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Executives

Mark Belgya – SVP & CFO

Richard Smucker – Executive Chairman & Co-CEO

Tim Smucker – Chairman & Co-CEO

Vince Byrd – President, U.S. Retail - Coffee

Paul Wagstaff – President, U.S. Retail - Oils and Baking

Steve Oakland – President, U.S. Retail - Smucker’s Jif and Hungry Jack

Analysts

Eric Katzman – Deutsche Bank

Alexia Howard – Sanford Bernstein

Ian Zaffino – Oppenheimer

Jane Gelfand – Barclays Capital

Ed Aaron – RBC Capital Markets

Farha Aslam – Stephens

Scott Mushkin – Jefferies & Co

Ken Goldman – JPMorgan

Jon Andersen – William Blair

Chuck Cerankosky – Northcoast Research

Robert Dickerson – Consumer Edge Research

Lucas Klein – Putnam Investments

The J. M. Smucker Company (SJM) J. M. Smucker CEO Discusses F1Q2011 Results - Earnings Call Transcript June 17, 2010 8:30 AM ET

Operator

Good morning and welcome to The J. M. Smucker Company’s first quarter 2011 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. Please limit yourself to two initial questions during the Q&A session and re-queue if you have additional questions.

I will now like to turn the conference over to the Chief Financial Officer, Mr. Mark Belgya. Please go ahead, sir.

Mark Belgya

Good morning, everyone, and welcome to our first quarter earnings conference call. Thank you for joining us. On the call from the company are Tim Smucker, Chairman of the Board and Co-CEO; Richard Smucker, Executive Chairman and Co-CEO; Vince Byrd, President of our Coffee Business; Steve Oakland, President of Smucker’s Jif and Hungry Jack; Mark Smucker, President of our Special Markets; and Paul Wagstaff, President of Oils and Baking.

After this brief introduction, I will turn the call over to Richard for opening comments. I will then review the financial results for the quarter and Tim will provide closing remarks. At the conclusion of these comments, we will be available to answer your questions.

If you have not seen our press release, it is available on our Website at smuckers.com. A replay of this call is available on the Website. If you have any follow-up questions or comments after today’s call, please feel free to contact me or Sonal Robinson, Vice President of Investor Relations.

I would like to remind you that in both the prepared comments and during the question-and-answer period that follows, we may make forward-looking statements that reflect the company’s current expectations about future plans and performance.

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

I also want to point out that company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is also detailed in our press release and on our Website.

I’ll now turn the call over to Richard.

Richard Smucker

Thank you, Mark. Good morning everyone and thank you for joining us. Let me begin by reviewing our results for the quarter, which continued our consistent and positive trends.

First, our sales for the quarter were comparable to last year. Several key categories realized volume growth, including Coffee and Peanut Butter, which contributed to a favorable sales mix.

Second, Coffee, our largest segment had a solid quarter and came in stronger than we originally expected during our year-end call. Third, non-GAAP earnings increased for the quarter, with earnings per share up 13%, led by increases in operating profit and reductions in our effective income tax rate.

Fourth, our continued investment in the brand, new product offerings, the pricing actions taken to date, and our planned promotional activities have positioned us well for the back-to-school and fall big holiday periods. And finally, the significant investments we are making in our business, including the project to streamline our coffee and fruit spread supply chain will allow us to continue delivering long-term growth and shareholder value.

Our quarter results occurred during a challenging economic environment demonstrating the strength of our brand and the importance of a consistent focus on our strategy. Our focus is long-term, yet we have a culture where teams adapt quickly and adjust tactics as necessary. While aggressive pricing can be seen in a number of the categories in which we participate, we will respond rationally and with a long-term view of the health of our brand and our categories.

Now, let me provide some commentary on each of our four business segments. In our Coffee segment, sales were up over a very strong first quarter last year and momentum in this business continues. We are supporting the coffee brands with all elements of marketing, including advertising, consumer promotions, and public relations.

Seven new commercials will air this year, including advertisements supporting Dunkin’ Donuts Coffee, Folgers Black Silk, and the recently re-launched Folgers Special Roast. Our K-Cups offerings continued to meet with great customer acceptance and will be in stores in the second quarter.

Folgers Gourmet Selections and Millstone K-Cups will be supported by a strong marketing program, including advertising. Dunkin’ Turbo Coffee, which launched late last year continues to gain distribution, increasing to a 12-week ACV of 55%, and the new Dunkin’ Donuts seasonal items are on track to be launched this fall.

Finally, as previously announced, in response to Green Coffee cost, which reached a 12-year historical high during the quarter, we took a price increase averaging 9% earlier this month on most of our U.S. retail coffee products.

Turning to our Consumer segment, net sales and volume were essentially even with last year, excluding divestitures. It is important to note that we achieved these results despite strong performance last year. Also, certain key promotional activities that occurred in the first quarter of the prior year have been shifted to later quarters this year.

In the Peanut Butter category, we will be airing new advertising to support the relaunch of Jif To Go. Also, consistent with our ongoing focus on price transparency, we took a 5% price decrease on our peanut butter products in the first quarter, reflecting a decline in peanut costs.

In the Fruit Spreads category, we continue to invest in our brands as news commercials continuing the classic voice campaign will be aired during the upcoming key promotional periods. We also continue to see momentum in the Smucker’s Orchard’s Finest premium fruit spreads products, which were launched on a national basis.

The national rollout of Smucker’s Snack’n Waffles in retail continues to provide us an exciting handheld platform. All of these actions position us well for the back-to-school period.

In our Oils and Baking segment, aggressive pricing by competitors negatively impacted both sales and volume for the Crisco and Pillsbury brands. Planned rationalization of lower margin products also contributed to the decrease for Pillsbury.

We recently announced a list price decrease for our oils business to narrow the price gap on shelf and to provide the consumer with a lower, everyday price for our Crisco products.

We continue to focus on product innovation and providing consumers with more options for our Pillsbury brand. Our recent launch of sugar-free cake mix and frosting has been met with good customer acceptance.

In addition, we will continue to offer new varieties of Pillsbury products, including the upcoming launch of seasonal items with a Halloween theme. This combination of new products, merchandising programs and narrowing the price gap in oils, gives us comfort as we enter the fall day period.

In the Special Markets segment, value was up slightly, led by the natural foods and export businesses. This increase was partially offset by volume decline in Canada. Excluding the impact of foreign exchange, sales were down 3% due primarily to price decreases and the timing of promotional spending.

In summary, we delivered a solid quarter and a good start to the fiscal year. Our successful performance continues to reflect a culture where our employees understand our vision and our strategy and consistently execute.

I would now like to turn the call back to Mark to have him review the financial results for the quarter.

Mark Belgya

Thank you, Richard. Overall, net sales for the quarter were equal with last year. Increases in the U.S. Retail Coffee segment were mostly offset by declines in U.S. Retail Oils and Baking and the impact of the divestiture of our potato business.

Favorable sales mix and foreign exchange were positive contributors, helping offset a 3% decrease in volumes, driven by declines in the oils and baking categories in the U.S. and Canada. Pricing action initiated during the quarter did not have a material impact on the results. Also included in last year’s results were approximately $3.5 million in industrial fruit sales that are no longer categorized as revenue.

GAAP earnings per share were $0.86 this quarter compared to $0.83 in the first quarter of last year, including charges related to restructuring and merger and integration activity. Total charges were up this year reflecting costs associated with the restructuring project announced earlier this calendar year. Excluding these charges, earnings per share were $1.04 this quarter and $0.92 in last year’s first quarter, an increase of 13%. The quarter results benefited from a lower tax rate when compared to the prior year.

Gross profit, excluding charges, increased $12 million to 39.9% of net sales from 38.6% last year. Included in gross profit were unrealized mark-to-market gains on commodity contracts of approximately $7 million.

Gross profit benefited from a favorable sales mix as a larger percentage of total sales came from the coffee, peanut butter, and fruit spread categories, which generate higher gross margins.

The impact of raw material cost was mixed as higher green coffee costs were offset by lower costs for peanuts and certain fruits. Most of the gains in gross profit flowed to operating income as the SG&A expenses were up 1% compared to prior year and increased as a percent of net sales from 19.1% to 19.4%. Overall, operating income, excluding charges, increased $10 million for the quarter and improved as a percent of net sales from 17.6% to 18.7%.

The effective tax rate for the quarter was 31.3% compared to 35.2% in last year’s first quarter. The lower rate in the current year reflects benefits realized from an increased deduction relating to the U.S. manufacturing activities along with lower state income taxes and a favorable federal income tax determination related to a prior year. We anticipate a full-year effective tax rate between 32% and 33%.

Let me now provide details on our segment. As a reminder, although our four reportable segments have not changed, we have modified the calculation of segment profit to better reflect the decisions of segment management with the corresponding financial results, most notably in the area of intangibles. We issued a Form 8-K last week providing the quarterly segment profits for fiscal 2009 and 2010 under this new calculation.

In the U.S. retail coffee segment, net sales increased 7% primarily as a result of volume gain. Growth in the Folgers brand along with continued double-digit growth in the Dunkin’ Donuts brand resulted in an overall coffee volume increase of 5%. This increase is on top of a 9% volume gain in last year’s first quarter.

Coffee segment profit increased 1% due to volume gains and a price increase offsetting higher green coffee costs. Segment margins were 30.4% in the prior year compared to 28.4% in the current year, reflecting the higher green coffee costs.

In our U.S. Retail Consumer segment, reported sales were down 4%, while volume declined 3%. Excluding the divested potato business, net sales and volumes were essentially flat when compared to a strong first quarter in the prior year as volume gains in Jif peanut butter, Smucker’s Snack’n Waffles, and Hungry Jack pancake mixes and syrups were offset by declines in toppings.

As Richard mentioned, certain promotions have been moved to later in the year resulting in a slight volume decline in fruit spreads for this quarter. Segment profit increased 8%, mainly due to lower raw material costs, improved profitability related to Smucker’s Uncrustables, and favorable product mix. These were partially offset by additional investments in segment marketing.

Segment margin improved nearly 300 basis points from 22.7% in last year’s first quarter to 25.6% this year. The divestiture of the low-margin potato business also contributed to the margin improvement. In the U.S. Retail Oils and Baking segment, net sales and volume for the quarter declined 11% and 12% respectively as the competitive and promotional environment experienced in the oils and baking category at the end of last fiscal year continued. The planned rationalization of certain low-margin baking products also contributed to the sales decline.

Segment profit in the quarter decreased 12% and profit margin declined by 20 basis points. The decrease in segment profit was primarily driven by lower net sales and higher production costs, partially offset by the favorable impact of unrealized mark-to-market adjustments on commodity contracts.

Sales in the Special Markets segment were flat. Excluding the impact of foreign exchange, sales declined 3%, primarily driven by price decreases and the timing of promotional spending. Volume increased 1% as gains in natural foods and milk, condiments and coffee were partially offset by declines in flour, oils, food service, and portion control.

Margins in the Special Markets segment increased from 13.4% to 17.4% as a result of favorable sales mix, lower supply chain costs, and the positive impact of unrealized mark-to-market adjustments.

EBITDA, excluding restructuring and merger and integration costs, was $248 million for the quarter or 23.7% of net sales, compared to $233 million or 22.2% of net sales last year. Based on first quarter results, we are tracking towards our guidance of full-year EBITDA approaching $1.1 billion excluding charges.

Let me conclude my remarks with comments on cash flow. Cash used by operations was $27 million in the first quarter of 2011 compared to a use of $26 million last year. As a reminder, we expect a significant use of cash for working capital during the first half of each fiscal year for seasonal fruit procurement, the build-up of inventory in advances of fall bake and holiday season and the additional build-up of coffee inventory in advance of the Atlantic hurricane period. We expect the generation of cash to accelerate in the second half of the year as we complete our key seasonal periods.

Capital expenditures are still expected to approximate $235 million despite only $27 million in the first quarter. As we previously stated, we expected use of cash this year of approximately $95 million for capital expenditures related to the coffee, fruit spreads restructuring project. This will primarily occur in the second half of the year. Finally, cash charges of $35 million to $40 million related to our restructuring project are expected for the year.

I’d now like to turn the call over to Tim.

Tim Smucker

Thank you, Mark, and good morning everyone. As we’ve stated over the years, we believe our strategy of owning leading brands in North America is a solid, well-understood strategy. It is one which has provided us the framework to achieve our growth objectives. We believe in running our company with a long-term perspective. As an organization, we remain committed to investing in our brands and continuous improvement in our operational practices and cost structure.

In March, we announced the largest capital investment in our history to streamline our coffee and fruit spreads supply chain. The estimated expenditures, annual savings, and overall timeline related to the project remain on track. We plan to break ground on our new manufacturing facility in Orrville later this fall and are actively working to expand our coffee capacity in New Orleans.

We are currently in the key back-to-school period. We have solid programs in place, supporting our fruit spreads, peanut butter and Smucker’s Uncrustables sandwiches and are anticipating a strong finish to the season during the second quarter.

We are encouraged by our first quarter performance and remain confident about the remainder of the year. For fiscal 2011, we anticipate an increase in net sales slightly ahead of the 3% growth indicated in our original outlook, due primarily to the impact of recent pricing actions.

We continue to expect non-GAAP income for diluted share to be in the range of $4.50 to $4.60, including amortization expense of approximately $0.40 per share. We are also maintaining our outlook on various cash flow items that we provided last quarter, including depreciation, amortization, and capital expenditures.

As we look forward, we feel positive regarding the plans we have in place and the tactical measures we have implemented. Due to our hedged coffee position relative to price, we would anticipate strong results in the second quarter. However, we have held to our original guidance range for the year.

We believe this is prudent as we monitor competitive activity and consumer response to our pricing actions. We will be in a better position to adjust guidance if appropriate following the next quarter. At that time, we will have completed our back-to-school period and be in our fall bake and holiday season.

In summary; first, we had another strong quarter; second, we will continue to adapt our tactics to ensure we are well positioned for the current environment, but our focus will not waver from our strategy and our long-term health of our brands; third, we feel confident in our ability to deliver on the earnings guidance provided; fourth, we continue to invest in our business and our brands through marketing and product innovation; and finally, we want to thank our dedicated employees for their continued commitment to our culture and doing the right things and doing things right.

Thank you for your time today, and now, we’re happy to answer any of your questions.

Question-and-Answer Session

Operator

(Operator instructions). And we’ll first hear from Eric Katzman of Deutsche Bank.

Eric Katzman – Deutsche Bank

Good morning, everybody.

Tim Smucker

Good morning, Eric.

Eric Katzman – Deutsche Bank

Okay. I guess my first question has more specifically to do with the coffee business to the extent that the input has gone up a lot, you’ve taken pricing. Have your major competitors followed on that price increase? And are you seeing any loss, probably it’s pretty difficult because you are kind of small in the single serve, are you seeing any kind of elasticity either with single serve or with maybe some trading away from Dunkin to lower cost Folgers?

Vince Byrd

Good morning, Eric. This is Vince. Let me start with the pricing action that was very well received and probably expected when we announced in early August. I think it’s public information that our major competitor did follow on mainstream. It’s also public knowledge that our main competitor in the Gourmet segment did not follow. And so, they have a press release in regard to the resulting impact of that. The pricing is now just, I’ll say, being reflected on shelf in terms of the everyday price in both cases.

The key that we’ll be watching during the second quarter and third quarter, though, are the price points during the key merchandising periods. In terms of pricing elasticity and volume impact, obviously we run models like everybody else does, but it really will depend upon the price points that the products are being merchandised. And I think it’s fair to say that our team will be monitoring those very, very closely, and we will respond where we need to in a responsible manner.

And in terms of single serve, I would say that we haven’t seen any movement away from that to this particular point. That category continues to grow very, very significantly, and we really haven’t seen much trading off from gourmet at this point. The gourmet segment continues to show nice growth including our Duncan brand, which was up about 15% in the quarter.

Eric Katzman – Deutsche Bank

Okay, thanks for that. And then I guess, follow-up maybe a broader question for Tim or Richard. There is a lot questions about the government’s approach to the tax policy on dividends. You have a lot of cash, a very strong balance sheet. I guess the assumption has been that you are going to be purchasing a lot of stock. Is there any kind of thought to changes in kind of given what if rates go up on dividends, is there any change that you would think of in terms of how you would use the cash flow to give back to shareholders?

Richard Smucker

Eric, this is Richard. When we look at our capital structure frequently and we do take into consideration the government policies, so that isn’t a subject that we haven’t talked about. We have talked about it, but we haven’t made any decisions at this point, and our plan would be to whatever we do would be the right thing for the shareholders’ value long-term, whether that’s something changed in the dividend policy or buyback of stock, which you know we will be able to do after November, that’s a two-year time period. So, we will look at all of those things, but we haven’t made a decision yet.

Eric Katzman – Deutsche Bank

Okay. I’ll pass it on and get back in queue. Thank you.

Operator

Our next question will from Alexia Howard of Sanford Bernstein.

Alexia Howard – Sanford Bernstein

Good morning, everyone.

Richard Smucker

Good morning.

Alexia Howard – Sanford Bernstein

I just wanted to focus a little a bit on the retail oils and baking sector. Looks as though the volumes were down fairly heftily, double digits, and pricing was pretty flat. I am sure you’ve got the promotional dynamic in there. Were the volumes down mainly due to competitor activity? And if so, would that promotional activity funded by retail as all the competitors and are you seeing any relief on that in the last month or so?

Paul Wagstaff

Hi, Alexia, this is Paul Wagstaff. And first thing just want to state the obvious, the oils and baking team wasn’t happy with the results for the first quarter. Clearly, we want to do better. That being said, our long-term strategy we still feel is accurate. We think it’s good and again we managed the total oils and baking category as a whole on the long-term. From a volume perspective, on the oils side, we did see significant competitive pressure in the category, and we do see that, that was a main driver of why we had lower volume.

On the baking side, we also had some significant competitive pressure, but there was also some planned declines in some of our lower margin items. We discontinued some items, for example, in flour which is a very heavy item, so big volume. We had some planned declines there. As far as going forward, we would anticipate it to be continuing from a competitive standpoint, but we feel we have pretty good plans in place to address that.

Alexia Howard – Sanford Bernstein

Great, thank you very much. And just moving on to the Coffee segment, did you get any benefit or any significant benefit to volume this quarter from the shipment of the K-Cups this quarter that I know that are really going to hit next quarter? And if so, how material was that volume benefit?

Vince Byrd

There were no K-Cups shipped in the first quarter and that will all begin in fact within a week or so. So, there was no volume as it related to that. I would like to go back to your previous question that you asked all about the funding, I think it’s fair to say from a macro perspective, there was a lot of disruptive pricing that occurred during the quarter, and I think the answer to your question is that’s being funded by both competitors and retailers. It’s just not one or the other.

Alexia Howard – Sanford Bernstein

Great, thank you very much. I will pass it on.

Operator

Ian Zaffino of Oppenheimer.

Ian Zaffino – Oppenheimer

Great, thank you. Just more of a theoretical question here. Now, that you have – I think you’ve done a great job in coffee and I think that you’ve really kind of established yourself as a great brand there. Is there an opportunity for you to kind of move away from the old Procter & Gamble pricing ways, the way you’ve trained the channel to look at green coffee and expect an increase or decrease depending on where it goes? In that, is there an opportunity to raise prices above and beyond what green coffee might go up and if it goes down maybe being able to hold pricing and hold margins? Thanks.

Vince Byrd

Well, I guess I would answer to some degree, we have already moved away from previous practices, primarily because of the way it’s managed from an inventory LIFO/FIFO perspective, we tend to be a little bit longer. But I think it’s true to our fundamentals that we are always transparent with our pricing with our customers. And this isn’t about margining up or margining down. It’s about taking it when we feel we need to that reflect those costs to accomplish our overall margin objectives or thought objectives for that fiscal year.

Ian Zaffino – Oppenheimer

Okay. All right. Thanks. That’s really my only question.

Operator

Jane Gelfand of Barclays Capital.

Jane Gelfand – Barclays Capital

Good morning. Just a question on how you are feeling about how the first quarter panned out versus how you are seeing the fall bake merchandising sort of getting set. You talked just two months ago about this being sort of a new normal and among the most toughest environments that you seen in your long career. So, I guess now you should have a little bit more visibility, given the merchandising that is ahead of time for fall bake. Do you see like, the first quarter was the toughest quarter that you’d expect from a promotional standpoint this year, or is fall bake going to be just as competitive and potentially as volatile?

Paul Wagstaff

Hi, Jane, this is Paul Wagstaff. From an oils and baking perspective, obviously we’ve had some significant competitive activities since the fourth quarter of last year in my area. And I would say that we would see some of that continuing to the fall bake time period. That being said, we want to be competitive and we’ve taken a price decline in our oils business to address some of this gaps on pricing on shelf, and we think that’s going to help address the issue going through fall bake.

Richard Smucker

This is Richard. Just from an overall standpoint for the industry, there is no doubt about it. Everybody is trying to gain customers and there’s probably more promotional activity than we’ve seen historically. We see that continuing. And I think that’s why we say that we are willing to adjust our tactics not our strategy. We feel very comfortable with our strategy. But we will and have adjusted packets as we need to, to adjust to the market. But I think we’re well positioned to do that, what we call responsibly, so that we still deliver our results. And so, it is kind of a new normal, but we think we’re well positioned for that new normal.

Jane Gelfand – Barclays Capital

Thanks very much. That’s helpful. And just as a follow-up. As we think about the reset in some of the price gaps in Oils and Baking, how does that show through on the profitability line? Last quarter, we had seen very similar dynamics on the top line, but clearly profit was up in the double digits. Here, it’s down this quarter. So, as we think about the impact of that price reset, how do you expect that segment operating profit line to trend for the rest of the year?

Paul Wagstaff

Well, I think the key is we manage it for the full year. And we have a lot of different budgets that we’re managing to go towards our overall fiscal year margin goal. So, I think we’re positioned pretty well to manage that.

Jane Gelfand – Barclays Capital

Thanks very much.

Operator

Next, we’ll hear from Ed Aaron of RBC Capital Markets.

Ed Aaron – RBC Capital Markets

Thanks. Good morning.

Paul Wagstaff

Hi Ed.

Ed Aaron – RBC Capital Markets

So, I guess a couple on coffee. The reported sales numbers were surprisingly strong relative to some of the external retail data that we saw during the quarter. I know you didn’t announce the price increase until after the quarter ended, but did you perhaps see any inventory load into the channel in anticipation of those higher prices?

Vince Byrd

No. This is Vince. We clearly signed that announcement, so that there would not be any forward buys in the system and I can assure you that there was no load in the quarter for that, that’s a conscious decision that we made. But I want to go back to your point about what you see in the syndicated data information. I would say, we share your concern, but as we have said before, those syndicated providers measure only about actually less than 50% of our total volume. And so, the real numbers are we actually grew coffee during the quarter fairly significantly 5% on units and 7% on sales.

And as you look at the syndicated information, you know that, that doesn’t show category growth or share growth. I will say that we did anticipate that our major competitor was going to have a gain during this period because of the pricing where they were and in some cases, as I think, Ken Goldman reported, they were below private label level. So, we did anticipate some share reflection, but again it doesn’t reflect the bigger picture of the growth that we have had with the brand.

Ed Aaron – RBC Capital Markets

Okay, thanks. And then just a follow up on the earlier question about price elasticity in the category. I mean, you haven’t owned Folgers long enough for us to really study that, but presumably you have a history of those numbers that goes back longer than what we can see. Based on that longer period of history, what would you kind of assume is maybe just a historical rule of thumb for how much volume would be expected to taper off relative to the magnitude of the pricing actions that you have taken?

Vince Byrd

We have, obviously, have our models and look at that, but as I’ve said earlier in my comments, it really is going to determine what the key price points are of our competitors and where we feel we need to be competitive. And so, it wouldn’t be fair for me to try to quote a number at this point.

Ed Aaron – RBC Capital Markets

Okay, thank you.

Operator

Next, we’ll hear from Farha Aslam of Stephens.

Farha Aslam – Stephens

Hi, good morning.

Vince Byrd

Hi Farha.

Farha Aslam – Stephens

On several occasions, you’ve mentioned your long-term strategy, but willingness to adjust tactically. Have you gotten new tools that you can better respond to the market, or is it a new strategy that you are quicker in tactical changes? And how long and can you give us some examples on those tactics?

Richard Smucker

I’d like to turn it over to Steve in just a minute, because he is doing a lot for back-to-school right now with Paul Wagstaff. Most of our tactics of what we do on our promotional activity on a quarter-by-quarter basis and the levels of promotion, the types of promotions that we do, we also adjust advertising schedules to be at the right time.

As Paul also mentioned, we have a number of buckets in terms of our marketing and promotional budgets, and we will adjust those up or down as needed. And that is, as Vince mentioned also earlier in Coffee, we’ll have to look at what the pricing points are during the holiday period, and we will adjust and we can do that pretty quickly, if we see certain customers in certain regions that we need to make promotional adjustments on. So, Steve, do you want to talk or Paul?

Steve Oakland

Sure. Hi, Farha, it’s Steve. If we look at back-to-school, for example, the syndicated data doesn’t reflect the fact that we had shipments up, for example, in peanut butter, and we’re really encouraged by that because a number of our largest customers have moved their back-to-school event into August away from July last year. So, we sort of got some dry powder there.

We got some events there, and we’re far enough into August that we see those shipping. But what we mean by that is, we can stack customer specific marketing funds. We can stack our national promotional events, and we can stack our trade events, frankly. And our customers are looking for a little more bang. When we have to do that, we’re trying to avoid the deep, deep discounts. We are blessed to have a team of both national account folks, we’ve got advantage nationally helping us with that. And it just requires us to get all those things lined up, and I think we’re nimble enough in the way we’re structured. We’re able to get those things lined as quickly, so the retailer feels like they can put something on their front page that’s a little louder than maybe normal.

Farha Aslam – Stephens

That’s helpful. And just as a follow-up, could you talk to the Uncrustables business, what’s the size of it, and how the manufacturing improvements are affecting profitability of that business?

Richard Smucker

Well, couple things. One thing that we didn’t catch in the script as we’re reading it, Uncrustable volume is getting back to more historic growth trends, and so we saw the Uncrustable business bounce back at the end of the fourth quarter, and we had a robust first quarter with it. So, it’s great to see those trends back. The whole wheat has just taken off.

Quite frankly, we thought whole wheat Uncrustables would be the answer. They’ve been slow to catch on, but that’s no longer the case. We’re making them as fast as we can. And there is no question that a single planned footprint is much more efficient for us. So, all those things added up. It’s growing both in food service and it’s growing in the consumer business.

Farha Aslam – Stephens

Great. Thank you very much.

Operator

Scott Mushkin of Jefferies & Company.

Scott Mushkin – Jefferies & Company

Hi, thanks. Thanks for taking my question. I just want to get back to Vincent, your comments to Ed’s questions about coffee, because it seemed like even given the activities in the alternative channels of one of your competitors, it seems maybe I am wrong, that you’re little surprised that your volumes were as robust as they were. So, I’m just trying to dive down in this, if we look at the measured channel, which does the scanner data, we saw declines. We also know what was going on at Wal-Mart, which is probably another 25% to 30% of the market. So, in 80% of the market, we have a pretty good idea that coffee volumes were tough.

So, I’m doing the math and the other 20% has to put up numbers that are just head scratching. So I’m trying to understand if you guys had visibility on why volumes were so good and where those volumes are going, or are people just drinking a lot more coffee, it’s kind of a head scratcher since Kraft talked about volumes up strong double-digits.

Vince Byrd

Sure. I don’t know if I can add much more than I’ve said earlier. You are correct. We are concerned about what’s being reflected in syndicated data. But I will say this, when we knew that a major customer were going to be very, very aggressive with its price points, and we anticipated that we may be short on volume back to our ability to implement, we went to sort of some rest of market and try to do what we could in a responsible way to make up part of that volume. And hence, we actually exceeded our expectations in the quarter given where we thought we may be in the end of the fourth quarter of last year. So – go ahead.

Scott Mushkin – Jefferies & Company

Is rest of market, is it traditional retail, I mean where would the volume go?

Vince Byrd

Well, it would be everywhere, but the alternative channel. So whether you talk dollar class of trades, convenience, drug, military, on and on. So, it’s a club of all those other channels. But there was also, our grocery business actually turned out to be very, very strong given our ability to change some of our tactics during the quarter.

Scott Mushkin – Jefferies & Company

And is there like a delay here, in other words some of the negative to one we saw in the fourth quarter was reflective of what was going to happen to you, or is there some timing issues here as well?

Vince Byrd

It could be, but although it seems to be a, we’ve had this issue before but yes, it could be.

Scott Mushkin – Jefferies & Company

Okay. So, it sounds like you’re kind of scratching your head a little bit too or is that wrong?

Vince Byrd

No. I think that is fair a little bit. I think we are scratching our head given what we know that we are actually delivering.

Scott Mushkin – Jefferies & Company

Okay. And then, I know there is also – thank you, that was very, very good. The coffee profitability, I think it was mentioned just quickly that there is hedges that are going to help coffee profitability quite a bit in the second quarter. Can we have little more detail around that?

Mark Belgya

This is Mark. I guess the only other additional detail, we have said in the past that we hedge for basically between 18 weeks to 22 weeks. So, clearly we’re covered over that period at a certain cost and we price to a certain cost as well. So, it’s just basically a difference in the pricing position and cover position that will generate that margin.

Scott Mushkin – Jefferies & Company

In the second quarter, Mark, would that be expected even with, let’s say, Maxwell House gets promotional again, the elasticity of demand is now what we think, is it just kind of baked in the coffee profitability is going to be up almost no matter what happens to the end markets at this stage?

Mark Belgya

Yes. We have certainly factored in some potential competitive responses and what might be necessary understanding, we still believe that the margin increase is still there.

Scott Mushkin – Jefferies & Company

And I have one final one, and then I will yield. Today when making the question about marketing spend in the quarter, was it up, down, maybe I missed that? I don’t know if you have any thoughts.

Mark Belgya

It was fairly comparable as a percent of sales with last year’s first quarter.

Scott Mushkin – Jefferies & Company

Okay, great. Thanks, guys. Thanks for answering my questions.

Operator

Ken Goldman of JPMorgan.

Ken Goldman – JPMorgan

Good morning. In scanner measured channels, your biggest branded competitor in jams and jellies just saw nearly a 20% drop in sales year-on-year in a category that otherwise seems to be doing fine. So, I am not really seeing anything that will be driving this. You look at their prices. They actually have seemed to rise significantly less than yours did over the last few months and they don’t seem to be promoting any less.

So, I am wondering if there has been any changes you have seen in any competitor strategies or retailer strategies in this category. I am not really asking you to comment on any competitor or retailer specifically, but maybe you could just shed some light on some of the industry dynamics right now.

Steve Oakland

Sure. Hi, it’s Steve Oakland. That is odd for the jam and jelly categories, any of us to move that dramatically in one quarter. I can speak for our business, and I mentioned it in the previous comment, a number of our back-to-school events were moved into July or moved into August from July last year, and I can assume that.

The other thing that we’ve done and we spoke in the script sort of the favorable mix. We’ve also put much more focus on our strawberry business than our grape business. And as you can imagine, that provides a much better dollar range for us, better margins for us and we also think it is a great place where our brand is so strong.

So, it is not because we’ve gone out and taken the grape jelly business. So, I really can’t speak to why their numbers are the way they are, unless their key customer events are pushed back into the later end of the year as well, that’s the only thing I can think of.

Ken Goldman – JPMorgan

As a ferocious eater of peanut butter and jelly, I am disappointed in your strawberry strategy there.

Steve Oakland

Well, we have grapes available. You just might have to pay a little more for it. Promotions (inaudible).

Ken Goldman – JPMorgan

Okay. And then I am curious about the overall innovation environment right now. I guess both for you and in general, for food manufacturers, with all of Wal-Mart’s for SKU rationalization over the past two years and given the back to basics approach of both consumers and retailers, maybe there hasn’t been a lot of room on shelves for new products.

But now that Wal-Mart has reversed course, they are going back to this more branded merchandising focus strategy, I’m wondering if there isn’t, I guess, a more welcoming atmosphere for new products right now. You guys mentioned some innovation today. My guess is there’s a lot of manufacturers that have a backed up R&D pipeline right now. So, is it a fair assessment that maybe we can expect new products to be a bigger driver than they recently have, or is it too early to say that? And I guess I’m asking both about Smucker and the industry as a whole.

Mark Belgya

Ken, I’ll start and I’ll let the others comment as well. I guess from our perspective, you still have to have an item that’s going to appeal to a consumer and be able to spend for it to be successful long term. You are correct about this, the overall SKU rationalization environment. Many of the SKUs that were eliminated during some of the major reviews have actually been added back very, very significantly. I don’t know whether that necessarily makes the hurdle higher for new products or not.

We have been successful with virtually every one of our product categories, where we believe we’re bringing a consumer value and a proposition to the retailers they tend to go in. If there’s one thing that’s probably changed over the years is that they manually take them during certain periods of time when they’re reviewing their sets. And so, that’s something that we’re all very, very sensitive to, and they all tend to be on different cycles.

Paul Wagstaff

And Ken, this is Paul Wagstaff. In Oils and Baking side, we did launch about over a dozen new items this past year, and actually we’ve seen some very good acceptance of those items, the two key ones, sugar-free, frosting and cake mix as well as some cookies. So, that’s actually a nice bright spot in our baking business.

Richard Smucker

This is Richard. I just think there is both continue to be emphasis on good and good for you products. And whether it’s ourselves or anybody in the food business, because I do think there is a real emphasis on people wanting to eat healthy. It’s still in the media, and we still push out on that. So, I still think it’s strong.

Tim Smucker

This is Tim. Let me just add say that, also as we’re positioned in many of our brands, in fact most of our brands as category leaders, one of the things we look at first of all is what’s the right set, and sometimes we’re the first ones to recommend some SKU recommendations and add good for you products in there. So, we’ve been really active in that area across all brands.

Ken Goldman – JPMorgan

Thanks very much.

Operator

Jon Andersen of William Blair.

Jon Andersen – William Blair

Good morning. Thanks for taking my question. I wanted to just touch on the outlook for the balance of the year. Obviously, you’re off to a strong start with a solid first quarter, and if I kind of run out the growth for the subsequent three quarters, it looks like to be expecting a low-single digit EPS growth from here on out to get within that range.

Again, given what you said about pricing actions in Coffee, profitability in that business in the second quarter, what sounds like a strong set of innovation and back-to-school and fall bake programs, is there a certain element of conservatism here? I’m just looking for a little more color on why that outlook would have been maintained at this point versus maybe taking a higher fare? Thank you.

Mark Belgya

Hi Jon, it’s Mark. I guess, I would just sort of point everyone back to Tim’s comment, because I think that really tried to capture our view. While we certainly see some upside in the coming quarter and as we’ve talked, there are some key areas, competitive pressure is expected to continue. So, we just think it’s a little premature to just assume that, that will go down.

So, I think your point of conservatism is probably fair in that when we get through the next quarter, clearly we’ll have our back-to-school behind us. We will be into fall bake. We’ll have a good read on that. We’ll have probably a little better sense of maybe where some of the commodities are headed. And if appropriate at the time, we’ll adjust guidance. Right now, we think keeping within our range is appropriate.

Jon Andersen – William Blair

Sure, thank you. One quick follow-up, just on the K-Cup opportunity, can you talk a little bit about the timing of the introduction, how many SKUs we’re talking about, and have your expectations for supporting that emerging piece of the Coffee business? Thank you.

Tim Smucker

Yes, sure. I suppose without giving away too many secrets, we have six SKUs, three in Folgers Gourmet Select and three at the Millstone. The acceptance overall has been probably at or exceeded our expectations. As I mentioned earlier, we’re going to ship next month and should be on shelf by end of month, and we have a full complement of support for the launch including a new television advertising campaign. So, we are very, very excited about the prospects of that business.

Jon Andersen – William Blair

Thanks, that’s very helpful. I appreciate it.

Operator

Chuck Cerankosky of Northcoast Research.

Chuck Cerankosky – Northcoast Research

Good morning, everyone. Wondering if you could comment on what you are seeing the consumer doing as you look at the mix of first quarter sales, not only in terms of what products were moving relative to the fourth quarter, but also things like sizes, and you mentioned the Uncrustables doing better. That’s a nice indication, but perhaps you could give us a little bit more across the board.

Richard Smucker

This is Richard. I’d like to turn it over to Steve. I think we said this a little bit last year, we see a continuing sense that they are concentrating more on our base products and, Steve, you see that more in your business probably than others. So, you might just comment on some of them.

Steve Oakland

Chuck, we had a good peanut butter quarter. We had a strong traditional fruit spreads. What I mean by that is regular strawberry and preserve strawberry jam, grape jelly. Large sizes do well, but quite frankly, some of those channels that are doing well right now tend to sell those sizes, whether it be club, whether it be dollar, whether it be one of the mass channel. And those channels quite frankly, the consumers’ going there right now. So, I am not so sure if it’s the consumer, the shopping channels of so large sizes or their desire to buy large sizes.

The other thing though, if you look at the absolute opposite of that, our Orchard’s Finest product, candidly we were conservative with that initial rollout. It’s a premium product. The best fruit we buy, 100% sugar, small size, expensive. It continues to exceed the numbers we thought it would and we are continuing to roll it national. So, that’s on the exact opposite of that trend. So, you just got to be flexible and you have the products for each different channel and be able to put them there.

Chuck Cerankosky – Northcoast Research

All right. Thank you very much.

Operator

Robert Dickerson of Consumer Edge Research. Mr. Dickerson, your line is open.

Robert Dickerson – Consumer Edge Research

Hi, guys. I just had a couple of easy questions just to clarify. I know Q4, I think you said for the year, your expectation was raw material costs are going to increase about $70 million. Is it still on track?

Mark Belgya

No, it clearly has increased with the cost of coffee increase, and we are probably looking something almost two-and-a- half times that.

Robert Dickerson – Consumer Edge Research

Okay, that’s helpful. And then also for the back half of the year, as you go into fall bake, expectations on an increase in marketing spend, I mean, obviously in Q1 you said your spend was about the same as you saw in 2010 year-over-year. Would you expect that to continue or would there be potentially some increase in marketing?

Mark Belgya

I think that as we said marketing spend as a percent of sales was 6.6 this quarter, same as the last. I think our marketing spend all in all will be pretty comparable. And I’ve got to remind you that last year was a record spend in marketing, so to spend at that level is a significant statement, and we should be near that number.

Robert Dickerson – Consumer Edge Research

Yes. I could probably agree. And then also just, obviously, I know a lot of people are asking about your Oils and Baking segment, and what’s happening there, it’s very competitive. We obviously know what’s going on at Wal-Mart. I am just curious kind of – I know you have the strategy in place, but kind of going forward, if we’re looking at volumes and what the trends have been in the actual segment, I mean, obviously they’re weak, I’m just curious, what you think get those volumes back up essentially outside of just having to drop price, I guess that’s one?

And then two, you’re doing a lot better in coffee and there is obviously a lot of margin benefits there. I’m just wondering at what point do you look at Oils and Baking as a segment for the total company and seeing that as potentially holding back some of the value in your overall business.

Paul Wagstaff

Hi Robert, Paul Wagstaff. To answer for the first part of your question, what brings some of the volume back, we’ve looked at this over the years and clearly when we get our price on shelf right and that means it’s at our competitor level. We see significant volumes gain come back to us. So, I wouldn’t say that price is clearly the driver there.

Tim Smucker

Paul, let me just add to that, that when we think of our brands, all of those brands are icon brands. Pillsbury and Crisco are great brands, and it’s not just one product in that category. So, Crisco is made up of oils, shortening, sprays and olive oil. And that brand together is a very, very strong brand, as is Pillsbury in frostings, in mixes, and cakes, powder, flour. So, clearly those are great brands and they continue to be and we continue to support them long term.

Robert Dickerson – Consumer Edge Research

Okay. Thank you very much. I’ll pass it on.

Operator

Eric Katzman of Deutsche Bank.

Eric Katzman – Deutsche Bank

Hi, thanks for taking the follow-up. I guess, somewhat related to the last question. Tim and Richard, from an industry perspective, it seems like the pretty deep promotions really haven’t resulted in kind of volume growth, and I think whether it’s that aspect hurting the food companies and their stock performance, and the retailer is kind of suffering from deflation and a lack of volume response. I guess maybe you could comment on, again, broadly thinking about the industry, what do you think where has the volume gone?

And then two, even though you’re kind of calling for the promotional levels to maintain themselves as we kind of progress through the rest of the calendar year, do you see the coming inflation as likely to instill more discipline and eventual pricing through a retail?

Tim Smucker

Eric, this is Tim. Let me just take an overall comment first. As you know, we take a long-term view of the business and the economy. We are in a global environment, as we all know and I think everybody, consumer, our customers, our competitors are looking for balance. And to us, our consumers, and then consumers are looking for value and research that we have shows that they define value as what I get for what I pay and I value products and brands that reflect my values.

And so, we have been and are committed to giving our consumers, our customers, and our shareholders that balance and that value through our consistent quality products, through transparency as we deal with our consumers and our customers. And with that, we think that long term we earn our trust everyday with our consumers, and then that helps us to fulfill our purpose of providing memorable meals and moments with our consumers.

So, that’s sort of a global perspective, and we think that, that’s been consistent over the years and will be consistent going forward. There are going to be fluctuations in volume here and there by quarters, but we think that we are responsive and flexible and do have the tactics and the quivers to address those issues.

Richard Smucker

I might just add to that, is that we always say we are responsible promoting and I think Eric you had a good point. A lot of these deep discounting have not driven the category growth. Categories have not grown because of the deep discounting. So, we are willing to participate, but we are only willing to participate to a level that it makes sense for the category for the customer. So, on our tactics, our tactics we are trying do them responsibly, really to build the business as Tim said for the long term and not just go after the short-term volume hits.

Eric Katzman – Deutsche Bank

Okay. And then just a follow-up for Mark. I am trying to remember back when we had a lot of input cost inflation, I think it was the company’s policy to basically not really disclose the dollar amounts for mark-to-market adjustments. I notice that this quarter you were pretty specific on what impacted gross margin.

And with this run in input cost, it seems to me that and especially kind of saying you’re your hedge position in coffee is pretty favorable in the second quarter that there is going to be more mark-to-market gains in the P&L. So, are you going to kind of identify those going forward, or is it just going to be the regular kind of course of business, because as you know, most of the other companies in the industry basically pull the mark-to-market changes out of their P&L?

Mark Belgya

Couple of comments, Eric, on that. I think first of all, we provided the information and I think we have been both sides of that. A couple of years ago, I guess we had a fairly significant and for a couple quarters following that, we included in our release and our communications and of course we have it to some degree just as we would on anything else, it is a bit of degree of materiality. So, part of this is just how much. I think in these times, particularly as we’ve seen run-up in some of the wheat and little bit soybean including coffee that it is the expectation that those are out there and we feel it’s good disclosure to have it.

Our philosophy is and the reason we included is that hedging is clearly a part of the business and there is a lot of things to go into what generates that. And we think putting the numbers out there is beneficial to you and to the investors, and they can kind of treat it as they will. But I don’t think it’s any significant change in our philosophy as far as it being in this quarter.

Eric Katzman – Deutsche Bank

And then – sorry to follow up on that. So, in the 450 to 460 of operating earnings for the year, you are just basically assuming that by the time we end up with the year, these mark-to-market gains or losses are going to net out and that 450 to 460 is including whatever volatility that accounting requires?

Mark Belgya

That’s right, because right now what you’re seeing basically that’s the market for the commodities as of the end of July. And if all the things hold, then that cost will flip. But you’re correct. We’ve not built any assumptions of any significant gains or losses in our guidance.

Eric Katzman – Deutsche Bank

Okay. All right. Thank you.

Operator

Jane Gelfand of Barclays Capital.

Jane Gelfand – Barclays Capital

Hi, again thank you for the follow-up. Just a quick question. Mark, on the last quarter’s call, we talked about your assumption that the trade spend budget that’s netted from gross sales really wouldn’t go up a whole lot year-on-year despite the fact that it was a more aggressive kind of promotional environment.

So, clearly we’re talking a lot more about kind of tactical moves and the continuation of some of the aggressive behavior into the next couple of quarters. So, I guess how much did promotion peak away from the top line in the first quarter and how do we expect that to kind of trend through the next couple and through the rest of the year?

Mark Belgya

Jane, this Mark. In terms of the quarter, it really wasn’t very significant. I think it held true to pretty much what we said at the end of the last fiscal and that it wasn’t going to be dramatically different. I guess more on a macro approach for the remainder of the year, and again it’s kind of tied back to again some of the comments around our guidance is that we’re going to continue to monitor the competitive activity and we’ll react as necessary, and as we head through the next quarter, we’ll have a better sense of that. But I think it’s just more of a kind of wait-and-see, and as everyone has said, we’re going to be rational in what we do, but there may be times that we’ll have to address certain categories with those additional promotional dollars.

Jane Gelfand – Barclays Capital

Thank you.

Operator

Ken Goldman of JPMorgan.

Ken Goldman – JPMorgan

Thanks. Given the success you have had in coffee, would you ever consider getting even larger and expand into other shelf stable beverages? It’s my understanding that maybe some tea brands, for example, might be for sale. And I guess without asking anything specific, of course, I am curious whether tea would even fit with your strategy or are you more comfortable looking to grow more on the food side right now?

Richard Smucker

This is Richard. I’ll just speak broadly. Our strategy is to own number one brands sold in the center of the store. We really don’t comment on individual categories in that regard. So, we look at a number of different categories, and we’ll continue to do that. But it really does have to fit that overall broad strategy. Sorry, I can’t be more specific.

Ken Goldman – JPMorgan

No, that’s okay. And I know the call is running long, but just a general question about consumer products. It’s my understanding that Wal-Mart, the new regime has not been happy about all the out-of-stocks it’s been experiencing. Possibly, they are willing to accept higher inventory levels in exchange for fewer out of stocks. Is this something that’s consistent with what you’re seeing out there? And if so, is it possible, maybe this could lead to a temporary, almost manufacturer-driven or retailer rather driven trade loading, if you will, or is this not likely to happen?

Tim Smucker

Ken, I can’t say that we have seen that and have not heard that that’s the case. So, if it’s going on, we’re not aware of it.

Ken Goldman – JPMorgan

Okay. Thanks very much.

Operator

Ed Aaron of RBC Capital Markets.

Ed Aaron – RBC Capital Markets

Thank you. Just a follow-up for Paul, I guess, on the Oil business. The pricing environment and the results this last quarter were kind of similar what happened last year where you had your main competitor promoting aggressively in a period where you tend to maybe lay low a little bit because you don’t view it as your prime season for that business.

So, in that respect you seem similar to last year, but you seem maybe a little bit more concerned than you were a year ago about that continuing, and I am just wondering, when you think about this business right now versus a year ago, why do you maybe seem to have a different view of the fall bake season and the pricing environment for that period than you seemed to have had last year at this time?

Paul Wagstaff

Yes, hi Ed. I think one of the things that’s different versus last year is this competitive activity we have been seeing has really, it started at the end of or during fourth quarter of last year and it’s continuing, and I think that’s longer in a duration than we have seen previously. So, it seems like there may be slight change in some competitive activity and their strategies, and so it just adds little bit of the uncertainty to our upcoming fall bake and what we are anticipating from our competitors, so that’s really the driving factor.

Ed Aaron – RBC Capital Markets

Fair enough. Thank you.

Operator

Lucas Klein of Putnam Investments.

Lucas Klein Putnam Investments

Hi, guys. Just a couple of questions around coffee profitability. I guess is there any way that you can be more specific for us about what you are looking for in terms of the level of profitability for coffee in 2Q? And then you had a 30% to 31%, I think, long-term margin target out there for coffee. Obviously, that changed a little bit with the amortization reclass to that segment. So, can you just tell us kind of what the latest thinking is about reasonable long-term margins in that segment? Thanks.

Mark Belgya

Hi, Lucas. This is Mark. In response to your first question, we really aren’t going to provide any specifics around the quarter estimates. That’s just not something we would normally do.

In terms of longer term, it’s the question it would be quite candid. I am surprised that it really took to this part of the call. But we have been pretty open. Since we bought the business that we had set some specific margin targets, but we always sort of had the caveat that, that was assuming no significant price changes. That clearly is no longer the case.

So, we really don’t anticipate putting a margin percentage out there, we are just not sure that’s all that meaningful. But the expectation is we will continue to grow the business in line with our other business units. From a company’s perspective, we expect to grow our operating income roughly 6%. And that comes from both the businesses as well as the corporate administrative functions. So, they will achieve the targets that are going to help contribute to that.

Lucas Klein Putnam Investments

Great, thanks a lot.

Tim Smucker

Okay. Well, thank you very much for all your interest in the questions today. And again, thanks to all of our great employees for their commitment to our consumers and our shareholders. So, thanks a lot. Have a great day.

Operator

Ladies and gentlemen, if you wish to access the rebroadcast after this live call, you may do so by dialing 1-888-203-1112 or 1-719-457-0820; with a passcode of 111-9146 or by accessing the Website for a downloadable MP3 format. This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.

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