The Hillshire Brands Management Discusses Q1 2014 Results - Earnings Call Transcript

Oct.31.13 | About: Hillshire Brands (HSH)

The Hillshire Brands (NYSE:HSH)

Q1 2014 Earnings Call

October 31, 2013 10:30 am ET

Executives

Melissa Napier - Senior Vice President of Investor Relations

Sean M. Connolly - Chief Executive Officer, Director, Member of Executive Committee and Chief Executive Officer of North American Retail & Food Service Business

Maria Henry - Chief Financial Officer and Executive Vice President

Analysts

Robert Moskow - Crédit Suisse AG, Research Division

Andrew Lazar - Barclays Capital, Research Division

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

Varun Gokarn - Goldman Sachs Group Inc., Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Gretchen Guo

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

Kenneth Perkins - Morningstar Inc., Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Operator

Good morning and welcome to the First Quarter Fiscal '14 Earnings Conference Call for Hillshire Brands. [Operator Instructions] This call is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Melissa Napier, Treasurer and Senior Vice President of Investor Relations for Hillshire Brands. Thank you. Melissa, you may begin.

Melissa Napier

Thanks, Sue. Good morning, everyone. Our results were released at 6:30 a.m. Central Time this morning. Our earnings release and the slides that we'll be reviewing today are posted on our website under the Investor Relations section. We expect to file our 10-Q later today. Sean Connolly, our CEO; and Maria Henry, our CFO, will provide their perspectives on the performance of the business during the quarter and discuss our outlook for the remainder of fiscal 2014. We'll take your questions after management's prepared remarks conclude. [Operator Instructions]

I'd now like to refer you to the forward-looking statement displayed and remind you that during today's call, we may make forward-looking statements about future operations, financial performance and business conditions. Actual results may differ from those expressed or implied in these statements. Explanations of non-GAAP financial measures that we also may refer to are included in our release. Sean?

Sean M. Connolly

Thanks, Melissa. Good morning, everyone, and thanks for joining us. Before we get in to our first quarter performance, as I always do, I want to take a minute to touch upon the big picture at Hillshire Brands, meaning our core beliefs around how we'll create maximum value for our shareholders over the long run.

Hillshire Brands is a focused food company with category-leading iconic brands. We are committed to delivering both growth and profitability and to do so sustainably. Accordingly, we believe in a very consistent and disciplined approach to brand building and innovation across our core brands.

But we also believe in improving cost efficiency in order to fuel our growth agenda. We've been relentless in this regard, and we will continue to be that way because at Hillshire, cost efficiency is not a project, it is a mindset.

We are now one quarter into the second year of our plan to build a leading food company, and we feel very good about the path we're on to create a sustainable winner for both our shareholders and our employees.

Now let's jump into Q1 and our outlook for the year. I'm pleased to report solid performance in the first quarter of fiscal 2014 as we successfully navigated a challenging macro environment. Our brand building and innovation investments continued to track well, and our core brands became stronger.

We'll cover lunchmeat in a moment, but the headline is our merchandising programs achieved the desired effect. We continue to make progress on our challenged businesses, and we'll further those efforts in the quarters ahead.

On the input cost front, clearly, we've experienced much higher inflation than we originally anticipated and therefore, are taking additional pricing actions. We'll cover that fully in a few minutes.

We still expect to finish fiscal 2014 in a position of solid growth, fueled in part by the strong innovation slate we have set for the second half. Finally, our previously stated full year guidance remains unchanged at this time.

As you know, we're committed to delivering growth momentum in the back half of the year, and Q1 was important in terms of laying the foundation for that momentum. We expanded distribution on innovations we launched late last year. You see several of those items on the left side of this slide.

We also continue to support our brands with strong MAP investment, including robust advertising programs on Jimmy Dean and Ball Park. We recently activated a strong new slate of marketing programs on Hillshire Farm, and we continue to expand our unique Aidells in-store sampling capability.

The bottom line is these programs are having an impact. What you see on this slide is multi-outlet sales performance from the retail scanner data. And not only do you see solid growth year-to-date versus the prior year, but you also see momentum on key businesses in the last month, particularly the Hillshire Farm franchise as our lunchmeat merchandising and new smoked sausage advertising kicked in.

I want to be clear, however, that you should not get ahead of yourselves in terms of extrapolating these trends. That's because we now know we will need to take more pricing than originally envisioned due to inflation, and clearly, that will dampen sales trends. Nevertheless, we like what we see.

Now you just saw the strong recent performance on Hillshire Farm lunchmeat on the previous slide. Here's a different look at the business that I think you'll find helpful.

What you see here are the past 13 months of performance on Hillshire Farm lunchmeat in terms of IRI dollar sales and dollar share data. Obviously, we are pleased to see the strong rebound in early fiscal '14. As we said last quarter, it was important to us to recapture consumers who drifted from this business last fiscal year following the packaging difficulties that we ran into.

To that end, instead of investing our Q1 lunchmeat marketing dollars in MAP, we invested in quality merchandising events with our customers, and these programs delivered the desired effect. And Hillshire Farm lunchmeat again showed how responsive it can be.

We've talked before about a few businesses that are a bit more challenged than the rest right now. We've made some real progress here, but clearly, we're not done. Our Bakery business is in need of innovation. So that's what we're doing, both in Retail and in Foodservice.

Our Deli business has put up solid performance on the bulk side where much of the volume is, but the presliced side needs more attention. Short term, that looks like better price competitiveness, but longer term, it's really about different thinking around innovation. More on that at a later date.

Finally, State Fair Corn Dogs has faced a more competitive environment than it has seen previously, which is requiring both short-term pricing adjustments and some new product and pack size thinking.

Now let's talk inflation. We expected input cost to be higher, but not like this. The acute challenges we've seen in the pork and beef markets were certainly not fully forecast and are driving major cost increases. And this is no longer primarily a first-half concept, as we now expect significant inflation throughout the year. The net of this is that we will continue to take additional pricing on top of what we had originally planned for.

In fact, we're already taking more robust pricing actions as we speak. As you can imagine, this will likely weaken volume trends, as consumers acclimate to higher price points. But we plan to mitigate this elasticity effect in the back half with continued MAP support and a robust innovation slate.

Recall our long-term goal on innovation is to be generating between 13% and 15% of our annual revenue from items launched in the prior 3 years. Historically, we hovered around 9% on this metric. Last year, we moved the needle to 11%, and in the second half of this year, we have very exciting new innovations coming on a number of our core brands. We'll share more details on these new products following Q2, but I think you will really like them when you see them.

Before I turn it over to Maria, let me add a few words on Foodservice. Overall, it was a solid quarter. We grew sales and took the pricing we needed. We also advanced our dessert innovation agenda and launched a terrific new line of double-layer pies. But at the end of the day, our outlook here remains modest, as the overall industry continues to be challenged.

With that, Maria, over to you.

Maria Henry

Thanks, Sean. Good morning, everyone. Thanks for joining us. As you've just heard and as you've seen in our results, we had a solid start to fiscal 2014. Rapid movement in certain areas of the commodity market, particularly pork and sows, caused our input cost to be significantly higher than we expected when we gave guidance in August.

As we saw these higher costs materialize, we took pricing actions in our Foodservice business within the quarter, and that helped us post stronger sales. Overall though, the higher input cost put more pressure on our gross margins and on our operating income. And you see that in our year-over-year comparisons for the quarter.

As we indicated we would do, we targeted additional dollars in above-the-line marketing investments in the quarter, particularly in trade to defend some key brands in the near term with pricing actions and in slotting dollars behind innovation.

Overall, brand investment remains an important part of our growth story, and we increased our total year spend year-over-year for the quarter when you consider trade investments, slotting and MAP combined. We also closed the previously announced Golden Island jerky acquisition during the quarter. We've integrated this business into our Gourmet Food Group business unit, which manages our Aidells and Gallo brand. While it's early days, so far, we really like what we see with Golden Island. And finally, we closed the quarter with a strong balance sheet, and we continue to evaluate acquisition alternatives to create value with our assets and capabilities.

Now let me walk you through some of the financial details. First, let's take a look at the quarter's financial results. Our adjusted net sales increased 1% on a 0.3% decrease in volume. Our sales of commodity meat were less of an impact on our results this quarter than they have been recently.

If you exclude commodity meat sales, our adjusted net sales would have been up 0.8% on a volume decline of 0.1%. As I've already mentioned, higher sales were driven by our Foodservice/Other segment, as commodity inflation triggered pass-through pricing. Our Retail segment sales were down modestly in the quarter.

Gross profit dollars and rates were down versus last year, primarily as a result of higher input cost. For the quarter, our adjusted gross profit rate was 27.3%. This is down from 30.5% last year when we had significant commodity deflation.

Our first quarter MAP investment was $40 million or 4% of net sales. We continue to be disciplined in where and when we spend our MAP dollars. Where we do invest, we continue to see results.

We're also driving productivity in this area, which allows us to have a greater impact per MAP dollar spend. You see in the numbers that for the first quarter, our MAP spend was down versus last year. This reflects not only the productivity we have achieved, but also our decision to put some of our investment dollars in above-the-line marketing activity and the fact that we had a high level of MAP spend in last year's first quarter.

As we expected, our adjusted SG&A, excluding MAP, was up versus the first quarter of fiscal '13, when we had an unusually low level of SG&A. Corporate costs were $9 million for the quarter, slightly behind a normalized run rate because of timing. We still expect to be tracking to about $60 million for corporate expenses for the year.

The net of all of this is that our adjusted EPS was down 28.6% for the first quarter, off of a very strong comparable in the first quarter of last year, when our adjusted EPS was up 88%. As I said on the last call, the '14 -- fiscal '14 would have exaggerated quarterly comparisons against fiscal '13, and you're seeing that in our numbers. Our goal is to fundamentally improve the profitability of our business from where we began. We will have some ups and downs in any given period because of commodity cost fluctuations, but we're working to move the centerline of our profitability up over time through brand building, innovation and cost efficiency. When you compare our first quarter results with our fiscal '12 baseline year, as we do on this slide, you can see that we are making progress.

Now let's look at the segments. Our Retail segment sales were down 0.7%. The positive performance of our Jimmy Dean, Ball Park and Aidells businesses were offset by our near-term pricing and merchandising investments in lunchmeat and corn dogs, as well as increased slotting investment behind innovation.

Operating income was down 27.8% compared to an increase of 46% in the first quarter of last year. The Retail segment results were affected by the significant commodity input cost inflation, as well as a near-term defensive actions that we've been discussing.

In our Foodservice/Other segment, first quarter sales grew 5.7%, driven by increased prices, as we pass-through higher input costs. Excluding commodity meat sales, Foodservice net sales were up 5.2%.

Operating segment income was up only slightly as increased pricing mostly offset higher input cost inflation in this segment. The operating segment margin of 9.2% is expected to be the high for the year because of favorable mix in the first half of the fiscal year and some delayed spending by our Foodservice team in the first quarter. So you shouldn't extrapolate the 9.2% margin for the year. The Foodservice industry overall continues to be a tough space. And while we are outperforming the market and taking share in some important spots, we expect our margins to continue to be under pressure in this area.

Moving on to cash. Our adjusted cash flow was a use of cash of $12 million, including the cash paid for Golden Island, and $10 million of share repurchases. Our adjusted EBITDA was 11% of net sales overall. We ended the quarter with a strong balance sheet.

As of the end of the quarter, we had $369 million of cash and short-term investments, and we are well positioned to execute the growth agenda that we've outlined. Our capital allocation plan has not changed. Our first priority continues to be investing in the business. Our investments in brand building, innovation, capability development and efficiency programs are targeted at creating long-term sustainable growth and profitability.

In the quarter, we repurchased $10 million of stock as part of our plan to repurchase $200 million over 2 years. And finally, we continue to pursue additional M&A opportunities to drive value. Our fiscal '14 guidance remains unchanged. We continue to expect sales to increase slightly in fiscal 2014.

Our outlook incorporates the expected benefit of higher pricing and innovation launches being somewhat offset by volume softness, as consumers react to higher prices. Our EPS outlook for fiscal 2014 remains flat to down mid-single digits. This incorporates the sales estimate I just spoke about, our expectation of significantly higher input costs for the year, continued investment behind brand building and innovation, the benefit of our savings initiative helping to offset inflation, and the lapping of onetime benefits we experienced in SG&A in fiscal 2013.

So let me wrap it up. We had a solid first quarter with sales coming in a bit better and earnings down year-over-year, as expected, against a big comp last year and higher-than-anticipated commodity input cost inflation. The inflation we've spoken about, continued competitive pressure, as well as a tough macro environment, create a challenging operating landscape. We are navigating through this and remain committed to our growth agenda and value-creation plan. Our efficiency programs remain on track, and we continue to make progress on establishing a continuous cost management mindset in our culture. And finally, we're holding the guidance for the year.

So with that, let me go ahead and open it up for questions. Sue?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Robert Moskow.

Robert Moskow - Crédit Suisse AG, Research Division

It's Credit Suisse. So just one clarification, Maria. There's a line item here called cash used to invest in short-term investments, on the cash flow statement. I guess I wanted to know what that was? And I'm going to jam in a second question. Can you give us an order of magnitude of what kind of pricing to expect for the year and how it flows in Retail or Foodservice? Is pricing on retail going to go up significantly? Or is this really just a Foodservice pricing action?

Maria Henry

Sure, Rob. On the short-term investments, what we did is we have a significant amount of cash, as you know, in the balance sheet. And so what we did is we moved some of the cash to short-term investments in order to increase the yield. All of the investment vehicles that we have though are short term in nature. And so when we did that, we reclassified it on the balance sheet. The way that I think about it is I think of the total of both cash and the short-term instruments that we're now using as available cash. So that's what that is, and that was just to get a little bit more in terms of yield. In terms of pricing, our intent is to price against higher commodity. Now in Foodservice, as you know, we've got a substantial amount of pass-through pricing that we're able to take. The Foodservice team did a really good job getting out in front of the commodity movement that we were seeing very quickly. So we saw the benefit of that in Foodservice in the first quarter. In the Retail business, as you know, that takes a little bit more time to get pricing into the market. So we are taking pricing. We expect to take additional pricing based on what we're seeing in the commodity markets. And, Sean, you may want to comment more on our philosophy there.

Sean M. Connolly

Sure. Obviously, our game plan all along has been to recover inflation with pricing, and for competitive reasons, I can't get into specifics on our exact pricing plans, obviously. But we've done this historically. We've recovered inflation with pricing. And the way it works is pretty simple. In deflationary times, we tend to over recover, which gives a boost to earnings. And then in inflationary times, earnings tend to be pressured because we don't tend to recover 100% of the cost increase in a given period. But over the long term, it does net out as a full recovery or slightly better.

Operator

The next question comes from Andrew Lazar.

Andrew Lazar - Barclays Capital, Research Division

Barclays. I guess with respect to some of the pricing actions that you're currently engaged in taking, is it your sense that you're -- Hillshire's in sort of a leadership role there or perhaps following? We're just hearing, obviously, somewhat of a different story from some other industry players where it sounds a little less rational. And I guess more importantly, I know when you took pricing several years ago, there were certain areas where you needed to kind of roll some of that back with some -- where the gaps got a little bit too large, I think, for where the brands were at least then from a brand health perspective. You've obviously done a lot in the last year, plus around some of that. So, I guess, I'm trying to get a sense of your confidence level around being able to take this pricing and perhaps have some price gaps widen a bit, given where the brand health is today.

Sean M. Connolly

Sure. It's a great question. I would characterize our overall pricing analytics and game plan as significantly advanced versus where we were a couple of years ago. As I think we've talked before, we are pretty buttoned up when it comes to understanding price elasticities, price gaps, price thresholds. And we deploy a whole suite of approaches to taking pricing whether it's taking a list price increase, whether it's adjusting our trade spend downward, whether it's downsizing a particular package so that we can stay below a price threshold. And obviously, the actions we take are informed by all of those analytics. So there are businesses where we may lean in a little bit harder and businesses where we may lean in a little bit less because they're not in a position to take it. So it's -- we approach it very analytically, and we feel good about our philosophy on this and our capabilities on it, and it's the right thing to do. Now obviously, we need to stay agile in this space. So we need to look. We need to continue to track the movements in inflation cost. We need to stay focused on executing our game plan. But we need to stay agile, because if our assumptions are wrong, we've shown that we can move quickly to adjust. So I feel pretty good about it overall. With respect to your question on the environment that's out there, let's face it. The consumer is seeing a lot of uncertainty right now. And when that happens, they get very discerning, particularly about the products that they buy. That's why product innovation is so important to our plan, and it's not just about low price. It's about perceived value, and that's really what we're trying to drive.

Operator

The next question comes from John Baumgartner.

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

It's Wells Fargo. Sean, in terms of Foodservice, anything you can speak to in particular relating to Hillshire-specific execution across channels? Any convenience or product mix, which may be notable or changed since last quarter you can point to?

Sean M. Connolly

Well, I think the overall message on Foodservice is that the space, on average, has been in a bit of a cyclical malaise. And in that type of environment, what we try to do is get down into the granularity of where can you drive growth. And you make a good point that some of it is what I'll call the sub channels of Foodservice. A good example of that would be the convenience store channel, which is a focal point for my Foodservice team, and they are putting up good points on the board in C stores, and a lot of it is branded, by the way. So it's -- I would characterize it as not only volume and net sales, but it's also strategic because it advances our brand equities. But at the end of the day, when you've got $1 billion Foodservice segment like we do, a lot -- you have to make it work in the traditional Foodservice channels, broadline distributors, restaurants, et cetera. And we believe in that type of environment we're in right now, the name of the game there is to win market share. And the way you're going to win market share really is not done well through price reductions. It's done well through innovations and coming up with new products that are extremely tempting to these otherwise very discerning operators. And a good example of that is this pie product we launched this year in the first quarter called Luxe Layers pie. It's literally a 2-layer pipe. It is the only one of its kind in the world, and it's early days, but it's the kind of thing that's helping us to pick up some share in an otherwise challenging environment.

Operator

The next question comes from Jason English.

Varun Gokarn - Goldman Sachs Group Inc., Research Division

It's Varun Gokarn in for Jason at Goldman. I wanted to focus on some of the volume drivers that are a little independent of price. Golden Island seems to be an acquisition that's pretty similar to what Hershey did with Brookside. You've got Costco exposure and the potential to expand that distribution in other channels. So my question is, what are your distribution expansion plans there? Will that require any additional CapEx or investment on advertising? And then what do you expect the timeline on that kind of buildout to be?

Sean M. Connolly

So the question is really around our plans with jerky, if I can paraphrase a little bit, and we have not unveiled those plans yet. And we're not prepared to unveil them today. Obviously, it's a competitive space. We view Golden Island acquisition as a great initial entry point into a very attractive category. Their capabilities, we think, are outstanding, in terms of the product quality that they've got. And currently, you're right. It is a small business, and it's largely focused at Costco and is performing exceedingly well there. So all of that's good. Obviously, our plans in this space are bigger than just the status quo, and we're continuing to refine them, and we'll be back at a later date to share a bit more on that, including what kind of marketing support those plans will require, what kind of capital investment.

Operator

The next question comes from Ken Goldman.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

It's JPMorgan. Maria, can you help detail which commodities, in particular, have come in significantly higher than what you expected? And to what extent does your guidance factor the potential impact from the porcine virus on the hog supply? Because it sounds like, starting in January, we'll see supply drop as a result of the virus. So just hoping to get your thoughts on whether that's baked into your numbers.

Maria Henry

Sure, Ken. On our commodities, as we talk about -- just to frame it as a reminder, we said that -- excuse me, 60% of our cost of goods is commodities and of that, 60% is meat related. So you get to a number somewhere around the $1 billion mark. We've also said that in terms of the weighting within our commodity meat basket, we are tipped to pork. And when I talk about pork, I'm talking about pork and sows there. There's been a significant impact from PEDD on the sow market and in sow pricing. So it's on pork and sows. So we are heavily affected with what's going on there. And as you probably know, we had a spike early and then the number of reported cases was coming down. And now the number of reported cases is going back up, and that's wreaked a bit of havoc on that piece of the market. So particularly around pork and sow. Sean also mentioned that beef is continuing to be inflationary with some of the things that are going on in that market, and you guys look at the same data that we look at. And you see what's happening with live cattle prices. Lean hogs have been on a run, and sows are significantly up. All of that affects our input cost. So the comments that we've made today and the fact that we are holding our guidance takes into account what we see happening in the commodity market really end of our fiscal year. As we said, we intend to cover commodities through pricing over time. The question will be, as we put pricing into the market, how much coverage are we able to get into this fiscal year and exactly how the consumer reacts to higher price points and what the effect of the higher pricing is on our volumes. So we've taken into account our expectations on all of that when we affirmed our guidance, and we're just through the first quarter. I'm pleased with what did we did on the top line this quarter, and we'll have to see how it plays out.

Operator

The next question comes from Ken Zaslow.

Kenneth B. Zaslow - BMO Capital Markets U.S.

Ken Zaslow, Bank of Montreal. Just -- I know you guys have done a lot of analytics. Can you talk about which brands do you think have the least degree of elasticity when you're raising price and which ones -- can you just talk about how your analytics work and how you're seeing which brands are the least elastic to price increases?

Sean M. Connolly

Sure. As I think many of you know, elasticities of demand are dynamic. They're influenced by a lot of things, but it's -- to answer your question, it's really actually a very simple answer. Where we are performing the best in the current environment is where we are farthest along on our brand building and innovation efforts. And those are the brands that are perceived to have the highest value to our consumers, and therefore, the consumers when they go to the shelf, if they see a small price increase, they tend not to overreact because they have a tremendously strong affinity for that brand. In brands within the portfolio where we are -- we've either not begun or we're in early days of the brand building innovation effort, obviously, the level of affinity the consumer has for that brand is not as great as it is say on Jimmy Dean, some of the brands that are the strongest in the portfolio. So it's -- I think the key point behind all of this is, this is core to the philosophy of how we run this company, which is we have been and will continue to be focused on building this business for sustained long-term value creation. And that means building stronger brands through consistent MAP support and innovation, as well as this continuous improvement mindset that we've got on costs. And if we find ourselves in any given year in an environment where input costs move significantly, we will look to strike the right balance between near-end profitability and investing for the long run. But in a year like this year of cost going against us, it means we will take price, but we won't abandon marketing and innovation just to inflate short-term performance. That's the way the business was run in the past, and we're committed to really doing what's right to drive the centerline of our profitability continuously north here over time.

Operator

The next question comes from Alexia Howard.

Gretchen Guo

This is Gretchen calling in for Alexia at Sanford Bernstein. Maria, can you give more color around the productivity MAP spending that you mentioned? What changes are you making to make that more efficient? And does that change how you think about your long-term goals for MAP spend levels?

Maria Henry

Thanks for the question, Gretchen. In terms of the MAP productivity, there's 2 areas where we're driving MAP productivity. The first is in the split between working and nonworking MAP. And we've continued to drive down the mix of nonworking MAP for the total amount that we've spent through various productivity initiatives. The second area is getting more productivity and more hits per dollar of MAP spend that we have. And Sean's probably a much more -- able to talk about those things than I am. So let me turn that over to him, but it's really in those 2 areas.

Sean M. Connolly

Well, I appreciate you handing over to me because I did want to address our MAP support in quarter 1. I would characterize our MAP support in quarter 1 as excellent. Our GRPs, which really are the touch points that we have with our consumers with our advertising whether it's on TV or online, were up double digits overall in the first quarter. And that is despite a planned reduction on Hillshire Farm advertising where instead we shifted our investment into lunchmeat merchandising, as I mentioned in my prepared remarks. And as Maria points out, working MAP dollars were up in the quarter, while we reduced nonworking spend as part of our overall efficiency programs. And on that, just, I think the point on our efficiency programs is simple, which is, if we confront inflation levels that are higher than we expected, we need to try to accelerate as many of the efficiency programs that we've got in place to the degree we can execute them. And we did some of that in terms of MAP efficiency in quarter 1. And the last thing I'll just point out here on MAP as I've said a number of times, don't straight line out our MAP line to the 5% long-term target. Recall last year, we closed the year at 4.4%, which, frankly, was higher than where we expected to be. And the only reason we ended up at 4.4% is because we had a bunch of deflation, and we invested a good portion of that back into MAP. But Q1 last year was unusually high. It was a 4.7% MAP rate out of the gate, and it's because we had a lot of things to get done, but I feel quite good about the overall MAP level we had in quarter 1, especially given our priorities on Hillshire Farm where merchandising.

Operator

[Operator Instructions] The next question comes from Akshay Jagdale.

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

This is actually Lubi on for Akshay over at KeyBanc. You've talked a little bit about pricing potentially having a dampening effect on volume growth, as we move through the year. However, I think, net-net, you're still expecting some improvement in volumes in the back half, driven by an additional MAP support and innovation initiative. So my question is, first, am I correct in saying that in aggregate, you expect an improvement in volume in the back half? And then if so, can you maybe elaborate a little bit on what gives you confidence in that outlook given that the consumer environment still remains relatively weak?

Sean M. Connolly

Sure. Great question. The way it works, at least in just about any of the categories I've worked in my career, when you take price increases, the greatest consumer reaction to the price increase you tend to get is in the early days after the price increase. And then the question is how long does it take until they adapt to the new pricing, and you kind of get your run rates back and running. So with respect to our sales guidance, I think our key point is that we still expect to build momentum in the sales trends as the year unfolds and close out the year with momentum heading into fiscal '15. Now nearer term, we've got some drags on the top line here with increased pricing will be rolling in to the marketplace, but we believe we have the actions in place to close the year in a solid position and driven in part by this innovation slate that we've got queued up in the back half of the year, which we'll share with you all later, which we feel very good about.

Maria Henry

Lu, I'd also add that we've provided outlook on sales and not volumes. So we've made some color commentary around volumes that when we expect to see happen with volumes as we put additional pricing out into the market. The back half comments that we've made with increased momentum has to do with our sales lines, just to be clear.

Operator

The next question comes from Ken Perkins.

Kenneth Perkins - Morningstar Inc., Research Division

It's with Morningstar. I just had a quick question on your MAP spending. You've done a lot more above the line in the first quarter. So I'm wondering if you think about your total pricing algorithm if you can kind of walk us through how you're thinking about the MAP spending above and below the line as you look to price over the input cost increases.

Sean M. Connolly

Well, we don't guide to -- on an annual basis, to where we expect to be at MAP. What we've said before is that what we'll call total marketing spend above the line and below the line is expected to increase year-on-year and that encompasses below-the-line advertising investments, as well as innovation investments, trade spend and new item slotting. And how we deploy that increase always depends upon a number of factors, namely the competitive environment, our innovation calendar, et cetera. So we -- that's about the level of detail we get into on that. But overall, I want to continue to make the point that the way we want to run this business is with more and more emphasis on innovation and below-the-line marketing, equity building marketing. We want to compete on the basis of the strength of our brands, not on the basis of the lowest price on average. That is really core to our philosophy.

Kenneth Perkins - Morningstar Inc., Research Division

Okay. So is it fair to just assume then that the rest of the year will sort of look at least like the first quarter in terms of MAP?

Sean M. Connolly

No. I don't think we'll guide to what our specific MAP spend is. As I said, looks like in any given year. But what I'll say is, look, we will continue to focus our energy on brand building and innovation. And that means we'll continue to support our brands in a healthy way.

Operator

The next question comes from Tim Ramey.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

It's D.A. Davidson. So just to kind of clarify your response to a question a couple of moments ago. I mean, it just mathematically, it sounds like you're saying that volume will go meaningfully negative for maybe 2Q and 3Q in order for the MAP to work out. I mean, we've got volume. We've got price mix to get to a slight increase in sales. And you said that pricing would be meaningfully up. I know you're not wishing to give volume guidance. But are we right in thinking that we should be thinking sort of down low- to mid-single-digit volume in the 2Q, 3Q?

Maria Henry

Yes. As you know, and as you just stated, I don't want to get into giving volume guidance. But when you hold the guidance of sales to increase slightly, and we talked about the pricing that we're going to put into the market, you can back into the fact that we are expecting to see some pressure on volumes as consumers adjust to the higher price points that we expect to have in the market.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Okay. So with that said then, how is it that I think you also said you expect the year to sort of exit with momentum. I mean, am I reading that wrong or is the momentum just in the price, but not volume?

Maria Henry

The momentum that we're talking about is around sales, and we talked about the drivers of that being the pricing that we've just been commenting on and then the innovations that are coming into the market in the back half of the year. You'll also remember that in our fiscal fourth quarter of -- fiscal year last year, we had a challenging fourth quarter. And so we're going to have an easier comp in the fourth quarter as well as we exit the year.

Operator

We have a follow-up question from Robert Moskow.

Robert Moskow - Crédit Suisse AG, Research Division

It's Credit Suisse, again. Sean, I was just thinking, like, you're raising price here and most likely, your competitors will follow in the protein space. But this comes at a time when a lot of other convenient meals might be deflationary, just because of the direction of commodities and the timing of commodities. Have you thought through at all like what happens to these protein-based products if other convenient meal items are falling in price, like soup or pizza or frozen entrées or anything else?

Sean M. Connolly

Sure. Well, you make a great point, which is that a lot of times, we talk to folks about our brand, there tends to be an assumption that there's just simply trading between our hotdogs and another company's hotdogs, our lunchmeat and other company's lunchmeat. That's not the way it works. These are basically simple meal categories, and people have a consideration set usually around day parts. In our case, we have a lot of lunchtime businesses. We have a lot of breakfast businesses, and you switch between them. So we track exactly what you're talking about, Rob. We know exactly where we source volume from when we're winning within the broader simple meals arena, and we know the categories to which we would be vulnerable should our pricing get out of certain thresholds. So when we talk about pricing analytics, we not only look at pricing analytics versus the exact same type of product in the exact same category, but we also look at it relative to other products and even brands that we might switch with. So we're keenly on top of that. Interestingly, many of those products also have meat in them. So -- and frankly, a lot of them don't have a different cost profile than ours. So if you look at Jimmy Dean sandwiches as an example, that's a category where meat is just a fraction of the total weight of the product. And the kinds of products that are -- a lot of our products interact with are similar, where they tend to be -- have some element of protein in it. So there tends to be some directional alignment, I would imagine, between how COGS move together.

Operator

Our last question is a follow-up question from Ken Goldman.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

JPMorgan. So Maria, I might have thought given your favorable cash and debt position and considering the stock price had been in a low valuation level that you might have maybe considered buying back a bit more stock in the period. So can you talk a little bit about your thoughts about buybacks in the moment? I realize that's not your first priority for cash. I'm just curious how you sort of balance your long-term goals for cash application with, I guess, maybe some shorter-term opportunities.

Maria Henry

Sure, Ken. We look at share repurchases opportunistically, and we do expect to repurchase $200 million worth of shares over a 2-year period. At any given quarter or point in time, we balance out the opportunities that we have in front of us, and we look at the expected returns and the flexibility that we need to be actionable on the opportunities in front of us to create value. So we view it very opportunistically. We monitor it very closely, and we weigh the various alternatives that we have. So I can't predict exactly how much or when we will be buying, but we still do intend to do $200 million of purchases over 2 years.

Sean M. Connolly

And I'm going to come back to -- I have one follow-up thought on Rob Moskow's question from a minute ago, which was really around kind of the relative value equation. I just wanted to put out there that I don't buy the notion that the only place to drive growth these days is in the value tier of the good, better, best continuum. We are driving good growth today on brands like Aidells, Ball Park burgers, Jimmy Dean sandwiches, despite the fact that these brands carry a premium price. And the reason that's the case is because number one, they're truly great brand equities, and two, we keep them fresh and relevant with innovation and MAP support. So certainly, the value tier is an important consideration, but it's got to be pursued very surgically, in my experience, because the best profit pools don't always reside there. So with that last bit of color, I think I'll bring the call to a wrap up. I appreciate everybody calling in, and Melissa will be around for any follow-up questions you have. Thanks very much.

Maria Henry

Thanks guys.

Operator

Thank you. That concludes today's conference. All lines may disconnect. Thank you for your participation.

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