The Hillshire Brands Management Discusses Q2 2014 Results - Earnings Call Transcript

Jan.30.14 | About: Hillshire Brands (HSH)

The Hillshire Brands (NYSE:HSH)

Q2 2014 Earnings Call

January 30, 2014 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

Kenneth Goldman - JP Morgan Chase & Co, Research Division

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

Andrew Lazar - Barclays Capital, Research Division

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

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

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

Robert Moskow - Crédit Suisse AG, Research Division

Varun Gokarn - Goldman Sachs Group Inc., Research Division

Operator

Good morning, and welcome to the Second Quarter Fiscal '14 Earnings Conference Call for Hillshire Brands. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Melissa Napier, Treasurer and Vice President of Investor Relations for Hillshire Brands. Thank you, Melissa. You may begin.

Melissa Napier

Thanks, Candy. Good morning, everyone. Welcome to our fiscal 2014 second quarter earnings call.

Our results were released at 6:30 a.m. Central Time this morning. Our 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 back half of the fiscal year. We will 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 and our actual results may differ from those expressed or implied in these statements. Explanations of non-GAAP financial measures that we may also refer to are included in our release.

I'll now turn the call over to Sean.

Sean M. Connolly

Thanks, Melissa. Good morning, everyone, and thanks for joining us. Before we get into our second quarter performance, as I often do, I want to take a minute and touch upon the big picture at Hillshire Brands with a quick overview of our core beliefs around how we will create strong value for our shareholders over the long run.

Hillshire Brands is a growth-oriented food company with market-leading iconic brands. And when we talk about growth, we're talking about both sales and profitability and to do so sustainably. Accordingly, we believe in a very consistent and disciplined approach to brand building and innovation across our portfolio. We also believe in improving cost efficiency in order to fuel our growth agenda. We've been unwavering in this regard, and we will continue to be that way.

As a management team that is building on new culture, we're constantly working to ensure that cost efficiency is a mindset and not a program. We are now more than halfway through the second year of our plan to build an agile, consistently performing food company, and we feel very confident about the path we're on to create a winner for our share owners, employees and other stakeholders.

Now let's jump into Q2 and our outlook for the year. I'm pleased to report strong results in the second quarter of fiscal 2014 as both sales and EPS grew at rates higher than we'd previously expected. To do this, we had to effectively manage through a much more challenging input cost environment than we originally envisioned, and we will continue to have to navigate this dynamic throughout the second half of the fiscal year.

Our actions will include the launch of our most exciting innovation slate yet and backing it with increased marketing support. When you add it all up, we now expect full year EPS to come in near the high end of the previously provided range.

As you know, we're committed to building momentum on our brands as we move through the back half of the fiscal year. The first half of this year was important in terms of laying the foundation for that momentum. We expanded distribution on innovations we launched late in fiscal 2013. We also introduced additional new products into the market, and you see several of them on the left side of this slide.

And we continue to support our brands with solid MAP investment, including robust advertising programs on Jimmy Dean and Ball Park. We also recently reactivated advertising on Hillshire Farm lunchmeat, which comes on the heels of a very successful period of trade merchandising that grew household penetration an impressive 2 points. And finally, we continue to expand our unique Aidells in-store sampling capability with a particular focus on the new gourmet chicken meatballs that are performing very well.

The bottom line is these programs continue to have an impact, and what you see on this slide is multi-outlet sales results from the retailers' scanner data. Overall, you see very solid performance in the quarter, with Jimmy Dean and Aidells continuing to lead the way. We're also beginning to see trend improvement on challenged businesses like State Fair and Sara Lee Desserts, which is encouraging.

As I did last quarter, though, I want to remind you that as we take pricing to help offset inflation, some of these trends may be pressured in the months ahead. Nevertheless, we clearly like what we see.

Now you just saw the relatively stable performance of Hillshire Farm lunchmeat on the previous slide. This slide helps put that performance in perspective.

From a volume shipment standpoint, Q2 was flat against a very strong 6% increase in Q2 last year. The key takeaway here is that Hillshire Farm lunchmeat has rebounded nicely from the self-inflicted dip we encountered in the back half of last year. And importantly, the brand is now shifting its marketing mix back to our preferred approach of focusing on advertising and innovation, not trade promotion, and the consumer appears to be tracking with us.

Now let's get into the facts on inflation. We expected input costs to be higher this year but not anything like what we've experienced. The increases we've seen in the pork and beef markets exceeded all of our forecast and have driven major cost increases.

As I told you last quarter, this is no longer a first half concept. And versus our last call, we now expect the second half inflation to be even higher, which will clearly pressure gross margins versus what we envisioned at that time.

The net of this is threefold: first, we will continue to be relentless on cost, both tightening our belt on discretionary spend and continuing to deliver our formal cost programs; second, we're taking broader pricing actions than we anticipated last quarter. Those actions are underway now, and we will monitor them carefully with our very capable integrated margin management team.

By the way, that team does expect elasticities to be a bit less favorable than what we experienced in Q2. Much of that pricing was on seasonal items that we believe benefit from higher loyalty associated with the holiday recipe usage of the products.

That leads me to the third action we're taking, which is to mitigate this elasticity effect in the back half with increased MAP support and a very robust innovation slate.

Regarding innovation, recall our long-term goal 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. And last year, we improved that number to 11%.

And in the second half of this year, we have exciting new innovations coming on a number of our core brands, and some new news from our Golden Island acquisition as we build our presence in the very promising jerky category. We're looking forward to sharing more details on these new products at CAGNY in a few weeks. I think you'll like them when you see them, and I think you'll like them even better when you taste them.

Now before I turn it over to Maria, let me summarize what I expect in the months ahead. Clearly, we now expect to see significantly higher inflation throughout the remainder of the fiscal year. And given a critical part of our margin management strategy is to recover inflation with pricing over time, we are in the process of broadening our pricing actions from what we did in the first half.

But we don't rely on pricing alone. Our cost programs will make major contributions in the second half as well. And to keep our consumers with us through the current environment, we need to keep our brand presence very strong. To do that, we have increased our MAP plan for the back half of the year and aligned it with a terrific innovation slate.

On guidance, we now expect EPS to come in near the high end of the previously provided range, which is clearly a positive development. And last but certainly not least, we remain highly active in our pursuit of winning acquisitions.

With that, Maria, over to you.

Maria Henry

Thanks, Sean. Good morning, everyone. Thanks for joining us.

Before I jump into the numbers, let me give you my quick summary of the quarter. Overall, we delivered strong financial results in a very challenging input cost environment.

I think about our stronger-than-expected earnings coming from 3 areas: one, our performance was better in some areas than we expected; two, we benefited from cost timing; and three, we had expense favorability from items that can break either way in any given quarter, and in Q2 they pretty much all fell favorable.

On the performance front, Retail volumes were solid in the areas where we set price. Our Foodservice business exceeded our expectations as we priced to offset input cost inflation and held our spending lower.

And finally, our organization did a fantastic job, delivering strong supply chain productivity, being very mindful with discretionary spending and continuing to deliver on our cost efficiency program. Not all of the favorable items will repeat as I'll talk about in a few minutes, but I am very pleased with how our teams are managing through this inflationary period, which we expect to continue at least through the remainder of the fiscal year.

In addition to good P&L performance, we continue to have a very strong balance sheet to put to work to create additional shareholder value.

Going to the numbers. Our adjusted net sales in the quarter increased 2.1% on a 3.2% decrease in volume. Our sales increase was driven by our Retail business. Our overall company sales growth was driven by pricing, which we took to offset higher input costs, and also by favorable mix in both segments.

Gross profit dollars and rate were down versus last year, primarily as a result of significantly higher input costs. For the quarter, our adjusted gross profit rate was 30.5%. This is down from 31.4% last year when we experienced significant commodity deflation. Aside from the input cost price volume dynamic, our gross margins benefited from our productivity program, supply chain efficiencies and some expense timing favorability. The second quarter is also our seasonal high quarter, which gives us leverage on our fixed cost base and helps our gross margins.

Our second quarter MAP investment was $33 million or just over 3% of net sales and down from last year's second quarter. As we said before, our MAP rate will move from quarter-to-quarter depending on a number of factors ranging from innovation launch timing to competitive dynamics. So this quarter's MAP level is lower than our average MAP rate reflecting a number of factors, including our plans for a very strong second half MAP investment.

Our adjusted SG&A, excluding MAP, was down versus the second quarter of fiscal '13 on tight cost management and expense timing. Additionally, corporate costs were only $7 million for the quarter versus a more normal level of about $15 million that we would expect. Lower corporate expense was a result of mark-to-market gains, lower spending and favorable expense items. Excluding significant items and mark-to-market gains or losses, we now expect to end the year between $50 million and $55 million for corporate expenses.

Our adjusted EPS was up 6.5% for the second quarter, off of a very strong comparable in the second quarter of last year when our adjusted EPS was up 29%. Year-to-date, you see that our adjusted EPS is down 8.2% on sales that are up 1.6%. The EPS decline is driven by a $31 million or 4.9% decline in adjusted gross profit as we did not fully recover the significant commodity inflation we experienced.

As I've said before, our goal is to fundamentally improve the profitability of our business from where we began. When you compare our first half results with our fiscal '12 baseline year, as we do on this slide, you can see that we are making progress.

Our investments in brand building and innovation, which are fueled by our cost efficiency program are clearly moving the center line of our profitability up.

Now let's take a look at the segments. Our Retail segment sales were up 2.7%. As you know, we took price this quarter, and we saw volumes hold better than we expected in some areas during the holiday season. So price and mix offset our lower volume.

The positive performance of our Jimmy Dean and Aidells businesses were somewhat offset by continued softness in the challenged Deli and Bakery businesses.

Operating income was up 2.8% compared to an increase of 23% in the second quarter of last year. The Retail segment is where the MAP timing plays out in the numbers. So in Retail, lower expenses in the quarter offset the lower gross profit that resulted from higher input costs.

In our Foodservice/Other segment, second quarter sales grew 0.3%. Increased pricing and favorable mix offset a 6% volume decline. The volume decline, excluding commodity meat sales, was 3.7% and was the result of a tough operating environment and slow traffic in the restaurant channel. Excluding commodity meat sales, Foodservice net sales were up 0.7%.

Operating segment income increased 10.9%. The segment delivered an 11% operating segment margin, which is higher than we expected. In some parts of Foodservice, we have contracts that enable us to pass through pricing as input costs rise. We did this and saw favorable price and mix offset higher commodity inflation. And the segment also benefited from supply chain efficiencies and expense timing.

Similar to last year though, we expect the second half operating segment margin for Foodservice/Other to be significantly lower than the first half operating margins because of seasonal mix differences. And as we have said before, the Foodservice industry overall continues to be a tough space. And while we're outperforming the market and taking share in some areas, we do continue to have modest expectations for this segment of our business.

Let me move on to cash. Our year-to-date adjusted cash flow was $38 million, including the cash paid for Golden Island and $30 million of share repurchases. Our year-to-date EBITDA was 13.5% of net sales, and our leverage remains low with $551 million of net debt. As of the end of the quarter, we had $397 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. And to date, we are very pleased with what we are seeing from those investments.

In the quarter, we repurchased $20 million of stock as part of our expectation of repurchasing $200 million through fiscal 2015. And finally, we continue to pursue M&A opportunities to drive additional value.

So based on where we are halfway through the year, we are refining our fiscal '14 guidance. We continue to expect sales to increase slightly for the fiscal year. This outlook incorporates the expected benefit of increased MAP and robust innovation launches mitigating the volume impact from broadened pricing actions.

We now expect EPS for fiscal 2014 to be near the high end of our previous range of flat to down mid-single digits. This incorporates the sales estimate I just spoke about and our expectation that input cost inflation will continue to pressure our gross margins in the second half. We now expect that our second half gross margins rate will be similar to the average of the first half.

Additionally, we expect SG&A and corporate expenses to be higher than they were in the first half because of expense timing and also our expectation that some of the favorability that we have experienced will not repeat.

Before I close, let me comment on taxes. You see in the tables in the back of the earnings release that we recorded a significant tax benefit in our reported results. This relates primarily to the reversal of a state tax valuation allowance in the quarter. There will be additional details in our 10-Q, which we plan to file later today. I will note, however, this does not impact our adjusted tax rate, which we expect to be 35% to 36% for this year.

So with that, let me go ahead and turn it back to Sean.

Sean M. Connolly

Thanks, Maria. I'll wrap up our prepared remarks with this: Clearly, I'm pleased with the quarter, but I'm most pleased by the tangible progress our team has made to build a winner for the long haul. We've always had great brands. Now our improved capabilities are enabling us to unlock the potential of our portfolio. In particular, I'm proud of the clear-eyed and objective approach our team takes to their work. Whatever comes their way, whether it's a new opportunity to drive sales growth or an inflation challenge that requires pricing and tightened spending, they don't blink. Rather, they jump on it and they make it happen. And I'm confident that clarity and agility will serve us well for a long time to come.

With that, operator, let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Kenneth Goldman.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

JPMorgan. Maria, can you -- a couple of questions. Can you quantify the input cost headwind you're seeing now versus what you saw a quarter ago? And if you can provide some detail about what in particular has risen so much? I'm seeing at least from the data that we have, sow's up a little, beef trimmings up a lot. But pork trimmings, they really have been flat or down slightly since you last reported, so I'm curious what you're seeing there. And if you could update us on your latest perspective on PEDV because summer hog futures have risen sharply on those fears but spot pork prices really aren't that high. So I know there's a lot of questions in there. I'm just hoping for some more color on commodities.

Maria Henry

Sure, Ken. Thanks for the question. I did see your report. I think a couple of things. I won't give a specific number. But since last time we were on the phone with you guys in October when we looked at the remainder of our fiscal year, so not just the second quarter but the remainder of the fiscal year, our input costs have risen versus what we expected. The areas that they're rising continue to be in beef and in sow. And the outlook on PEDV, that one's tough. We watch very closely the number of new reported cases on that. And while we are very hopeful that one of the vaccines that are being developed that people try to combat this will work, that remains a variable for the second half of the year. So what I can tell you is input costs are up for the full fiscal year versus the last time we were on the phone with you, and it's mostly in those 2 areas.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Are you basing that mostly on what you're seeing with the hog curve when you take your guidance up or are there other things that you're looking at there? I know you mentioned beef and sows, but beef and sows have gone up -- they haven't gone up that much as far as I can tell to drive your numbers up significantly higher.

Maria Henry

Sure. There's a number of factors that affect our outlook. So we look at our specific commodity basket, of course, and we look at all of our various hedging positions that we have through the year. And we look at the curves then and where they are. So given our specific commodity basket, our hedging position, what we see going on in the market, particularly with some of the variability around sow, we are expecting additional inflation for the year.

Operator

Next question, Alexia Howard.

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

Yes, it's Sanford Bernstein. Can I ask about the pricing dynamics, particularly in the sausage segment? It looks for me, the consumer takeaway data, as though quite a lot of price was put through, and the volumes, at least from the data that we're seeing, were quite weak. But it sounds as though the volume numbers that you're seeing may not be so bad. Could you talk a little bit about pricing and competitive dynamics in that segment?

Sean M. Connolly

Sure, Alexia. Overall, we are the market leader in many of our categories, and that means that we decide when we believe it's right to take price. And in many cases, we are leading the pricing actions, and we did that in Quarter 2. As we do that, we model in what we expect to be the elasticity response to that because as we've spoken on previous calls, we've made it kind of progress in that area in terms of that capability. But, of course, elasticities are dynamic. And one of the reasons they're dynamic is because we are working so hard to try to strengthen our brands and reduce elasticities over time. So you never get it exactly right, but you put your best model in there and then you track it accordingly. So I'd say net-net, overall for the quarter, we saw a more muted response than we would have anticipated. And I think that's a good sign on average for our brands. In terms of where we are with Hillshire in the sausage category, we feel very good about it. If you look at the baseline trends in that category in the last year since we've been kind of refreshing that smoked sausage business, we feel like it's performing very consistently with what we'd expect. In any given window of time, you may see a competitor in that category could get more promotional for a variety of reasons. That'll be their rationale, not ours. And we continue to run our play. Obviously, in general, we monitor, and we'll continue to monitor like a hawk what happens in terms of volume trends vis-a-vis the pricing actions we take. But thus far, moving through Q2 and now into Q3, we feel good about where we are. We've got more pricing coming obviously per our comments today, and we'll continue to watch it. But whether it's sausage or other categories right now, I feel good about where we are.

Operator

Next question, Andrew Lazar.

Andrew Lazar - Barclays Capital, Research Division

Barclays. Sean, it sounds like as you just said, your elasticities are a bit better than you anticipated even though you've been leading the pricing in a lot of areas. So even though I know you're broadening pricing from here, I would think that as others may do start to catch up on pricing in some areas where you had led maybe over the last quarter or 2, there's more reason to think that maybe the elasticity stays a bit more muted potentially going forward. And then it's only a quarter, but how much of this do you think is because you've strengthened the brands in a different way than maybe the last time you had to take a lot of pricing, which was a bit tougher on volume versus, I don't know, the competitors following the pricing more quickly this time than last time? I'm trying to get a sense of how much of that is structural versus not.

Sean M. Connolly

Well, I think the first part of my answer here has got to be that we are much farther along in terms of our brand positioning, our product innovations, our packaging than we were a couple of years ago. We've made a ton of progress there, and there's absolutely no doubt in my mind that, that drives brand loyalty and our numbers have been improving in that regard. By the same token, in the Food business, you've got to remain somewhat humble. Your work is never done. It's a competitive space. The consumer is stressed right now. So I think there is some underlying improvement in elasticities and what we've seen. But we also compete in very competitive categories. And it's not out of the realm of possibility that we'll see competitors go for a volume grab here and behave less rationally than we've seen in the recent months. So yes, we have to reserve some flexibility to respond, and we also have to be pragmatic about how much better our elasticities. I made a comment that is a bit of our judgment at this point around Q2 elasticities and how we think they were more muted than what we'd expect in the back half. Part of that is judgment. That's more of the art of figuring this out. And what we're talking about there is when you're buying Jimmy Dean roll sausage to go in your Thanksgiving stuffing, our conclusion is you're probably less likely to roll the dice and trade down to a lower-priced product than if it's just a random Saturday morning sausage consumption in March. So that's where we are not precise in our modeling, and that's more of our experience and our judgment driving that outlook. But we think there's absolute legitimacy to it. But overall, I think structurally, we're in a much better place. And frankly, no matter what happens from here out, we're going to continue to work the plan this way because we believe this is absolutely the right way to run the railroad.

Andrew Lazar - Barclays Capital, Research Division

And then with sales being expected to be up I think you said slightly for the full year, obviously more pricing rather than volume, where do you think -- it's still a guess here, but where would volume come in on the full year? In other words, you have some elasticity, of course, as you broaden out pricing, but you'll be shipping in and try to kind of make up for some of that, as you said in the prepared remarks, with a lot of the new items that you're really coming out within a bigger way in the back half of the year. Would you still expect volumes to be lower year-over-year by a bit or is that likely to be somewhat positive given the new products as well?

Maria Henry

Yes. Andrew, we're still expecting volumes to be lower on a year-over-year basis in the second half.

Operator

Next question, Ken Zaslow.

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

BMO Capital Markets. After you take the pricing actions, what percentage of your portfolio that has the higher input cost will be covered by the pricing actions?

Sean M. Connolly

Well, we don't get into specifics, Ken, on our pricing plans in terms of how broadly are we going to take them because that kind of picks our hands in what is a very competitive environment. But in general, our principle on pricing is that we expect to fully recover the inflation we face with pricing over time. And the way it works, the way it's always worked for us is pretty straightforward, where in deflationary times like last year, earnings tend to get a boost because we don't pass through 100% of the cost relief. But in inflationary times earnings tend to be pressured because we don't fully recover 100% of the cost increase in any given year. That said, we aim to cover as much of it as we possibly can, which means if the input cost inflation is broad-based, then we will look to make our pricing similarly broad-based.

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

Let's pick an environment and say 6 to 12 months where PEDV virus becomes less of an issue and the current sow prices, which is actually I think about 12% below where you had last quarter, if inflation does actually come down, would that -- would you actually have to reverse your price actions? And how much margin expansion would you seem to expect to get?

Sean M. Connolly

The way we talk about that historically really remains true, which is by and large, we are not a pass-through business like that. The one exception to the rule tends to be our Foodservice segment, where we do have contracts with customers, which pass through pricing when we see inflation rather quickly but it also works the other way around. On the retail side of our business, I think our game plan right now in the eyes of our customers would be characterized as heavily focused on innovation. And our customers are extremely pleased with that approach from Hillshire because they are looking for innovation to stimulate their categories, and they want us to have the fuel for that growth. So they much rather see us put the emphasis into a continued stream of innovation. We call it a funnel and not a tunnel. So it's a continuous stream of innovation as opposed to having a surge of innovation and then have it falling flat-footed for a year. So on average, we'll look to hold on to the pricing we've taken in the Retail segment and put our energy and our spending into innovation so we can continue to make our customers pleased with Hillshire as an innovator. Clearly, that is category specific, and we will have competitors in certain categories that look to boost volumes and market share should we come out of an inflationary period, go into a deflationary period. And as we've said before, if that happens, we will defend the market-leading positions that we've built so carefully with vigor, but we'll be very rational about it.

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

And then my final question is on cash deployment. I think you've been quoted in some news sources saying that you would like very much to get an acquisition done. I thought it was by year end, and I'm not sure if it meant fiscal year end or not. But it seems like maybe the deployment of cash towards acquisition is maybe a little bit slower than you anticipated. Can you talk about what the acquisition environment is for you? Has something changed at all? Are the prices too high? How do you think about it?

Maria Henry

Ken, I'll take that one. The acquisition environment remains very good. We're very positive on what we're seeing in the market. We're seeing a lot of attractive opportunities for us of various sizes. As you know with M&A, we can't exactly predict the timing but we absolutely do intend to be an acquirer. If you think about what we've done on capital allocation overall, I think we've been very consistent. Our first priority is investing in the business. We took our dividend up coming into this year. We announced that we intend to do $200 million of share repurchases over 2 years through fiscal '15. And so we've got a very attractive balance sheet that gives us a lot of flexibility and access to the debt market to react very quickly when we do have an opportunity to move on some M&A activity, where we see things that we can bring into our portfolio to help advance our growth agenda, our margin expansion agenda, as well as reduce the overall volatility of our portfolio over the long term. So nothing to update you on today, and it's hard to predict the timing. But we are actively looking at opportunities. We see a lot of good things and happy that we have the flexibility to be in a position to move quickly when something is actionable.

Sean M. Connolly

If I could also build on Maria's comments here. The Aidells acquisition we made a couple of years ago continues to be a home run for us. That is going exceptionally well. And more recently, much more recently, we had the Golden Island acquisition, which while small is very exciting in terms of really giving us an entry into a very interesting category. And that integration has gone absolutely seamlessly as well. So we are quite active right now, seeing what's actionable out there and also evaluating what makes sense economically and strategically. Our goal is not to stockpile cash, but we do need to allow our highly disciplined approach to M&A to play out, and we're rather bullish about it.

Operator

Next question, Akshay Jagdale.

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

This is actually Lubi on for Akshay from KeyBanc Capital Markets. I just wanted to follow up on the earlier questions about commodity inflation, if I may. Just could you tell us how much it was in this quarter and maybe in the first half so far? And then if you could give us some sort of order of magnitude of how much your expectations have changed now versus where your previous estimates were, that would be helpful.

Maria Henry

Yes. I'll take that one. In terms of the commodities, we don't give specific numbers. But if you go back to looking at what we expected when we built our plan and gave our guidance in the beginning of this fiscal year and then you look at what our expectation is today in terms of commodity inflation, it is significantly higher. And as I mentioned a few moments ago, when I look at what we thought for the remainder of this fiscal year back when we were on the phone with you on October versus what we think today, those estimates are also higher. So given our basket, given our strategy on hedging, we've seen a tremendous amount of commodity inflation, both on a year-over-year basis and versus our expectation. So the fact that we are able to still be within the guidance range, and we're at the high end of the guidance range on the profitability, despite the fact that we've had significant commodity inflation beyond our expectations, I think is a good result and an indicator that our business model's working and that the team is doing a good job managing on the expense side and being able to get in front of things and react very quickly, both in terms of pricing and in terms of cost management. But it is significantly higher than we thought when we entered the fiscal year.

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

Okay. And then just in terms of the lunchmeat category, could you give us a little bit more color on sort of what your expectations are for that business going forward? And I know you mentioned in your opening remarks that the business has rebounded nicely, and you talked a little bit about shifting marketing mix. But just how should we think about that category going forward?

Sean M. Connolly

The way you should think about that category is that it is an important business for our company. Remember when we started this journey, nothing had been done with that business in quite some time, so we put a lot of effort into getting the fundamentals right, getting the product quality right, trying to update the packaging, get some new line extensions in play and then turn on advertising. And as you saw in the deck today, it was working nicely, and we grew sales -- grew volumes last year 6% in the second quarter, and then we had a packaging challenge in the back half of last year. The core business has rebounded nicely, but we have obviously bigger plans than just to continue to nurture and be stewards of the core business. And a lot of that is really around innovation. So what I can tell you at this point is that we'll have more exciting innovation on lunchmeat and we'll have more to share with you down in Florida in a few weeks at the CAGNY Conference.

Operator

Next question, John Baumgartner.

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

Wells Fargo. Sean, looking at Foodservice here, pretty significant volume decline, I guess, particularly versus last quarter, and I guess in line with some of these new product launching as well. Could you just go into that decline a little bit more in detail in terms of how temporary or not temporary you think it's going to be?

Sean M. Connolly

Well, I think you've got a lot going on in the Foodservice division right now. First of all, you've got a sector that continues to be in what I call last quarter cyclical malaise, and that hasn't changed. And you heard in Maria's comments today that traffic through the holiday season through the second quarter in the channel was weak, and that's certainly a contributor to it. But the Foodservice division is also not immune to elasticity effects, and we plan those in. So overall, I'd say the business is on the sales line, not too far off of what we would expect there. And the team has done an exceptionally good job with cost management, recognizing that hey, in times of adversity everybody's got to up their game and make sure that we create as much flex as we can. So I'd say that business is about where we'd expected to be, given the macro environment. And I think as Maria points out, just a reminder too on Foodservice, that the margin structure in that business varies by season, and we hit a seasonal high in Q2. And what we expect in the balance of the year is much more consistent relative to the second quarter and the first half with the changes we saw last year.

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

And again in terms of the menu offerings and the growth in desserts, did you see any indications that the consumers are opening their wallets more for dessert or is it more just distribution gains that you're getting in your pies business right now?

Sean M. Connolly

Well, it's a bit -- there are some core strength there because we have been innovating, and we always talk about innovation in the context of the Retail division, but the Foodservice team has been phenomenal in terms of the innovation they brought into the marketplace. They're doing that because they're trying to gain share. And frankly, they have been gaining share. They've been gaining quite a bit of share in key categories like pies. This year we had a big innovation on a double-stuffed layer pie. It's the only one of its kind in the world, and it's pretty provocative stuff, and it does help us gain share. But when you're gaining share in a shrinking market, you don't pick up a lot of ground, and that is the reason why our outlook for that segment remains modest for the months ahead.

Operator

Next question, Robert Moskow.

Robert Moskow - Crédit Suisse AG, Research Division

Crédit Suisse. Sean, I'm just trying to step back and think about what you've learned about the business over the last 1.5 years or so. And one of the major assumptions that you had when you had the operating plan was that sales could grow to or the pace of its growth could get up to 4% to 5% at some point. And then also that your MAP spending could accelerate rapidly to -- what was it -- 5% of sales. And what I've seen over the last 18 months is that the company's done very well. You've made a lot of good improvements within the organization. But the sales growth seems to be very dependent on pricing, and the MAP spending also seems to be dependent on what's going on in the competitive environment and how much merchandising is necessary. I just wanted to know if had you had to adjust any of those assumptions about how the business works? And if you have, how does it alter at all your outlook for EPS power?

Sean M. Connolly

Sure. Well, first of all, our outlook, our midterm outlook is not changing at all, and our plan remains intact. Our philosophy here has been and continues to be the same, which is we're focused on brand building and building the business for sustained long-term value creation. And our approach to innovation and MAP, we believe, is exactly the right approach. And as you remember, when we got into this, we said, look, this is going to build. This is not going to be like flipping a switch. We've got a portfolio here that we believe has been undermanaged and has been neglected. And we've got some fundamentals that we've got to work on to put the business in a position to perform. And since the day we launched, we've had 2 significant and unusual events in the last couple of years: one was the drought and this year's PEDV. We clearly don't expect those kinds of events to be emerging every single year. So I would say we are very pleased with the progress we have made against strengthening the core portfolio, especially given the unique dynamics that we've encountered in the marketplace in the last couple of years. So I feel very good about it. And the one piece I always remind folks when we talk about growing at at least 4% with this portfolio is we're a $4 billion company. So when we're growing 4% in absolute dollars, that puts our floor at growing $160 million a year, which with the portfolio of brands we've got and the slate of innovations we've got, we think is absolutely achievable. I think that number feels a lot bigger than it is for a company like ours. And when you apply it to the $20 billion company, that's enormous pressure growing that amount year in, year out. But I think it's absolutely doable for us, and I think the progress we are making with the underlying structural strength of the brand amidst some adversity is indicative of that.

Robert Moskow - Crédit Suisse AG, Research Division

And do you have a MAP target for this year? I know you're going to spend more in the back half, but what is your target for the year?

Sean M. Connolly

Let me give you my perspective on MAP. I'm glad you asked that. We don't give MAP guidance on an annual basis. What we have said is that by the end of fiscal '15, we want MAP rates to be at about 5%. But we've also said that we'll move around from quarter-to-quarter for a variety of reasons. Frankly, there may even be variability year to year depending upon the environment. The key is overall around MAP is we're committed to it and we're committed to it because it works. If you look at Q2, our MAP support level in Q2 was very meaningful. Our GRPs were up in the high single digits, and our dollar spend was down for a few reasons, and that may happen from quarter periodically. Let me give you the color on Q2 MAP. Three things in Q2 that caused the dollars to be down. First, as I mentioned last quarter on Hillshire Farm lunchmeat, especially at the beginning of quarter 2, we still had a bunch of our marketing money shifting above the line to trade where last year, it was below the line in MAP. And that was intentional, and that was to help us recapture some of the lapsed consumers on Hillshire Farm lunchmeat, and it was exceedingly effective. So we feel very good about that. Another piece of the MAP was pushed out of what was in the second quarter a year ago into the second half this year. And the reason we did that was very pragmatic, and that's we've got a huge innovation slate coming in the second half of the year, and we want to align our MAP spent with that innovation slate. And the third piece of it is not inconsequential, and you've been hearing a bit of this in the industry in general, and I would say we're as good at it now as probably anybody out there. But as you saw last quarter, we have made huge strides in getting more bang for our buck with MAP efficiency. So we were in a position this year, and this quarter is a good example, where our GRPs were up 7%, which is not small on a significantly lower spend. That is an area that the team has really continued to surprise us on the positive side. And I think what it reflects is that MAP haven't really been scrubbed and optimized in quite some time, so there is more efficiency there than we probably originally expected. But at this point, our overall target of 5% by next year, that still is as good as anything. And what I want to also remind our investors is that we invest our MAP on a very select number of brands. It's very focused on the few brands that have demonstrated empirical evidence that the MAP generates a return. So the way we talk about it internally is we spend MAP on brands when they're MAP-ready. And over time, we expect more of our branded portfolio to become MAP-ready. But until we get there, we're going to spend it in a very disciplined way because ultimately we've got to grow the profit of this business. So it's going to be good ROI. Hope that's helpful.

Operator

[Operator Instructions] Next question, Jason English.

Varun Gokarn - Goldman Sachs Group Inc., Research Division

It's actually Varun Gokarn in for Jason. It's Goldman Sachs. One question on gross margin. You mentioned that it was going to be roughly in line with the first half or the second half. You've got some good supply chain productivity in the first half. There were some expense timing benefits in the second quarter, and then you're seeing the level of inflation is supposed to be higher in the second half. So given those headwinds, why would you expect them to be flat with the first half of the year? And what are the other drivers that are going to allow you to achieve that?

Maria Henry

Sure. Let me take that one. The commentary around the gross profit rate in the second half is driven by a couple of things. We had previously said that we expected our gross margins to increase as the year progressed. So given the changes in what we see in front of us, particularly on the input cost side, we wanted to make sure that we gave an updated perspective on that. So we've got higher input costs than we had expected. The other variable is really watching to see what happens to volumes as we have broadened pricing out into the market and to watch the consumer reactions to the actions that we are taking. So when we look at all of those dynamics, we think that where we'll end is somewhere around the equivalent to what we were able to put up for the first half.

Varun Gokarn - Goldman Sachs Group Inc., Research Division

Okay, great. And then one just quick question on MAP spend. I know you talked about this earlier, Sean. But in terms of the back half of the year, is it conceivable you have not spent up year-on-year at any point, especially given the timing between the second and the third quarter?

Sean M. Connolly

I can't give you a specific number because I don't want to set a precedent for guiding MAP especially. I don't do by year. I'm not going to do it by half or by quarter. But I can tell you that our plan is not only to have a robust MAP spend in the back half of the year, but it is also now to have a higher level of MAP spend in the back half of the year than we expected a quarter ago. And the reason we're doing that is kind of similar to where we were last year when we said, look, we're at the midway point of our year, and we're ahead of what we expected. We're going to take some of that overdelivery to the bottom line. We're going to take some of that overdelivery and invest back in the business. We were doing it for different reasons last year, but the philosophy remains the same. We're doing it this year into an inflationary environment, into an environment where there's more pricing. But again, it's all about long-term sustainable performance. The more we can invest in these brands, particularly in times of challenging macro environment, the stronger they're going to be overtime, the lower the elasticities will be and the higher the margins will be. And that's what we're going to continue to do.

Operator

At this time, we're showing no further questions. I will now turn it back to the speakers for closing remarks.

Sean M. Connolly

We appreciate everybody calling in today. I'm pleased to report our second quarter results. And we look forward to talking with you again shortly. Thank you.

Operator

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.

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