment, and running these businesses for the longer term?

Or has something so fundamentally changed in your view in this broader packaged food space that these more radical structural changes are really needed? I'm curious in your perspective because you got obviously a longer-term perspective to draw from.

That is a very good question, Andrew. As you know, our history and our heritage, and we do take a long-term view and we think that's right for our industry. We think it's right for the economy. But that being considered, we live in a changing world and a dynamic market which there is a lot more emphasis on short-term goals and short-term structures. That's why we always talk about why it's more important to think through the long-term because you can make a quick hit on return for one quarter but we think for example at Smucker's if you hold a share of Smucker's stock for five years, you're going to make much more money on Smucker's over the long term than if you just took a premium on a very short period of time.

So we think the industry is changing. We think the dynamics are changing but we also think that our strategy of taking a long-term view at Smucker's and using this as an opportunity to take advantage of this change in the marketplace, we will see some brands come to the market because of these changes and we think that bodes well for our Company.

So we are going to continue to do what we are doing. If you look at our returns over -- since we went public some 55 years ago, I think our average return is 11% over that period of time and that is true whether you look at a five, 10, 15, 20, 25-year period of time. So we would rather see a long-term growth rate of 11% a year than get a quick hit for 20% in one quarter.

That's helpful. I appreciate your perspective, Richard.

I appreciate the question.

John Baumgartner, Wells Fargo.

Thanks, good morning. Just in peanut butter, I'm just wondering what you are seeing there in terms of the price competition and I guess in particular as relates to your decision to maybe take prices down there ahead of the cost improvement?

Hi, John, this is Paul Wagstaff. We see ourselves -- we are the leader in the peanut butter category and we felt that taking the 10% price decline which we did effective January 7 was the right time to do that for the category and to continue to see the growth that we are experiencing, so we felt it was the right appropriate time. Our competition did follow, which made sense and we typically do lead pricing increases or declines.

So overall we feel it was the right thing to do, right timing, and we feel we are positioned well for ongoing growth.

Okay, great. Just a follow-up, in canned milk, can you walk through the performance there, the drop in sales in the quarter and maybe you're thinking about pricing elasticity going forward maybe in light of the dairy inflation?

Hi, John, again Paul here. Our canned milk business, we had a little bit of a struggle overall for the fall bake time period. Some of that is due to the fact that we aren't seeing as much of the baking that is taking place with canned milk. That being said, we have done some things on the pricing side to get a little more competitive with our competition that we've seen. And we are very well aware of the high dairy costs. We don't see the dairy costs coming down anytime soon or at least significantly anytime soon, so that will be something we'll be working on into next year.

Great, thank you.

Jason English, Goldman Sachs.

Good morning, guys. Thanks for the question. I apologize in advance if some of these have already been asked, but you guys mentioned a destocking effect from last year that you aren't seeing recur this year. Are you seeing any year-on-year benefit as you lap that destock?

It's Richard. Not significantly because I think everybody has tried to take their inventory levels down and keep them at that lower level so it's not like they took them down the prior year and then all of a sudden went up 10% this year. They took them down and they kept them at those levels, but we haven't seen another leveling effect.

That's helpful, thanks. One more if I can. Peanut butter, the price cost mismatch that has resulted from your price reduction ahead of the cost relief, is that something we should expect to continue until next year's fall harvest?

Jason, Paul here. Again, I think the answer is yes, we will be -- where we are priced to now really ties in with where our cost of peanuts are and that will go into next fiscal year.

So your price -- there's not really a mismatch. You are priced kind of in line with your cost and then after this 10% reduction?

It will be. Going forward it will be. That's correct. We've leaned into it a little bit but going forward into next fiscal year, we are aligned -- our pricing will be aligned with our cost.

Very helpful, thank you, guys.

Ken Goldman, JPMorgan.

I share Jason's sentiment that if this has been asked forgive me. But your numbers on the volume mix side were kind of meaningfully better than what Nielsen data would've suggested and I know that Nielsen does not represent all of your channels and there's timing issues and so forth and also I realize that your volume number is a volume mix number.

But do you think at all that you shipped ahead of consumption even slightly this quarter? I know again it's hard for you to tell that. I'm just curious based on your conversations with retailers and inventory levels and so forth, do you think your shipments were more or less in line with takeaway this period?

Ken, this is Vince. We do not believe so.

you think they were in line?

We think they were in line and we saw better consumption than last year's third quarter when you look at some of our key brands and products and gets back to some of our better pricing and narrowing price gaps. But no, we would not say that those are out of line during the quarter.

This is Mark. Just to clarify a point in your question, I think you said that mix volume was combined. It's not actually. Mix was actually up plus 4 and volume was down negative 1.

Thank you. Separate question, can you remind us -- there's been a lot of talk in the last 24 hours obviously about companies getting purchased in the food space. Can you remind us what percent of votes -- not voting stock but actual votes insiders would hold in the event that a potential acquirer was looking at Smucker?

This is Richard. We really don't disclose that although I say it's a significant amount.

Ken, this is Mark. We really don't disclose it for a reason. It is just because of the (inaudible) nature of it, it's not something that is readily known at any given time, so thus we don't like to speculate on it.

Is it fair to say it's over 50% at any time as a percent of the total votes?

We really don't comment on it, but --

I know. I was trying. I give you credit for literally not commenting. Thank you.

That concludes our question-and-answer session. I will now turn the conference call back over to Mr. Richard Smucker for closing remarks.

Well, we want to thank everybody for being on the call today. We feel good about our results and even better about our future and look forward to seeing everybody next week at CAGNY.

Ladies and gentlemen, if you wish to access the rebroadcast after this live call, you may do so by dialing 1-888-203-1112 or 1-719-457-0820 with the pass code of 839-4093. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.