Sonal P. Robinson - Director of Corporate Finance, Vice President of Investor Relations and Assistant Secretary Richard K. Smucker - Chief Executive officer and Director Vincent C. Byrd - President, Chief Operating Officer and Director Mark R. Belgya - Chief Financial officer and Senior Vice President Mark T. Smucker - President Of US Retail Coffee and Director Steven T. Oakland - President Of International, Foodservice And Natural Foods Paul Smucker Wagstaff - Director and President of U.S. Retail Consumer Foods

Eric R. Katzman - Deutsche Bank AG, Research Division Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division Kenneth Goldman - JP Morgan Chase & Co, Research Division Ann H. Gurkin - Davenport & Company, LLC, Research Division Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division Edward Aaron - RBC Capital Markets, LLC, Research Division Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division Charles Edward Cerankosky - Northcoast Research Cornell Burnette Robert Dickerson - Consumer Edge Research, LLC Farha Aslam - Stephens Inc., Research Division Michael Gabovich

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

Good morning, everyone, and welcome to our first quarter earnings conference call. Thank you for joining us today. On the call with me are Richard Smucker, Chief Executive Officer; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Chief Financial Officer; Steve Oakland, President, International, Foodservice and Natural Foods; Mark Smucker, President, U.S. Retail Coffee; and Paul Smucker Wagstaff, President U.S. Retail Consumer Foods. Following this 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 our outlook for the full year. 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 encourage you to read the full disclosure statement in the press release concerning forward-looking statements. Let me also remind you that the company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is detailed in our press release located on our website at smuckers.com. A replay of this call will also be available on the website. If you have any follow-up questions or comments after today's call, please contact me or Mark Belgya. I will now turn the call over to Richard.

Thank you, Sonal. Good morning, everyone, and thank you for joining us. We are pleased to start the new fiscal year with solid results after a challenging back half of fiscal 2012. Let me begin by summarizing some of the key highlights for the quarter. First, net sales for the quarter increased 15%, with all 3 business segments realizing top line growth. Two of our strategic growth drivers, acquisitions and product innovation, played key roles in achieving higher sales. Volume across most categories improved with total tonnage increasing 2% for the quarter, led by strong performances from our coffee brands and peanut butter. Overall, results exceeded our expectations for the quarter. Second, non-GAAP earnings per share increased 4% to $1.17 per share. Volume growth and mark-to-market gains were key drivers to this increase. We are pleased with this earnings performance, particularly as we are lapping a strong prior year profit comp in our coffee business. Lastly, our cash from operations was a first quarter record with an increase of $167 million. Our ongoing ability to generate strong cash flow provides continuing opportunities to enhance shareholder value. To that end, last month, the board authorized an 8% increase in the quarterly dividend rate payable in September. Our first quarter results reflect the progress that continues to be made on the key areas of focus that we discussed at our year-end call. As we have stated, these were designed to address both short-term challenges as well as further position the company for long-term growth and include the following: further building our brands through increased investments in marketing support; continuing to drive our innovation pipeline; optimizing price points to meet our consumer needs and address competition; capitalizing on our recent acquisitions; and continuing to optimize our supply chain. We are pleased with what…

Thank you, Richard, and good morning, everyone. I'm pleased to report that each of our 3 business segments had solid starts for the year. Of significant note is the improvement we saw in our volume results compared to the last 2 quarters. These results reflect our team's commitment to the company's key initiatives that Richard spoke to of brand building, innovation, optimizing our price points, capitalizing on acquisitions and enhancing our supply chain. Let me begin with the U.S. Retail Coffee segment. Net sales increased 4%, driven by volume growth across our key coffee brands including Folgers, Dunkin' Donuts and Cafe Bustelo and the continued growth of our K-Cup business. As expected, coffee segment profit declined for the quarter compared to last year's record first quarter profit. As a reminder, the prior year's profit was partially timing-related due to a favorable pricing position in that quarter that preceded higher green coffee costs recognized in the following quarters. To a lesser extent, the reverse situation occurred this year as we expect lower green coffee costs will be recognized through the remainder of the year. Let me now elaborate on the key initiatives as they relate to coffee. First, with respect to brand building, we've previously discussed a number of initiatives planned for the year including new product launches and marketing investments, all of which remain on track. Of particular note is the continued strong performance of our K-Cup offering. Once again, the product line exceeded our expectations, delivering an incremental $31 million in sales growth for the quarter. As a reminder, this business does tend to be more seasonal than our traditional coffee business, particularly around the pre- and post-holiday season. Based upon the continued success of K-Cups, we are revising our projections and now expect K-Cup sales to grow approximately…

Thank you, Vince. Net sales increased $181 million or 15% in the first quarter, approximately 1/2 of this growth came from the incremental impact of the foodservice beverage acquisition. The remaining increase was primarily attributable to favorable sales mix, net price realization and volume gains. GAAP earnings per share were $1 this quarter and $0.98 in the first quarter of last year including restructuring, merger and integration and pension settlement costs. Excluding these special project costs, earnings per share were $1.17 this quarter and $1.12 in last year's first quarter, an increase of 4%. The increase in earnings per share was a result of several factors. On the plus side, EPS included a $0.09 per share impact from the net change in favorable unrealized mark-to-market adjustments and a $0.04 per share benefit of share repurchases in 2012. These factors were somewhat offset by an increase in interest expense related to last October's public debt issuance and a slightly higher effective tax rate in the current year. An increase in gross profit led operating income, excluding special project cost, to increase $13 million or 6% for the quarter. Included in the results was a $20 million gain from unrealized mark-to-market adjustments on derivative contracts. This compares to a $4 million gain in the prior year. A significant portion of the benefit in the current quarter is expected to reverse later in the fiscal year as the related contracts are closed and we purchase the physical commodities. Overall commodity costs were higher in the current quarter compared to the prior year, particularly for peanuts and green coffee. We expect lower green coffee costs to flow through in the coming quarters. Turning to cash flow. Cash provided by operations came in positive at $167 million in the first quarter. This compares to a…

[Operator Instructions] Our first question comes from Eric Katzman with Deutsche Bank.

I guess the first question actually is balance sheet-related. I notice that, Mark, that you had well over $300 million of cash on the books. Is that -- that seems more than you normally hold. Is that what you were referring to in terms of not having to tap a revolver to fund your working capital through the fall season?

That's right, Eric. In June, we had indicated that we thought we might actually have to tap here in the U.S., primarily to fund our normal buildup of inventory. But we came into the year probably with a little higher inventory level than we've seen in past years. So we were able to end the quarter positive, and as you suggested, $300 million. It is important to keep in mind of our cash, about $100 million of that is in Canada. So there's a little bit of an active issue to that, but still we're running much more favorable than we had expected.

Okay. And then just maybe a more fundamental question. Can you just talk a bit about with coffee costs having come down quite a bit versus a lot of other commodities that are now moving up, what is the kind of the competitive landscape in coffee? Obviously, Kraft is going through some transitions with introducing Gevalia and Starbucks is trying to obviously gain share and there's all kinds of questions around K-Cups. So maybe you could go into more detail around kind of the competitive landscape and then I just have one other follow-up on coffee.

Sure, Eric. This is Mark Smucker. Overall, you're correct. The category does remain a competitive category and the competitors that are out there are good. I mean, they're effective. Having said that, we still feel very optimistic about our brands, the activities that we've got in place, the fact that we've successfully managed some of these price points that were referenced in the script, and feel that going forward, we're very well positioned for the fall period. I would also add that just from a volume perspective as we look forward, as we got into the quarter and looking at inventories, we also had some questions around are we reloading the customers. And as we look forward and look at the shipments that we've had in the quarter, we're pretty confident that the trends that you see in the share numbers will continue.

Okay. And then, I guess the -- can you comment, I guess, it's maybe Steve, but can you comment on how much holding on to the roast and ground, no-margin foodservice side of the Sara Lee acquisition limited your profits in the segment or on a consolidated basis and how that should affect things as we progress through the year and you exit those businesses?

Sure. Eric, Steve. I don't think it really limited the actual dollar numbers. It did affect the margins. Although some of that business is actually negative, most of it's probably more in the break-even range. So I think what you'll see as we get through the next 6 months or so is you'll see our margins improve dramatically in our segment and that'll be the impact. A little bit of dollar profit, but I don't think it was material for the company. And I think if we step back and look at the Sara Lee transaction, we bought that from a company that was getting ready to split up and it became evident to us in the end that, that transition with those customers just wasn't going to happen the way we want to have it happen. And so, having us manage it over this 12-month period, we think is the best thing for that business and for our relationship, frankly, with those customers going forward. The systems are in place. We closed quickly. We got it all on Smucker's systems from May 1. So our team has a plan. More than half of that business will be gone over the next 6 months and we have a plan for the rest of it, primarily in the rest of the fiscal year. So we think it was the right thing to do for the business, and I don't think it hurt us dollar-wise. It did hurt us margin-wise.

Eric, this is Mark Belgya again. Just to kind of comment on that. If you do look at the segment profit for Steve's segment, we're basically in line with our expectations from a dollar perspective that we spoke to in June. But clearly, the effect of it right now with that being a lower-margin business, that is primarily what's driving the International, Foodservice and Natural Foods' reduction period-over-period in margin percent as Steve indicated.

One last thing though. We did have a great first quarter in liquid coffee and so -- we won't typically comment on that kind of detail on a quarterly basis, but we're really proud of the team, given all the changes and there's some great new contracts signed, some big contracts defended. So the core of that business and why we bought it is in good shape.

We'll take our next question from Chris Growe with Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just want to ask a question, first, if I could, about -- just to get some perspective on the EPS guidance and the way to look at that for the year. Obviously, you had a strong outperformance this quarter, and my question just more relates to if there's any impediments coming up that you foresee that could take away from some of the upside potential that came through in this quarter.

Chris, this is Mark Belgya. Let me just give you a couple of points. The first is that for those of you that have followed us for quite some time, it is pretty rare for us to move on our guidance for the year after just 1 quarter, and that really has primarily been due to the pending Fall Bake period that is obviously very big to us. You add into that obviously the volatility of the economy, the consumer and the recent spikes in corn and wheat. So those are all, I would say, are more cautionary as opposed to concerns. But those all factored into where we landed in our guidance. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. That's helpful. That's what I assumed. Just want to make sure that was clear. And then I did have one more follow-up question for you, and that was you had talked last quarter about introducing some more or really pushing some more opening price point products. I just wondered, as a general question across the business, how mix performed. I know it was positive in coffee. I guess I wanted to understand, and I guess a lot of it's from the K-Cups, beyond that, was there any detrimental mix in other categories because of that trend.

Chris, this is Paul. On the Consumer Foods side, no, we really didn't have any other negative impact on mix. Mix was actually good for the quarter.

Chris, I would just -- this is Vince. I would just add that the margins or profitability of those items are in line with our core items. So it's not like we sacrificed profit when we focused on those items.

We'll go next to Ken Goldman with JPMorgan. Kenneth Goldman - JP Morgan Chase & Co, Research Division: Could you, Mark, I know you don't give quarterly guidance, but you did mention that we should expect the reversal of the mark-to-markets later in the year. Could you just give us some color on when that takes place so that we can model a little bit more efficiently?

Yes, Ken. It would be in the back half of the year. We're in pretty good shape from a hedge position through our Fall Bake. So as we get into physical commodities later in the late third, and particularly in the fourth, where -- is probably where you want to charge that to. Kenneth Goldman - JP Morgan Chase & Co, Research Division: Okay. And then in your K-Cup guidance, which I think you're raising today, how much are you factoring in there the expiration of Green Mountain's patents and what that may mean for the number of players that potentially could enter the market at this point?

Sure. Ken, this is Mark Smucker. Let me just back up and just sort of reframe the category. First, we had, as you know, a great year last year with almost $180 million in sales. And the growth in the quarter -- this past quarter, of course, was also very strong. So as we said, the momentum continues and it's part of our overall strategy of playing in all segments. And I think we're probably the one national roaster who truly does play in every segment in the category. That said, last quarter, I think I was the one who said low double digits. And after a lot of work by the team and looking forward on some of the issues that you raised, that's why we feel comfortable with the approximate 60% growth for the full year. Having said that, we can't really comment, of course, on Green Mountain's patents, but there have been a number of questions about private label entering the category or other, as Green Mountain terms it, unlicensed participants. Overall, we feel reasonably comfortable that we'll be able to manage through that. Every category we play in has private label. Private label will continue to enter the category, although I would point out that the barriers to entry for the unlicensed participants are relatively high. So there are a lot of unknowns there and we wouldn't expect a significant impact on our business this fiscal, although we do agree with some of the comments from our partner, Green Mountain, that ultimately over a 3- to 5-year period, the private label component would be somewhere in that 5% to 15% of the category range. Kenneth Goldman - JP Morgan Chase & Co, Research Division: And quick follow-up. What does that exactly mean when you say that the barriers to entry are a little bit higher? What would prevent a large branded competitor, for example, from coming in and using a co-packer and taking some shelf space from you? Not that you're not going to do great, but I'm just curious how that would play out.

Well, I think it's, generally, it's capital costs, it's equipment and the time it would take to get that equipment up and running would be the primary reason. Kenneth Goldman - JP Morgan Chase & Co, Research Division: Is there not a lot of capacity right now?

I don't think we know that. I think that in our world, we're doing very well. But it would be hard for me to comment because we just don't know.

We'll go next to the line of Ann Gurkin with Davenport Investments. Ann H. Gurkin - Davenport & Company, LLC, Research Division: Y'all made a comment this morning that you do not need to adjust prices through the end of the year -- calendar year in key categories. So should I interpret that as you feel good about where branded prices are versus private label in these key categories?

I think what we're commenting on is that we do not anticipate any further pricing action through the calendar year based upon the visibility of our costs. We will continue to execute in the second and third quarters, primarily, as we did in the first relative to our pricing and promotional strategy. So I guess the way to interpret that is, is we don't anticipate any other pricing action other than we implement in milk that will go in effect in the second quarter.

We adjust -- this is Rich. We adjust promotions as necessary as competitive positions deem it important, but we're not planning to change prices. Ann H. Gurkin - Davenport & Company, LLC, Research Division: Right, that helps. And then any update on a strategy for the flour business? Any developments there we should know about?

Ann, this is Paul. At this point, no. We really don't have any updates on our flour business. So, no.

We'll go next to Jonathan Feeney with Janney.

I wanted to talk a little bit about marketing spending. I think it seemed from some prior comments and presentation materials, there's been -- I guess, has a cadence of -- despite, I think, the gross profit numbers were ahead a little bit, but the cadence of marketing spending was a little bit lower at plus 6% this quarter than I expected it to be up. Is that in line with plan? Is there something that you saw that -- or did I just get that wrong? Or can you talk a little bit about that over the course of the year and how much that should be up year-over-year in your mind?

Yes, Jon, this Mark Belgya. You're right, we were up 6%. About half of that was specific to the Sara Lee acquisition and actually was right in line with our expectations. Beginning of the year, we said that marketing was going to be up about 20% and you may recall that was made up of a couple of components. There were some moving of trade spends that had been spent last year that was coming back into marketing. Obviously, Sara Lee was bringing additional marketing and then, of course, just our organic increase to support existing new products. As we looked out over the year, originally, that was going to ramp up particularly in the second and third quarters. We still anticipate a good increase. Whether it'll be the whole 20%, we'll sort of evaluate that as we move through the year. But we would expect to see a step-up in the second quarter for sure.

And order of magnitude, like, I mean…

I'm sorry, what was that?

Order -- sorry, order of magnitude. You said step-up. When you say step-up, you mean step up in the rate, right, so greater than...

As a percent of sales, we would -- dollars and percent of sales would be probably moving closer to middle teens roughly.

We'll go next to Alexia Howard with Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Can I ask about the channel mix shift that several other companies have mentioned over the last few quarters? In particular, I think you mentioned that you're trying to launch lower opening price point product here. We've seen dollar stores, for example, be very rapidly growing across the landscape and I just wanted to find out how you see your positioning in that growing area. And if you are underexposed, how quickly you can close that gap.

This is Vince. I'll start the answer and we'll turn over to Mark and Paul. But a couple of points. First of all, clearly over the last 2 years or so, we have seen somewhat of a shift in our business to club channel and/or dollar channel, the one exception being, of course, we lost some peanut butter business and a major club customer last year for part of the country. Clearly, the Folgers brand when we acquired it was a avenue for us to further explore the dollar channel and that's what really has made that segment grow. Secondly, though, as it relates specifically to our opening price point items, those aren't necessarily only targeted at the value chains per se. Those items are also sold across many of our channels, including traditional grocery stores. So it isn't necessarily a strategy of only having those OPP items, as we call them, for the heavy discounters. But from a macro perspective, you're correct. There continues to be somewhat of a shift to nontraditional channels. And then, of course, there's a very large account who's doing much better than they have maybe over the last couple of years and we're seeing a rebound with that customer. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Great. And then could I ask just a specific follow-up question on where you're at in the peanut butter cost cycle? It looks as though peanut -- well, peanuts, we know, have come down a bit from their peaks. Given your forward contracting, I was trying -- you had good profit growth there, but it seems as though it was more from pricing ahead of cost increases. Are you at the point yet or can you see the point at which those peanut-butter or peanut import costs will start to come down year-on-year?

Alexia, this is Paul. And when we look at the peanut business, overall we look at their spot prices and they are coming down. However, spot prices are really more directional, so keep in mind that, that isn't necessarily our cost. And we do, as you mentioned, we do enter into these long-term contracts with our shellers in order to manage our overall business. But from a competitive perspective, right now, we actually don't want to share too much more detail on that. And so I'd like to kind of stop it there other than to say that we feel very good about our overall coverage. We know we're going to get peanuts going forward.

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

Just wanted to maybe drill in a little bit more to the drivers of the positive volume surprise in the quarter. To the extent that the volumes kind of outperformed your own expectations, is it fair to say that was mostly driven by price gaps maybe coming in line faster than you expected it, and then if so, does that raise any concern that maybe competitors will kind of get more aggressive in the months ahead?

Ed, let me start again and I will turn it over to Mark or Paul or Steve. But clearly, taking the learnings from our third and fourth quarter, evaluating our post promotional analysis and our elasticity models allowed us to implement those revised strategies in the first quarter and we'll continue that through the fiscal year. But I would say that it was a combination of not only getting price gaps versus competition right, but it was also getting key price thresholds correct that obviously the consumer was responding to, specifically, in coffee, when we went over a $10 average price point pretty much across the country. The other thing I would suggest is that in some cases we've actually done a reduction in some trade spend areas to better manage profitability, specifically in baking where we might have moved off a 10-for-10 strategy to maybe like a 4-for-5 strategy. So I'm sure the competition will respond, but I think we're in a much better place today and understand our models better than maybe what we had previously, and we feel comfortable as we go into the back half of the year.

Great. And then, Mark, can you just maybe clarify the inventory reloading comment that you made? Were you suggesting that there wasn't a restocking benefit in coffee in the quarter? I'm just not sure that I understood it properly.

Yes. Actually, thanks for the follow-up. We saw in some of the pre-release materials there's some questions about that, so we're trying to address it. We talked last quarter a little bit about customers deloading somewhat in anticipation of a price decline. And so the concern would be is some of the volume uptick a reloading of the inventory. And so the clarification is simply that we don't think it is. As we looked, we dug into that pretty hard to make sure that, that wasn't the case and so as we look into the forward months and our shipment trends that we experienced in the quarter, we feel pretty comfortable that the growth is real.

We'll go next to Scott Mushkin with Jefferies & Company. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: A lot of -- some of my questions have been answered, but what I want to go back to was the original comments, I think, as the call got on about that the industry is getting better in the latest 4-week data. So I guess our 4-week data doesn't actually show that, but I guess some instant commentary from a lot of the retailers that I actually cover as well that they're not seeing that at all. So I want to just poke at that a little bit and see what you guys are seeing, which seems to go contrary to even your largest customer that reported, I think, yesterday they had a good July. But if you look at their consumable sales, they really haven't moved all that much. So I was just trying to understand what you guys are seeing maybe versus other people.

Yes. Well, this is Richard. I think a couple of things. One is we have seen a number of our retailers report. I think volume is relatively flat, but it's not down. Where if you looked at the third quarter of last year, it was down quite a bit, and the fourth quarter for us and the industry recovered but was still down. The first quarter, although basically flat, flat is good. We're doing better than flat because we're doing better than the industry. But we see a slight recovery. We do see a very, very cautious consumer out there. And we think that'll continue into the months ahead until we get some stability in the market and the economy. But we're seeing -- I wouldn't say robust recovery by any manner or means, but we're seeing a little bit of optimistic return in some of the step of our customers and we just think that any ray of light is good. And so, we're pleased about that. But we think we'll continue to do better than the industry. Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division: Okay. I appreciate the commentary. And I guess, Ed kind of asked this question, but maybe I'll give it another turn on the coffee and some of the -- it seems like the turnaround happened pretty quickly. And if you were going to -- is it the -- is the repositioning just worked better? Is that how you'd have to summarize it -- is that how you'd summarize it?

I think it's -- Scott, it's Mark. I think it goes back to Vince's comment about managing the price points. And it is not only about the gap, but the threshold that we had crossed. And since we get asked a lot about elasticity and the models and so forth, it is a new learning for us. We saw what happened as we went above that $10 price point on Red Can and conversely, I think, we're seeing the impact as it comes down. So it was excellent execution by our team and getting the price points reflected quickly on shelves. And as a result of that, you see, as we've talked about the hourglass, some of the migration going back to the core from the opening price point and some of the premium areas. So our business smoothed a bit in the quarter.

Let me add to Richard's comment about the industry. I would just -- I think this was in the formal remarks as well. But obviously, 4-week data is going to vary significantly or can vary significantly. But if we look at the categories of which we participate in, we have clearly seen that there's been an uptick versus some of the trends that we had seen in our third and fourth quarter.

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

If you could comment on sales mix and consumer confidence maybe looking a little better and couple that with some of your new product developments and things like the organic natural area, Uncrustables, hazelnut spreads, some of which, to me, sounds like you're pretty willing to go into more upscale or pricier products?

Sure. Chuck, this is Paul. I'll speak to Uncrustables and hazelnut. We have seen a pretty significant increase in Uncrustables, up about 25%. And part of that is driven, frankly, by last year, we were on allocation because of some capacity constraints we had at our facility. That has been changed. We've put the new capacity in, we're up and running again and we're seeing a real good response from the consumer on Uncrustables. And then on hazelnut, that product, again -- that category, overall alternate nut butter category, has grown quite substantially over the last several years. And since we're the #1 peanut butter business, we thought we should participate in that category. So we've entered that, we are very confident and comfortable with what our products have done so far very early on in the cycle. But, overall, we feel good and the consumer response, we think, is strong.

I might add just in terms of what we've seen. We've talked about the hourglass effect and so certain items are doing well at the top end such as K-Cups, such as Uncrustables, which would be a little more higher price per unit. Those are doing very well. The opening price points are doing well. We said that the middle was squeezed. So we are seeing at the top end that there are some opportunities for higher-end products and we're seeing some good sales of those. And that gets, I think, a little bit to Scott's question earlier, we're definitely seeing the top end do fine. We're actually seeing the middle come back a little bit. Our Red Can, which was really squeezed last year, we've seen that rebound. And so I think that gives us some of the optimism because when we said the bottom end of the hourglass is doing well and the top end was doing well, the middle was being squeezed. We're seeing a little relief in the middle right now.

And then, lastly, you spoke to the Natural Foods business and -- yes, as we know and we've seen the numbers, the natural food industry has rebounded and the large retailers they're doing well. But also the large natural or national traditional retailers all have a great set now for natural foods. And those customers are becoming more and more important for our Knudsen, our Santa Cruz Organic brands. And you would have seen a lot of organic lemonade across the country in traditional retail this year. So those items speak to what Richard talked about and I think they're as important volume-wise to that retailer as they are positioning-wise. Those upscale retailers want to have a national -- a natural and organic segment. We're leaders in our categories there. So we have been able to benefit from that.

Looking at some of these commodities that are under pressure from the drought as well as the possibility of some commodities actually being in better supply, do you think over the -- after the calendar year, do you think you'd be leaning more towards raising or lowering prices when all things considered and the need to maintain volume momentum?

Chuck, this is Paul. On the commodities in my area of Consumer Foods, we're seeing exactly what you're saying, some of the higher prices coming out of the drought-stricken crops. Again, through our fiscal year, we are covered and we really monitor very closely on a daily basis the overall crop conditions. And we won't make those type of decisions 'til we get closer through the Fall Bake time period.

This is Richard. The one thing I will comment on, I think that you will not see some of the huge increases in prices that you've seen in the last couple of years. But we have to take price adjustments. They'll be probably modest at best, but we -- last year, we took coffee -- well, we took coffee down but we also took it up for 2 years prior to that substantially and the same with peanut butter. We don't see those type of increases or decreases.

Yes, I guess, Chuck, I would just -- maybe frame it in macro, obviously, from a supply perspective, peanuts and coffee are coming down. But again, they're not down to anywhere near the levels where we were 2 or 3 years ago. Obviously, we know what's going on with the drought. So again, depending upon our positions and supply at the end of the calendar year or starting in the new calendar year, you would anticipate there could be some pricing action going up. But at this point, as Paul just said, we're in good shape through the calendar year and we do not anticipate any further action.

We'll go next to David Driscoll with Citi.

This is Cornell Burnette calling in for David Driscoll. Just had a couple of follow-up questions. Did I just hear correctly that in consumer, you guys are pretty much completely covered on your commodity exposure for the rest of this fiscal year?

It's actually -- Cornell, this is Paul. Through the rest of the calendar year, we're covered.

Okay. Understood. And then secondly, just getting back -- sticking with consumer and looking -- more focusing on volumes. Obviously, the environment is up, but I think the flat volume growth that you had in the quarter was definitely impressive. Going forward, though, I wanted to know what was some of the things that may prevent you from -- you had mentioned earlier that you didn't increase your volume expectations from the year relative to where you stood before. Going forward, I want to know what kind of keeps you from being a bit more optimistic on the volume side and consumer, just given that in the second half of the year you'll be lapping some of the supply constraints that you had on the peanut supply last year and so I would expect that those volumes should be up nicely, and in some of the other businesses you look like you have some good things in the pipeline as well.

Yes. I want to frame in the kind of back-to-school and O&B time period. From a back-to-school perspective, that would include primarily our fruit spread and peanut butter business. We do feel pretty good. Now keep in mind last year, in the -- in October time frame, roughly, we had a lot of buy-in. There's kind of hoarding on the peanut butter side. So we're going to be facing that coming up, so that's kind of one we'll watch out. On the O&B time period or the Fall Bake time period, we're going to see a little bit of mixed results there on our oils and our baking mixes may not be as strong just from a price point perspective and some of the things we're seeing with our competitors. But on frosting, for example, we should have a very good business and actually milk should come back a little bit. So I think there's going to be a little bit of mixed results on O&B overall, but we feel very strong about back-to-school and our peanut butter business.

So then, overall, you do think that there's a good possibility this year that -- for the full year at least, in consumer, we could expect flattish or maybe even a slight pickup in volumes?

Well, I think the other thing to keep in mind is we have a downsizing that took place in the cake business. And so when you look at kind of the apples, it will be a little apples-to-oranges comparison because we do have that downsize that took place and that's a pretty heavy-volume product. So the comparables there will be a little bit more challenged.

Cornell, this is Richard. I'm glad you asked that question. It gives me the opportunity to always talk about this. But I always think that volume is not a great measure of performance when you're looking in our businesses because we have huge weights in oils and in flour, which carry lower margins. And so if those businesses are down and all the other businesses are up, we might have a down-volume overall company but we'd be way up in profits and units. So we really have to look at our business category-by-category to see the volume trends. And so I think that's one thing we want to keep a watch out here.

We'll go next to Rob Dickerson with Consumer Edge Research.

I just had a really just an easy question on cash flow again or just -- I know Eric pointed out early on, I guess, there is an increase in your cash build. You pointed to having kind of record year-over-year improvement in free cash in Q1 and you're also increasing guidance for the year. So is this -- I didn't -- I don't think I heard anything with respect to where the additional cash may actually be allocated. I think you still have almost 4 million on your buyback authorization, so if there's any color you could provide, that'd be great.

Rob, it's Mark Belgya. You're right, we do have about 4 million shares to authorize. You'll recall a couple of quarters ago, we exhausted the 10b5-1 program we had in place. In terms of allocation, I think that we restated today that we're sticking pretty much to our capital expenditure, $210 million to $220 million. So with that locked in, obviously, acquisitions come as they do, but we're still going to continue to look at opportunities to enhance share value -- shareholder value. I'm sure there's questions out there from a buyback perspective, we'll continue to look at opportunities there. But again, I think we think of it just because the dollar amount grew, we still kind of go back to the allocation that we talk about often in the 4 buckets and we sort of stick to that over time. So I wouldn't necessarily say just because we have an increase in cash that we're going to change that. But we'll certainly look at opportunities. As I think as Richard mentioned in his scripted comments, we did take our dividend up for this coming September as well.

We'll go next to Farha Aslam with Stephens.

First question is on peanut butter. The volume increase in the quarter, was it really driven by better back-to-school or how much did the reintroduction of new products help you? And kind of going forward, when do you expect to realize the lower peanut cost? Is it already happening or is it going to be more back half of the year?

Farha, this is Paul. And on your first part of your question, really there are several reasons why we saw the volume increase. Back to school, having those promotions back on was a significant impact, clearly. We did have the pipeline fill of some of the reinstated items that we had previously discontinued, there's 8 of those. We also had some of the new product launches, the hazelnut Jif To Go, et cetera. So those are kind of the main reasons, drivers for the volume increase. And as we talk about your second part of the question, really I feel like I've answered that already and I don't want to change from that very much. We're not going to really speak to from a competitive reason -- from a competitive perspective where we stand on our overall pricing other than to say we do have these long-term contracts with our shellers and we're going to get enough peanuts for our needs.

And then just a follow-up. On M&A, could you just share with us the landscape right now and what the acquisition picture looks like for Smucker's?

Well, as you know, Farha, we have a list of -- wish list of brands out there that we think would be a great fit with Smucker's. The landscape hasn't changed a lot. There is some activity in terms of you've seen several transactions take place recently. We think that we're going to see some brands come available probably in the next 24 months and we would be interested in some of those. But I don't think there's been a big change in the last 6 months or so.

[Operator Instructions] We'll go to Michael Gabovich with Glenrock Asset Management.

I was wondering since you set that promotions somewhat this quarter, do you expect Kraft to possibly increase their promotions. I realize the category has already been -- become increasingly -- promotional spending has been up. What do you expect Kraft basically to respond given your kind of uptick here?

I don't -- it's difficult to comment on any competitor. Any news or the category is good activity to help grow the category. And at this point, we're not in a position to really talk about any specific competition.

I'll now turn the conference call back to management to conclude.

We would like to thank everybody for being on the call today, and again have a great holiday coming up. Thank you very much.

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