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The J. M. Smucker (NYSE:SJM)

Q1 2012 Earnings Call

August 18, 2011 8:30 am ET

Executives

Vincent Byrd - President, Chief Operating officer and Director

Mark Smucker - President Of Us Retail Coffee And Director

Richard Smucker - Co- Executive Chairman, Co-Chief Executive officer and Director

Steven Oakland - President Of International, Foodservice And Natural Foods

Sonal Robinson - Director of Corporate Finance & Investor Relations and Assistant Secretary

Mark Belgya - Chief Financial officer and Senior Vice President

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

Analysts

Jason English - Goldman Sachs Group Inc.

Scott Mushkin - Jefferies & Company, Inc.

Eric Katzman - Deutsche Bank AG

Robert Dickerson - Consumer Edge Research, LLC

Farha Aslam - Stephens Inc.

Jon Andersen - William Blair & Company L.L.C.

Edward Aaron - RBC Capital Markets, LLC

David Driscoll - Citigroup Inc

Charles Cerankosky - Northcoast Research

Operator

Good morning, and welcome to The J.M. Smucker Company's First Quarter Fiscal 2012 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference over to Sonal Robinson, Vice President of Investor Relations. Please go ahead.

Sonal Robinson

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

After this brief introduction, I will turn the call over to Richard for opening remarks. Vince will then provide an update on our business segments, and Mark will close with additional comments on our financial results for the quarter and outlook for the full year. We will then open up the call for questions.

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

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

I will now turn the call over to Richard.

Richard Smucker

Thank you, Sonal. Good morning, everyone, and thank you for joining us. Let me summarize some of the key highlights for the quarter. First, our sales for the quarter increased 14% over the prior year to $1.2 billion, as sales were up in all 3 of our reportable segments. Net price realization was the primary driver of the increase following pricing actions taken in nearly all of our categories to offset higher raw material costs. Volume was down, while mix of products sold was favorable.

Our strategic growth drivers, including acquisitions and new products, also played a key role in top line growth. Rowland Coffee, acquired in May, contributed 2 percentage points of the quarter's net sales increase. Additionally, the ongoing strong performance of Folgers Gourmet Selections and Millstone brand K-Cups also contributed 2 percentage points to sales growth.

Second, non-GAAP earnings per share increased 8% as higher sales more than offset the increase in commodity cost. Earnings per share also benefited from share repurchase -- shares repurchased in the last half of 2011, which contributed approximately $0.05 to the quarter's results. Offsetting these items was a higher effective tax rate in the current quarter.

Third, following a 17% increase in dividends paid in fiscal 2011, the board recently authorized a 9% increase in the quarterly dividend, payable in September. These actions, once again, are evidence of our continuing commitment to deliver shareholder value.

Lastly, we seamlessly completed the transition of our executive management structure that was announced in March. With the strength of our leadership team and our dedicated employees, we are well-positioned for continued success. We are satisfied with the results for the quarter; in particular, the continued share of market growth for most of our brands. However, we are not content with volume declines. As a result, we continue to adjust our plans as necessary to meet the needs of our consumers and our customers.

As we navigate our way through uncharted economic waters, we continue to believe that our strategy of focusing on leading brands, combined with excellent implementation in the marketplace will continue to yield long-term sustainable growth.

I will now turn the call over to Vince for an update on our business segments.

Vincent Byrd

Thank you, Richard. Let me begin with the U.S. Retail Coffee segment. Net sales increased 27% in the quarter, primarily reflecting the price increases taken during the past year. Our K-Cup product offering continued its strong performance, contributing 6 percentage points of the sales growth, while the Rowland Coffee brands, acquired in May, contributed 5 percentage points.

Segment volume, excluding acquisitions, decreased 8% for the quarter with declines in both Folgers and Dunkin' Donuts brands compared to a strong quarter last year. While volume was anticipated to be softer due to the significant level of price increases, the magnitude of the decline was more than we had anticipated. However, we are encouraged that our Coffee business continued to gain share of market in the quarter.

Coffee segment profit increased 25% for the quarter, with pricing actions taken over the past year more than offsetting higher green coffee costs. A portion of the segment profit growth is timing-related, as favorable pricing position that benefited the first quarter results precedes higher green coffee costs that are anticipated to be recognized in upcoming quarters, primarily affecting the second quarter.

The benefit of unrealized mark-to-market gains on commodity contracts also reduced the impact of higher green coffee costs. As announced earlier this week, we decreased prices by 6% on the majority of our coffee items in response to moderation in the green coffee futures market, which is expected to result in lower costs later in the fiscal year. The timing of this pricing action allows us to target key price points and positions us well as we enter into the holiday periods.

While commodity costs continue to be volatile, we remain committed to investing behind our brands and our supply chain. Marketing expense increased in the quarter due to the addition of Rowland Coffee business and the continued support of our coffee brands with all elements of the marketing mix. Coffee product innovation remains strong, as we recently launched several new items that build on our single-serve strategy, including Folgers instant stick packs and 2 new varieties of K-Cups.

We are working towards a seamless integration of the Rowland Coffee business with customer-facing and distribution network activities targeted for the end of the second quarter. As we continue to learn this business, we are pleased with the initial results and remain on track to deliver $0.05 accretion targeted for 2012.

Lastly, the restructuring project is progressing well, with the expansion of the New Orleans coffee facility on schedule to be completed by next summer.

Turning now to the U.S. Retail Consumer Foods segment. Net sales increased 2% as price and favorable sales mix more than offset a 3% decline in volume. As noted in our press release, volume was down across all categories in the Consumer Foods segment, while profitability declined as net price realization was not sufficient to offset higher raw material costs.

An unfavorable change in unrealized mark-to-market adjustment also contributed to the decline. Let me provide some additional commentary on the dynamics within our key categories.

In peanut butter, we proactively managed the 2010 peanut crop availability, with temporarily rationalizations on selected items and a reduction of first quarter promotional activities, which contributed to a volume decline in the quarter. The inability to cross-promote also limited the growth of our food spread business during the quarter. While the first quarter was somewhat challenging for peanut butter, our outlook for the full year is positive. The actions taken have allowed us to build inventories to a level where we can support a ramp up of promotional activities as we conclude the back-to-school period and head into the Fall Bake and Holiday season.

In addition, we are pleased with the continued rollout of our Jif To Go and the ongoing success of our Jif Natural peanut butter. As we preview the upcoming 2011 peanut crop, we expect significantly higher peanut costs as we progress through the fiscal year and anticipate taking further pricing action to offset these costs.

Turning to Crisco. We continue to see aggressive competitive activity within the base oils category. While this has led to some volatility on our oils business, we are effectively managing the competitive environment with a focus on everyday price points.

Specific to the quarter, a large portion of the volume decline was related to our shortening business, which we plan to address over the balance of the fiscal year. In the milk category, commodity costs have continued to increase since year end and given the intense competitive set, rising costs have been difficult to recover through pricing, primarily on our private label business.

The baking category also continues to be challenged with commodity cost increases. Since we do not typically lead pricing actions in the baking category, our ability to recover costs has been impacted for our Pillsbury brand. Our focus remains on product innovation and positioning the business for a successful Fall Bake and Holiday period.

We are also encouraged that key retailers have increased their support of various Fall Bake activities, including the expansion in the number of bake centers. While the overall segment volume was soft, we are encouraged to have maintained or grown market share across all channels in each of our key categories, peanut butter, fruit spreads, oils, baking and milk in the latest 12-week period ended in July.

Let me conclude my remarks with International, Foodservice and Natural Foods segment. Excluding the favorable impact of acquisitions and foreign exchange, net sales increased 7% as price increases and mix more than offset a 1% decline in volume. Volume gains were realized in Santa Cruz Organic beverages and Bick's pickles, but were offset by declines in flour.

Segment profit grew 9% in the quarter as net price realization more than offset higher raw material costs, the unfavorable impact of unrealized mark-to-market adjustments and a 5% increase in our marketing expenses in support of our brands.

I would now like to turn the call over to Mark.

Mark Smucker

Thank you, Vince. Consolidated net sales increased $142 million or 14% in the first quarter, reflecting a 13% impact of net price realization across many of our categories. Volume declined 3%, while sales mix was favorable. The recently acquired Rowland Coffee brands contributed approximately 2% to net sales for the quarter, while the impact of the stronger Canadian dollar added 1%.

GAAP earnings per share were $0.98 this quarter and $0.86 in the first quarter of last year, including restructuring and merger and integration costs. Excluding these special project costs, earnings per share were $1.12 this quarter and $1.04 in last year's first quarter, an increase of 8%.

Earnings per share reflected increased operating income and the benefit of share repurchase activity in the last half of 2011. These factors were partially offset by a higher effective tax rate in the quarter. Operating income, excluding special project cost, increased $10 million or 5% for the quarter, reflecting an increase in gross profit.

Despite some moderation in the commodity markets near the end of the quarter, significantly higher raw material costs were recognized in COGS, which was up 19% in the current quarter. Cost increases were led by green coffee, flour and soybean oil. As expected, price increases taken over the past year offset higher costs, but did not result in gross margin gain.

Included in first quarter results was a $4 million benefit from unrealized mark-to-market adjustments on derivative contracts. This compares to a $7 million benefit in the prior year. While the impact of unrealized mark-to-market adjustments was not material on a consolidated basis, as Vince indicated, the impact by segment varies.

The increase in gross profit was partially offset by a 7% increase in SD&A expenses, reflecting higher selling and general and administrative expenses. The acquisition of Rowland added to our SD&A expenses as we will incur incremental costs until the integration is completed later this year. Total marketing expense was down a modest 1%, primarily -- transfer of funds, trade promotion in support of our Consumer Foods business.

The effective income tax rate was 33.2% in the first quarter compared to 31.3% in the prior year. The effective tax rate in the first quarter of last year benefited from a favorable federal income tax determination related to a prior year, a higher domestic manufacturing deduction and lower state income tax expense. We continue to anticipate a full year effective tax rate between 33% and 33.5%.

Turning to cash flow. Cash used by operations was $58 million in the first quarter compared to a use of $27 million last year. The increase was driven by a higher working capital requirement, specifically the impact of commodity cost increases on higher inventory levels that were partially due to the additional buildup related to our supply chain restructuring project.

During the first quarter, approximately $307 million was borrowed under our revolving credit facility at an average rate of 1.5% and remained outstanding as of the end of the quarter. Borrowings were used to fund the Rowland Coffee acquisition, as well as working capital needs. With the normal build in inventory, in advance of the Atlantic hurricane season and to support the Fall Bake and Holiday promotional periods, we expect to draw additional funds on the revolver during the second quarter, but anticipate paying down the majority of the revolver borrowings by the end of the fiscal year. Last month, we amended our revolving credit facility, increasing the borrowing limit to $1 billion and extending the term to July 2016.

Capital expenditures were $68 million in the first quarter, tracking toward the full year range of $250 million to $275 million. We continue to anticipate free cash flow of approximately $450 million for 2012, somewhat contingent on our year-end inventory balances.

Subsequent to the end of the quarter, we repurchased nearly all of the approximately 500,000 common shares remaining under our current 10b5-1 plan utilizing $37 million of cash. An additional 2.5 million shares remain available for repurchase under previous board authorizations.

Let me conclude by updating our outlook for the remainder of the fiscal year. We still expect net price realization to drive significant top line growth in 2012 as compared to last year. The impact of the recent coffee price decrease and first quarter volume is expected to lower our sales growth by a few percentage points below the 20% we originally guided to in June. With the recent market decreases in certain commodities, most notably coffee, we now anticipate year-over-year cost increases as a percent of COGS, will also be lower than our initial guidance of 25%.

As a result, we continue to expect non-GAAP income per diluted share to be in the range of $5 to $5.15, including amortization expense of approximately $0.50. Although we generally do not comment on quarter estimates, we want to reiterate that the second quarter results will be impacted by the timing of coffee costs hitting our P&L. While the first quarter benefited from our price position relative to recognized green coffee cost, we expect this trend will reverse in the second quarter as higher green coffee costs will be realized, along with the impact of the coffee price decrease [ph].

As always, we manage the company with a long-term perspective and remain confident in our ability to deliver on the full year guidance. While volatility in the commodity markets and uncertainty in the economy continue, our focus will not waver from our strategy in building our brands for the long term.

In closing, let me say that we remain confident in our employees’ ability to execute in this challenging environment, and we thank them for their continuing efforts.

Thank you for your time today, and we'll now be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll hear first from Eric Katzman with Deutsche Bank.

Eric Katzman - Deutsche Bank AG

Barely had time to think of my questions. Okay. I guess you made some comments about the peanut butter inventory or supply position limiting production, as well as its influence on jam and jelly. Is there a way to kind of quantify that? And how does that kind of play out during the rest of the year? Because I guess those are 2 pretty profitable businesses within the portfolio, and then I'll ask my second question after.

Paul Wagstaff

Eric, this is Paul Wagstaff. And yes, just to take a step back and explain kind of what happened. Yes, we wanted to make sure that we were proactive in managing the 2010 crop, peanut crop, which we knew was not a very good crop and wanted to make sure that we had the availability. So what we did is we temporarily discontinued 8 of our items to focus on our core 18-ounce and crunchy and creamy products to make sure that we had those products on shelf during the summer and the first quarter. And in line with that, what we decided to do is basically reduce our first quarter promotion activities. We made sure that we had enough inventory build in our warehouse, which we do have right now. And that basically led to some lower volume in peanut butter, as well as in our jam and jelly business to be -- cross-promote with peanut butter. So where we are now is we have inventory levels that are solid. We feel that we can go back and support the rest of the back-to-school, as well as getting into our Fall Bake time period. And we feel very good for the full year projection that we're going to be in great shape on both peanut butter and spreads.

Eric Katzman - Deutsche Bank AG

Okay. But is there -- so there isn't really a way to quantify kind of how much you feel that, that held the quarter back?

Mark Belgya

Eric, this is -- it's Mark Belgya. I would say that if you look at the profitability shortfall in consumer foods, it probably was just about 15% to 20% of a dollar decrease in the overall segment. So they're down about $15 million. So it's about fit to that.

Eric Katzman - Deutsche Bank AG

Okay. And just to follow-up, obviously, the decision to lower the coffee prices got a fair amount of attention, kind of I guess Sara Lee, at least they're a European business, but they showed that unfortunately, elasticity is kind of shown up in coffee and you saw that. So how much of the price cut in coffee is just a function of the elasticity being worse thing you thought versus, just let's say, more competitive conditions within the category and you wanting to be a leader and go first?

Mark Smucker

This is Mark Smucker. I think as it relates to the decrease, it has more to do with how we price to our position, and we don't feel necessarily that the decline was more than was anticipated. We always talk about the elasticity model and that we've tend to beat those. But clearly, we were a little disappointed with the results, but we do think that this price decrease positions us very well going into the holiday period. And that although there may be some margin compression in the quarter, we do feel comfortable, in terms of recovering $0.01 profit and then position well going into the back half of the year.

Operator

We'll take our next question from Farha Aslam with Stephens.

Farha Aslam - Stephens Inc.

Vince, just going along the elasticity question, you had mentioned volumes were weak in the quarter. Could you just share with us kind of which segments outperformed your expectations and which ones had more pressure?

Vincent Byrd

Well, I'll start, but I'll turn it over to Mark and Paul. I think as we just alluded to and alluded to in the formal remarks, coffee was lower than we would have anticipated. Paul has already explained the peanut butter and fruit spreads really don't have much to do with pricing elasticity, it's more about the availability and the ability to cross-promote. Probably shortening and baking would be the other 2 that were the key ones. So I'll ask the other 2 if they support or have any additional commentary.

Paul Wagstaff

Well, this is Paul, and I would agree with Vince. On the shortening side of the business, we took a price increase in -- beginning of the year, and that had an impact on our volume. And on the baking side, as we're not typically leading price increases in that category, we weren't able to recover some of the cost increase on a couple key areas.

Mark Smucker

Yes, I would echo. This is Mark. I would echo Vince's comments. We feel obviously very good about K-Cups. And in the mainstream channel I think as well, we may have seen some shifting of volume around in the category. But we still feel pretty good, obviously, about our share position.

Farha Aslam - Stephens Inc.

That's helpful. And then going into the rest of the year, you guys had commented that you're going to seek to shore up some of those volume declines. Given that the economy is quite weak, do you anticipate further promotional activity is needed? And are you concerned about matching pricing with increasing costs?

Mark Smucker

I'll go first. This is Mark. In coffee, the reason, one of the key reasons that we took a price decline is because we felt that, that was really the right thing for the consumer. And clearly, we'll be focused on our promotional spending as we go into the next several months. But the bottom line really is that the price decline was necessary and is important to consider, in light of -- and balancing that, what we might spend in trade versus what we really hope the consumer should see the price on shelf.

Paul Wagstaff

And this is Paul. And I think in the other categories on peanut butter, food spreads, baking, milk, et cetera, we do have some leverage that we're in the position to pull to make the back 3 quarters of the year better.

Operator

We'll take our next question from Jason English with Goldman Sachs.

Jason English - Goldman Sachs Group Inc.

A quick question on Dunkin' Donuts. I think this is the second consecutive quarter you've had a low double-digit decline. Can you flesh that out for us, what the drivers are? And whether or not you expect that to persist?

Mark Smucker

Sure. I guess I'd start by saying that we still feel great about the business, and we think that there is upside to the business. The performance this past quarter was driven by a couple things. One, the timing of some promotional activity that we had experienced in the prior year that wasn't repeated this year. And we may get some of that back in the second quarter. And then just we were not enjoying the price advantage that we had been versus one of our key competitors in the gourmet segment, and so I think that obviously had some impact. But again, going forward, I think we're well-positioned going into the holiday period, and we feel good about how we will be able to reflect those prices on shelf versus competition.

Jason English - Goldman Sachs Group Inc.

Just to clarify that last comment, you feel good about how you're going to be able to reflect the price position. Are you suggesting that you're going to try to widen out that price gap again?

Mark Smucker

Well, we hope to. I think that depends on how we manage that with our customers, and it's obviously going to be very dependent on how our retail customers reflect that price. But I'd say we were optimistic.

Vincent Byrd

Well, this is Vince. And then if -- what, if any response we to get from the competitive set.

Mark Smucker

That's right.

Jason English - Goldman Sachs Group Inc.

Sure, sure. And this time last year, you guys, you were outperforming measured channel, your volume by quite a bit. Now we're underperforming. Is this a factor of any inventory shifts in the pipeline? Or is this a factor of what may be happening in some of the unmeasured channels?

Vincent Byrd

Are you speaking specifically to Dunkin' or coffee or?

Jason English - Goldman Sachs Group Inc.

This is coffee overall. Sorry, I should have clarified, and specifically volume.

Vincent Byrd

Well, yes. So as Mark indicated, where some of the shortfall occurred in the quarter tends to be in some of our non-measured channels, if you will, and so probably had a greater impact this quarter than it has had historically. And quite frankly, some of that was price point driven that we hit some thresholds that I think the consumer has responded to. But as Mark indicated with our price decline, we should be able to address that going forward.

Operator

We'll go next to Ed Aaron with RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC

Wanted to ask first on the K-Cups. The volume contribution there was maybe a little bit lower than I had expected, and I'm just wondering if you think that retailers are maybe taking a little bit more of a cautious approach, just with kind of the new competitor coming into the market shortly. Any kind of thoughts there?

Mark Smucker

No, actually. I think we still feel very optimistic about our K-Cup business. We're the first national brand to launch in the category, and we still are bullish and believe that there's significant upside, as well as feeling good that we're positioned well going into some of the key competitive activity that we will experience in the second and third quarters.

Edward Aaron - RBC Capital Markets, LLC

Okay. And then on peanut butter, just can you maybe talk about the competitive dynamics there a little bit? There's a new competitor coming in and then talk about your main competitor not getting all the price through that they had intended, I'm just wondering if either of those things has an effect on kind of how you view your ability to perform in that business this year?

Paul Wagstaff

Ed, this is Paul. And from a competitive perspective, yes, we know, very well aware of the competitor, the new competitor on the block. I think again what happened in the first quarter is we delisted temporarily, these 8 items are – we allowed our competitor to come in and pick up some of those slots, so we're well aware of that. We understand the key competitor has been aggressive in promoting. We also maybe understand that they may be pulling back a little bit, so that would be expected from what we understand in the peanut crop. So from our perspective again, we did what we felt was a responsible thing in the first quarter, and we feel very well positioned going into the next 3 quarters.

Operator

We'll go next to David Driscoll with Citi Investment Research.

David Driscoll - Citigroup Inc

I guess, could you discuss coffee volumes for the category? And then I'd also like to hear your thoughts on exactly what's going on or as much as you can on why the volumes are down? And what I specifically mean here is, certainly it's some price elasticity. But do you know which consumer is it affecting? Is it affecting your loyal consumer who drink multiple cups a day? Or is this dis-incentivizing new consumers from coming into the category? This question would relate to kind of the future in terms of how easily it is to regain these volumes assuming that coffee prices continued to decline.

Mark Smucker

I think -- let me speak to your first question first. And in terms of the category as a whole, I think as you look at -- I think you guys probably have these numbers, but the category is down slightly on a 12-week, it's down 1% in volume. But again, we've been doing very well from a share perspective, particularly in the mainstream segment. I think I understand your second question you're asking, which consumers are either hurt or benefited from the shifts in segment? Is that your second…

David Driscoll - Citigroup Inc

So let me rephrase. So volumes are down in coffees, and then the question is, who are we losing here? Are we just losing -- is it that second or third cup people aren't drinking, and that's how you see a decline? Or is it we just have users that normally might have come into the category and you're just simply not attracting them because of the very high prices?

Vincent Byrd

This is Vince. Let me -- let's take a step back in a macro perspective, what's going on. You have continual shift growth of the gourmet segment versus the mainstream segment, roast and ground. That continues, and you have a lot of activity obviously between us and a couple of competitors. Secondly, you have, although still small, a growing segment of single-serve primarily as it relates to K-Cups, which adds dollars but doesn't add a lot of volume per se because of the ratio. So those 2 phenomenons are going on. The third thing is that consumers, some consumers are, in fact, trading down from maybe some of our -- like our classic roast to what we would refer to as our opening price point offerings, custom roast and those type of things. So I think the consumer is, in fact, you have higher-end consumers still attracted to the gourmet or a single-serve category, and you have some consumers, quite frankly, that are trading down because again, our retailers are trying to reach price points that they were unable to do with more of our classic roast. With our recent price decline and where we're going to place our emphasis, we believe we'll be able to get that back, and there is no impact though from a profitability perspective, because all of those basically contribute equally. But there's no fundamental change other than that over sort of a macro perspective.

Operator

We'll go to our next question from Scott Mushkin with Jefferies & Company.

Scott Mushkin - Jefferies & Company, Inc.

Just wanted to go into coffee a little bit more, probably beating this dead horse a little bit, but I just wanted to understand the price decline, the motivation behind that. Was that really the fact that green coffee costs had come down or was it mostly motivated by the volume concerns? And your -- I also got that maybe you're looking to offset, some of this by some hedge, anticipated hedging gains or hedging benefits to fund this price decrease or did I misinterpret that?

Mark Smucker

I'll start, and I'll let Mark or Vince chime in. This is Mark Smucker. I think first of all, the main driver of that decrease, it is the right thing to do in terms of getting to the key price points through the holiday period. And yes, you're correct that some green coffee costs are coming down. We have the ability to participate, in some nominal degree, in some of the downward movement of that, even though we're looking at burning through some of our higher-priced inventory. However, I think it's a combination of the factors that you mentioned. But at the end of the day, it really is driven by trying to be collaborative with our customers and trying to help them get to the price points that we believe the consumer can afford.

Scott Mushkin - Jefferies & Company, Inc.

Okay. That's perfect clarification. The other thing I wanted to get in on or talk about a little bit is the idea that maybe the retail trade has built some inventories, in anticipation of all the price increases and then there's a possibility that some of the volume weakness you're seeing is, I guess run off, of some of the inventories that perhaps were built in the channel. Do you have any thoughts on that, as you've kind of gone through this big kind of bubble of costs and everything?

Vincent Byrd

This is Vince. I would say that we probably did experience a little bit of that in peanut butter on our last price increase. Other than that, actually, we see some retailers that are decreasing inventory levels given the actual costs of the commodities themselves. But yes, so I guess that's how we respond.

Scott Mushkin - Jefferies & Company, Inc.

Okay. And then the final question, I'll yield, is any update on kind of the China acquisition search? I know you guys mentioned this at CAGNY, and I just wonder if you had any update for us.

Steven Oakland

Sure. This is Steve Oakland. I can speak to some of the efforts in China. Couple things, we continue to do research in the markets in China and to understand both the categories and the number of companies in those categories and understand how those markets really work mechanically. And so that'll position us to be there in a meaningful way here sometime in the future. We will have an office open in Shanghai later this fall, and we're starting to put a team together. So we're excited about that, and we're trying to get ourselves positioned to be meaningful there, but we're not going to do anything until we feel like we've got a firm foot on the ground.

Operator

We'll move next to Jon Andersen with William Blair.

Jon Andersen - William Blair & Company L.L.C.

I wanted to just talk about Dunkin' Donuts for another minute. Could you provide a little more color on kind of where you stand today from a distribution perspective with Dunkin', and maybe how many SKUs on the shelf? And what the opportunity is over the next few years?

Mark Smucker

Well, this is Mark again. In terms of the total Dunkin' as it relates to our distribution, we've got in the upper 80s ACV distribution, so we're actually pretty well positioned. Now if you look at some of the newer items, they might be slightly below that. But we're still in the upper 70% in terms of ACV in some of the recent launches. Now total SKUs, we've got probably about a dozen SKUs, which is significantly fewer SKUs than our key competitor would have. But we do benefit at this time of year from some of the seasonal and flavored coffees that we launch in that category, and those in the past have performed very well for us. So bottom line, distribution is getting there. We're pretty far along that path, and then counting on some of the seasonal items to continue to drive volume in the second quarter.

Jon Andersen - William Blair & Company L.L.C.

That's helpful. I guess just a couple quick follow-ups perhaps for Mark. The previous revenue guidance for 20% growth for the year, if I kind of back out the 6% price reduction on coffee, I'm getting to about kind of a 2% impact to sales for the year. So are we now saying something kind of in that upper teen range? Or how much is maybe the incremental impact from volume? What's the right way to think about that?

Mark Belgya

Well, I think as I said in my prepared comments I think we said it would be a couple percentage points below the 20% we guided to and that does factor in obviously the 6% decline and then with some thought on volume contribution. But I don't think we’d necessarily be specific, give you volume or price, just take it a couple of percentage point below the volume [ph].

Operator

We'll move next to Robert Dickerson with Consumer Edge Research.

Robert Dickerson - Consumer Edge Research, LLC

I guess a couple questions. First question just a follow-up to the last question was, if sales are going to be a few percentage points lower, was there any additional guidance for what you think COGS maybe is obviously? Sales can come down by a few basis points or 300 basis points but relative to where input costs are probably in the back half of the year and what you said that you continue to hold $0.01 profit, it would seem as if your operating profit growth, which frankly is all I really care about, should be healthy and continue to hold.

Mark Smucker

Yes, well, we would expect a couple percentage points decline in sales that would be a little bit more of that on the COGS side. So I think as you said, we were at 25% in June. So you're kind of getting down in the lower 20s range.

Robert Dickerson - Consumer Edge Research, LLC

So essentially though, I mean, for every whatever the ratio is but for whatever -- for any incremental reduction in your top line growth, it seems as if you're actually having a little bit more reduction in your COGS growth. So net-net, I just want to be clear that we we’re all very focused, uber-focused on the top line, but it does sound as if and also inclusive of your comments earlier that your outlook, so to speak, for profit growth, even though you haven't given us one, internally doesn't seem to be changing too much. I mean, it may be better.

Mark Belgya

Well, you make the judge on it on the profit, be it better. But that's right. And I mean, if you think about it just from our general approach on price changes we, I mean, clearly we talked about it along the way up in terms of protecting $0.01 profit. So yes, I mean, we're seeing costs, expected cost increases from higher peanut butter, from higher peanut cost, and would expect to lower the price to sort of offset the margin. There's always going to be a little play, as you know, as it relates to the timing. But generally, I agree with your comments.

Operator

We'll go next to Chuck Cerankosky with Northcoast Research.

Charles Cerankosky - Northcoast Research

Thought I'd ask more of a big picture question, when you're looking at the consumer condition right now, how are food shoppers manifesting a slow growth economy, the high unemployment when they're shopping for Smucker products? And what are you seeing regarding trading down within your brands, trading into private label, what they're doing with sizes? And how are the retailers maybe collaborating by promoting private label?

Vincent Byrd

Hey, Chuck, this is Vince. As I mentioned earlier, clearly -- well, first of all, if you look at our wide range of products, we believe we offer value across our full range regardless of the segment. And as you all know, peanut butter is one of the lowest costs of protein in the industry. So overall, and you think about as we said before, to brew a Folgers product coffee at home, it's still less than $0.10 a cup compared to the alternative. So in a macro perspective, we feel that we're very well positioned. Having said that, as I mentioned earlier because of some of the price points, retailers are looking for either smaller sizes to promote or in the case of Coffee, there's been some shifting to again what we would refer to as our opening price point offerings. And again, that's driven by the retailers and/or the consumers. That's not a shift in our promotional emphasis within the industry. But I guess I'll leave it at that, unless Mark or Paul wants to add additional commentary.

Richard Smucker

And I'd only add that -- this is Richard. On the private label side, at least in our categories, we continue to gain market share in almost every category that we're in. And so even if private label maybe growing a little bit, it's not growing at our expense.

Operator

[Operator Instructions] We'll take a follow-up question from Eric Katzman with Deutsche Bank.

Eric Katzman - Deutsche Bank AG

Two detailed questions, I guess one for Mark on the -- do you have a change in the net interest expense for the year? It came in a little less than what I had thought for the first quarter. Is there any change there or is the working capital going to offset whatever cash flow benefits that provides?

Mark Belgya

Eric, I don't think it will be materially. It might be up just a little bit, because I think we will carry inventories, so we’ll be borrowing maybe a little bit longer, but I don't think it's material under modeling.

Eric Katzman - Deutsche Bank AG

Okay. And I don't recall any comment on the productivity program. I think you were suggesting as much as $0.30 or more a share of kind of benefits this fiscal year. Is that more second half weighted? I assume so, but just can you clarify that?

Mark Smucker

Yes, well, I think, in Vince’s prepared comments he might have coffee spoke to the coffee. But our projects, which are primarily around our fruit spreads operation here in Orrville with new construction and, also with the New Orleans coffee facility, it is sort of stepped up. I think I’d use that term over the time, to getting ultimately, I think what we said about $65 million to $70 million. But we have recognized about $25 million within the run rate over the course of the year, this current fiscal year. And that was -- I'm sorry. That was consistent with what we said in June, and that's included in our guidance.

Eric Katzman - Deutsche Bank AG

Okay. And then just last thing. Any changes on the category management designations in coffee? I know that that's something you've been targeting given your breadth of products. Have you made strides there and could you detail anything?

Vincent Byrd

Eric, this is Vince. There's nothing significant to report. We have had a couple of wins, if you will, and also we're becoming more and more reliant on to be a validator of certain information, but nothing significant to report.

Operator

We'll take our next question from Ed Aaron with RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC

Just a quick clarification question on the coffee price decrease. So it’s obviously a pass-through category, but you seem to talk about it as a decision that was somewhat driven by consumer right now, and the reason I ask about it is that, Arabica has bounced back somewhat meaningfully this week and it's actually only a few cents lower than where it was when you last raised price. So I'm just wondering whether you might, if there is a consumer issue that you're seeing if you would be slower to take price up again if the commodity does kind of continue – start to move higher.

Richard Smucker

I'd say the short answer is no. But again, I think it is driven again by getting to the right price point through a price reduction rather than through necessarily increase in trade. So I think the key driver, and why we're comfortable in doing that despite where our commodity costs may be is that by getting to those key price points again, we feel that we will be able to drive some volume and make up that $0.01 profit that we may have missed in the second quarter.

Operator

We'll take our next from Robert Dickerson with Consumer Edge Research.

Robert Dickerson - Consumer Edge Research, LLC

Just a quick question, just on capital structure. I know you mentioned on the call that you had a number of leverage you could potentially pull, and kind of in the remainder of the year or back half of the year. And you're obviously a bit credit light right now, so to speak, so I'm just curious, it seems like you didn't call out, but it seems like you did buy back probably about 1 million shares in Q1 and with where your stock price is right now and your leverage capability and what have you, could you foresee potentially any incremental buy back at least in Q2? Or is that you're just basically staying mute on that?

Mark Belgya

Rob, this is Mark. A couple thoughts or comments. We did buy back about 0.5 million shares here at the end or after the end of the quarter, during month of August. So you'll see those reflected modestly through the rest of the year on our weighted shares. The effect that you're seeing as you compare, for example, this quarter's weighted shares to a year ago, was more the effect of what we bought in the back half of fiscal 2011, so that sort of clarifies the change in shares. In terms of going forward, we have 2.5 million shares that the board authorized in January of this year. As we have said, we kind of have 4 buckets of cash deployment. On the growth side, we've got CapEx, and we've got acquisitions. And on the shareholder return side, we've got dividends and buybacks. And we really do look at those 4 uses of cash pretty evenly. Clearly, we have been able to take advantage and have repurchased shares over the last 2 years at pretty reasonable price. We'll continue to look at the opportunity to do that. But as opportunities from acquisition, obviously, that’s part of our growth algorithm, we'll take that into consideration at the time. So at this point, I wouldn't say we're going to be active in the market, but we'll clearly consider it as one is the uses of our cash through the rest of the fiscal and into next year.

Operator

That is all the time we have today for questions. I will now turn the call back over to management to conclude.

Richard Smucker

Well, we thank you for your time and interest today. And just in summary, we still feel very solid about the year. We felt that the first quarter was a solid quarter. And in light of taking a number of price increases, our volume held up fairly well, and in areas where it was a little short, we have plans to make that up for the remainder of the year. And our plans are to come right in where we said we would at the beginning of the year. So we're still feeling pretty good about the market. So thank you for your day, your time.

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 4796460 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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