Sonal P. Robinson - Vice President of Investor Relations, Director of Corporate Finance and Assistant Secretary Richard K. Smucker - Chief Executive Officer and Director Vincent C. Byrd - President, Chief Operating Officer and Director Mark R.

Belgya - Chief Financial Officer and Senior Vice President Paul Smucker Wagstaff - Director and President of U.S. Retail Consumer Foods Mark T. Smucker - Director and President Of US Retail Coffee Steven T. Oakland - President Of International, Foodservice and Natural Foods.

Eric R. Katzman - Deutsche Bank AG, Research Division Andrew Lazar - Barclays Capital, Research Division Kenneth Goldman - JP Morgan Chase & Co, Research Division David Driscoll - Citigroup Inc, Research Division Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division Akshay S.

Jagdale - KeyBanc Capital Markets Inc., Research Division Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division Robert Dickerson - Consumer Edge Research, LLC Thilo Wrede - Jefferies LLC, Research Division Farha Aslam - Stephens Inc., Research Division Christopher R.

Growe - Stifel, Nicolaus & Co., Inc., Research Division Jason English - Goldman Sachs Group Inc., Research Division John J. Baumgartner - Wells Fargo Securities, LLC, Research Division.

Good morning, and welcome to The J.M. Smucker Company's First Quarter 2014 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference call over to Sonal Robinson, Vice President of Investor Relations. Please go ahead, Ms. Robinson..

Good morning, everyone, and welcome to our first quarter earnings conference call. Thank you for joining us today.

On the call with me are Richard Smucker, Chief Executive Officer; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Chief Financial Officer; Steve Oakland, President, International, Foodservice and Natural Foods; Mark Smucker, President, U.S. Retail Coffee; and Paul Smucker Wagstaff, President, U.S. Retail Consumer Foods.

Following this brief introduction, Richard will provide an overview of our first quarter performance, Vince will then provide an update on our business segments, then Mark will close with additional comments on our financial results for the quarter and our outlook for the full year.

Before I turn the call over to Richard, let me remind you that we may make forward-looking statements during the call that reflect the company's current expectations about future plans and performance.

These forward-looking statements rely on a number of assumptions and estimates, and actual results may differ materially due to risks and uncertainties. I encourage you to read the full disclosure statement in the press release concerning forward-looking statements.

Additionally, please note the company uses non-GAAP results for the purpose of evaluating performance internally. Discussion on non-GAAP information is detailed in our press release located on our website at smuckers.com. A replay of this call will also be available on the website.

If you have any follow-up questions or comments after today's call, please contact me or Mark Belgya. Let me now turn the call over to Richard..

Thank you, Sonal. I really appreciate everybody joining us this morning. Let me begin by saying that we had a very, very good first quarter following the momentum that we gained from last year's results and that resulted in record earnings for our first quarter. I want to share with you some of the highlights that began the quarter.

Volume was up, driven by performance of our U.S. Retail business. Net sales decreased slightly due to price declines taken over the past 12 months. In Coffee, volume was up 4% behind solid gains for the Folgers, Dunkin' Donuts and Cafe Pilon brands.

Volume gains were also realized across the majority of the brands within Consumer Foods, resulting in an overall 4% increase in that segment. And within the International, Foodservice and Natural Foods segment, volume was down for the quarter, but as expected, due to the planned rationalization that Vince will expand on in a moment.

Excluding these, volume was flat for the prior year -- for this year compared to the prior year. Non-GAAP earnings per share increased 6% to $1.24 despite prior year results that included a significant positive impact from mark-to-market adjustments and also higher SD&A expenses in the current year.

And finally, we continued the responsible use of our strong cash flow. During the quarter, we announced a 12% increase in the quarterly dividend rate and repurchased 1.5 million shares.

Solid execution of the plans and initiatives that we outlined during our year end call, including brand building and supply chain investments, contributed to these first quarter results. Our teams continue to perform with excellence, and we thank them for their efforts.

Looking ahead to the upcoming holiday period and the balance of the fiscal year, we remain confident in our ability to achieve another year of earnings growth and deliver on the updated earnings guidance that Mark will share with you in a couple of minutes.

This belief is supported by several factors, including a solid lineup of quality marketing and merchandising programs across our various brands and categories to support the Fall Bake and Holiday periods, the additional growth from innovation and new products, lower commodity costs compared with last year and the continued execution of our pricing and promotion strategies, and finally, the anticipated contribution from acquisitions and new businesses.

To this last point, let me briefly comment on the announcement that we released earlier this morning regarding our latest transaction, the acquisition of Enray Inc. This enabling acquisition provides added scale for our Natural Foods business, adding an on-trend line of organic gluten-free ancient grain products to our portfolio.

We're very excited to welcome the Enray employees to the Smucker Company and add the truRoots brand to our family of brands. And we look forward to sharing more about this acquisition in the coming months ahead. With that, I'll turn the call over to Vince for an update on our business segments..

Thank you, Richard, and good morning, everyone. We are pleased with the start to the new fiscal year as these results reflect our commitment to brand building and other key initiatives we identified leading into the year. Let me now provide further color on our segments' quarterly performance, beginning with U.S. Retail Coffee.

Volume for the segment was up 4%, led by our Folgers, Dunkin' and Cafe Pilon brands. During the quarter, Folgers Gourmet Selection K-Cups and premium bagged coffee realized significant volume growth. In addition, momentum in our mainstream Red Can business continued.

Red Can results were driven by growth within our Folgers Colombian product line, reflecting the pass-through of lower green coffee costs through our recent pricing actions. Increased marketing support also contributed to the performance of the Folgers brand.

This included the completion of the third installment of The Best Part of Wakin' Up jingle contest in June. This very successful event continues to utilize digital platforms to expand the reach of the Folgers brand among millennial consumers. The Dunkin' Donuts brand also realized a good start to the fiscal year, up 6% in volume for the quarter.

This increase was achieved despite a very strong comp in the prior year's first quarter. Our strong merchandising and pricing strategy, combined with ongoing brand support, led to the quarter's results. The overall coffee volume gains in the quarter were a key contributor to the segment profit growth.

In addition, our price-to-cost relationship had a significant positive impact on the first quarter results compared to the prior year. As a reminder, the first quarter of 2013 was negatively affected by the price declines taken in advance of lower green coffee costs.

These lower costs were recognized later in 2013 and resulted in strong period-over-period growth during the last half of that fiscal year. This is in contrast to the front half loaded segment profit growth expected in fiscal 2014. Keep in mind these price-to-cost timing impacts will continue to periodically affect quarterly year-over-year comparisons.

Our focus remains on managing profitability over the fiscal year and on a long-term basis. Green coffee costs have retreated from their record highs of 2 years ago and arabica coffee futures have traded in the range of $1.15 to $1.35 over the last several months.

While this has lowered our overall coffee costs at this point, they have not declined to the level at which we would implement a list price decline. Instead, we will use other pricing strategies to pass along the benefits of the lower green coffee costs to our customers and consumers.

Let me conclude my comments on coffee with an update on our K-Cup business where sales grew 14% in the first quarter, in line with our expectation of 15% growth for the full year.

As expected, the K-Cup environment continues to be competitive with new entrants coming into the marketplace, and we anticipate they will garner trial of their products during the upcoming key holiday periods. Let me briefly comment on the relationship with Green Mountain.

We recognize there's been significant press recently regarding their contractual arrangements with other partner brands. We believe the recent extension of certain partnership agreements supports our view that Green Mountain is the highest quality and most efficient producer of K-Cups in the industry.

Specific to our company, we typically do not discuss details related to our contracts. However, let me assure you that we are pleased with our contractual arrangement.

We have a multi-year agreement in place that has been periodically amended to take into consideration current and future opportunities that are expected to provide additional value to both companies, as well as to our customers and consumers.

Similar to coffee, the Consumer Foods segment achieved solid volume gains in the quarter, also up 4% over the prior year with growth realized across most of our key brands and categories. This volume performance was once again led by peanut butter as the Jif -- momentum for the Jif brand continues.

Our price declines, the successful execution of our jar downsizing, the contribution of new products and the ongoing brand-building support all contributed to Jif's performance. Turning to the Smucker's brand. Volume for food spreads was flat for the quarter.

This reflects a positive response to our Smucker's Natural Fruit Spread launch offset by declines with 1 major club store customer. Sales of Smucker's Uncrustable in U.S. retail channel achieved another strong quarter with volume up 22%. This marks the third quarter in a row where Uncrustables has grown in excess of 20% in this channel.

We are currently in the midst of our key back-to-school promotional period and are encouraged by the programs we have in place and look forward to a successful conclusion to our overall spreads and uncrustable businesses. Turning to the bake aisle.

Pillsbury volume was up 2%, driven by flour and frosting, including contributions from the successful launch of our new seasonal varieties. Profitability for baking mixes continued to improve due to the previously discussed change in our promotional strategy on cake.

In the oils category, Crisco achieved a strong start to the fiscal year with volume growth of 11%, reversing recent downward performance in this price-sensitive category. A continued focus on managing price gaps drove the first quarter performance.

Let me conclude my remarks on Consumer Foods with a brief discussion on segment profit, which was down 11% from the prior year. Approximately 1/2 the decline reflects the reduction in favorable mark-to-market gains this quarter compared to the same period last year for this segment.

Much of the remainder was the result of the 10% price decline taken earlier in the calendar year on peanut butter during a period of higher recognized peanut costs.

As we noted on our year-end call, we expect this trend to reverse as we proceed through the back half of the fiscal year and this will be a key contributor to the company's earnings growth during that period.

Looking at all the key commodities across our Consumer Foods portfolio, we have essentially locked in our cost structure for the upcoming Fall Bake and Holiday season. At this time, we do not foresee taking any action in our key categories through the end of the calendar year.

Further, with good merchandising programs in place and solid support at all key retailers, we believe we are well positioned for this promotional period.

Let me conclude with the International, Foodservice and Natural Foods segment where strategic business decisions designed to align the portfolio for long-term profitability continued to have a significant impact on our reported results. Volume declined 6% in the quarter, primarily reflecting the impact of 3 such decisions.

First and most significantly for the quarter, was the planned change of promotional strategy to support our Santa Cruz Organic lemonade product line. Now that the product has been established within the marketplace, we were able to reduce our aggressive promotional activities, resulting in reduced volume and yet improves profitability.

Due to the seasonal nature of the lemonade sales, the majority of the anticipated volume decrease for the fiscal year occurred in the first quarter.

Second, the previously announced exit of the private label coffee business in Foodservice continues to impact our year-over-year volume comparisons and remain on track to complete this rationalization by the end of the calendar year. Lastly, we saw a step-up in the effect from exiting a portion of the school Uncrustables program.

We anticipate the volume impact will increase further in the second quarter given the ordering pattern associated with the start of a new school year. The impact will then moderate as the year progresses. Excluding these planned rationalizations, volume was flat to the prior year.

Segment profit grew 7% for the quarter, reflecting the net benefit of lower commodity costs, the enhanced profitability of the Santa Cruz Organic line and favorable mix. Excluding mark-to-market adjustments, segment profit increased $7 million or nearly 20% compared to last year's first quarter.

Lastly, as Richard mentioned, we are very excited about the enabling acquisition of the Enray business. As a leader in the natural food space, we believe this $45 million on-trend business has the potential to deliver significant growth for the foreseeable future.

In summary, we are pleased with our start to 2014 and look to continue this momentum into the rest of the year. Our consistent performance is a testament to the company's strategy, the strength of our leading brands and the commitment of our dedicated employees. I will now turn the call over to Mark to discuss our consolidated results..

Thank you, Vince, and good morning, everyone. Net sales decreased $19 million or 1% in the quarter, reflecting a 4% reduction in net price realization, partially offset by a 1% increase in volume and 2% from sales mix.

GAAP earnings per share were $1.19 this quarter and $1 in the first quarter of last year, reflecting a reduction in special project costs, which are defined in our press release. Excluding these costs, earnings per share were $1.24 this quarter and $1.17 last year, an increase of 6%.

Last year's results included a $20 million benefit from unrealized mark-to-market gains on derivative contracts. This compares to a $5 million positive contribution this year. Operating income, excluding special project costs, was up 1% for the quarter behind a 4% increase in gross profit.

Lower commodity costs this year compared to 2013 caused gross profit to increase by $21 million and gross margin to improve by approximately 200 basis points. The gain in gross profit was largely offset by an 8% increase in SD&A expenses.

Higher administrative expenses were driven by an increase in compensation costs, as well as expenses associated with an upgrade to the company's Oracle IT systems. This major upgrade was implemented seamlessly by our team during the first quarter. Marketing was up 6% over last year, in line with our quarter expectations.

We continue to expect marketing to be up 10% for the full year with much of the costs related to the Olympics sponsorship occurring in the back half and total SD&A to be up 8%, also in line with our original guidance. Turning to cash flow. Cash provided by operations was $82 million in the quarter compared to $177 million last year.

This decline primarily reflects the higher current year use of cash to support inventory and other working capital need compared to the prior year. Capital expenditures were $36 million in the quarter, resulting in free cash flow of $46 million.

Due to the timing of the start for certain projects, CapEx spend was less than expected in the first quarter. However, we continue to anticipate a full year total of approximately $270 million as the CapEx related to key 2014 initiatives is expected to ramp up later in the fiscal year.

And at this point, our 2014 free cash flow target remains at $600 million. As Richard noted, we acquired 1.5 million shares during the first quarter, borrowing $145 million against our revolver to help fund the repurchase. Some of the borrowings were repaid by the end of the quarter as there was $85 million outstanding at July 31.

We anticipate borrowing further in the second quarter, but expect to pay down all revolver borrowings by the end of the fiscal year. Let me conclude by updating our full year sales and EPS outlook. We continue to expect volume for our U.S.

Retail segments to increase approximately 2% over the prior year with overall company volume flat, reflecting the planned rationalizations within International, Foodservice and Natural Foods. We now anticipate 2014 net sales will decrease approximately 1% from the prior year compared to our initial guidance of being flat year-over-year.

The decrease reflects the net sales impact of passing through commodity cost declines in coffee. Sales of approximately $40 million associated with the Enray acquisitions are included within our guidance. We have increased our non-GAAP income per share outlook to a range of $5.72 to $5.82, up from our previous guidance of $5.65 to $5.75.

The increase primarily reflects the share repurchase activity in the first quarter as the range now assumes weighted average shares of approximately 105.5 million shares along with a modest EPS impact in 2014 from the acquisition of Enray.

Based on our first quarter results and plans for the rest of the year, we're cautiously optimistic about achieving the high end of this range. In closing, let me reiterate that we are pleased to have delivered a solid first quarter.

With good plans in place for the upcoming promotional periods, we look forward to continuing this momentum as we proceed through the fiscal year. With that, we will open up the call to your questions. And operator, please queue up the first question..

[Operator Instructions] Our first question comes from Eric Katzman with Deutsche Bank..

I guess, Richard, maybe, or Vince, you could comment just more broadly on kind of the consumer and the environment. It seems like a lot of the food companies focused in the U.S.

were getting a little bit more optimistic as the spring unfolded and then it seems like some of the retailers out there, along with some of your competitors, have kind of noticed a bit more, I guess, weakness sequentially as kind of the year has unfolded. Maybe you could ask or answer that, and I'll have a follow-up just on the company..

the top 1/3, the middle 1/3 and the bottom 1/3. And I think we still see that the top 1/3 is doing fine. The middle 1/3 is doing fine, although sometimes they don't know it, don't feel it. But the bottom 1/3 of the consumer is still very challenged and we've seen that.

The way we've responded to that is to make sure we have the right pricing in each level to provide them with the right products and pricing for each group. But I guess consumer confidence is still up as far as you look at the Michigan consumer confidence trends.

But I have to admit, on some of our retailers, we're seeing that lower 1/3 being challenged and we think that's going to continue throughout the year, but I think we're well positioned because of the product lines that we offer and the product categories that we're in to do pretty well in this environment..

Eric, this is Vince. I would only support exactly what you said and I think that's probably what's leading a little bit to our cautious optimism about the back half of the year.

We feel we're in a very good place as we head into the holiday bake period, but you can't ignore the results of some of our key customers and some of our peers within the consumer industry. So we're certainly -- we believe we're in a good place, as Richard mentioned, but we just can't ignore the -- some of the trends that we're seeing..

Okay. And then just as, I guess, kind of a follow-up to that. You've been pretty consistent across, I don't know, maybe 70% of the business that's a little more pass-through oriented. I guess, you mentioned you've kind of locked in through the calendar year, but it seems as if there's some deflationary pressure out there.

Do you see retailers pressuring you to lower pricing further, particularly in coffee? And I'll pass it on..

Eric, this is Vince again. Yes, there has been pressure from time-to-time on making sure that we pass those costs on. I think we are consistent in our approach of being as transparent as we can. In some cases, over the past 18 months, we've leaned forward into some of our pricing, which is evident by, say, peanut butter.

But also, as we said in the scripted remarks, we need to keep in mind that we can pass those pricing on through other mechanisms other than just maybe list price decreases or increases or decreases, that the teams have other levers whether it be through trade strategies or marketing activities..

Our next question comes from Andrew Lazar of Barclays..

This may relate to the answer -- part of Eric's first question, but I guess your -- the U.S. Retail volume where both Coffee and Consumer volume was up, a healthy 4% in the quarter, you're holding your full year volume guidance for U.S. Retail at up -- I guess, up 2% essentially.

So I'm trying to get a sense of is something specifically expected to change in the back half of the year that you kind of see already in your business, or is it just related to can't ignore some of the broader industry factors that you talked about?.

First of all, innovation and new products contributed significantly to our growth, which of course, some of that would be pipeline fill. Secondly, we had a very solid quarter on oil and flour business, which we're excited about, but on the other hand, that typically doesn't occur quarter-after-quarter.

But as I said earlier, we don't see anything in our business, given where we are on our pricing and our promotional strategies, to be pessimistic. It's just that, again, the nature of being somewhat conservative given what we see in the marketplace. So I'll ask Paul or Mark if they have anything they would like to add to that..

No, I think that's right..

And then, there aren't -- I guess, that many U.S. food companies are getting sort of a kind of positive mix impact that you have been getting quarter in and quarter out. I think this quarter mix was a 2% positive contributor.

And then trying to get a sense of the sustainability of that, maybe we can talk about the couple of key buckets, right, that, that mix is coming from and which ones you think are kind of structural going forward. So one bucket is obviously the faster growth of the K-Cup piece.

One would be some of the SKU rationalization or business rationalization maybe you're doing in specific segments.

And then what's going on in sort of the core business, whether it be new higher-margin products or what have you, but trying to get a sense if you can sort of dimensionalize those for us to give us a sense of sustainability of mix going forward?.

Andrew, this is Mark Belgya. Couple of comments on mix. Yes, we have really last probably 2 or 3 years have benefited. A lot of that was driven by coffee, and as you mentioned, particularly K-Cup. This quarter, I think we continue to benefit from peanut butter as well.

Even with the impact of higher peanut cost, it's still a good margin business and obviously volume was very strong.

I think the other thing, too, and this probably is more of a comment in the baking area and we talked about this over the years, is that as we have grown Pillsbury from sort of a traditional cake business to more of a seasonal, they tend to be a higher range -- higher margin business.

So as we've grown that, and really that probably applies even to new products across-the-board, they do tend to be a little more stronger margin because they're delivering on whether it's convenience or good, good-for-you type attributes, which just obviously presents a better mix opportunity than just what I would say are more traditional products..

Our next question comes from Ken Goldman with JPMorgan..

You guys pride yourself on being a transparent company. I think most of the time you deserve credit for being just that.

But when you raise your guidance in a press release and you don't mention that one of the main reasons for the increase is an acquisition, and you don't mention the acquisition until the press release that comes out later, that's maybe the opposite of transparency.

So before my question, I just wanted to give my -- get up on my soapbox, so forgive me for that for a second..

Ken, this is Mark. let me just address that just to quantify. It really was not material and, had it been, we would have addressed that in the release and in both releases. But that was not the key driver of that guidance move..

So the main driver was more about the share buyback then?.

Yes, and then obviously the discussion around the higher end is just an overall view of the business..

Okay. Why didn't you mention that in the press release? And forgive me, I guess it's soapbox day for me, but why not just mention that? Because there is a little bit of confusion this morning among the investor base as to whether the acquisition was meaningful or not.

And when you don't mention that it's accretive or not, you don't mention the margins, you don't mention the growth, people kind of assume the worst..

Well, yes, I'll just address that as well. We have a lot of discussion around how we wanted to handle the announcement of Enray.

And we felt because of the importance of that business to our Natural Foods and just the overall importance of the acquisition, internally we wanted to do it separately and, again, because this year's contribution is not material, we did not think that we were misleading anybody by adjusting the guidance and not referencing it with the intent of obviously covering it during the call..

Ken, this is Richard. I would hope that the people on the call and our other investors don't feel that there's any sleight of hand here. We've have been -- always been transparent. And it's a small acquisition, very important acquisition in the long run, but its sales are $45 million. We're only going to have it for about less than 3/4 of the year.

So the actual add to earnings is very small in the first year. We expect it to be, in fact, very small. So as Mark mentioned, the increase in the earnings guidance is because of the share buyback and the positive nature of our momentum, which is continuing through last year and this year both. So I just want to make that clear..

I appreciate that and I'm sure I'm annoying people by asking this, so I'll let it go from there. Just one quick question, Mark. You cited higher inventory and other working capital needs. Maybe you mentioned this and I missed it, but can you talk about why inventory was up at a time when costs are down? I might have expected the opposite..

Yes, a lot of it, Ken, had to do with last year actually. It was probably in certain categories it was lower than we would have liked. So -- and I think we might have commented on this earlier this calendar year, but we thought we would be building inventory.

And then we actually -- we're probably building a little bit earlier on some of our upfronts around business continuity and Fall Bake. But last year's was what I would say was abnormally low compared to where we would feel more comfortable from both a customer service and just inventory levels in general..

Our next question comes from David Driscoll of Citi..

Okay. Just wanted to ask a little bit about the K-Cup business. You mentioned in your prepared script the quarter comes out at 14% growth. Your guidance for the year, 15% growth.

Can you develop this a little bit and just talk about what you're seeing kind of category trends? How strong are the private label offerings? How much is that affecting your growth? And then why the confidence in, I guess, is just a slight pickup, but I think you made some comments about the seasonally strong periods for K-Cups coming up and your expectations of how you're going to perform.

But can you just talk a little bit more about the environment itself and these types of growth rates?.

Sure, David, this is Mark Smucker. I guess I would start on the confidence side and that is that if you look at consumer takeaway in the quarter, it was still very strong. And although we did report 14% in shipments, when you look at consumer takeaway, it's still in the 20% range.

And so maybe a little bit of the softness that we saw would have come from a couple of our Millstone items, but our Folgers brand is extremely strong with 30-plus percent consumer takeaway. So I think we still feel pretty, obviously, very good about the category in general.

The other comment, just more broadly, about the segment is that, sure, private label and some of the unlicensed participants are garnering a good amount of trial. We think that, that noise and just the number of new brands and players that are in the market will continue through the fall and holiday period.

But again, as we've said many, many times, just the relationship with Green Mountain, the relative cost and quality advantages that we believe we enjoy by being partnered with them, some of the commitments that some of their other partners have made as well just point to the fact that it's still great growth and we still feel confident about it..

One follow-up on coffee. I believe and just to confirm that what you said is that the front half of the year is where the profit growth is weighted to and that is simply because -- or the driving factor here isn't necessarily K-Cups, it's really related to the cost and pricing favorability.

That lower coffee costs, combined with the decline in pricing not being as much as the decline in costs shows up much more favorable in the front half of the year than the back half of the year.

First off, is that correct? And then in the back half of the year, is profit growth just really a function of volume growth?.

Yes, I think all of that is correct, David..

David, I would only add that if you look back to last year, you will see that we're going to be facing some very difficult comps as it relates to profitability in the third and fourth quarter in particular. So that's why the comment about it being more front-loaded than back loaded..

Our next question comes from Jonathan Feeney of Janney..

I noted in your press release the marketing spending variance between the 2 businesses. You have a little bit of a different trend and it surprised me.

It looks like marketing was up for the Coffee business and down for the Consumer business where the volumes -- it seemed like the Consumer business maybe needed a little bit more investment at this stage.

What do you think marketing and advertising will be for the full year across those 2 businesses? And what should we expect for the second half as far as the sequential change?.

Hey, Jonathan, this is Paul. Regarding the Consumer Foods business, for the full year, our marketing spend is going to be, up, and that's what we plan and actually we're excited about that with the launch of all of our new items and the support of the Olympics initiatives.

So we feel good about our marketing spend and we feel it's going to be up versus prior year..

And the same for Coffee?.

Yes, essentially it would be the same for Coffee. It will be up versus the prior year..

And I know this is not necessarily your direct bailiwick, but do you get the sense in your categories, I know this is a broad question, that your competitors are raising marketing and advertising spending because what we see is it seems like over the past couple of years somewhat of the opposite and maybe that having a negative impact on category.

So if you can just comment on that category level, marketing and advertising, how that's driving the categories? That's all I have..

Yes, this is Paul. And I know in the Consumer Foods categories, we have seen some increase in marketing spend on some of our competitors in some of the categories, so it's a little bit of a mixed bag.

But we feel people have been a little more responsible and actually pushing some marketing to drive the categories, which we actually feel is good overall..

Yes, this is Mark Smucker. I agree with Paul. I think that it's a mixed bag in terms of the competitive spend. There are some isolated incidents or it's by brand. But overall, we continue to be the leader in share of voice and just consistent communication with the consumer. So I would think that we lead in that area..

Our next question comes from Akshay Jagdale with KeyBanc..

Just one follow-up on the inventory. Mark, if you can get into a little bit more details. I mean, with costs coming down; inventory days even on a year-over-year basis, I think, were up at least 6 days.

Is this -- is this strategic and should we expect this every year now given your plans have also moved to an area that's exposed to some more weather risk, if I may, or can you just help us understand what's going on because it does seem -- I know you talked about year-over-year there's a difference, but seems like this is related to where your plants are located and it's affecting how you sort bought things of this year?.

Sure, Akshay. This is Mark Belgya. I think, a couple of things. I think the comment that you're discussing is around coffee and obviously our location is in New Orleans area. The practice there -- and Mark, please add in here. But I think the practice that started with Procter's ownership and we've continued.

It's just a prudent way to manage that business. I think the other thing that you got to just keep in mind is in addition to the hurricane preparation, we also lead into a Fall Bake, so we've kind of got 2 big working capital needs. So fundamentally, I don't think there's anything different.

You'll recall last year, in our second quarter, we spoke to an issue we had with our supply chain as it related to canisters. So that was a driver as to why our finished goods inventory was just lower than normal.

So as I said on the year-end call, internally we feel that there's continued opportunity in managing down working capital from a free cash flow. And although we don't speak to it, we don't have any major initiatives in place, we still think it's an opportunity.

So it's more just the explanation for the quarter, but I wouldn't really read anything into that beyond..

That's helpful. And then just on single serve, your comments regarding your relationship with Green Mountain, honestly, I don't know exactly what to make of it.

It seems like your support, you're very happy with the relationship, but the fact that you're not announcing anything specific, like most other large guys have, is that just a function of your own company policy where you like to keep things private? Or is that a function of different terms or that you're playing it a little bit closer to the vest? Or I don't know, what should we make of the fact that other large companies have publicly extended their relationship with Green Mountain and you're not doing it publicly, but it seems like you're still being supported, so I'm a little bit conflicted trying to understand that a little better..

Akshay, this is Vince. Let me try to reinforce what we said in the scripted remarks. Obviously, the investment community has raised a question about the term of our contract and relationship with Green Mountain, and other branded partners had press releases about extending terms and number of years.

So first of all, it is our style not to necessarily disclose any contractual arrangements with a partner.

But what we were trying to assure the community is that we are very comfortable with the agreement that we have in place with Green Mountain and the fact that it is a multi-year agreement, so you should not be worried about the term of that relationship as we go forward. And that's nothing more, nothing less.

That was the key message we were trying to deliver..

I might add to that, just to give some additional comfort, is that I think when we first made our agreement with Green Mountain, we recognized and believed that they were going to be the long-term key winner in this category. And so our initial negotiations with them was for a long-term agreement.

And I don't know what the other partners did in their initial agreements, but we didn't have to adjust because of that because we had faith, I guess, from the beginning..

So in other words, I mean, the relationship has gone as good as you thought it was or better and it's just status quo.

You're very happy with that business, is that a good way to characterize it?.

Yes, the relationship has far exceeded, I think, either one of our expectations. Again and I think if you recall, we evaluated the entire single serve landscape when we acquired the Folgers business from Procter and concluded that Green Mountain was probably going to be the winning partner.

And I think, at this point -- well, I don't think, we're very pleased with the results that we've achieved. We've helped grow the overall pie as we said. We've strengthened our position of single serve at retail. And as we said before, we have ongoing dialogue of projects that we'll continue to look at that relationship going forward.

We've already had a couple of amendments, and we're looking at other opportunities. So we feel very solid with the Green Mountain team..

Okay. And just one on just overall sort of your feel going into the year. I heard Ken's question, I'm coming from the opposite side, which is you usually don't raise guidance in the first quarter and just judging from the brief commentary that you had, seems like you're seeing something that's more positive than I thought.

So can you just help me -- I mean, you're going into the Fall Bake season and obviously you're getting ready with a little bit more inventory and volumes came in much better.

I mean, is it shaping up to be a better year generally? Am I wrong in thinking that typically you wouldn't raise guidance in the first quarter and the volume trends are looking positive. Am I reading that incorrectly that it's actually looking pretty better for you throughout the year. It seems to have gone off to a better start than expected.

And if so, can you just give us some other tidbit than what you've already mentioned that made you feel good about demand from the consumer for your products? Is it just that price points on an absolute basis are coming in where you think demand is better or just help me understand that?.

Let me try to do that, Akshay. This is Mark Belgya. A couple of things. One, is you are correct about the timing. We don't typically adjust or address a guidance. I think part of that was driven by what we said in our scripted comments around the share repurchase. I know that we were partway through the buyback when we did our 10-K.

So there were some indications. So we felt it was appropriate to adjust for that. And then I think that the first quarter exceeded our expectations and for all the reasons I think Vince probably said it best is that everything -- we got a lot of good programs in place and there's really no negatives.

We still have to get through Fall Bake and we've lived that the last couple of years where it's been very positive and then less than that. But things are great. I mean, we've got good Fall Bake promotional plans in place. We're very excited about the sponsorship in the back half of our fiscal year with the Olympics and new products.

Yes, I guess to some degree when you get 1 quarter down, it probably does make you feel a little stronger and thus we felt that it was appropriate to raise guidance..

Our next question comes from Alexia Howard with Sanford Bernstein..

Can I ask about the peanut forward contracting practices. I know that you ended up with taking pricing down 3 or 4 quarters ahead of when those higher priced peanuts rolled off.

As you look forward into when the peanut prices get lower, would you think about changing the way that you do that going forward? Or do you plan to have the same kind of practices in place out through fiscal '15?.

Alexia, this is Paul. And as far as our peanut purchasing process, we have looked -- taken a step back and looked at how we've done that over the years and is there need to make any adjustments. And I'd say, it's fair to say that we have kind of looked at all sorts of different alternatives. We feel comfortable with our approach going forward.

We have made some slight adjustments to it and I think we'll be -- feel better positioned as we go forward overall with how we purchase peanuts. But again, it was a very unusual about a 1.5 years, 2 years that we had with peanuts with a couple of really bad crops and followed by a huge crop. So it was kind of unusual circumstances.

But, overall, we feel good about what we're doing and we've made some slight adjustments, but we feel strong in our position..

Okay, great. And then just a quick follow-up.

On the Enray acquisition, do I gather from your earlier comments that there'll be no margin impact from that at all?.

Alexia, this is Mark Belgya, again. We didn't quantify, but just to put some numbers out there. For a full year, it's probably about $0.05 and obviously the ownership this year is going to be less than a fiscal, so something less than $0.05..

This is Steve Oakland. I want to make sure we talked a little bit about the transparency comment about this business. I don't want to misrepresent it. To Mark's point, we're clearly going to have it for a very short period of time.

But it's a wonderful business and we think it's got great growth potential and we talked about that in the scripted remarks. And we just want to get ourselves, a marketing team get their hands on this thing and we think there's opportunities for distribution.

They've done a great job on supply chain and innovation and we've got a much larger go-to-market organization in the natural channel. So when we put the 2 of those together, literally the announcement meeting with their team is going on as we speak right now in California. So let us get our hands on this thing and we feel great about it.

We did want to send the message though that it is a profitable business. It's just small at the current time..

Our next question comes from Rob Dickerson of Consumer Edge Research..

Just to come back to the free cash flow and the buyback for a second. So can you just kind of walk me through the thought process of why now? Like why be purchasing $165 million worth of stock now when the free cash flow in Q1 was down substantially relative to Q1 last year; and last year in Q1, you didn't really buy back stock.

I'm just trying to get a sense if you do any acquisitions now and you're increasing your buyback early on in the year, why is that different than what you would have done last year when you technically should have had more cash and inventory wasn't an outflow?.

This is Mark. A couple of things. One is we're obviously looking at our cash generation over the course of the year, recognizing that the first half is typically a use of cash. And I don't want to mislead folks by saying that we just went out and borrowed money to do the stock repurchase.

We're going to be in a borrowing position regardless, which is typical for this time of year.

Just as why in the first quarter, we bought the shares probably about $101-plus, so we still felt that was a good value to go out into the market and buy and we're comfortable with the cash on the back half of the year that as I said earlier we're going to pay down all our revolver.

We're still fine from a leverage perspective if the right opportunity came up from acquisitions. So I don't really see there's any hindrance. Obviously, the cost of borrowing on a short term is extremely low. So all in all, we just didn't view it negatively and we think it sends great message with the investment in our own company's stock..

Okay, fair enough. And then for the new guidance that I'm assuming that now is based off of the current diluted shares as of reported this morning. It's not off the 106.5 that you did before, but it's off the new number.

There's not an embedded continued buyback occurring for the rest of the year that you've put into guidance?.

That's correct..

The next question comes from Thilo Wrede of Jefferies..

I think on the last quarter call you talked about the plan to increase marketing spending this year by 10%.

Is that still the plan? Or has that number come down, because it sounds like you're planning to shift more into promotions at least for the coffee business?.

Okay. Thilo, this is Mark Belgya again. Yes, we have not changed our guidance. You might not have caught it a little bit earlier, but we still expect total marketing to be up 10%.

I think what you're going to see is in the first half of the year, as you saw in the first quarter, it's below that 10%, but that really is because of the planned spend related to our U.S. Olympic sponsorship, obviously tied-in closer to the February Winter Olympic Games. So it will ramp up -- so by year's end, it'll be around 10% total company..

Okay. I must have missed that in the beginning. Sorry about that.

And then are you seeing a change in your price elasticity that how consumers are reacting to the price reductions that you've had so far?.

Sorry, I didn't hear the last part -- we didn't hear the last part of your question. Sorry..

Sorry.

Are you seeing an unexpected price elasticity or volume response to the price reductions that you've had or is that all coming in as planned?.

Let me just start. I think the key learning was probably 2 years ago when we were in a very high inflationary environment and given where the economy was at that particular point. It was a combination of the absolute price point, as well as managing gaps.

But then our teams have done -- I think we've commented in the last several quarters, our teams are doing a much, much better job of managing those gaps. And then clearly, the absolute price points have benefited us and our brands and whether they trade up or trade down within some of our categories..

I think in Coffee -- this is Mark Smucker, the elasticity is as expected. But Vince is right that when we're in a more normalized pricing scenario, it's just having that discipline of managing our absolute and relative prices to our competitors..

And I would agree. In Consumer Foods, very similar comments to what both Mark and Vince said. We feel the consumer takeaway is being reflected based on our price points and getting them right on shelf. So we feel good about that..

Our next question comes from Farha Aslam with Stephens Inc..

When you look at Olympics, this is the first time you've participated.

So could you just give us some color on what the timing and costs we should expect in terms of do you expect a volume benefit or pickup from the Olympics? If so, when? And then also, how should we model costs that would be related to the Olympics?.

Farha, I'll start and then we can talk -- Mark Belgya maybe can talk about the financial impact.

But we're not public with the amount of our commitment to the USOC, but it's fair to say that the increase in marketing spend, a lot of that is driven by our overall support, as well as we have shifted some of the existing marketing spend to support the Olympics.

And so, I guess the key point though is that it's a holistic view and in terms of almost every element of the marketing mix, including new television advertising, in-store displays, digital and social media, et cetera.

The other comment that is probably relevant is that in terms of the volume impact, we obviously hope by aligning with the other 6 or 7 key major sponsors, which are some very significant consumer brands, we're able to leverage that and work with them as well and hopefully getting some very significant display activity.

And so it's public knowledge relative to some of those other partners, but the Kelloggs and Procter & Gambles and Coca-Colas, et cetera. So we feel very, very good about where we are. But most of that impact, of course, will be the first Winter Olympics coming up in Russia..

I don't really have much more to add to that..

We might -- let's add the brands.

So Paul, you want to speak to the brands?.

So on Consumer Foods, we're going to have the Jif band, the Smucker brand and our Uncrustable brands be part of the sponsorship. And I don't really have much more to add on to Vince, he was right on..

Yes, and on Coffee, it's Folgers and since it's our first time going through that. It is going to be a learning experience, but we do expect benefit. I just don't think we've quantified that at this point..

And it's a 4-year relationship, so it will go through the Summer Olympics in Brazil. So as Mark said, I think we'll have some very key learnings through this Olympic period and then hopefully it'll build and do better in the next..

Okay. And then just a follow-on to your top line growth. So it looks like Enray is going to benefit your top line by about 60 basis points this year, but you've guided to lower sales for the year.

Clearly, you're anticipating a lot more coffee promotional activity in light of the declines in robusta costs even though you're not cutting your list prices.

Could you just tell us how you plan to manage pricing going forward? Do you have -- have you built capabilities that'll help you respond? How quickly can you respond to competitive activity in coffee and the rest of your portfolio because it's clear that we should expect more promotions going forward..

Yes, Farha. It's Mark Smucker. You're absolutely right. We can respond very quickly. And as Vince pointed out in the script, although the green coffee costs have come down at a very gradual but generally consistent rate, and that of course benefits us, we have not crossed a critical threshold at this point where we would take a broad list price decline.

And so, as we are always transparent with our customers, we want to share and it's appropriate to share in that benefit with the trade and so a lot of that is done by planning additional promotional activity, responsibly, of course, to make sure that we continue to manage, as Vince said, the relative gaps to our competitors.

So bottom line, we're transparent and we're sharing some of those costs by passing them through in the form of promotional activities..

Our next question comes from Chris Growe of Stifel Financial..

I just -- I had 2 quick questions for you. I just want to ask first off on the -- in the first quarter, you did have a good amount of new product activity and you cited that as a factor that mid-helped [ph] revenue a little bit.

I wanted to just get a sense if you can talk about how much you think that benefited the revenue? And I guess more importantly, what divisions was that the biggest benefit such that year-over-year there was an increase in new product activity?.

Just from an overall perspective of our 4% growth in U.S. Retail, it was approximately 1% of that 4% was driven by new products. And Mark and Paul can speak to their respective areas..

Chris, Paul here. In Consumer Foods, we had about 60 new items that we launched or are in the process of launching. And as Vince said, 1% of our volume growth was -- for the quarter was due to the new products. So we feel good about those..

And in Coffee, again number of new products. In the quarter, it was north of $70 million that were related to new products, obviously a lot of that was K-Cups.

But I think you'll see that going forward in the subsequent quarters, some of the items that we're launching in Dunkin' Bakery Series as well as the Life is good brand, we'll start to see those sales come through in the second and third and fourth quarters.

So at the beginning of the year, not a lot, but we'll see that pick up through the holiday period..

Okay.

Just to be clear on that, Mark, the $70 million of new products, that's an absolute number or is that the change year-over-year? Because you have more new products coming in, it sounds like in the division as well which could be very incremental?.

That's absolute..

Absolute, okay. And then just a quick follow-up would be just to understand the input costs and really I'm more interested in it sounds like you're pretty well hedged through Fall Bake and Holiday.

Could you say that about the full year that you feel pretty good about your input cost estimates for the year?.

Chris, Paul here. Yes, you said that correctly. Through Fall Bake, we're very well positioned and everything's locked in and we're good to go. I'd say based on how we're seeing the commodity market react here, we feel good about the full year as well. Again, we watch that on a regular basis so as things change, we can react to it.

But overall, we feel pretty good about where costs are coming in..

I agree with Paul. In Coffee, we don't comment specifically on our position, but we are comfortable with where we're sitting now. We do believe that arabica markets are going to continue to probably trade within the range that they are just because there's plenty of arabica supply out there.

The demand for robusta is a little stronger, so we might be a little more bullish on robusta. But really, I think it's what we said in the script that those commodities will continue to trade roughly in the ranges that they are..

Our next question comes from Jason English with Goldman Sachs..

I wanted to pick up the last questioning right where we just left off. Mark, you were talking about the path forward for coffee costs. There's been some headlines coming out of Brazil that there the prices are below the cost of production. The government stepped in to intervene. Clearly, there's adequate supply today.

What do you see the path forward there? And then, secondly, sticking on coffee, you mentioned the shipments below the rate of consumption on K-Cups. I'm curious what you think drove that destocking by retail and whether or not we should be concerned that it foreshadows some sort of distribution or shelving changes..

Jason, this is Mark. We haven't seen any significant destocking, and it may just be timing related. I think again there will be some noise in the period or in the holiday period rather as it relates to a lot of the new entrants and so forth. So obviously, we're going to watch that very carefully.

But again, we're encouraged by the performance of the segment, and in particular, our Folgers brand. So I think that's why we still have some optimism. And then back to your first part of the question, Brazil tends to operate in a big crop and then a smaller crop rotating year-over-year.

This was technically an off year and it's been probably the largest -- I think it is the largest off crop that they've ever had. And so again, you're exactly right, there's a lot of supply out there and the forecast for the next crop is also large and so I think that's what's driving the arabica markets from a fundamentals perspective..

Our last question will come from John Baumgartner with Wells Fargo..

Just in terms of Retail Coffee, wondering if you can speak to the Millstone brand? I know the scanner data has been quite weak there.

So just wondering if you can walk through your positioning and strategy around that brand and particularly maybe in K-Cups?.

Sure, John. This is Mark Smucker again. If you recall, we made a -- well, the consumer, I should say, made the decision that bulk coffee is not something that they're interested any longer. And so we are actually exiting the bulk coffee business. And so a lot of what you're seeing is related to our exit of the bulk coffee.

But we are committed to the brand, both in K-Cups, as well as in bagged coffee, and so we will continue to support it. But you will see, at least over the next couple of quarters, you're going to see continued declines in that brand due to the bulk exit..

Well, with that, that seems to be our last question. So we thank you for your time today, and we look forward to a good year. Have a great day..

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