The J. M. Smucker Management Discusses Q3 2013 Results - Earnings Call Transcript

Feb.15.13 | About: J. M. (SJM)

The J. M. Smucker (NYSE:SJM)

Q3 2013 Earnings Call

February 15, 2013 8:30 am ET

Executives

Sonal P. Robinson - Director of Corporate Finance, Vice President of Investor Relations 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

Mark T. Smucker - President Of US Retail Coffee and Director

Paul Smucker Wagstaff - Director and President of U.S. Retail Consumer Foods

Steven T. Oakland - President Of International, Foodservice And Natural Foods

Analysts

Eric R. Katzman - Deutsche Bank AG, Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Farha Aslam - Stephens Inc., Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Charles Edward Cerankosky - Northcoast Research

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

David Driscoll - Citigroup Inc, Research Division

Andrew Lazar - Barclays Capital, Research Division

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Operator

Good morning, and welcome to the J.M. Smucker Company's Third Quarter 2013 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference call over to Sonal Robinson, Vice President of Investor Relations. Please go ahead, Ms. Robinson.

Sonal P. Robinson

Good morning, everyone, and welcome to our third quarter earnings conference call. Thank you for joining us today. On the call with me are Richard Smucker, Chief Executive Officer; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Chief Financial Officer; Steve Oakland, President, International, Foodservice and Natural Foods; Mark Smucker, President, U.S. Retail Coffee; and Paul Smucker Wagstaff, President, U.S. Retail Consumer Foods.

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

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

During this call, we may make forward-looking statements that reflect the company's current expectations about future plans and performance. These forward-looking statements rely on a number of assumptions and estimates, and actual results may differ materially due to risk and uncertainties. I encourage you to read the full disclosure statement in the press release concerning forward-looking statements.

Let me also remind you that the company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is detailed in our press release located on our website at smuckers.com. A replay of this call will also be available on the website. If you have any follow-up questions or comments after today's call, please contact me or Mark Belgya.

I will now turn the call over to Richard.

Richard K. Smucker

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

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

Net sales increased 6% led by our strategic growth drivers of acquisitions and product innovation. Looking briefly at our 3 segments. Coffee volume increased slightly in the quarter due to the strong performance of K-Cups. The Cafe Bustelo and Pilon brands also achieved double-digit growth during the quarter. And Folgers was modestly impacted by the canister constraint we discussed last quarter.

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

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

Non-GAAP earnings per share grew 20% driven by 3 main factors: first, a substantial increase in coffee segment profit, reflecting the timing of lower commodity cost; second, profit growth across the International, Foodservice and Natural Food segment and the impact of the share repurchases over the last 12 months; lastly, cash from operations continued to be strong in the quarter and increased to $684 million from the first 9 months of the year, an increase of 46%.

During the third quarter, we completed our important Fall Bake and Holiday period. With a combination of solid merchandising programs and pricing insights gained from last year's holiday season, we are pleased with the execution of our promotional strategies. And while certain categories performed better than others, we were encouraged by the results and view the holiday period as a success.

As we look ahead, we are cautiously optimistic as to the economic environment. We are encouraged by stronger food and beverage industry demand, including total edible volume trends as measured by SymphonyIRI. These have improved sequentially from the 52- to the 12- to the 4-week period. We have seen a similar pattern with our consumer takeaway trends improving over these same periods.

We are further encouraged by our ongoing investments in our brands and our businesses. We expect to introduce approximately 19 new products this year. Our New Orleans coffee supply chain initiatives were completed this quarter, and our food spread product -- project remains on track and on budget. We look forward to sharing many of the details with you, including several new product launches planned for this year, when we present at the CAGNY conference next week.

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

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

Vincent C. Byrd

Thank you, Richard, and good morning, everyone. Let me begin by reinforcing that our momentum through the first 9 months of the fiscal year reflects the ongoing commitment to the 5 key areas we outlined at the outset of the year, which include further building our brands through increased marketing support and innovation, executing pricing leadership, continuing to optimize our supply chain, capitalizing on our recent acquisitions and focusing on sustainability. With that, let me provide further commentary on the performance of our 3 business segments.

I'll start with the U.S. Retail Coffee segment, where volume was up 1% for the third quarter. As we discussed on the last call, the supplier-driven constraints for the coffee canister were expected to have a modest impact on third quarter volume for the Folgers' Red Can business. This scenario played out as expected as our coffee volume was negatively impacted by approximately 1 to 2 percentage points, primarily in our opening price point line. Overall, our team did a tremendous job, strategically managed demand based on product availability and minimizing customer disruption and the total financial impact on the company. Given these challenges, we were encouraged by our roast and ground results for the quarter. Our most recent 4-week share market within mainstream segment is also encouraging, gaining 2 share points. We are pleased to report that the canister issue is now behind us, enabling us to build inventories to more desirable levels to support the business.

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

Turning to our other key coffee brands, Cafe Bustelo and Pilon both achieved double-digit volume growth in the quarter, continuing their strong performance from the first half of the year. Dunkin' Donuts volume declined slightly in the quarter, reflecting increased competitive activities. However, we remain pleased with the brand's performance with volume up 6% year-to-date. Coffee segment profit increased 27% for the quarter, primarily due to the timing of lower recognized green coffee costs. Keep in mind, we took a price decrease in May ahead of anticipated lower green costs. The majority of these lower costs were recognized during the third quarter and, in part, offset the unfavorable impact from earlier in the year. While this resulted in fluctuations on our profit between quarters, the price-to-cost relationship through the first 9 months of the fiscal year was essentially neutral on the coffee segment profits. As we look ahead, considering the decline in green coffee costs in our current cost outlook, we expect to take additional pricing decline in the near future. We will issue a press release announcing any coffee pricing actions once effective.

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

Last month, we implemented a 10% price decline on the majority of our peanut butter products. As previously discussed, we are covered by longer term contracts for peanuts. Therefore, elevated peanut costs were recognized in the third quarter and are expected to continue in the fourth. Although price decreases were passed along in advance of recognized lower peanut cost, we believe our actions appropriately reflect our role as the category leader. As we move into fiscal 2014, we believe this price decline achieves our price-to objective based upon our anticipated cost structure over the course of the fiscal year.

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

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

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

Let me now turn to International, Foodservice and Natural Foods segment. Much of the net sales increase in the quarter was attributed to the nearly $60 million of incremental sales associated with the foodservice acquisition, which lapped in early January. We remain pleased with the performance of the liquid coffee concentrate business as we enter the second year of ownership. We are executing on our plan to exit the private label roast and ground portion of the acquired business and anticipate this process will be virtually completed by the middle of next fiscal year. Overall, the acquisition has delivered better-than-planned segment profit for the first 3 quarters of 2013.

Excluding the impacts of the acquired business, net sales and segment profit were up for the segment as the base business also performed well during the third quarter. While overall volume was down, this was primarily driven by a decrease in our Canadian flour brands. Our coffee business in Canada continued its growth behind the strong performance of K-Cups. The combination of these 2 factors provided a significant sales mix benefit for this segment in the quarter. Finally, natural beverage achieved double-digit volume growth for the quarter, continuing their momentum from the first half of the year.

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

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

Mark R. Belgya

Thank you, Vince. Net sales increased $92 million or 6% in the third quarter, primarily driven by the 2 months' additional contribution of the foodservice coffee business acquired last January. Sales mix continued to be favorable in the quarter, reflecting volume growth in K-Cups and peanut butter. This helped to offset slightly lower overall volume and net pricing.

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

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

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

Marketing expense was also up in the quarter. For the full year, we now expect a low double-digit increase in marketing expense. While lower than our initial estimate, we remain comfortable with this level of spending, as we have consistently been on air supporting our key brands with TV advertising and continue to increase our digital marketing activities.

The effective income tax rate was 34.1% in the third quarter, bringing the rate for the first 9 months to 33.8%. We now anticipate the full year effective tax rate will approximate 34%.

Turning to cash flow. Cash provided by operations was $324 million in the third quarter, bringing the full year total to $684 million. This compares to $469 million through the first 9 months of last year. The increase reflects the higher current year income and a net decrease in working capital among other factors.

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

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

We are bringing up the bottom end of our previous guidance range for non-GAAP income per diluted share and now expect it to be in a range of $5.17 to $5.22. We're cautiously optimistic in achieving the high end of this range. Our guidance is based on approximately 109.2 million weighted average shares outstanding for the purpose of calculating annual EPS. No shares were repurchased during the quarter and as such, the number of current shares outstanding remain at 108.5 million.

Last month, our board increased the company's share repurchase authorization by 5 million common shares, bringing the total currently authorized to approximately 6.9 million.

And lastly, with 9 months behind us, we continue to project free cash flow will exceed $650 million for the full year.

In closing, let me reiterate that we are pleased with our performance through the 9 months of 2013, which reflects our focus on the 5 key priorities Vince spoke to earlier. We would like to thank all our employees for their dedicated efforts as we track towards delivering a record year of sales and earnings.

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

Question-and-Answer Session

Operator

[Operator Instructions] For our first question we go to Eric Katzman of Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

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

Vincent C. Byrd

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

Eric R. Katzman - Deutsche Bank AG, Research Division

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

Vincent C. Byrd

That's true, yes.

Eric R. Katzman - Deutsche Bank AG, Research Division

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

Mark T. Smucker

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

Mark R. Belgya

Eric, this is Mark Belgya, just to add to that. We have not defined of the total $70 million that we've assigned to the overall restructuring, no, we've not went in to how much is coffee, how much is food spreads. But as Mark suggested, most of the savings have come through for coffee. There probably a little bit of a spillover, but most of those will be realized by year's end.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. And then last question, I'll pass it on. Richard, I guess we've heard from 2 companies now in the industry, Kraft, really early this morning about some inventory -- trade inventory issues and de-loading and McCormick, they're a little more specialized obviously, but they also talked about it. You didn't mention it at all. Are you seeing anything from retailers, maybe in categories that you're not in? Or are your categories just somehow performing better in terms of consumption so the retailers didn't need to cut back? Maybe you could just help frame that a little bit for us.

Richard K. Smucker

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

Operator

And our next question comes from Alexia Howard with Sanford Bernstein.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Can I ask about the Dunkin' Donuts brand. Obviously, the volumes were down 2% this quarter. Are you seeing increased competition in the premium end of the roast and ground space, how's the shelf space and distribution developing on that brand? And, yes, maybe some comments around that.

Mark T. Smucker

Sure, Alexia. This is Mark Smucker. Yes, I would say, generally, the category is very competitive right now. And we are, again, competing in all tiers of that segment, if you will. We are, of course, pleased with the results that we've seen for the year. And I think as both Richard and Vince mentioned in the formal remarks, we're encouraged by the latest 4-week trends. Obviously, it's only 4 weeks, but we're encouraged to see that some of that consumer takeaway is picking up a little bit, and so we believe that, that bodes well for the Dunkin' brand.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

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

Paul Smucker Wagstaff

Alexia, this is Paul Wagstaff, and we had a decent Fall Bake for Crisco. We were not participating in one of our key retailers, our largest key retailer, in the Fall Bake. But that being said, we were able to grow the business by 1%. So we feel it's pretty decent.

Operator

And our next question will come from Ed Aaron with RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC, Research Division

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

Mark T. Smucker

This is Mark Smucker again. I would say it's played out generally as we expected. We talked in the last couple of quarters about the deceleration of the growth, and that has been more or less as we've expected. As you can imagine, there are more players in the category than there were, say, 1 quarter ago. And -- but really, we've held our share. If you look at our dollar share on K-Cup versus the prior quarter, although we may be down slightly on the year-over-year, versus the prior quarter we're actually up slightly. So bottom line, we're very pleased with the -- with our results there. And we think that the category is still trying to settle out in how that will affect the total business going forward.

Vincent C. Byrd

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

Edward Aaron - RBC Capital Markets, LLC, Research Division

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

Mark R. Belgya

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

Edward Aaron - RBC Capital Markets, LLC, Research Division

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

Mark R. Belgya

That's exactly right.

Operator

Next we go to Farha Aslam with Stephens.

Farha Aslam - Stephens Inc., Research Division

My question is regarding your commentary that volume trends in grocery and your business have been improving and particularly, last 4 weeks were strong. What do you think is driving that? Is that consumer confidence? Your ability to offer better value to consumers with commodities coming down? Could you just give us more color? And is there something that you've noticed that's particularly stronger in your business versus the overall industry?

Richard K. Smucker

This is Richard. A couple of things. One is we are actually seeing the consumer being a little more confident and therefore spending a little more. If you look at the actual numbers for the last 4 weeks, the industry was up about 2.8% in tonnage, which is one of the biggest increases we've seen in a 4-week period. And we're trending that way also. Also our pricing actions. Last year, we thought some of our pricing points were not where they should be versus our competition and we did a lot to adjust that in the last 12 months or so, and that has certainly helped our volume.

Farha Aslam - Stephens Inc., Research Division

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

Richard K. Smucker

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

Farha Aslam - Stephens Inc., Research Division

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

Mark R. Belgya

Farha, this is Mark Belgya. We've talked historically for transactions sort of that 7 to 10, 8 to 10 times EBITDA. Obviously, some of the transactions that have occurred recently in the food spaces, run north of that. I think it just reinforces the importance of strong brands. So I think you have followed us a while and understand our diligence as we look at brands, and we still think that's a reasonable range. We'll continue to challenge ourselves, particularly when we're looking at strong brands. But we realize that right now you're seeing some higher multiples and that may play out. But we still -- I think as Richard mentioned, we're still very comfortable with our acquisition strategy long-term.

Operator

And for our next question we go to Ann Gurkin of Davenport.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

I want to follow along that same line of discussion. And I'm curious if you're still reviewing products lines in your portfolio for potential disposal.

Richard K. Smucker

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

Ann H. Gurkin - Davenport & Company, LLC, Research Division

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

Paul Smucker Wagstaff

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

Operator

And our next question comes from Akshay Jagdale with KeyBanc Capital Markets.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So first question just on your guidance for the fourth quarter implies a deceleration and growth across-the-board. So what -- can you just help me understand like what's happening sequentially that makes EPS growth slowdown from the level that we've seen so far this year, especially the last 2 quarters? And similarly, I mean, what -- why should margins not continue to go up, especially given what we're seeing on the commodity side on coffee and peanuts? I'm just -- I know there's probably some level of conservatism, which you usually always have. But I'm trying to understand, I mean you're making a lot of positive comments, but fourth quarter guidance seems, obviously relative to consensus, below what we were expecting.

Mark R. Belgya

Yes. Akshay, this is Mark Belgya. A couple of things. First of all, I think we have -- the last couple of quarters we've been pretty specific in our discussions around where we are in terms of the long-term peanut costs, so we think that, that will have some effect in the fourth quarter. Overall, commodity costs of coffee are stabilizing as well. We still expect a very strong gross profit margin percent, but we see those 2 things sort of affecting the gross profit side of things. In terms of the SD&A, I think, as Ed and I mentioned earlier on the call, the dollars were up in absolute measures for the quarter. That level of spending for the most part is a bit of a fixed overhead amount. So because the fourth quarter top line is a smaller dollar amount versus the second and third quarter, SD&A as a percent will be up as well. So -- and then the tax rate, of course, we're expecting to be a little higher and sort of below the line. So in summary, I'd say it's just 3 or 4 things that are probably driving our guidance. So Rich, I don't know if you have any...

Richard K. Smucker

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

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. Great. And just to follow-up on coffee, sort of a bigger picture question. Being the largest coffee company, obviously, in the U.S., I'm curious to know how do you think the category is going to shape up, maybe a year or 2 down the road from perspective of the mix of the shelf. So I believe 2 years ago at CAGNY, you had put out 2 charts that I thought were interesting, saying roast and ground roughly 47% of the category, premium 31% and single serve, 22%. And clearly, your -- you are way more indexed towards roast and ground, with 66% of your sales, I believe, coming from that particular category. That's changed, but I'm curious to know how you think of it a few years down the road. Like where do you think the premium and single serve end of the category will be in terms of percentage of total pie?

Mark T. Smucker

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

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And just a follow-up on the single serve side. We've stocked [ph] -- and you've mentioned the quality issues today, one of the major brands that was supposed to compete with Folgers has come into the market. I mean, can you just characterize what you're seeing in terms of the pricing in the single serve category, specifically? I mean, what are you seeing -- there is some promotional activity right now, and what is your expectation going forward?

Vincent C. Byrd

This is Vince. I think it's playing out as exactly as we had anticipated. There are basically 3 tiers of pricing. And we sit in the middle of those tiers. And we're -- the unlicensed participants are about where we expected them to be. So it'll ultimately probably be a 3-tier pricing category.

Operator

We'll go now to Chris Growe with Stifel.

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

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

Mark R. Belgya

Well, I think it's basically the effect of potential pricing, it's the biggest play on that. We mentioned also that volume is going to be flat year-over-year, which I think might be down just a bit from what we directed on the previous quarter. And then we're going to continue our exit of the private label roast and ground, so a combination of all 3 of those.

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then I have further question for you in -- with regard to your price mix in the quarter. I guess, really, I'm trying to break those apart. U.S. pricing down in the quarter, I would bet across your business. Mix, it looks likes it was pretty positive and then I'm curious about promotional spending as well and how that fared in the second quarter -- third quarter, sorry.

Mark R. Belgya

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

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Then promotional spending then, is that expected to stay higher? And I guess in relation to that, with your advertising forecast for the year a little below what you expected earlier, is that getting pushed in the promotion? I'm just curious how those 2 are playing together.

Mark R. Belgya

Well, the promotional spending I don't think is significantly different to what we were expecting. I think just to be clear, we talk about promotions as sort of trade spend versus marketing. And then just on marketing, even though we are projecting sort of low double-digit versus the 20% for the year, we do think marketing will be up for the company in the fourth quarter pretty significantly.

Operator

We'll move now to Chuck Cerankosky with Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

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

Steven T. Oakland

Sure, Chuck. Steve Oakland. There's a lot of moving parts in our foodservice business. As you know, we doubled the size of that business with the Sara Lee coffee acquisition and then we took on some pieces of the business that we knew we wouldn't have for the long-term. So let me give it to you sort of by business. We're very encouraged by the liquid coffee business, and we've yet to be able to do what we think we can do this year with our brands, with our technology and our agreement with Douwe Egberts. So we think, although roast, although it's up year-to-date, we think it can get better than that as we go forward. So that's great. When it comes to traditional foodservice, that business is soft in volume, just marginally. And if we think about the core casual dining customers, the places where our brands really work well, I think we've seen their macro numbers off 1% or 2%, and our business would mirror those industry trends. So we feel like we're holding or gaining share. Our margins are doing well, and we're doing at least as well as the industry. And then the coffee will be the platform that we'll grow off of into the future.

Operator

For our next question we move to Jonathan Feeney of Janney.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Just one question. You've given the strengths particularly -- you had some significant improvement in operating profit, a huge growth in one of your businesses, why the decision to shoot a little bit lower? I mean great in marketing spending, great growth year-over-year, but it seems like you changed the plan a little bit. Is that -- you just don't think it's as effective or what's behind that?

Mark R. Belgya

I'll start and then anyone jump in, please. I think, as I said in my prepared comments, we put 20% out at the beginning of the year and that was based upon the Sara Lee, obviously, incremental base growth on our marketing and then the reclassification of what was treated the [ph] last year back into marketing. And as we went through the year, we're quite pleased with our on-air activity, all our brands are being supported. Obviously, as you go through things, some of it is just due to efficient spending, quite honestly, and we'd bee able to recognize that through the year. But if anyone else wants to comment on the quality and the amount we're on-air, but we feel pretty good about it.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

I guess just following up, I always kind of wondered about this, isn't more better? Or do you -- I mean if you -- I guess couldn't you do just that much more, if you've been more efficient? Or do you reach a point, I guess, in the saturation curve where you just make a judgment that says, "Hey, we don't want to spend anymore right now like just how it lines up with innovation," or isn't that right?

Vincent C. Byrd

So this is Vince. So I would comment that, philosophically, we believe that we have to be the supporter of our brands and the categories. And you know we've talked historically about we have a greater share of our voice in most cases than our share of market. So we support our brands in those categories for the long-term. We just think that's the right thing to do. Now in any one quarter or any one fiscal year, the presidents all have levers that they can pull if they need to be sharper on price points or not necessarily. And so we at time to time can shift funds from marketing to trade, if need be, but that's not the case. And as you look at the entire year, where our marketing investments are going to go up. But we haven't reached a point of saturation, if that's your question. If you reach a point of we're out of any TV commercials, we obviously produce more and continue to support those brands.

Operator

We'll go now to David Driscoll of Citi.

David Driscoll - Citigroup Inc, Research Division

I wanted to just to talk about K-Cups for a few minutes. The first observation I would make is that you guys deserve certainly congratulations. By our data, it appears that you have 9 of the top 20 SKUs within the K-Cup market in groceries, so terrific job. My question really is a longer term question. I sometimes feel like these earnings calls, and I'm probably guilty of this myself, may be a little too short-term-oriented. I'd really like to go against that right now and say long-term, is this K-Cup opportunity just an enormous opportunity, I think you said this is a $300 million business. In, within say a 5-year window, what do you think this is? Is this a $1 billion business? I mean, could this be fundamentally someone's entire investment thesis on Smucker's given the rate of growth and the profitability of that particular market?

Mark T. Smucker

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

David Driscoll - Citigroup Inc, Research Division

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

Mark T. Smucker

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

David Driscoll - Citigroup Inc, Research Division

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

Mark T. Smucker

Yes. I think in the script, we talked a little bit about just the timing recall of our price decline in the beginning of the year was ahead of the moderating green coffee costs. So it really is timing-related as we realized coffee cost versus what our pricing is in the market.

David Driscoll - Citigroup Inc, Research Division

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

Mark R. Belgya

Yes. This is Mark Belgya, David. Yes, that's right. I mean, obviously, with -- K-Cups contributed an incremental $30 million, you can do the math on the contribution. But the cost or price -- the cost and price to position to that probably was the bigger contributor.

Operator

We take our next question from Andrew Lazar with Barclays.

Andrew Lazar - Barclays Capital, Research Division

Yes, Richard, as you -- you guys tend to think of things in a bit of a longer term time frame. This question, I'd be curious on your perspective on it. From an industry standpoint, we've -- are you surprised that maybe some of these kind of 100-year-old-plus companies are, for lack of a better term, kind of throwing in the towel, if you will, in making these large strategic changes, whether it's splitting up or Heinz selling itself yesterday, sort of doing that when the going gets a little tough on the fundamentals rather than maybe taking numbers down, making the proper investment and running these businesses for the longer term? Or has something so fundamentally changed in your view in this broader packaged food space that these more radical, structural changes are really needed? I'm curious in your perspective, because you've got obviously a longer-term perspective to draw from.

Richard K. Smucker

Well, that's a very good question, Andrew. And as you know our history and our heritage -- and we do take a long-term view. And we think that's right for our industry. We think it's right for the economy. But that being considered, we live in a changing world and a dynamic market, which there's a lot more emphasis on short-term goals and short-term structures. That's why we always talk about why it's more important to think to the long-term, because you can make a quick hit on return, but -- for one quarter, but we think for example at Smucker's, if you hold a share of Smucker's stock for 5 years, you're going to make much more money on Smucker's over the long-term than if you just took a premium on a very short period of time. So we think the industry is changing. We think the dynamics are changing. But we also think that our strategy of taking a long-term view at Smucker's and using this is an opportunity to take advantage of this change in the marketplace, we will see some brands come to the market because of these changes, and we think that bodes well for our company. So we're going to continue to do what we're doing. If you look at our returns over -- since we went public, some 55 years ago, I think our average return's 11% over that period of time, and that's true whether you look at a 5-, 10-, 15-, 20-, 25-year period of time. So we would rather see a long-term growth rate of 11% a year than get a quick hit for 20% in 1 quarter.

Operator

Next we move to John Baumgartner with Wells Fargo.

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Just with peanut butter. Just wondering what you're seeing there in terms of the price competition, and I guess in particular, as it relates to your decision to maybe take prices down there ahead of the cost improvement.

Paul Smucker Wagstaff

John, this is Paul Wagstaff. And when we -- we see ourselves -- we're the leader in the peanut butter category and we felt that taking the 10% price decline which we did effective January 7, was the right time to do that for the category and to continue to see the growth that we are experiencing. So we felt it was the right appropriate time. Our competition did follow, which made sense, and we typically do lead pricing increases or declines. So overall, we feel it was the right thing to do, right timing, and we feel positioned well for ongoing growth.

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

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

Paul Smucker Wagstaff

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

Operator

Now we take a question from Jason English with Goldman Sachs.

Jason English - Goldman Sachs Group Inc., Research Division

I apologize in advance if some of these have already been asked, but you guys mentioned the de-stocking effect from last year that you aren't seeing recur this year. Are you seeing any year-on-year benefit as you lap that de-stock?

Richard K. Smucker

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

Jason English - Goldman Sachs Group Inc., Research Division

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

Paul Smucker Wagstaff

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

Jason English - Goldman Sachs Group Inc., Research Division

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

Paul Smucker Wagstaff

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

Operator

We now take a question from Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

I share Jason's sentiment that if this has been asked, forgive me. But your numbers on the volume mix side were kind of meaningfully better than what Nielsen data would've suggested. And I know that Nielsen doesn't represent all of your channels and there's timing issues and so forth. And also I didn't realize that your volume number is a volume mix number. But do you think, at all, that you shipped ahead of consumption even slightly this quarter? I know it's again hard for you to tell, but I'm just curious based on your conversations with retailers and inventory levels and so forth, do you think your shipments were more or less in line with takeaway this period?

Vincent C. Byrd

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

Kenneth Goldman - JP Morgan Chase & Co, Research Division

You think they were in line?

Vincent C. Byrd

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

Mark T. Smucker

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

Kenneth Goldman - JP Morgan Chase & Co, Research Division

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

Richard K. Smucker

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

Mark T. Smucker

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

Kenneth Goldman - JP Morgan Chase & Co, Research Division

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

Richard K. Smucker

Well, we really don't comment on it, but...

Operator

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

Richard K. Smucker

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

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 the passcode of 8394093. This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.

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