Operator: Good morning and welcome to The J. M. Smucker Company's Second Quarter 2011 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 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 second 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; Richard Smucker, Executive Chairman and Co-CEO; Vince Byrd, President of our Coffee Business; Steven Oakland, President of Smucker's Jif and Hungry Jack; Mark Smucker, President of Special Markets; and Paul Wagstaff, President Oils and Baking.
After this brief introduction, I will turn the call over to Tim for opening comments. I will then review the financial results for the quarter and Richard will provide closing remarks. After 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, Vice President 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 statement in the press release concerning such forward-looking statements.
I also want to point out that 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.
I'll now turn the call over to Tim.
Timothy P. Smucker - Chairman and Co-CEO: Thank you, Mark. Good morning everyone and thank you for joining us. We're pleased to report another quarter of earnings growth even though we continue to operate in a challenging economic and competitive environment.
Let me summarize the key highlights for the quarter. First, sales for the quarter increased 1% excluding the impact of divestitures and foreign exchange. Pricing and favorable mix offset an overall decline in volume.
Second, on a non-GAAP basis, operating profit was up 10% and combined with a lower effective income tax rate resulted in a 13% increase in earnings per share.
Third, we announced an expansion of our current restructuring project to improve the cost structure of our Canadian pickle and condiments business. Finally, we entered this year's Fall Bake and Holiday period with strong multi-brand, promotional programs that incorporate all of our major brands. We are optimistic about the season.
Now, let me provide commentary on each of our four business segments. In our Coffee segment, sales and segment profits were up for the quarter despite a decline in volume. We anticipated volume declines in the quarter due to significant pricing actions taken earlier in the year to offset increased green coffee cost. The decrease driven by Folgers Coffee was larger than anticipated as our primary competitor continued to be aggressive with promoted price points. Overall, we remained encouraged as we move through the Holiday period and into the remainder of the fiscal year.
Our launch of Folgers Gourmet Selections and Millstone brand K-Cups this quarter enhances our participation with the single-serve category. We are pleased with the K-Cup performance to date as all major customers have accepted the product offerings. Primary marketing support of the launch including television advertising began in November.
The Dunkin' Donuts Coffee brand is continuing its strong momentum aided by distribution gains, turns on the core business, and the success of new product launches. This includes our new Dunkin' Donuts seasonal items, which are all performing well.
In the Consumer segment, volume increased 1% excluding divestitures, while net sales declined reflecting the price decrease taken on peanut butter earlier in the fiscal year. During the quarter, we concluded a successful back-to-school period, despite a very competitive environment, particularly in the peanut butter category. We are encouraged by the consumer response to our, Jif to Go offering. Also, the growth of Jif Natural continues to drive share gains in the peanut butter category.
Turning to our Oils and Baking segment, unprecedented competitive pricing throughout the quarter contributed to sales and volume declines, compared to a strong second quarter last year. In many instances, particularly in the baking business, we choose to protect profits over market share.
We believe the current aggressive pricing will continue throughout the remainder of the Fall Bake period, but are encouraged by the merchandising programs we have in place for the Fall Bake period. Further, the Crisco brand has shown signs of volume improvement over the trends in the previous few quarters. This follows the price decrease taken on the Crisco Oils to narrow the price gaps on an everyday basis.
Our Special Market segment had a strong quarter, with volume gains realized in all four business areas. This was led by natural foods which benefited from improving trends in our natural and organic foods categories. Volume gains in Canada were driven by a strong Thanksgiving holiday period for the baking business. Also, Folgers Coffee continues to show significant growth in both the U.S. food service business and in Canada.
So in summary, we are pleased to have delivered another good quarter. As we continue to navigate this challenging environment, we remain committed to responsibly managing our business for the long-term, with a focus on balancing volume growth, share of market, and profitability.
I would now like to turn the call back to Mark to have him review the financial results for the quarter.
Mark R. Belgya - SVP and CFO: Thank you, Tim. Net sales for the quarter were equal with last year and up 1%, excluding the impact of divestitures and foreign exchange. Pricing and a favorable sales mix overcame a 4% volume decrease that was driven by declines in our Oils and Baking brands, and Folgers Coffee in U.S. Retail.
GAAP earnings per share were $1.25 this quarter and $1.18 in the second quarter of last year, including charges related to restructuring and merger integration activities. Excluding these charges, earnings per share were $1.38 this quarter and $1.22 in last year's second quarter, an increase of 13%. The quarter results benefited from a lower tax rate when compared to the prior year.
Gross profit, excluding charges, increased $40 million to 39.6% of net sales from 38.5% last year. Reflected in gross profit were unrealized mark-to-market losses on derivative contracts of approximately $6 million. Coffee pricing actions taken earlier in the year, relative to the recognition of higher green coffee cost, contributed to gross profit in the quarter.
As you probably are aware, green coffee futures continue to increase during the quarter and into November hitting new 13-year highs for (indiscernible). If these costs are sustained, pricing actions in the future are likely. The impact of other raw material cost was mixed as milk, sugar and soybean oil were higher and peanuts and flour were lower.
SG&A expenses declined 4% compared to the prior year and decreased as a percent of net sales from 18.2% to 17.4%, primarily due to a decrease in marketing expense. You may recall last year's second quarter included a significant marketing investment in support of brand building initiative, including new advertising. We continue to invest in marketing behind our brands with the decrease in the quarter reflecting a return to a more normalized level of spent.
In addition, a portion of the marketing expense decrease was reallocated to support promotional programs, particularly in the Oil and Baking segment. Operating income excluding charges increased $24 million for the quarter, with operating margin improving nearly 200 basis points from 18.7% in last year's second quarter to 20.6% this year.
The effective tax rate for the quarter was 32.5% compared to 34.9% in last year's second quarter. This anticipated lower rate in the current year primarily reflects benefits realized from an increased deduction relating to U.S. manufacturing activities, along with lower state income taxes. We anticipate the full year effective tax rate to remain comparable to the year-to-date rate of 32%.
Now let me turn to our reportable segments, starting first with the U.S. Retail Coffee segment. Net sales increased 7% over the prior year, reflecting price increases totaling 13% taken earlier this fiscal year. This was partially offset by a 7% volume decline and increased trade promotion. The Dunkin' Donuts brand continued its double-digit volume growth.
The introduction of K-Cups during the quarter contributed about 2% to net sales in the Coffee segment. Coffee segment profit increased $17 million, representing 13% over the prior year. This reflects the impact of pricing versus recognized green coffee cost.
Based on our hedge positions, we expect to recognize steadily higher green coffee cost as we progress through the fiscal year. Current year segment profit also reflected lower margin expenses as the prior year included significant investment spending in the brand.
Sales in our U.S. Retail Consumer segment were down 6%, primarily due to the divestiture of the potato business along with the impact of the 5% price decrease taken on peanut butter in the first quarter. Excluding this divestiture, sales declined 2%, while volume increased 1% as gains in Smucker's fruit spreads and Jif peanut butter were partially offset by declines in Smucker's Uncrustables and topping.
Segment profit increased 5% reflecting lower supply chain and raw material costs along with the favorable sales mix. Marketing in this segment increased during the quarter. Segment margin improved 300 basis points from 24.3% in last year's second quarter to 27.3% this year. The divestiture of the potato business contributed to the margin improvement.
In the U.S. Retail Oils and Baking segment, net sales and volume for the quarter declined 8% and 10%, respectively, as the competitive and promotional environment in the oils and baking categories continued throughout this quarter. The Pillsbury brand experienced double-digit declines in volume for the quarter, partially due to a plan reduction in flour sales.
Decreases in canned milk sales also occurred. Volume for the Crisco brand declined 3%, while sales decreased by a larger percentage due to price decreases taken earlier in the fiscal year.
Segment profit in the quarter decreased 10% and profit margin was lower by 30 basis points. Segment profit, which reflected the decline in sales was also impacted by higher raw material costs and unrealized mark-to-market adjustments on commodity contracts.
Sales and volume in the Special Markets segment both increased 4%. The favorable impact of foreign exchange contributed to the increase in sales. All business areas in this segment realized volume gains for the quarter led by natural food business which was up 12%. Volume gains in Canada along with the growth of Folgers coffee in both the U.S. foodservice and Canadian business areas also contributed.
Segment profit was strong, increasing 24% for the quarter, mainly due to coffee price increases taken earlier in the year, lower flour cost and the favorable impact of sales mix. Segment margin increased over 300 basis points from 16.7% to 19.8%.
Turning now to our input cost, we continue to see significant increases in the market price for the majority of our key commodities, most notably coffee, wheat, corn and oil. As a result, we now expect fiscal 2011 cost increases to approximate 7% of costs. While we are generally hedged on key commodities from late third quarter to mid-fourth quarter of fiscal year, we will continue to monitor the situation closely to determine appropriate future pricing actions.
Let me conclude my remarks with a few comments on cash. Cash provided by operations was $47 million in the quarter bringing the year-to-date total to $20 million. This compares to cash provided by operations of $188 million for the first half of last year. Reflected in the decrease between years has been $80 million impact from a change in the timing of income tax payments, which were accrued at year end, but paid in June of this year. An increase in green coffee and other commodity costs, along with higher inventory level also contributed to the year-over-year change.
As a reminder, we expect a significant use of cash for working capital during the first half of each fiscal year with a buildup of inventories in advance of Fall Bake and Holiday season and the additional buildup of coffee inventory in advance of the Atlantic hurricane period. We expect the generation of cash to accelerate in the second half of the year as we complete our key seasonal periods.
We have revised our capital expenditures forecast for the year lowering our full year estimate from $235 million to $200 million. Approximately $25 million of this decrease is due to a shift in the timing of expected cash outlays for capital related to the coffee and fruit spreads restructuring project.
Although this is a shift in the estimated timing of the cash payments, the timing for the overall project remains on track. Capital expenditures related to the project are now estimated at $70 million for fiscal 2011. Therefore, taking the impact of the tax payments, working capital, and capital expenditure changes into account, we would estimate free cash flow to approximate $450 million for fiscal 2011.
Lastly, I would like to comment briefly on dividends and potential share repurchase. On November 6, we marked the second anniversary of completing the Folgers merger. This milestone represents the point at which our two-year restriction on repurchasing shares lapsed. We currently have approximately 3.7 million shares approved for repurchase by our Board under previously authorized plan. Our intention would be to begin repurchasing these shares contingent on market factors.
Turning to dividend, our stated payout target is 40% of annual earnings. We are currently below that goal and the average dividend yield of our peer group. Our Board will take this into consideration as they review future quarterly dividend.
I would now like to turn the call over to Richard.
Richard K. Smucker - Executive Chairman and Co-CEO: Thank you, Mark and good morning, everyone. As Tim indicated, the current landscape remains challenging, yet we realized another quarter of earnings growth and are positioned for good third quarter. We based this outlook on the strength of our brands, on a combination of new products and marketing programs in place for the Fall Bake and Holiday period.
Marketing activities include several new television ads that are currently airing or are planned for the upcoming Holiday period. Within Coffee, we have new commercials supporting the Folgers and Dunkin' Donuts brand, as well as the recently launched K-Cup offering.
In the fruit spreads category, our first ever Smucker's holiday commercial began airing this week. This advertisement was a continuation of the voice campaign, which emphasizes the heritage of the Smucker's brand. Finally, our national expansion of the Jif to Go product, will be supported by increased marketing efforts.
Additionally, we continue to invest in digital marketing as an opportunity to leverage technologies and strengthen our relationship with our constituents. This includes the recent launch of Social Media pages for some of our iconic brands, including Folgers, Jif, Pillsbury and Crisco, allowing our consumers new opportunities to interact with these brands.
Turning now to operational practices in cost structure; during the quarter, we announced the expansion of our current restructuring project to address capacity under utilization in the Canadian pickle and condiments business. This initiative includes transitioning the majority of the Bick's pickles and condiments production to third-party manufacturers in the U.S. and the closing of our manufacturing facility in Ontario, Canada.
Combined with our coffee and fruit spread supply chain initiatives, we now expect to achieve annual savings of approximately $68 million from these restructuring activities, when fully implemented in fiscal 2015, excluding one-time cost.
As Mark mentioned, the overall timeline related to the project remains on track. With this addition to the restructuring project, we now expect total restructuring and merger integration charges of approximately $125 million in the current year, up with, approximately $45 million are cash related.
Let me conclude with our outlook for the year. Net sales are expected to increase in excess of 3% for the full year, primarily due to pricing actions. Volume for the last six months of the year is projected to be comparable with the prior year.
We are increasing our earnings outlook as we now expect non-GAAP income for diluted share to be in the range of $4.55 to $4.65, including amortization expense of approximately $0.40 per share. This guidance excludes restructuring and merger and integration costs, which are estimated to range from $0.70 to $0.75 per diluted share for the full fiscal year. The impact of share repurchases is excluded from the range.
Consistent with our historical trends, we anticipate a larger portion of the second half earnings per share to fall in the third quarter. Further, although to a much lesser extent than the spend in the second quarter, we expect an incremental benefit in the third quarter due to our hedged coffee position relative to price, which is reflected in our earnings range.
As a reminder, last year's third quarter included $10 million of non-cash impairment charges, related to the write-down of certain intangible assets. Looking ahead, the impact of higher commodity costs will flow through our results and have the most affect in the fourth quarter. Keep in mind that last year's fourth quarter included a one-time gain of approximately $13 million from the sale of potato business.
It also benefited from an unusually lower tax rate of 28%. Considering these factors, we do not expect to repeat the strong earnings experienced last year's fourth quarter. We believe next fiscal year earnings per quarter will reflect a more traditional pattern. Overall, we have confidence in our ability to continue to provide long-term growth for our shareholders.
So in summary, we delivered another quarter of earnings growth in a challenging environment. Second, although we anticipate further cost escalation in commodity markets, we have a proven ability to navigate our way through these challenges. Third, we feel confident in right raising our earnings outlook for the year. Finally, we continue to demonstrate our commitment to enhancing shareholder value through stock repurchases and a strong dividend and will continue to evaluate alternatives to do so.
We thank your time for today and now we'll be happy to answer your questions.
Operator: Farha Aslam, Stephens Equity.
Farha Aslam - Stephens Equity: First question is, could you just give us some more color about the $6 million mark-to-market loss in the Oils and Baking division? How does that work?
Mark R. Belgya - SVP and CFO: The $6 million actually was for the total Company for the quarter. So obviously, they were a portion of it, but the way it works is there's a couple of different pieces of it. On the Oil side, I won't get into a lot of technical matters here, but on the Oil side we actually defer gains or losses in hedging and matched them to the period that we actually use the physical inventory. So, that's really – any hedging gains or losses are put on the balance sheet, but what flows through the P&L is mark-to-market on primarily wheat or flour hedges because of the economy rules around those hedges. So, that's typically what you will see coming through that would represent the large portion typically in any quarter for all the segments as it relates to hedging.
Farha Aslam - Stephens Equity: That $6 million didn't include coffee, right?
Mark R. Belgya - SVP and CFO: That's everything. That's all Company hedging activity.
Farha Aslam - Stephens Equity: My follow-up would be on M&A. Could you comment on the M&A environment and what you're seeing out there in terms of acquisitions?
Richard K. Smucker - Executive Chairman and Co-CEO: It's probably heating up a little bit although I wouldn't say it's out of the normal. I know Tim --
Timothy P. Smucker - Chairman and Co-CEO: I think that's right. I think we continue to look at a number of opportunities, but it's about the same as it's been before.
Farha Aslam - Stephens Equity: Any particular areas of interest?
Richard K. Smucker - Executive Chairman and Co-CEO: As you know, if you look at our strategies, our number one brand sold in the center of the store, primarily North America. So there is a lot of good brands out there that we still think would be nice fit with our portfolio.
Operator: Ed Aaron, RBC Capital Markets.
Edward Aaron - RBC Capital Markets: I wanted to ask, first on, just on the promotional environment, you mentioned in coffee you had some lower volume because of what your primary competitor was doing. It does seem like they’ve pulled back a little bit like this month in particular. Are you seeing any signs of improvement there? Then on the baking business, you mentioned that you didn't expect much near-term improvement n the competitive landscape but one of your main competitors there announced a recent pricing increase, so just trying to understand that.
Vincent C. Byrd - President, U.S. Retail, Coffee: I’ll take the coffee question first and I will turn it over to Paul. I would say, clearly, that there was a lot of competitive activity on coffee during our quarter. We're particularly pleased actually with our results given that even though that coffee has risen significantly, if you look at our pricing of our bean roast and ground in our premium coffee competitors, both of them were below last year's levels basically. We have seen some indication of that starting to turn around, and as, I think, Tim or Richard mentioned in their formal remarks, we're balancing everyday our volume, our share, our sales and our profitability.
Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: In regards to the baking side, I think the primary timeframe we're talking about is Fall Bake. We don't anticipate any change in promotional activity going on through Fall Bake and as you know, we're right in the middle of that as we speak. We have seen that announcement from one of our competitors taking the pricing up and that really is more of an impact for the fourth quarter.
Edward Aaron - RBC Capital Markets: Then one follow-up if I could. Just, you mentioned that you expect to have the hedge benefit again in coffee in Q3. If you do like a 20-week lag analysis on the coffee commodity, it's hard to understand why there'll be another benefit this quarter. In some research, you do by, call it, 18 to 22 weeks out. I'm just trying to understand that a little bit better.
Vincent C. Byrd - President, U.S. Retail, Coffee: Well, I guess without getting into specifics, if you've for (all types of) purposes, you're correct. We're 18 to 20 plus weeks out. There will be a small benefit in the third quarter, not as much as in the second. But a lot will depend on where the commodity rest for the balance of the fiscal year. So, we do anticipate a little bit of better business in the third, but if something does happen with the commodity coming down, we'll obviously be in an unfavorable position in the fourth at this point.
Operator: Alexia Howard, Sanford C. Bernstein.
Alexia Howard - Sanford C. Bernstein: Couple of quick questions. The guidance for the sales outlook for the full year implies, I think, a fairly nice acceleration about half year, you attributed mainly to pricing. But it sounds as though you're expecting the volume situation to stabilize versus going down this quarter. Could you talk a little bit about the dynamics there, what gives you the confidence that the volume situation will improve maybe by segments? Where are you expecting to see more pricing coming from and so on?
Mark R. Belgya - SVP and CFO: I'll just sort of confirm your comments and then turn to the guidance to comment on your respected areas. You're right. From the top line, the pricing that we have in place, particularly the full back half year impacted the 13% coffee that's out there will drive a lot of that at guidance. Also volume, we are expecting to level off really across most of the business segments on the back half. So, if there's anything specific guy's you want to add to that?
Vincent C. Byrd - President, U.S. Retail, Coffee: I think we are confident with what we have in place. As mentioned earlier, we are seeing some indication that competitive price points are moving up. But a lot would determine on where the commodity rests primarily in the third quarter. We hope that to drive some volume, in last years fourth it was not extremely strong in terms of our growth. So, I think we can at least hopefully, meet that as we look forward.
Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: Alexia, this is Paul Wagstaff. On the oil side, we did see the oils volumes start to come back here in the recent four or five weeks and we would anticipate that continuing through the balance of the year.
Mark R. Belgya - SVP and CFO: Alexia, just to give you the consumer business or the peanut butter or fruit spread businesses actually grew slightly in volume for the quarter. So, we expect those trends to continue and particularly in peanut butter, as you know, we took a price decline in the first quarter. So, the impact of that's really massed in second quarter because that's the key promotional back-to-school period. So, we should get the benefit of that in volume in the third fourth quarters.
Alexia Howard - Sanford C. Bernstein: On the marketing side, obviously there was a pull back on marketing against a lot of spending last year. Do you expect that to shift from marketing into more promotional activity to continue going forward or would you expect that marketing spending to stabilize or even increase as we look out?
Timothy P. Smucker - Chairman and Co-CEO: This is Tim, let me just make a comment. Again, as we think about building the brands long-term, you will see those fluctuations from time-to-time. But we are committed to building all of those brands because as, 70 plus percent of our businesses is in number one brands and we're committed to do that. There will be ups and downs by a quarter, but that hasn't changed our overall commitment. So, I don't know if Vince or…?
Vincent C. Byrd - President, U.S. Retail, Coffee: I would say I think it was in Mark's formal remarks that, last year was probably unreasonably high because we choose to invest back some incremental spending. This year is a more normal level. We haven't cut the marketing in the coffee business, although, we did increase some of our promotional spending as we spent back some of the green. I'll turn it to Paul or Steve to comment on their segments.
Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: On the Oils and Baking side, we have seen some intense competitive pressures and we do managed it for the long-term, as Tim was mentioning. However, from a quarter-to-quarter basis, we did pull back some marketing and put it into some promotional pricing. We would anticipate that as an ongoing issue, but short-term, we're doing that.
Steven Oakland - President, U.S. Retail, Smucker's Jif and Hungry Jack: In the U.S. Retail, Smucker Jif businesses, we will see marketing growth just at a slightly faster pace than volume. I think as in the prepared remarks, we're excited about some of the new advertising creative and the success on Jif to Go and look forward to supporting us.
Mark T. Smucker - President, Special Markets: I would just add from a Canadian perspective that we've had a very good year there, not only Fall Bake, but in terms of the marketing. Then we have unprecedented levels of marketing spend in advertising activity to support the brand. So, I think from that perspective, it's been positive for Canada as well.
Operator: Chuck Cerankosky, Northcoast Research.
Chuck Cerankosky - Northcoast Research: Mark, if you could look ahead just for a bit into next fiscal year, where do you think the tax rate will be?
Mark R. Belgya - SVP and CFO: Chuck, it will probably be up a little bit higher than this year, probably not dramatic. The impact this year we're seeing, this is the final year, if you will, of maximizing the deductions given to you as manufacturers. It was sort of stepped up and we finally hit the maximum percent. So, I don't think you're going to see the decrease. Obviously, we don't know what's going to change overall, but that aside, it will probably be up marginally from where we have been running last year or two.
Chuck Cerankosky - Northcoast Research: Could you talk a little bit about Uncrustables in the context of the -- it would sound like another wise good back-to-school, but also where the consumer's ahead of that regarding more expensive value-added product?
Steven Oakland - President, U.S. Retail, Smucker's Jif and Hungry Jack: Uncrustables, year-to-date is down just slightly and it wasn't the strongest quarter. But if you remember in order to consolidate that all into our Kentucky facility. We discontinued some of the items, the peanut butter only item, the cheese item those items which were in the last year's comparables. So, I think when you take that out, that's about half of the loss. When you take out some of the other timing of the events, we feel Uncrustables are doing fine, that the retail shop churns are fine. We think those numbers will improve a little bit in the Retail segment as we get into the back half of the year. Mark?
Mark R. Belgya - SVP and CFO: I would add that the food service business in school is doing reasonably well. It's basically flat. But I would say overall from a total venture, we are running the plant very well. We're producing as many sandwiches as we can and actually looking at expanding our capacity here in the fourth quarter, so that we can continue to meet demand.
Chuck Cerankosky - Northcoast Research: Then looking at the coffee volume, promotional market was a little more than you would have expected. How long do you intend to put up with that kind of a volume decrement that you saw in the second quarter? Was that already reversing?
Timothy P. Smucker - Chairman and Co-CEO: Well, Chuck, again, it's a balancing act as we’ve said earlier of measuring of a balancing volume share and profitability. Quite, honestly, we just don't think that some of those levels is good for the category and our customers’ long term. Having said that, the Folgers brand obviously respond very, very well to promotional activity and we'll just have to monitor as we go through the balance of the year.
Operator: Ken Goldman, JPMorgan.
Ken Goldman - JPMorgan: When you think about the algorithm between coffee cost, pricing and volume, is there a breakeven relationship you look at between price and volume in order to keep paying profits flat? I guess, what I'm asking you, is you had 13% pricing, 7% volume loss this quarter in coffee. Is that enough going forward if coffee cost stay where they are and considering they're going to hit you harder it looks like in 2012, to maintain penny profit that year? If not, how should we really think about the potential impact to your bottom line? I'm not really asking, I guess, for guidance on next year, just for clarity as a general rule about how to think about them?
Timothy P. Smucker - Chairman and Co-CEO: Well, I guess as we have stated previously, we are charged with growing our segment profits year-on-year. So margins may vary, percentages may vary year-over-year. We're on plan to do that as we speak. Again, we will take pricing action as necessary in order to protect margins or primarily penny for penny. But it's again a balance between the volume this year and the profitability. If the commodity remains where it is today, more than likely we will have to consider some action in the back half, because we obviously didn’t anticipate where the commodity sits today when we took the pricing action back in August, was it significant lower at that particular point.
Mark R. Belgya - SVP and CFO: One other thing I will just add is, there has been a tremendous amount of new product activity over the years and that also plays, obviously, as we invest, whether its Dunkin' Donuts, the K-Cups, other single or (decaffeinated) and all those kind of activities and there is a lot of that going on, and a lot in the pipeline. So, that will also have an impact.
Ken Goldman - JPMorgan: As a follow-up, has price elasticity been right where you thought it was, or higher or a little bit lower? I know it's early but any help you can provide there would be appreciated.
Timothy P. Smucker - Chairman and Co-CEO: Well, Ken, again we take a long-term view of the business, but it’s obvious that we were down in the quarter. None of us like to see our volume move down and our share go down, but as you have pointed out in your analysis, a lot of that was not necessarily driven by our pricing action as much as it was driven by the key competitors' pricing actions, which you have done a great job of articulating. So, we are again very pleased with the results overall when you consider all of the noise and the competitive activity that was going on in the quarter.
Operator: (Jason English), Goldman Sachs.
Jason English - Goldman Sachs: Looking at your guidance now after a strong quarter here, you're kind of implying roughly flat to modestly down EPS for the back half, but I hear you talking about pretty solid Fall Bake program in this continued benefit of a hedge/price mismatch in coffee and the possibility of some share repurchase activity. What are some of the headwinds you're concerned about as you've laid out this back half outlook?
Mark R. Belgya - SVP and CFO: A couple of things. One is, and I think you guys are all aware of this, but last year we did have an abnormally low tax rate, particularly in the fourth quarter. So, a little bit of that comparison is driven by that. I think generally, while we agree with all the positive comments you just said, there's still the risk and the uncertainty of what cost is going to do and any pricing actions, either of ourselves or the competitive environment that we're facing. So, to some degree, I think it's a little bit of what happened in the last six months. We're building a little bit of reservation in the guidance.
Richard K. Smucker - Executive Chairman and Co-CEO: I think, Mark, I might add to that. This is an industry risk, I think, not just a Smucker risk. From all these commodity costs going up, we track eight commodities, but most of our competitors are also buying those commodities. So, as we all look to raise price and protect our margins, everybody in the industry is going to get affected by that. So, the real question is what is the consumer going to do and how is the consumer going to respond and are they going to be more cautious. So, I think we all have that to be alert to.
Timothy P. Smucker - Chairman and Co-CEO: Let me just add one other thing, Richard, is just the political environment. I mean, you've seen that they -- Erskine Bowles and Alan Simpson (indiscernible) yesterday and today and the consumer is looking for balance and there is a lot of -- they're looking for certainty and that isn't just a consumer, but it's our customer and the customers are trying different things and we're trying to navigate right through that and be consistent as we can and look for balance. So, that's all it's going to be -- we're all dealing with that.
Jason English - Goldman Sachs: So, well stepping back and kind of building on the conversation that you just had with Ken. Coffee is a good example where category pricing up, volume holding in okay, the issue or the challenge you're faced with is not in aggregate category elasticity affect or rather across elasticity affect with one competitor moving faster than the other or one promoting more aggressively than the other. This is broadly about the industry and prices rising as this wave of inflation hits. Is that the bigger risk that some moved faster than others, some continue to promote a little bit longer than others and we just get a quarter or two of some disruption?
Mark R. Belgya - SVP and CFO: I think that is true. I think that is exactly right and there is a risk there. Our strategy is this balance that we've talked about several times and we don't believe that although we discount and offer value deals to our customers, you can't deep discount your way to profitability or to long-term growth, and that really isn't good for the industry or the category. There is a lot of hard evidence that that's true. So, we try to continue to be, I would call a responsible competitor as oppose to taking some deep discounting approach.
Operator: Jane Gelfand, Barclays Capital.
Jane Gelfand - Barclays Capital: Just a quick question about the fiscal fourth quarter. There was a brief mention of a potential lag, the other way between coffee hedging and coffee pricing, and at the same time, you're clearly considering another pricing move. So, I guess what I'm wondering is, what do you need to see to decide one way or the other, whether you're going to price or not, is it just the sustainability of the commodity level or a certain competitive environment and then is there enough time to decide that throughout the fiscal third quarter to ultimately mitigate that gap, is it enough to kind of – should we think about a serious lag or is it more of a dollar-for-dollar matching thing that you're going for, for the fiscal fourth quarter?
Mark R. Belgya - SVP and CFO: Well, you articulated very well, it's all of those factors. It depends on where the commodity is. It depends on where our position is, and of course, what's going on from a competitive environment. I will say, in coffee, we have the luxury though of implementing pricing very, very quickly. So, once the decision is made, we're tends to implement that in a very short period of time, unlike some other markets or some of our other product categories where we may not have that luxury. So, we're not concerned with the ability to implement it once the decision is made. But, as I mentioned earlier, if the commodity does not take a dramatic change as to where it is today, we will be faced with some type of pricing action in the back half.
Jane Gelfand - Barclays Capital: So we shouldn't be thinking about a serious lag between the pricing and hedging come the fiscal fourth quarter?
Mark R. Belgya - SVP and CFO: No.
Jane Gelfand - Barclays Capital: Then just as a follow-up on, maybe use of cash. I'm just wondering about maybe how your thought process may have evolved as even nearing the point of this kind of lapsing of the two-year lock up. Just on the piecing and kind of timing of share repo. I'm wondering whether you chose to moderate that a little bit or maybe because you're seeing the M&A environment heat up or at least the pipeline. I'm just wondering whether your thinking has changed at all just given some of the things you are seeing on the M&A side, potentially.
Mark T. Smucker - President, Special Markets: I don't think I would characterize there is any change in our thinking. I think we've been pretty consistent, I'm sure most of you on the phone have seen our chart where we allocate or show the deployment of our cash fairly evenly across the different outlook. So, as it relates to repurchase, we've said time and again that we had a 3.7 million shares that, in fact if you go back before Folgers transaction, we were pretty active in the market. So, to some degree our continuation of buyback shares, it's just the continuation of what we were doing prior to the transaction. Again, generally, I would say there has been no material change to our thinking, as it relates to the deployment of cash.
Operator: Jon Andersen, William Blair.
Jon Andersen - William Blair: Question on Dunkin, which was particularly strong in the quarter, I think up double-digits in volume. Just wondering if you can bring us up to date on where you are in terms of distribution at grocery, what opportunities there are in terms of adding additional SKUs and facings on the shelf, and the outlook for growth going forward, can that growth be sustained in the near to medium-term?
Mark R. Belgya - SVP and CFO: First of all the growth in the quarter was driven by two primary reasons. First, increased distributions in turns of our core SKU, so Dunkin original and the others, but it was also significantly benefited by the launch of our seasonal items that we put into the marketplace. In fact in one major retailer, one of the seasonal items was the second highest selling SKU of the (entire bag) coffee segment, second only to our Duncan original. So, the seasonals definitely did have a play during the quarter and continue to do so. Going forward, the team is continued to be challenged to have double-digit growth in that. We have very few SKUs compared to our competitors. Our ACV is very strong on our original and some of the top flavors, but there are opportunities to continue to expand the ACV significantly.
Jon Andersen - William Blair: I know it's very early, but is there any early read on the take-up, rollout in initial sell-through and what kind of media programming are you planning through the holiday season?
Timothy P. Smucker - Chairman and Co-CEO: First of all, I'd just like to compliment and thank our marketing and sales and operations team and the relationship that we have been able to establish with Green Mountain and Keurig. That project all came to fruition in a very, very short period of time. As it was mentioned in the former remarks, although we haven't necessarily shipped to all customers at this point, all major customers have accepted it. We did kick off some marketing support this past couple of weeks. We have, for the first time I believe, a K-Cup internationally advertised and we also dropped an FSI this past weekend as some of the initial support. The initial reads are very, very positive, but it's still early days at this point.
Jon Andersen - William Blair: Mark, I know as inventories were up about 8% year-on-year, just wondering if that's a reflection of higher commodity costs, what's in that number with the growth ahead of sales?
Mark R. Belgya - SVP and CFO: Yeah. It clearly is driving a lot of that year-over-year. I mean, if you look across on coffee, it's a significant piece of that, but our other businesses inventories are also upset (indiscernible).
Operator: Ian Zaffino, Oppenheimer & Company Inc.
Ian Zaffino - Oppenheimer & Company Inc.: Just going back to the whole green coffee thing, if ignoring your hedges and given where commodity costs are right now, how much price would you need to take on the coffee side?
Timothy P. Smucker - Chairman and Co-CEO: I don't know that we would disclose that information necessarily. First of all, coffee is fluctuating $0.05 to $0.10 a day and it's up another $0.05 this morning. So I guess I’d prefer not to give a range right now.
Mark R. Belgya - SVP and CFO: Just to that point, if and when we do take any kind of pricing action in coffee, we typically followed it up with release. So you'll know that, but it is our policy not to describe any pricing moves prior to any announcement.
Ian Zaffino - Oppenheimer & Company Inc.: Then the other question would be on the Folgers side. What was the actual volume on the coffee side ex-Dunkin' Donuts and ex-K-Cups?
Timothy P. Smucker - Chairman and Co-CEO: It was down about 7% in volume, but I would point out that it had a pretty difficult comp because last year it grew 5% in last year's second quarter.
Ian Zaffino - Oppenheimer & Company Inc.: So that 7% is excluding Dunkin' and K-Cups?
Mark R. Belgya - SVP and CFO: It would be a couple of percentage points lower without the those.
Ian Zaffino - Oppenheimer & Company Inc.: Okay, sort of nine-ish?
Timothy P. Smucker - Chairman and Co-CEO: Yes.
Operator: Eric Serotta, Wells Fargo Securities.
Eric Serotta - Wells Fargo Securities: Just a point of clarification here, the 7% commodity inflation number that you cited, is that pre-hedging or does that include the impact of your commodity hedges?
Mark R. Belgya - SVP and CFO: Eric, but that is intended. What we typically will say over the course of the year is what our absolute anticipating cost increase over the fiscal year is. That number has moved from $70 million at the outset of the year to roughly I believe the number is around $200 based on that cost. So that will be the expected cost we would incur during the fiscal period.
Eric Serotta - Wells Fargo Securities: Then shifting gears a bit, this is the first quarter and sometime you didn't highlight oils as an area of weakness, in fact you pointed to Crisco as an area of strength. Could you comment a little bit about the dynamics in edible oil market, what you're seeing from your branded competitor and from private label?
Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: We've definitely seen some competitive pricing on both the private label and our number one competitor through the Fall Bake time period so far. I think what we did, we announced a price decline in August to better reflect pricing on shelf that would be similar to our number one competitor, and that has had a favorable impact on volume that we've seen that increased here recently.
Operator: Scott Mushkin, Jefferies & Company.
Scott Mushkin - Jefferies & Company: But I want to take a step back, and I know you guys referenced you're running the business for the long time, a couple of different times, and as I look at the numbers coming out, now what you're selling into the channel, but what seems to be coming out of the channel is consumers baskets. It seems that we had about 65%, maybe 70% of the business in baking, oils, and coffee, not showing great market share or volume growth over a multi-quarter period now, I will put it at three. So, I guess my question is, oils clearly responded to what you did in August and that seems to abating. When do you look at the other businesses and say, okay, no mass, we need to take some action and I appreciate and I think it was said before, it's just not all about price, but what do you do, I mean this Company that builds on gaining share, making great brands even better, how we sort of look at this as investors, when do we need to take some actions here? Could we look at the earnings you're putting up right now is over earning to a degree?
Mark R. Belgya - SVP and CFO: Well, that's not the way we look at it. We do take a long-term approach and actually this is the first quarter where we've actually had a volume decline, but part of that volume decline was planned and lot of the volume is in heavy items such as flower, we had planned to lose some margin or lose some volume in flower. Coffee was probably not planned, because we knew that -- but we had a great run for the last 24 months on coffee almost or actually just short of that 21 months on coffee. So, in general we're not seeing what you are seeing overall for the long-term period. We recognize this quarter was down a little bit in volume, but part of that was planned.
Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: I think the one other comment I would make from a competitive perspective is, over the last three almost four quarters, we've seen some unprecedented pricing action of our competitors, that again going back to I think a comment that Tim made earlier in the presentation, we want to focus on our balance volume and share of market and profitability and we just not willing at this point chase some of those deep discounts, we don't think that's good for the category. That being said, we did made some changes on the oils and we think that's rebounding nicely. In our Baking business, we actually feel pretty good about for Fall Bake. So, hopefully, we'll see those results shortly.
Mark R. Belgya - SVP and CFO: Another part we haven't talked about is mix and the types of products that we sell. It's not just the volume it's the mix of products that we sell. I know that especially in peanut butter and in fruit spreads, we're getting a better mix of products than we've ever had before. We're actually selling less grape this year, which is not a high-margin item, but it's a high-weight item, and more strawberry, which is a touch better in the same. You might speak to that, Mark?
Mark T. Smucker - President, Special Markets: Just in Special Markets as well, we're seeing favorable mix across the board pretty much in every one of our business units there. In Canada, we have seen some decent share growth in many of those categories as well. In categories that are not typically growth categories, we have been able to increase our share at the expenses of our competitors.
Mark R. Belgya - SVP and CFO: One other follow-up. We are selling more in alternative channels which aren't measured as well and so, when you (indiscernible) these numbers, they don't really measure the alternative channels and probably most manufacturers in the consumer foods area are selling more in the alternative channels, and we definitely are. So, that business picked up nearly as well in some of the numbers that you're looking at.
Scott Mushkin - Jefferies & Company: Did you guys actually give us the hedging gain in coffee did you give us the dollars?
Mark R. Belgya - SVP and CFO: No, because it's not really the hedging gains. The hedging actually is overall Scott hedging losses for $6 million for the Company. Basically what you're seeing in coffee, it's coming through the coffee goods sold, it's not hedging gains or in this regard.
Scott Mushkin - Jefferies & Company: So how much did it benefit, Mark cost of goods sold, do we know?
Mark R. Belgya - SVP and CFO: No, we wouldn't quantify that, Scott. Its just basically is driven – it's the reason the margins were as they were for the quarter in coffee.
Scott Mushkin - Jefferies & Company: The $6.6 million is that coffee in there too, so that's a net number or is it not part of that?
Mark R. Belgya - SVP and CFO: That's a net number. All companies hedging activities across the board are in that.
Scott Mushkin - Jefferies & Company: Sequentially, was that up or down?
Mark R. Belgya - SVP and CFO: It's not dramatically different. I would tell you a year ago, it was about $5.5 million last year, so pretty even swing. But its not – last quarter wasn't dramatically different.
Operator: Mitch, Pinheiro, Janney Capital Markets.
Mitchell Pinheiro - Janney Capital Markets: Couple of questions, one of the 2% K-Cup contribution, is that primarily channel fill versus takeaway?
Mark R. Belgya - SVP and CFO: Well, sure, a lot of it is. But I can tell you, we had some very good reach from some early customers, where the volume is churning and we've had reorders. So, but yes, sure, a lot of that was the initial fill.
Mitchell Pinheiro - Janney Capital Markets: So, looking at the next quarter, you'll have a similar type of sort of the rest of the customers in the channel fill plus continued takeaway, is that how – is it to give me a similar kind of gross rate or contribution?
Mark R. Belgya - SVP and CFO: No, we would still see significant growth rate I'd think in the third quarter and fourth quarter as we fill the channels and get the initial read on the shelf takeoff.
Mitchell Pinheiro - Janney Capital Markets: What's the likelihood of you introducing additional SKUs in K-Cups in the next 12 months?
Mark R. Belgya - SVP and CFO: It's very likely.
Mitchell Pinheiro - Janney Capital Markets: In terms of broader question and my last question is, I'm looking at IRI in the categories, and I look at the Cook at Home segment. A lot of the categories, whether baking mixes and baking nuts and sugar, and condensed milk, and a lot of different cook at home category seemed very weak in the last couple of reporting periods. What's your interpretation of that? Is that not the right characterization? Or was that a really tough comp to a year ago? Or how would you look at these categories being weak on a volume basis?
Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: I think one of the comments I would say is that, there is a little bit of a timing issue. It seems like what we're seeing is consumers are shopping later than they did last year as far as taking those type of products off the shelf. So, we would anticipate to see those type of products being taken off the shelf now versus in the second quarter, which when you go back to previous years, there was more – I'd say there was earlier buying from the consumer. So I wouldn't say we're concerned, I just think it's a little bit different timing.
Mitchell Pinheiro - Janney Capital Markets: Are you seeing – ex the impact of holiday, which it's hard to do, but have you seen any change in trends either leaning towards or away from the Cooking at Home?
Paul Smucker Wagstaff - President, U.S. Retail, Oils and Baking: No. I don't think we have. I think we still feel that we're seeing consumers cook and bake more at home and that trend is as we see it continues.
Timothy P. Smucker - Chairman and Co-CEO: I think another thing, Paul, that some of our customers have eliminated some SKUs early last year and they've thought that they've found that that wasn't a good idea, so they're putting those back. So you're seeing some of that now, and that's what to Paul's comment that they're buying later now because they're getting more choice now.
Operator: (Karen Lamark), Federated Investors.
Karen Lamark - Federated Investors: You may have answered it with your response to Jane about the deployment of cash, but I wanted a little more clarity on the dividend comments. I understand you are currently running less than your targeted payout ratio. Just wondering if you have considerations of raising the target payout ratio? Then secondarily, are you considering taking some action on the dividend before April, which is what I think you’re (typically doing)?
Mark R. Belgya - SVP and CFO: I think in terms of the dividend, first of all, we have been pretty consistent over the years with the 40% target. We think that’s appropriate. We do look at that periodically versus our peers. Right now I think the Board is probably more focused on getting as closer to that target. It’s, obviously, something that we will look at going forward as we evaluate ways to return value. But that’s just something that Board look out every time, and I think the fact that we are running a little below, we are just trying to point it out and the Board will take that into consideration here in the next couple of meetings.
Karen Lamark - Federated Investors: Should we still expect any action if it’s going to be taken will be April or before that?
Mark R. Belgya - SVP and CFO: I really can't speak for the Board. I think that we provide them with the information and they will take the actions that they see appropriate.
Operator: Unfortunately, we are out of time for questions today. Gentlemen, I would now like to turn the conference back to you to conclude.
Timothy P. Smucker - Chairman and Co-CEO: Well, thank you very much for your interest and always great questions. I just want to reiterate what Richard had said earlier, that our team is – just want to thank our team, it's just fantastic team. Thank you for your support. Wish you a lot of memorable meals and moments over the next holiday season. So, thanks a lot. Have a great day.
Operator: 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 a pass code of 5826472 or by accessing the website for a downloadable MP3 format. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.