Operator: Good morning and welcome to The J. M. Smucker Company’s Third Quarter 2010 Earnings Conference. At this time, I’d like to inform everyone that today’s conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. Please limit yourself to two initial questions during the Q&A session and re-queue if you then have additional questions.
I will now turn the conference over to the Chief Financial Officer, Mr. Mark Belgya. Please go ahead, sir.
Mark R. Belgya - SVP and CFO: Good morning, everyone, and welcome to our third quarter earnings conference call. Thank you for joining us.
On the call from the company are Tim Smucker, Chairman of the Board and Co-CEO; and Mark Smucker, President of Special Markets who are joining us remotely. And with me this morning in Orrville are Richard Smucker, Executive Chairman and Co-CEO; Vince Byrd, President of our Coffee Business; Steve Oakland, President of Smucker’s Jif and Hungry Jack; and Paul Wagstaff, President of Oils and Baking.
After this brief introduction, I will turn the call over to Richard for opening comments. I will then review the financial results for the quarter, and Tim will provide an overview of our outlook and closing remarks. At the conclusion of these comments, we will be available to answer your questions.
If you have not seen our press release, it is available on our website, at smuckers.com. A replay of this call is available on the website. If you have any follow-up questions or comments after today’s call, please feel free to contact me or Sonal Robinson, our Director of Investor Relations.
I would like to remind you that in both the prepared comments and during the question-and-answer period that follows 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 risks and uncertainties. I invite you to read the full disclosure statements in the press release concerning such forward-looking statements.
I also want to point out the Company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is also detailed in our press release and on our website.
And finally, as you know, the Folgers merger closed on November 6, 2008. And as a result, this year’s third quarter contains five additional days of operations from November 1 through November 5.
I’ll now turn the call over to Richard.
Richard K. Smucker - Executive Chairman and Co-CEO: Thank you, Mark. Good morning, everyone, and thank you for joining us. I would like to begin by summarizing the key financial highlights for the quarter. First, we concluded a successful Fall Bake and Holiday season in both the U.S. and Canada. Our multi-brand themed events took advantage of all elements of the marketing mix and generated a good response from our customers and our consumers.
Second, volume was up 4% with gains in nearly all key brands in both the U.S. and Canada. Third, margins were once again up with improvements across most of our businesses. Lower commodity cost and synergy benefits were the primary contributors.
Fourth, non-GAAP earnings per share were up 34%. Fifth, this earnings result resulted in cash from operations exceeding $320 million, a new record for the company. And finally, our performance continues to confirm our strategy of owning leading brands sold in the center-of-the-store.
Let me now provide some commentary on each of our four businesses, beginning with coffee. This quarter marked the first anniversary of the Folgers merger and a very successful first 12 months. We completed the integration and achieved our forecasted synergies, all in line with original expectations. The financial results exceeded all pro forma estimates and contributed to our overall strong performance.
We are encouraged by our marketing initiatives, our new advertising and new products. For example, we will be shooting additional commercials for Folgers and Dunkin’ Donuts coffee in the fourth quarter to add to those recently produced. We are also in the process of launching Dunkin’ Turbo, which will build our presence and support our success in the growing gourmet coffee category. In addition, we expanded distribution and support of Folgers Black Silk, which is receiving good consumer response.
Our pricing and promotion strategy implemented in the first quarter has been effective, offering consumers’ value on a daily basis while providing promotional support as needed. This quarter we continued to grow share as well as increase sales and profit in the coffee business. We are particularly pleased with our efforts to revitalize the core Red Can, our number one priority, and these are showing good results.
The Folgers brand contributed most of the volume increase, while Dunkin’ Donuts coffee realized double-digit growth. Our sales of Dunkin’ Donuts coffee have now exceeded $225 million on an annual basis.
Also, as you may have seen this morning, we are pleased to announce we have entered into a multi-year manufacturing and distribution agreement with the Green Mountain Coffee Roasters Company. This agreement will enable Green Mountain to manufacture single-serve K-Cups using coffee beans roasted and blended by Smucker’s for our Folgers Gourmet Selections and Millstone brands. This will enable us to participate in the fastest-growing single-serve brewing system with Keurig Single-Cup Brewers.
As the leader in the coffee category, our goal is to participate in all segments of the business. Although the single-serve segment currently represents less than 5% of total at-home coffee, it is the fastest-growing segment in the category. Our agreement with Green Mountain allows us to market and sell the Folgers Gourmet Selections and Millstone K-Cups to consumers in the U.S. and Canada through grocery, mass retailers, drug stores and club channels.
Our initial plans are to provide a variety of six offerings nationally. These products will be available toward the end of this year. We are excited about this relationship and the opportunity to enter into this fast-growing segment.
Turning to the consumer segment, marketing increased 14% in the quarter with activities across all communication channels, including new advertising for our Smucker’s and Jif brands. Volume was up across most categories, with gains in pancake mixes and syrups, peanut butter and fruit spreads. Net sales in consumer were impacted by increased promotional spending, mix of products sold and selective price declines.
Our oils and baking segment delivered volume growth led by the Crisco and Pillsbury brands. A combination of new products, merchandizing programs and marketing investments contributed to a solid Fall Bake. Dollar sales for the segment were down as expected, primarily on price decreases taken last year in various categories and higher promotional spending.
Finally, sales in the special market segment increased 8% in part due to favorable foreign exchange and five additional days of Folgers. The export and foodservice coffee categories and the natural foods area all achieved volume growth. In addition, volume gains were realized in Canada, primarily in the baking and spreads categories.
Canada’s Fall Bake was very strong, the best in many years. During the quarter, Robin Hood, an iconic Canadian brand with a strong heritage, recognized its 100th anniversary. In celebration, we set up several Robin Hood branded bakeshops and invited families to prepare easy and fun recipes. This public relations effort received substantial media exposure, and more importantly, demonstrated our commitment in helping consumers create memorable meals and moments.
In summary, we delivered another record quarter with record financial results, affirming our strategy of owning the marketing center-of-the-store number one food brands. This Fall Bake and Holiday period marked the first time we were able to include the Folgers brands in our planning and execution, and we were pleased with the results. The addition of Folgers elevates our family of brands to a higher profile and positions us to meet the needs of both consumers and our retailers.
I’d now like to turn the call back to Mark and have him review the financial results for the quarter.
Mark R. Belgya - SVP and CFO: Thank you, Richard. Sales for the quarter increased $23 million or 2%. Excluding the additional coffee sales and the impact of foreign exchange, sales decreased 2% for the quarter.
Overall, volume was up 4%, but was more than offset by a 6% decline due to pricing mix, with price, including promotional spending, the key driver. In certain instances, we chose to increase trade spending in order to pass along decreases in commodity cost, which may not be sustained rather than taking a permanent price list reduction.
GAAP earnings per share were $1.14 this quarter and $0.68 in the third quarter of last year. Excluding charges, earnings per share were a $1.17 this quarter and $0.87 in last year’s third quarter, an increase of 34%.
Last year’s results include a number of factors, which make quarter-over-quarter comparisons a bit more difficult. Items specifically related to Folgers include an unfavorable inventory revaluation adjustment of $12 million, additional promotional expense, and a difference in the recognition of marketing expense between the third and fourth quarter.
Also included in the third quarter of last year and partially offsetting these negative amounts related to Folgers was the favorable impact from the reversal of mark-to-market charges related to non-qualifying commodity instruments. You may recall the mark-to-market charges were originally recorded in the second quarter of last year.
Operating income increased $46 million for the quarter, excluding charges, an increase as a percent of sales from 14.3% to 17.8%. We realized non-cash impairment charges of $10 million this quarter related to the write-down of certain intangible assets, primarily the Europe’s Best trade name in Canada. This impacted margin by approximately 80 basis points.
Gross profit increased $57 million to 38% of net sales from 33.9% last year. Much of the improvement is attributable to Folgers, including the impact of lower green coffee cost and the extra five days of business. In addition, last year’s gross margin was impacted by the inventory adjustments I noted earlier. Lower cost and raw material and freight across all our businesses also favorably impacted this quarter’s margin.
SG&A expenses increased approximately $3 million, but decreased slightly as a percent of net sales from 17.9% to 17.8%. Marketing decreased in the quarter primarily due to the recognition of Folgers marketing expenses between the third and fourth quarters of last year. We expect marketing expenses for coffee and the total company in the second half of the year to be higher than last year, resulting in significantly higher marketing expenses in the fourth quarter.
During last year’s third quarter, the organization and shared service structures necessary to support the combined businesses was not yet complete. As a result, this year’s general and administrative expenses are higher, reflecting the full model to support the coffee business and the larger company. In addition, pension and other employee-related benefit expenses increased.
And finally, the current year include approximately $2 million of cost associated with the pending closure in April 2010 of our West Fargo, North Dakota plant. Another $2 million to $3 million is expected in the fourth quarter. This plant currently manufactures a small portion of our Uncrustables product, which will be transitioned to our Scottsville, Kentucky facility.
The effective income tax rate for the quarter was 31.3%, reflecting the impact of reduced effective tax rates in Canada, compared to 31.8% in last year’s third quarter. This brings our year-to-date rate to 33.7%. We continue to anticipate a full year tax rate of approximately 34%.
Let me now provide details on our four segments. As you may recall, last year’s third quarter coffee results for Canada were included in the U.S. retail coffee segment. We have reclassified last year’s third and fourth quarter segment results so that coffee is accounted for in the U.S. retail coffee and special market segments consistent with fiscal 2010. The reclassifications for both quarters are included in our press release.
As reported, sales for the U.S. retail coffee segment increased 9% in the quarter, including the five additional days. Volume increased approximately 4% compared to the same three-month period last year; that is, November 1 to January 31 for both years. Coffee segment profit increased 62% and margin improved from 21.3% to 31.5%. Last year’s margin was lower due to the merger-related inventory valuation adjustments and the recognition of marketing and promotional expenses between the third and fourth quarters, as previously noted. This quarter’s coffee margin again benefited from favorable green coffee cost, although to a lesser extent than the first two quarters of this year. This benefit is the primary reason coffee margins exceeded the long-term margin expectation of 30% plus this quarter.
In our U.S. retail consumer segment, sales were up 1%. Volume was up 4% with gains in pancake mixes and syrups, peanut butter and fruit spreads. Volume gains were mostly offset by higher promotional spending, product mix and price declines on selected items, notably ethnic flour and red and black raspberry fruit spreads. Segment profit increased 6% mainly due to lower raw material and freight costs, which were partially offset by the higher marketing spending. Segment margin improved by 110 basis points compared to last year’s third quarter.
In the U.S. retail oils and baking segment, sales declined 12% compared to last year, reflecting the impact of price decreases taken last calendar year and higher promotional spending across the segment. Volume was up 3% primarily led by the Pillsbury and Crisco brands. These gains were somewhat offset by modest declines in canned milk. Segment profit declined 17% mainly due to the inclusion last year of the reversal of mark-to-market charges for commodity instruments. In addition, a higher portion of sales sold on promotion in this year’s quarter and product mix contributed to the decrease.
Sales in the special market segment increased 8%, but excluding the impact of foreign exchange and the additional Folgers sales declined 1%. Most categories in Canada achieved volume growth, as did our natural foods and export businesses. Foodservice portion control volume declined, which is still generally attributable to the current economic environment. Overall, volume in this segment was up 6%. The impact of volume growth was more than offset by mix and increases in promotional spending. Profit in the special market segment was again strong, increasing 53% for the quarter, primarily due to lower raw material cost and a higher percentage of coffee sales across the segment compared to last year. Margins improved from 12.6% to 17.8%.
Let me conclude with comments on other financial metrics. EBITDA, excluding merger-related cost and adding back share-based compensation expense as the amortization, was $267 million or 22.1% of net sales. Through the first nine months of the year, EBITDA was $790 million or 22.3% of net sales. Cash from operations in the third quarter was a record $323 million, bringing the year-to-date total to $509 million. With capital expenditures of $113 million, our nine-month free cash flow totals nearly $400 million.
I would now like to turn the call over to Tim.
Timothy P. Smucker - Chairman of the Board and Co-CEO: Thank you, Mark, and good morning, everyone. We are very pleased with our financial results for the first nine months of the fiscal year, and as a result, we are comfortable again raising our outlook for the year.
We anticipate income per diluted share, excluding merger and integration costs, in the range of $4.02 to $4.07, an increase from our previous range of $3.95 to $4.05. Amortization of $0.40 is included in our forecast. Excluding amortization, our new forecast is $4.42 to $4.47 per share. These earnings are based on a sales range of $4.5 billion to $4.6 billion.
Our forecast for the year includes the impairment charge of $10 million or $0.05 per share that we recorded this quarter. Based on the expanded guidance range, we anticipate our adjusted EBITDA, excluding merger and integration costs, will approximate $1 billion. Importantly, we remain committed to our long-term strategic objectives of 6% annual sales growth and greater than 8% earnings per share growth.
Although we normally do not comment on quarters, our outlook for the year obviously forces a range of earnings for the fourth quarter. As we stressed in both our first and second quarter calls, this year’s fourth quarter results will be less than last year, which was exceptionally strong.
Mark has commented on a few of these items, but to summarize, last year’s fourth quarter was higher than the third quarter, contributing 55% of the second half earnings per share. We do not expect this waiting to recur. The shift in marketing expenses between last year’s third and fourth quarter will result in incremental marketing in this year’s fourth quarter of approximately $20 million.
Coffee margins in last year’s fourth quarter and the first half of this year far exceeded our long-term target, primarily due to favorable green coffee cost. Although still favorable, the additional contribution from lower green coffee cost will be less.
And finally, costs in the baking category are up significantly from the fourth quarter last year, particularly sugar, cocoa and milk. In response, we have announced the price increase for private label milk, which will become effective later in the fourth quarter and are considering other pricing actions. However, any future pricing actions are not expected to impact the fourth quarter.
So, in summary, first, the addition of Folgers contributed to a strong Fall Bake and Holiday season. Second, we are pleased with our financial performance, including the significant generation of cash. Third, we have again raised our outlook for the year. And fourth, our performance continues to confirm our strategy of owning leading brands in North America in the center-of-the-store. And finally, we want to thank our talented team of all of our employees throughout the company for their tremendous efforts.
Well, thank you for your time today. And now, we are happy to answer any of your questions.