J.M. Smucker Co. SJM
Q3 2010 Earnings Call Transcript

Operator: Eric Katzman, Deutsche Bank.

Eric Katzman - Deutsche Bank: I guess the cash build here is pretty remarkable. I’ve heard reports from some other companies that they – I think like somebody told me that Ralcorp, for example, had felt okay to buy back stock even within the two-year restriction. So I’m wondering if you could just comment on that, if that same, I guess, approach could apply to you? And then, if not, just where do you think the Board goes with the dividend or the use of cash over the next couple of quarters?

Mark R. Belgya - SVP and CFO: Eric, this is Mark. I’ll start, and then I’ll have Richard answer the second part of question. The rules under the Reverse Morris Trust do allow for repurchase. It’s obviously situational. The way that our agreement was with Procter is such that we are holding to the two-year window. Of course, that’s only, what, eight months out basically. So I think we’ve commented before we have a little under 4 million shares already authorized by the Board. So, if the situation is appropriate that time, we could enter the market. I think I’ve comment in the past, we were fairly active in the time leading up to the purchase of Folgers. So we certainly will reevaluate that, but not to expect do anything from a repurchase until November.

Richard K. Smucker - Executive Chairman and Co-CEO: On your second question regarding dividends, as you know, our Board reviews our dividends each quarter. But it’s historically our fourth quarter of the year that we look at increasing those, and that meeting is coming up in April.

Eric Katzman - Deutsche Bank: And then, I guess, just as my follow-up maybe to Vince, you announced the single-serve agreement with Green Mountain. Can you just give a sense as to what you think that means, and is that a margin accretive deal to the extent that you are already producing pretty high margins in coffee as it is?

Vincent C. Byrd - President, U.S. Retail, Coffee: Yes. Sure, Eric. Let me back up. I think it’s fair to say that we continue to get the question asked about how we think about the single-cup space. And I think our standard answer to-date has been, as a market leader in any product category, we like to participate in all segments. We also are a company that likes the dot the i’s and cross the t’s, and we took time over the past 12 months or so to really evaluate the landscape, both domestic and internationally. And several months ago basically concluded that we believe that Green Mountain and Keurig was the right partnership for Smucker. And I think you all know through their public filings that they are the leader in home brewers. Their growth rates have been significant. I believe they are public in their recent quarter that they sold about 650 million K-Cups and they have a very, very high consumer appeal. In terms of what we can bring to the party, we believe that leveraging our marketing, selling, distribution and all of our brands will not only be good for Smucker, but more importantly, will help grow the overall category and really provide a channel for consumers to purchase K-Cups because a significant amount of them are not purchasing what we would consider our traditional retail channels. And so, in our long term, we hope that it will contribute to our strategic growth objectives. Given the fact that we will be launching later this fiscal year, and clearly, Eric, we’ll be investment spending in the brand, there will be a margin hit as with launching any new product. But long term, I think it’s fair to say that once the margins or the marketing normalizes that it will not be dilutive to the company.

Operator: Ken Goldman, JPMorgan.

Kenneth Goldman - JPMorgan: Just a little more color, if I could, on Green Mountain, and forgive me if it’s in the press release. But the exclusivity, it seems like you can’t use another single-serve brewer if you wanted to, but I’m curious about the exclusivity in terms of whether Keurig is allowed to also use Maxwell House, for example, in its single-serve systems?

Vincent C. Byrd - President, U.S. Retail, Coffee: I don’t know that we want to go into those details, but I think you will probably know that they have their own system that’s been in the marketplace for a number of years, and maybe I’ll just leave it at that.

Kenneth Goldman - JPMorgan: And then my second question, it’s always dangerous looking at ACNielsen data, but I’ll take that risk. According to ACNielsen, in measured channels your SKUs are down in Folgers some 10% to 15%, which is normal given the economy and what’s happening. If this is accurate, when does this lap, because if you look at your velocities and you look at your distribution, they’ve both been pretty impressive? So it’s possible and I’m curious what your comment is that maybe sales are artificially low because you’ve taken some SKUs out, and that when you lap that, things will look even better. Is that a fair assessment or not?

Vincent C. Byrd - President, U.S. Retail, Coffee: Well, your first comment is the most important one as it’s risky looking at the data that you have available to us. I would not say that our SKUs are down significantly. We have clearly shifted some emphasis to within the category, but if you look at the O&D period or the last quarter, clearly, the category is up. We grew share (during) that category in both our core Red Can and led by Dunkin’. As you know, the challenged areas that we have is Millstone. So maybe that’s being driven by Millstone, I’m not exactly sure. So, overall, we feel very good in where we are forward-positioned right now, Ken.

Operator: Farha Aslam, Stephens.

Farha Aslam - Stephens: Could you comment on the mix changes that you spoke about? Do you see that continuing comment on the consumer and how the consumer is feeling regarding trading down to more basic products and what will cause them to trade up again?

Steven Oakland - President, U.S. Retail, Smucker's Jif and Hungry Jack: I can comment about mix change in consumer. I guess there is two things. Earlier in the year we did see, in the fruit spread business particularly, the consumer trade from our more premium items, the Simply Fruit or Low Sugar or Sugar Free into traditional fruit spreads. We were, frankly, pleased that we saw some of those segments come back in the quarter. So, I don’t know that we can say that’s an economic indicator, but we saw people come back to those better-for-you segments and higher cost per (AU) or cost per ounce segments. Frankly, in consumer, we had a great period in pancakes and syrup. Given the seasonal time and our other promotional strategy behind at the tie-ins with coffee, we had a great Hungry Jack period. And that did drive some of our mix change, and what happens there is, as you can imagine, a box of pancake mix on promotion is $1.99, but it’s a lot of tonnage. So, although the margins are good and you can see that in our segment reporting, we did move a lot of tonnage in those categories, which sort of dilutes or causes the impact of high tonnage and lower net sales.

Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: On the oils and baking side, I’d point out one mix change that we saw, and that’s really on the flour side of the business. We saw a significant growth in flour over the O&D time period, and that’s a little less margin item than some of our other items.

Farha Aslam - Stephens: And maybe as a follow-up, could you just share with us promotional trends as they went through the quarters versus what you are seeing today? Have you seen any mitigation of promotional pressure as the quarter continued?

Vincent C. Byrd - President, U.S. Retail, Coffee: Let me start, Farha, and then I’ll turn it over to Paul and Steve. From a pure coffee perspective, the strategy that we implemented in our first quarter of reducing our trade spend and putting that into every day price, I think we would deem as a success at this point. And we clearly got some very good merchandising during the Holiday Bake period, but net-net, we’re very comfortable with where our pricing is. The second comment that I would make though is, is that many of us just came of a recent retail industry event, and clearly, our customers are driving price points on leading brands that are not necessarily funded by manufacturers and using them to increase the food traffic. And so, they may be taking little or no margin on our brands. So, I would just make that comment from a macro perspective, and then I’ll turn it to Paul and Steve.

Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: On the oils and baking side, the Crisco oil part of the business, we did not take our price down or list price down starting in the first quarter of this year. Instead what we did is we chose to spend those additional dollars and basically give that funding back to the retailer in the form of promotional spending instead of a price decline. So that’s what we have been experiencing this whole year so far.

Steven Oakland - President, U.S. Retail, Smucker's Jif and Hungry Jack: In the consumer business, the trends that Vince talked about, the retailer wanting some hot price points on their front page, and if you think about a year ago was when peanut butter experienced the tough times with the PCA recalls. Peanut butter, it was a very competitive quarter, and I think everybody saw opportunities to lap pretty soft numbers in the previous quarter. And so, there was a lot of peanut butter promotion activity during the quarter driven by the manufacturing community, and I would argue, driven by the retailer.

Operator: (Jane Gelfand), Barclays Capital.

Jane Gelfand - Barclays Capital: As we look at your margins in the quarter, they were approaching 19% on a clean basis once you take out the impairment, and looking across the group, that’s certainly at the top end, from a benchmarking standpoint well above that 15% target you laid out a couple of years ago. And so, I know you’ve mentioned in the past that you are working through sort of the core to find out where more opportunity may lie from here and perhaps you’ll talk about that more as the fiscal year comes to an end, but for now, I guess, we’d be curious to hear your thinking on how you strike that balance between keeping the margins high at the attractive levels they are currently versus making sure there is enough flexibility there to fund the core and keep it growing?

Mark R. Belgya - SVP and CFO: It’s a good question, and I think that what I would say – and I think it would be reinforced by everybody on the room – is that being in the game for the long term is we are going to take opportunities to reinvest to the brand. We’ve obviously, this year, have had the luxury of the profitability of coffee and the overall lower commodity cost to do that pretty significantly across all the businesses. But at some point, our view is that commodity cost will tick back up, and as a result, we’ll have to continuously look across the organization to find productivity gains and the like. I know we say this every time, but the way we operate is that our businesses, our presence are all charged with identifying those opportunities. And again, now that the Folgers integration is basically complete and as we head into fiscal ‘11, that’s what we’re going to focus on. It doesn’t mean we’re not going to look for acquisitions or do anything differently, but things we can focus a little bit of our attention on those areas and that can cross production, it can cross the administrative functions and all the way across supply chain.

Jane Gelfand - Barclays Capital: And maybe as a quick follow-up and a little bit closer in, even though you may be working on the longer term opportunity side on productivity, we know that margin expansion’s never a straight line. The environment is clearly challenging economically. Everyone across the industry is starting to spend back more in promotions, and obviously the commodities have bounced off recent trough. So, maybe as we look at over the next four quarters, I know you don’t have a crystal ball, but how do you think about how margins are likely to trend more near end versus the longer term vision that you might have?

Mark R. Belgya - SVP and CFO: Well, I guess what I would say just to your opening comment, I mean, clearly, our margins are high in the industry, but we believe a lot of that come from the acquisition strategy we followed and the strength of the brands and the interaction the brands play. Costs, we think, if you just look across, are ticking up a bit. So we will evaluate that, and if necessary, take pricing actions to try to maintain that. And we’ll have much more to say on this in June when we talk about FY ‘11, but in the short term we’re going to continue to try to guard the margins, but at the same time, for example, in the K-Cup space, we’ll invest as necessary.

Operator: Chuck Cerankosky, Northcoast Research.

Chuck Cerankosky - Northcoast Research: (Alex Bisson) and I are both here and we’ve got some questions.

Alex Bisson - Northcoast Research: A couple of questions for you. In the press release, you indicate you are looking forward to additional opportunities. I suspect one of those was K-Cups. But what else is behind that, is that the innovation, acquisition or something else?

Richard K. Smucker - Executive Chairman and Co-CEO: Well, I think it probably means all of the hosts. We’re always looking for more opportunities, but primarily I think it was the K-Cup in the short term. But we’re also looking for new products and we’ve got a number of new products that are being launched and about to be launched. So that’s what that meant, I guess, I should say.

Alex Bisson - Northcoast Research: Given the inclusion of K-Cups, does that help or alter your go-to-market strategy for institutional coffee sales?

Vincent C. Byrd - President, U.S. Retail, Coffee: No, it does not because we actually only have the rights for the product in what we would consider to be our traditional grocery retail club mass channels and not in the foodservice or office home space.

Alex Bisson - Northcoast Research: And then maybe one more for me, can you talk about Europe’s Best and why the impairment charges…

Mark T. Smucker - President, Special Markets: Basically, I think Mark alluded too, there was a $10 million number. It’s somewhat less. It’s probably in $8 million range in terms of – one of our key customers in Canada, they basically went out and bid their private label business bundling that with some of the branded products and a competitor was awarded that. And so, although we had lost some of the items in that customer, we’re able retain and expand our frozen vegetable business because the losses there on the SKUs were mainly on fruit. But we do believe going forward that we have an opportunity in the future to recapture at least a decent portion of that frozen fruit business. So that’s essentially – I don’t know, Mark, if you want to elaborate a little on that.

Mark R. Belgya - SVP and CFO: Yeah. Maybe Alex, just to close the accounting loop on that then is that event where that loss of business, in our opinion, it triggered what would be a – let’s call it a potential indicator of impairment. So we went through the accounting requirements and basically valued the business. And when we looked at the fair value of that trademark versus what it was on the books for, that’s what caused the impairment charge. So, right now, we don’t think there is anything based on the current business environment that would require us to take an additional charge, but that was how the accounting was taking care of.

Chuck Cerankosky - Northcoast Research: Then finally, if we look at the Uncrustables business, how are trends there shaping up and what’s that telling you about the consumer?

Mark T. Smucker - President, Special Markets: Just overall, I think we still feel very good about that business, and in the foodservice side anyway, we are seeing that our business versus last year and the quarter is up in schools, and part of that is driven by the launch of our waffle product. So with the combination of both the sandwiches and the waffles, we’re seeing good trends, and more importantly as well the profitability of the business continues to inch up. We’re pleased with that.

Chuck Cerankosky - Northcoast Research: Profitability is measured in return on sales or in dollar operating profit?

Mark T. Smucker - President, Special Markets: Mostly dollar operating profit.

Mark R. Belgya - SVP and CFO: If we look at Uncrustables in retail, I spoke earlier about the PCA recall a year ago, if you remember, a lot of the media on that was about it being ingredient peanut butters that were problems. And although our items were not involved in any way, we think it did hurt Uncrustables a year ago. So, we’re pleased to see Uncrustables’ volume actually up in the third quarter. So, we think we got that behind us – hopefully, the economic conditions behind us a little bit and feel good about it going forward.

Operator: Alexia Howard, Sanford Bernstein.

Alexia Howard - Sanford Bernstein: Just a couple of quick ones. Am I right in thinking promotional activity was up fairly significantly in coffee this quarter? Is the plan to continue that into the fourth quarter or do you expect to see some moderation there?

Vincent C. Byrd - President, U.S. Retail, Coffee: Well, again, I would not say that coffee promotional activity was up significantly in the fourth quarter – in the third quarter. You have to take into account the pricing and promotional strategy that we implemented in first of the year. There is a lot of noise going on because of price decreases primarily, and then, of course, we increased (Colombia) early in the year. But net-net, our trade spend was not up during that period. And then, as you dial that forward to the fourth quarter, it will not be as deep as it was last year because, again, we hadn’t enacted our – what we call our pricing and promotional strategy that we implemented in the first quarter. But I would say we got better quality merchandizing during the third quarter than maybe it was done last year.

Alexia Howard - Sanford Bernstein: And then, just one quick follow-up. You quantified the marketing spending increase in the fourth quarter of $20 million. Are you able to quantify the reduction year-on-year that happened in the third quarter in dollar terms?

Mark R. Belgya - SVP and CFO: It would be about – to the total company about $10 million.

Operator: Mitch Pinheiro, Janney Montgomery Scott.

Mitchell Pinheiro - Janney Montgomery Scott: Two questions, first around the Green Mountain news. So you’ve studied the single-cup market over the last year. How big do you think single-cup could be in the at-home channel, say, in three years or five years?

Vincent C. Byrd - President, U.S. Retail, Coffee: That’s a very good question, and I really wouldn’t offer a guess at this point. I think if you look at the growth that Green Mountain is public with is probably a good indication, but as you know, it’s just grown very, very significantly over the last several years. But it’s currently a relative small category when you compare it to the overall coffee category, particularly a traditional grocery or mass, but again, we believe that we can help fuel that growth and provide another avenue for the consumer.

Mitchell Pinheiro - Janney Montgomery Scott: Curiously, Dunkin’ Donuts was not included in this agreement at the moment, if you could comment as to why? Is it perhaps because you don’t own the brand or I’d love to understand that, and also understand – I guess, it’s not your Red Can business, is that a demographic issue?

Vincent C. Byrd - President, U.S. Retail, Coffee: Yes. I think we just have to start somewhere and we chose to focus on our two gourmet brands of Folgers Gourmet Select and Millstone. Obviously, we have a very, very solid relationship with our friends at Dunkin’ Donuts, and our business continues to flourish there. But our initial offerings are going to focus on our two brands.

Mitchell Pinheiro - Janney Montgomery Scott: So it’s not out of the question that you could have Dunkin’ Donuts in K-Cups at some point?

Vincent C. Byrd - President, U.S. Retail, Coffee: Our initial focus will be on our two brands.

Mitchell Pinheiro - Janney Montgomery Scott: Then finally, just relating to guidance, so if you look at your sales guidance that would imply a fourth quarter range of flat to maybe down 10%. I’m just not sure why the down, if you could talk about the down 10% part of the range?

Mark R. Belgya - SVP and CFO: Well, I think, first of all, last year in the fourth quarter, I know some of you guys are new to it, so that you might not be as familiar with this, but last year’s fourth quarter was an extremely strong coffee quarter. The business overall did well, but coffee was extremely well. It was our first promotion around the Easter holiday and we just had a blowup quarter. So we expect it to be down. I think probably – if you just do the math, which sounds like you’re doing on a 10% would be a volume decline, but probably incremental spending to get to that point would push it down to that, although that would not be our expectation – negative 10%.

Mitchell Pinheiro - Janney Montgomery Scott: And then on the earnings per share, the implied just backing out the three quarters, has about roughly – I hope my math is correct, but $0.88 to $0.95 would be the range for the fourth quarter? Am I doing the math correctly there?

Mark R. Belgya - SVP and CFO: That seems too high. We were at $3.30 for the year-to-date, so it would be more in the mid-to-upper 70s.

Mitchell Pinheiro - Janney Montgomery Scott: It’s excluding the $0.17 to $0.19?

Mark R. Belgya - SVP and CFO: Yes.

Mitchell Pinheiro - Janney Montgomery Scott: So if I add that back in…

Mark R. Belgya - SVP and CFO: If we just talk – what we call non-GAAP earnings, we are $3.30 through the first nine months, and then at the high end would be $0.77 to get to the $4.07.

Operator: Scott Mushkin, Jefferies.

Scott Mushkin - Jefferies: I actually have a few questions here. So just quickly on the fourth quarter just – and I know there is a lot of noise and there was a blow up from fourth quarter last year, but one of the things that struck me is volume growth in the third quarter accelerated a little bit. Are trends the same in the fourth quarter so far? Could you maybe speak to that just so we know how the base business is doing?

Mark R. Belgya - SVP and CFO: No, they would not be the same. Clearly, we’ are projecting to have a volume decline in the quarter, again, part of it driven by the coffee, but no, we are seeing as expected a planned decline.

Scott Mushkin - Jefferies: So that’s expected. And you attribute that, Mark, to just some great numbers that came out of the first promotional activity in Easter, did I get that correctly?

Mark R. Belgya - SVP and CFO: That’s exactly right. And yeah, just to be clear when I say down, down the last year’s fourth quarter.

Scott Mushkin - Jefferies: And that’s specifically in coffee. The other businesses you are not expecting that or are you expecting that through all the business?

Mark R. Belgya - SVP and CFO: Generally, we expect oils and baking will probably be down some, but I think otherwise we’re expecting to be reasonably flat.

Richard K. Smucker - Executive Chairman and Co-CEO: Our business is still solid. There is not a change in how our consumers are buying or spending. Our business is still very solid. It’s just the fact that last year’s fourth quarter was abnormally strong. So we don’t see any change in the general economic conditions.

Mark R. Belgya - SVP and CFO: Just to frame things in and for what it’s worth is that one of the comments we made – I believe that was in leading into the fiscal ‘10 last June is we categorized our sales, and we said that about 55% to 60% of our sales for the total year would fall in the second and third quarters, and then the remainder, obviously, in the first and fourth quarter. Based upon our projections that we have provided as part of our outlook, we’re basically seeing that 55% of our sales are falling in those two quarters. So, we’re pretty much in line with what we expected from a dollar sales perspective.

Scott Mushkin - Jefferies: So you’re not seeing a big change in competitive activity or anything that’s driving lower volume expectations. It’s purely because of this look in your own numbers?

Mark R. Belgya - SVP and CFO: That is correct.

Scott Mushkin - Jefferies: Year-over-year?

Mark R. Belgya - SVP and CFO: Yes.

Scott Mushkin - Jefferies: So I want to dive into something that Kraft said and understand coffee as we move forward. Kraft down at CAGNY said, hey, we had a tough quarter in coffee and they actually threw it all at you guys. You were getting promotional. I guess, what I would say, my question to you is, number one, you seem to be gaining a lot of market share, it doesn’t seem to be coming because of lot of promotional or unsustainable promotional activity. So what do you guys attribute the market share gains to, the number one reason, and is it sustainable?

Richard K. Smucker - Executive Chairman and Co-CEO: Let me reinforce a couple of things, and yes, we obviously did hear that comment. It was brought to our attention. I think in a macro sense, you can say that period we had basically owned the business for still less than a year, but it’s the ability for our sales and marketing team to leverage the Folgers and Dunkin’ brands with our other iconic brands. And as we said previously, it gives us the opportunity to maybe get on the front page of the ad or it might get us display activity that we might not have been able to historically. We’re, honestly, a little perplexed as to the comment because even though our team – when our team looked at the numbers, our quality merchandising was clearly up and our competitors price points were not as low as they may have been last year, but for the most part they were slightly to significantly below our price points. And so, we’re not sure that we understand the comment. Now, as I mentioned earlier, there were instances where we did not fund the pricing as our retailers chose to use Folgers or in the case they have used our competitors’ brand to drive foot traffic to their stores to make sure they are competitive within their respective marketplace. But net-net, we’re very pleased that our promotion and pricing was executed within our guidelines and with very, very few exceptions. We obviously will have learnings, but we feel we’re in a good place and it is our objective to grow share long term.

Scott Mushkin - Jefferies: And do you think you are gaining shelf space at key retailers and is that something that is happening and can be sustained?

Richard K. Smucker - Executive Chairman and Co-CEO: There is always opportunities, probably the biggest one is, is that with the Dunkin’ brand we have less than a third of SKUs of the main competitor, and yet, we have the number one and three of the top five SKUs turning in there. And so, we believe there is opportunities for incremental shelving or facing, as I should say, of particularly Dunkin’. And also, I would just add Black Silk, which was referred to earlier, was a major emphasis of ours. We think it’s a great product. We’ve put incremental marketing behind it and grew ACV of it as well.

Scott Mushkin - Jefferies: I had actually one and a half more if I may. (Sorry to take) so much of your time. So getting back to the dividend question or the cash, reduced cash build that you guys were seeing, I do think you have said a 40% payout ratio is what you are targeting. When you look at that ratio, given the big spread between cash earnings and GAAP earnings, what’s the number we should be focusing on there? And then, I had one more with the K-Cup, if I could, kind of a half more.

Mark R. Belgya - SVP and CFO: Yeah, I would say we have typically paid 40% of our – I guess, it will be our GAAP earnings over time. For the longest time, there really wasn’t any difference, and I think this is one of the discussion points we’ll probably go through with the Board because, as you’ve suggested, the difference between – particularly a GAAP number and something more that represents a free cash flow or earnings per share. I think it’s more likely than not though that it would be probably around our non-GAAP earnings per share. I mean that’s what we report to the Street, but it will be something we’ll take under advisement with the Board.

Scott Mushkin - Jefferies: And then as far as looking at this K-Cup investment, I mean is it going to be so substantial that we can get flat earnings as that happens or is it not going to be to that level?

Mark R. Belgya - SVP and CFO: No. No, absolutely not.

Operator: Ed Aaron, RBC Capital Market.

Edward Aaron - RBC Capital Market: I just want to circle back on Scott’s question about the competitive landscape in coffee and the comments from Kraft. Have you seen any meaningful change more recently? I mean the January retail data looked like some of the share had shifted maybe a little bit more in their direction and just wondering if you are seeing any type of competitive response from your main competitor there that has you at all concerned?

Richard K. Smucker - Executive Chairman and Co-CEO: Well, as we all know, month-to-month there is going to be activity from all of us in the category. Probably the biggest news is that, I think you’re all aware, they chose to follow us on our promotional pricing strategy that we implemented in the first quarter. So that was implemented or is being implemented in the January timeframe. If you look at a major customer, they are back on deal at a level that they were pre-Holiday. And so, there is a cycle there and I would just again say that it’s below our pricing and promotional guideline points. But any one month we can always point to each other and comment about who is on deal and who is not on deal, but we feel very comfortable where we are.

Edward Aaron - RBC Capital Market: And then, my follow-up just on the K-Cup opportunity. I was just hoping you could maybe help me understand the brand positioning around that. I know you are using Gourmet Select, which is your premium product within Folgers, but K-Cups are generally $0.50 serving, Folgers, as a brand, on average, is closer to a nickel. So even using the premium product, it seems like the brand price point that proposition is a bit different from what you are accustomed to. Just curious to get your thoughts around how you are sort of like managing the positioning around that so that the consumer has a clear message of what Folgers stand for from a price value perspective?

Richard K. Smucker - Executive Chairman and Co-CEO: Well, again, I think between Folgers Gourmet Select and our Millstone, which is our premium coffees, we feel that it fits very, very nicely with the category. And again, what we’re bringing to the party is not only the leading brand – you could debate whether a consumer distinguishes between Folgers and Folgers Gourmet Selection. We are bringing a leading brand to this category, the first national brand to be involved. And we’re bringing a choice, we are bringing another opportunity for a consumer to be able to fulfill their needs, and hopefully, grow this category working with Green Mountain. And we believe that this is a segment that we need to participate in and feel very comfortable with where our initial efforts are.

Operator: Ian Zaffino, Oppenheimer.

Ian Zaffino - Oppenheimer: Just as far as the Green Mountain deal and the Dunkin’ agreement, do you have the right to go out and use Dunkin’ in a K-Cup format or do you need Dunkin’s permission to do so? And then, on the other side of it, does the agreement you just struck permit you to begin to use Dunkin’ in K-Cups as well or do you have to strike another deal with Green Mountain? And I have a follow-up. Thanks.

Richard K. Smucker - Executive Chairman and Co-CEO: As I commented earlier, we really prefer not get into those details at this point. I think, again, we are very excited about being able to enter the relationship, and again, the initial effort will be against our two brands that we own. But we prefer not to get into the details of either agreement.

Ian Zaffino - Oppenheimer: And then just on a different angle on the agreement, it looks like both you and Green Mountain will be distributing and marketing these products. Is there certain areas that you’re going to be doing it in where you have the grocery stores, they have the foodservice or how do the economics vary between the two?

Richard K. Smucker - Executive Chairman and Co-CEO: Yeah. Let me be clear. We will be marketing and selling the products in our products, in traditional grocery club mass channels. They will not be marketing our products in those channels. They will have the right to basically sell them online through their website, et cetera, but for the most part you need to think about it as we’re the ones that will be marketing those brands – our brands. And it is our coffee.

Steven Oakland - President, U.S. Retail, Smucker's Jif and Hungry Jack: We supply the coffee, the roast, the blends. So it’s our coffee; they put it in the cups for us.

Richard K. Smucker - Executive Chairman and Co-CEO: They are manufacturing it for us and they will distribute it.

Ian Zaffino - Oppenheimer: And given your history of really staying in the traditional channels versus foodservice and K-Cups tending to be much more foodservice-oriented, I mean how do you plan on going about attacking this new area for you?

Richard K. Smucker - Executive Chairman and Co-CEO: Well, first of all, I’m not sure that I would say that it’s primarily a foodservice opportunity, but again our agreement does not contemplate the foodservice or office channel. We do not have those rights.

Operator: Eric Serotta, Consumer Edge Research.

Eric Serotta - Consumer Edge Research: You guys have made pretty clear in the past that you expect acquisitions to account for over time on average about half of your long-term top line and EPS growth goals. Just wondering, with you having not announced any acquisitions recently, do you – and I realize it may be a little bit early for 2011 guidance, but you made a comment in the press release that you reaffirmed your long-term guidance. Do you think you’d be able to hit that in 2011 without any acquisition activity?

Mark R. Belgya - SVP and CFO: Eric, I think the purpose of that statement as we reinforce it every time is that really is our strategy objective over a timeframe. And although I understand the question, a natural tendency to want to just extend that for the next year, I think we really do want folks to focus on that. And then, specific to FY ‘11, I think we would just defer it to June when we’ll have much more details to go through from both the top line and earning outlook.

Eric Serotta - Consumer Edge Research: And then in terms of the acquisition environment, any comments on how the pipeline looks certainly and whether the organization, having now the adjusted Folgers for or had Folgers within the fold for about a year, whether you think the organization is ready for another acquisition yet or whether you need a bit more digestion time because it certainly looks like the balance sheet is in shape given the debt pay down over the past quarter or so?

Richard K. Smucker - Executive Chairman and Co-CEO: Acquisitions, as you know, are lumpy. Obviously, the way we describe it, we have our lines in the water all the time and we’re just not exactly sure when the fish are going to hit. I think your second question is, are we acquisition ready? I would say that it’s been 12 months, and looking around here, everybody is catching their breath. So I think if we found the right thing, we could do it now.

Eric Serotta - Consumer Edge Research: Okay. And then, lastly, turning back to a comment in the press release and in your commentary about lower green coffee costs in the quarter, maybe I’m looking at the wrong thing, but when I look at just average New York Board of Trade green coffee cost or Arabicas, it looks like they are actually up year-on-year for the quarter on average. So wondering – maybe I’m looking at the wrong pricing theories versus what you would be buying, but if I am not, if that would be the – I understand that’s the benchmark, what accounts for the difference and why were your coffee costs down year-on-year? Was that largely hedging or was that related to the inventory evaluation adjustment in the year ago period?

Vincent C. Byrd - President, U.S. Retail, Coffee: Well, I think what we’re trying to comment on is, is that if you say where we were priced to in our first and second quarters versus where green was versus, say, our third and now going into our fourth quarter, clearly Arabica coffees have increased over that timeframe. And then, also you have to keep in mind that as you look across all of our offerings, we use a combination of Arabica and Robustas. And so, in our case, you can’t just look at Arabica coffee. But as we look out, and based on our current positions, we know that our green coffee costs have increased versus where they rested in the fourth quarter of last year and the first half of this year.

Eric Serotta - Consumer Edge Research: And am I correct if the green coffee – that your Arabica price excluding hedging or spot Arabicas that would – you use as your benchmark? I realize you are not using all Arabicas, but those were up pretty substantially in the fiscal third quarter year-on-year for the quarter on average?

Vincent C. Byrd - President, U.S. Retail, Coffee: Yes, that’s correct.

Richard K. Smucker - Executive Chairman and Co-CEO: Eric, just to underscore Vince’s comment, I think we’ve tried to be clear on this, but when we talk about this favorable benefit of coffee really across all the quarters, it is always to this price too. We’ve been talking about lower cost on some other raw materials, and that’s clearly period-over-period lower cost, but in this event we are being a little more specific to the benefit versus the price to position.

Operator: (John McMillin), Lord Abbett.

John McMillin - Lord Abbett: When you talk about your investments in K-Cups, basically you are doing distribution, you are providing the bean, there’s really no major investment, correct?

Vincent C. Byrd - President, U.S. Retail, Coffee: Well, no, sure there is. We are going to support the product through promotional spending, marketing support, demonstrations, all kind of things, John. So, yes, we will be investment spending in it.

John McMillin - Lord Abbett: Can you quantify it at all?

Mark R. Belgya - SVP and CFO: Not, at this point.

John McMillin - Lord Abbett: What kind of returns you expect?

Vincent C. Byrd - President, U.S. Retail, Coffee: Well, again, I think as I mentioned earlier, long term we do not believe it will be dilutive. I think on an initial basis, it clearly will be an investment if you would just evaluate it as a segment. But that’s like any new product when we launch.

Mark R. Belgya - SVP and CFO: Yeah. You may look at it like when we first came out – first did Dunkin’. We had marketing programs behind Dunkin’ when we came out with that and this is very similar to that.

Richard K. Smucker - Executive Chairman and Co-CEO: And I think too we’ll look at in the context of the overall marketing support for coffee. That is a sector of that, so it will come into consideration as we look at the overall marketing spend next year.

John McMillin - Lord Abbett: Well, if it works half as well as Dunkin’ I think we’ll be okay. Thanks a lot.

Operator: Eric Katzman, Deutsche Bank.

Eric Katzman - Deutsche Bank: I guess I was just curious, I think you had said that the organic or natural business was up and most of what we hear is that that segment is quite weak. So could you just comment a little bit on that?

Mark R. Belgya - SVP and CFO: Sorry, what was the question?

Richard K. Smucker - Executive Chairman and Co-CEO: The question was about the natural category? Why it was up?

Mark R. Belgya - SVP and CFO: Yes. It was up basically because we had seen – several of our customers had – as you know, the whole industry has been down and we saw that there were some lag in some of the off-take in the first couple of quarters, and essentially, we just recovered a lot of the volume that we had seen go down in the first couple quarters. We do believe that that industry is going to continue to be challenged. And so, strategically we’re looking at bolstering our core business, but also looking at how we might start to participate in some parallel categories.

Mark T. Smucker - President, Special Markets: Just one additional point is that in the natural, we actually – where our growth did come was from the branded side – I guess just to underscore Mark’s comments, both from our R. W. Knudsen brand and our Santa Cruz Organic. But we’re very pleased to see the branded side of business return back.

Timothy P. Smucker - Chairman of the Board and Co-CEO: And the other thing I would comment there also is that as we look at that business, and it’s hard to know because there isn’t really good data in the industry, but our feeling is that the organic side of the business tends to be more consistently strong than, say, the natural side, if that makes sense. There seems to be a core sort of diehard organic consumer that is true to that category and does not leave that category even though it is a higher priced area.

Eric Katzman - Deutsche Bank: I’m very familiar with that at home. And then, just as a follow-up – thanks for that, follow-up to Mark, and I think it was a question earlier, I love to focus on the quarter, but the $4.07 that you were talking about that on a high end that includes – you are including the $0.05 impairment, right?

Mark R. Belgya - SVP and CFO: Yes.

Eric Katzman - Deutsche Bank: In that number?

Mark R. Belgya - SVP and CFO: Yes.

Eric Katzman - Deutsche Bank: And then, there’s also, you said, I guess, about $0.11 year-over-year increase in the fourth quarter in the A&P spending, that’s the $20 million?

Mark R. Belgya - SVP and CFO: Yes.

Eric Katzman - Deutsche Bank: And then, what was the – I can’t remember, but the peanut butter hit the year ago, that was in the fourth quarter, right?

Mark R. Belgya - SVP and CFO: It was.

Eric Katzman - Deutsche Bank: And how much was that?

Mark R. Belgya - SVP and CFO: Steve, you can jump in. I think in – early on, the whole category was down 20%, we tracked better than that and for the full quarter, Steve…

Steven Oakland - President, U.S. Retail, Smucker's Jif and Hungry Jack: Yeah. We were up about half that much, but the key here– we think the peanut butter business is our toughest one to call where is it going to shake out in the quarter. And that’s because a year ago, if you remember, we went out with national media, we partnered with a number of customers and had front page ads, Trust Jif. So we had a lot of business in the Jif brand in the last two months of the quarter. And although we’ve got great promotional support, it’s difficult for us to really tell you how are we going to shakeout versus the year ago, will we be up or we’ll be flat. We don’t think we’ll be anything worse than flat. We hope we’ll be up a little bit. Early indications are great but there’s a lot of noise in the last two months in peanut butter, and I look forward to commenting on it in the next meeting. But with the businesses very solid, but the comparables are difficult in the last two months, I guess, is what I’m saying.

Eric Katzman - Deutsche Bank: And then, lastly, I guess, historically it seems like to a certain extent you’ve won Fall Bake on the oils business, and then ConAgra has pushed it around, I guess, Easter and stuff. So is that how you see it shaping up again this year?

Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: Yeah, I would say that we pretty much won the O&D time period. We felt very good about that. It’s clearly going to be competitive coming into the fourth quarter. That being said, we feel pretty confident that we have some good promotions lined up.

Operator: Jon Andersen, William Blair.

Unidentified Analyst: It’s actually (indiscernible) for Jon. Congratulations on the quarter. Just a quick one for you, after that $550 million pay down in debt this quarter, it doesn’t look like you have anything due for quite a while. Do you have any restrictions or prepayment on this that prevented you from repaying that debt going forward?

Richard K. Smucker - Executive Chairman and Co-CEO: There are actually. In all our notes, there is a prepayment penalty, and obviously, based on the market condition, that can be very sizable. So, we look at that very periodically, but yes, we do have that up there.

Operator: Jane Gelfand, Barclays Capital.

Jane Gelfand - Barclays Capital: Just a quick question on spreads. You mentioned some targeted price declines. Just wanted to get a little bit more color on whether that’s part of the strategy, whether it’s more tactical in relation to something you are seeing out there in the market, and most importantly, are you seeing the results as you adjust some of those price gap?

Steven Oakland - President, U.S. Retail, Smucker's Jif and Hungry Jack: I’ll comment on fruit spreads and peanut butter. First of all, a year ago we had an anomaly in the fruit spread business. We had a very short crop on certain of the premium cranberries, blackberries, raspberries, et cetera. And we took a 30% price increase, okay? So obviously that had big effect on that whole business. We have since rolled a big portion of that back. And so, those are material varieties during the third quarter. So that’s some of the price decline in the fruit spread business. As far as peanut butter, we’re sort of between crops right now and there have been some favorable costs in the peanut butter industry. When you compare that to the fact that the retailers, as Vince mentioned earlier, are looking for those front page items and we all, as an industry, have soft comparables, some of that favorable peanut butter cost has been spent back on the peanut butter business. Now, we try to balance that. I think we’ve been able to increase margins, been able to increase our tonnage. And the segments even – there is even another compound to that, some of the segments like club and the consumer is looking if there is tremendous value in some of those segments right now. And so, we’re even seeing larger sizes very effective right now. So there is a lot of variables, but we’re looking close at the peanut butter business. If we think those things are sustainable, we’ll roll them into price as we always have; if not, they’ll probably just be short-term promotions.

Jane Gelfand - Barclays Capital: And just one more quick one. As we think about spreads, as you look at that business, how comfortable are you with where some of those core item price gaps are relative to private label or do you see more opportunity there over time to adjust it a little bit more?

Richard K. Smucker - Executive Chairman and Co-CEO: We have to be careful there. Obviously, our advertising, our brand scores, the brand health measures of that business are as high as they’ve ever been. So we feel great about our connection with the consumer right now. But we are the largest strawberry producer in the world and we have to leverage that scale. We have to provide value to consumer. To short term let that gap get too large and take that margin gain and allow consumers the opportunity to try private label, we just think is a wrong decision. So we may give up some of those short-term margin opportunities and keep the pressure on, continue to give them value on an everyday basis with those items. So we’ll try to continue to leverage our scale, keep that gap close to where it is right now.

Operator: And there are no additional questions at this time, gentlemen. I’ll turn the conference back to you.

Mark R. Belgya - SVP and CFO: Well, thank you very much for your attention today and great questions. And again, thanks our team for great results. Well, have a good day, and we’ll be talking to you probably later on today. Mark and Sonal (will be glad to) take a number of questions. Thanks so much.

Operator: And 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 719-457-0820 with passcode of 7290467 or by accessing the website for a downloadable MP3 format. This does conclude our conference call for today. Thank you for participating and have a nice day.