J M Smucker Co (SJM) 2016 Q3 法說會逐字稿

Good morning and welcome to the JM Smucker Company's third-quarter 2016 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.

(Operator Instructions)

I will now turn the conference over to Aaron Broholm, Director, Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining us on our third-quarter earnings conference call.

With me today and presenting our prepared comments are Richard Smucker, Chief Executive Officer, and Mark Belgya, Chief Financial Officer. Also joining us for the Q&A portion of the call is Vince Byrd, Vice Chairman; Steve Oakland, President Coffee and Foodservice; Mark Smucker, President Consumer Foods; Dave West, President Pet Foods; and Barry Dunaway, President International.

As a reminder, on March 1, Barry will be assuming leadership of the Pet Food segment. At that time the International business will begin reporting to Mark Smucker. For the purpose of today's call, questions in these areas will be fielded by the current business President.

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

Additionally, please note the Company uses non-GAAP results for the purpose of evaluating performance internally, as detailed in the press release, which is located on our corporate website at JMsmucker.com. A replay of this call will also be available on our website. If you have any questions after today's call, please contact me. I will now turn the call over to Richard.

Thank you, Aaron. Good morning, everyone, and thank you for joining us. It is a great pleasure to see many of you last week at CAGNY. We appreciated the opportunity to provide an update on a number of key initiatives that are going on across our businesses.

One of our take-aways from CAGNY was how aligned the CPG companies were on the trends that we're all seeing in the changing consumer perceptions and shopping habits. The real key to success is how each company responds to these changes and perceptions.

We are trying to capitalize early on trends and not the fads, with bigger, longer-lasting bets. We also believe that our Company, and especially our brands, are well in line with the consumers' desires. And we are in a better position than most to capture more of the growth from these trends.

Today our comments will primarily focus on the third-quarter financial results that we announced earlier this morning and our updated outlook for the rest of the year. I'll begin with an overview of consolidated results.

First, net sales increased 37% to nearly $2 billion, driven by the addition of the Big Heart Pet Brands. Excluding acquisitions, divestitures and foreign exchange, the sales decline of 1% was reflected in volume decline in Consumer Foods and a price decline in Coffee.

Second, non-GAAP operating income grew $108 million or 44% for the third quarter. The addition of the Big Heart business, strong Coffee segment profit growth, and the one-time gain on the divestiture of the US canned milk business were all key drivers.

Third, reflecting increased interest expense and a higher share count, non-GAAP earnings per share increased 14% to $1.76. Excluding amortization, adjusted earnings per share were $2.05, an increase of 21% from the comparable measure in the prior year. Both of these EPS metrics include a $0.14 per share gain on the divestiture of the milk business. Lastly, we generated record free cash flow of nearly $500 million in the quarter, bringing the full year total to $962 million.

Turning to our US Retail segments, I'll start with Coffee, which had another strong quarter as our growth initiatives, along with favorable manufacturing overhead and commodity costs, benefited results. Looking at the key drivers, Folgers roast and ground coffee volume, based on tonnage, was up slightly compared to the prior year, while unit shipments increased even more, reflecting the transition to a reduced canister size were the key Folgers offerings.

With our price reduction related to small canisters and an additional list price decrease implemented in July to pass through lower green coffee costs, consumers are seeing lower price points on shelf, and our market share continues to grow. During the latest 12-week period, our brands gained 3 points of dollar share within the mainstream coffee segment.

For our overall K-Cup portfolio, the Dunkin' Donuts brand continues to drive growth, with a 12-week ACV of over 90% and a 6% dollar share of the K-Cup category. Consumer trial and repeat rates also remain strong.

We are pleased with the momentum for this business, which has helped offset declines for Folgers K-Cups. As with other mainstream brands, Folgers K-Cups continue to be impacted by the proliferation of offerings in the K-Cup space and the resulting competitive pricing. Our team is focused on improving this trend, including price improvements.

The performance of Dunkin' Donuts bagged coffee was soft in the quarter, reflecting aggressive competitive pricing. However, through recent target pricing investments, which are supported by favorable green coffee costs, our price gaps have improved and we are well positioned as we move ahead.

Lastly, Cafe Bustelo brand established a new record for the quarterly sales under our ownership, with double-digit gains for both roast and ground and K-Cup offerings in the quarter. Promotional activities such as our Cafe Bustelo pop-up cafes have successfully broadened the brand awareness and the brand continues to gain traction, especially with millennials.

Turning to Consumer Foods, overall results were mixed. Specifically, the Smuckers brand performed well in the quarter. Smuckers Uncrustable frozen sandwiches achieved a 16th consecutive quarter of double-digit volume growth. In addition, net sales for Smucker fruit spreads were in line with last year's third quarter and the brand continues to gain volume and dollar share within the fruit spreads category.

Within Natural Foods, our branded business also had a strong third quarter, led by double-digit sales gains for our RW Knudsen Family and Santa Cruz organic brands. Volume for the Jif brand was down from the prior year, primarily attributable to a reduction in inventory levels at several key customers. We believe this is mostly the result of timing as scan data trends remain positive for our peanut butter business.

Lastly, in the baking aisle, the overall category remains down, which we believe is partially attributable to continued growth in retailers' in-store bakers. Our results have been further impacted by aggressive competitive pricing, as was expected. Our focus remains on providing value-added innovation in these categories and competing responsibly.

Results for our Pet Food business also fell short of expectations in the quarter. Mainstream Pet Food sales continued to reflect heightened competitive activity in dry dog food, which has impacted the performance of our Kibbles 'n Bits brand. As we discussed last week, we are looking at all levers, including pricing, and are committed to improving the competitive position of our dry dog food business.

Cat food sales were also down in the quarter. However, similar to peanut butter, we view this as a timing issue with certain key customers, as market share trends remain positive. Offsetting much of these declines were the continued strong performance of our premium pet food and our pet snack brands, which both achieved high single-digit sales growth in the quarter.

We have been pleased with the roll-out of the Natural Balance brand into PetSmart. Also, innovation for Milk-Bone and Meow Mix brands has continued to be a key contributor to pet snack results. Overall, while mainstream dog food has been challenged, we are pleased by solid results in pet specialty and pet snacks, which are the growing segments of the business.

With respect to both Pet Foods and the broader organization, we continue to make good progress on our integration activities and synergy targets. Our March 1 integration is now just a week away. And through the hard work and dedication of many individuals throughout our Company, we are well prepared for this exciting milestone.

Lastly, as Mark will discuss in a moment, we continue to expect our full-year earnings per share, before factoring in the gain of the sale of the milk business, to be in line with the guidance provided at the end of the second quarter. In addition, we remain confident about our brands and the initiatives we have in place to support future growth across our key platforms of coffee, consumer foods, and pet foods.

Finally, I'd like to close by thanking all of our employees. This continues to be an exciting and dynamic time and we appreciate their ongoing efforts. With that, I will now turn the call over to Mark.

Thank you, Richard, and good morning, everyone. I will start by providing additional color on our third-quarter results and then conclude by updating our outlook for the year.

Net sales increased by $534 million in the quarter, reflecting the addition of Big Heart. Including Pet, sales were down as lower net pricing, primarily for coffee, detracted 2 percentage points from net sales.

Foreign exchange was also unfavorable in the quarter, reducing net sales by about 1 percentage points. Conversely, volume and mix combined to add 1 point of growth as strong contributions from Dunkin' Donut K-cups were mostly offset by declines in several key categories.

GAAP earnings per share were $1.55 this quarter, 2% below the prior year. Included in GAAP earnings were $45 million of special project costs related to merger integration activities, compared to $6 million of such costs in the prior year. Also included were $7 million of unallocated derivative gains compared to $13 million last year.

Excluding these items, non-GAAP EPS was $1.76 for an increase of 14%, which included a $0.14 per share gain on the divestiture of our US canned milk business. Excluding the amortization expense of $52 million, adjusted EPS was $2.05, up 21% for the quarter.

Non-GAAP gross profit grew 49% reflecting the addition of pet food and favorable volume mix for the coffee segment. Commodity costs were also favorable in the third quarter, most notably for green coffee, and were only partially offset by lower net pricing. Combined, this resulted in a 310 basis point increase in gross margin to 38.5%, well ahead of our previous expectations for the quarter.

SG&A increased at a greater rate than sales, primarily attributable to incremental marketing spend across all three US Retail segments. For the third quarter, synergy recognition totaled approximately $12 million bringing the year-to-date total to $20 million, mostly benefiting G&A expenses. As we indicated last week, we're now on track to achieve $35 million in synergies for the full year.

Amortization expense increased $27 million in the third quarter as a result of the pet food acquisition. Factoring all of this in, and including a $25 million gain on the sale of the milk business, non-GAAP operating income increased $108 million or 44%, while operating margin increased 80 basis points to 18%. The gain in operating income was partially offset below the line by higher interest expense and an increase in the number of shares outstanding related to the Big Heart acquisition.

Let me now provide a brief overview of the results for our segments starting with Coffee. Net sales grew 1% as favorable volume and mix of 5% was mostly offset by lower net pricing.

For the Folgers brand net sales declined 9%, mostly attributable to a 6% reduction in net price realization. Unfavorable mix driven by declines in Folgers K-Cups also was a factor.

Sales for the Dunkin' Donuts brand increased 55% for the quarter driven by Dunkin' Donuts K-Cups. And, lastly, Cafe Bustelo sales were up 16% as the momentum for this brand continues.

Segment profit increased 17% for the quarter. Higher volume mix and lower manufacturing overhead more than offset a double-digit increase in marketing and significantly higher selling expense due to the Dunkin' Donuts royalties. In addition, we continued to recognize lower green coffee costs in the quarter, which was only partially offset by the lower net pricing.

As we move ahead, we anticipate fourth-quarter segment profit growth to be comparable to the year-to-date rate, reflecting the momentum in the business, additional contributions from Dunkin' K-Cups and favorable coffee costs. Factored into this outlook is ongoing marketing spend related to new products, along with plans to continue supporting key price points, as well as other targeted pricing investments to address competitive activity related to Dunkin' Donuts bagged coffee and Folgers K-Cups. Overall, we are very pleased with this level of profit recovery following the decline in the prior year.

Turning to Consumer Foods, net sales were down 5% as lower volume, the impact of the canned milk divestiture and lower net price realization all contributed. Looking at our key brands, volume for Jif peanut butter was down 7% compared to a strong prior year quarter where volume was up 7%.

As Richard indicated, we believe the current-year decline is mostly the result of timing as consumer take-away was up slightly in the quarter based on volume trends reported in IRI's latest 4- and 12-week scanned periods. Volume for Smuckers Uncrustables was up an impressive 33% for the quarter, while Smuckers fruit spreads were down 2. However similar to peanut butter, we're encouraged that consumer take-away trends were much better as scan volume was up nearly 4% in the latest 4- and 12-week periods for Smuckers fruit spreads. Lastly, in the bake aisle, volume for the Crisco and Pillsbury brands declined 3% and 9%, respectively.

Segment profit increased 6% compared to the prior year, including the $25 million gain on the milk divestiture. A 42% increase in marketing expense, the unfavorable impact of volume and planned increases in manufacturing overhead cost offset much of this gain. The higher overhead costs were primarily attributable to the new peanut butter facility in Memphis, as well as temporarily under-absorbed overhead costs related to our working capital initiatives.

On a full-year basis we continue to expect Consumer Food segment profit to be down as the gain from the milk sale will be more than offset by higher overhead, the unfavorable impact of lower pricing net of cost, and higher marketing expenses.

Net sales for our US Retail Pet Foods segments were $571 million in the third quarter. Sales for pet snacks and premium pet brands both increased high single digits, driven by distribution gains and new item launches. Conversely, mainstream pet food sales declined low double digits resulting in a modest overall decline for the segment.

Pet Food segment profit was $97 million for the quarter. As anticipated, we realized a sequential increase in segment profit margin from 15.6% in the second quarter to 17% this quarter, and we continue to expect another sequential step-up in the fourth quarter. Despite the softer than anticipated top line and a slight reduction in profitability expectations for 2016, we remain on track to deliver on our target of growing full-year Pet Food gross margin by 100 basis points compared to the prior year.

Lastly, net sales for International and foodservice declined 4% in the quarter as the addition of Pet Food in Canada was more than offset by a $17 million impact of FX. Combined segment profit for our International and Foodservice businesses was up 4% over the prior year, primarily in our Canadian business. Favorable mix along with lower selling expenses contributed to the profit gains.

The impact of foreign exchange partially offset these items. We continue to expect FX to remain a significant headwind in the fourth quarter and into FY17.

Turning to cash flow, cash provided by operations was $542 million for the quarter, compared to $428 million in the prior year. The increase primarily reflected lower working capital needs as the impact of higher non-cash depreciation and amortization in the current year was offset by the benefit of terminating an interest rate swap in the prior year. Factoring in capital expenditures of $43 million, free cash flow was $499 million for the quarter, bringing the year-to-date total to $962 million.

We're increasing our full-year outlook for free cash flow from $925 million to $975 million. The increase primarily reflects the strong cash flow performance through the first nine months of the year, which includes nearly $100 million of our working capital improvement target, up from our previous estimate of $60 million.

Partially offsetting this is we now project CapEx of $240 million for the year, an increase from our most recent guidance of $220 million, as we pull forward spending on certain projects into 2016. As a result, CapEx in the fourth quarter is projected at approximately $80 million. This step-up in CapEx, along with planned inventory build and incremental tax payment, are the primary cause of free cash flow increasing only modestly for the fourth quarter.

In addition to this strong free cash flow, we used the aftertax proceeds from the divestiture of the milk business of approximately $165 million to further pay down debt during the third quarter. As a result, we ended the quarter with total debt just under $5.3 billion and leverage currently stands at approximately 3.5 times.

Let me conclude with an update on our full-year sales and earnings outlook for 2016. We now expect net sales of approximately $7.8 billion with the reduction from our previous guidance of $7.9 billion primarily attributable to Consumer Foods and Pet Food segments.

For Consumer Foods this reflects the softer than anticipated third-quarter results, which we expect to continue into the fourth quarter, particularly for our oils and baking businesses. For Pet, this reflects the continuing challenges in our dry dog food.

With stronger than expected Coffee segment profits and an increase in synergies we expect to offset the net sales shortfall at the bottom line. As a result, we continue to expect non-GAAP earnings per share to be consistent with our previous guidance range of $5.70 to $5.80.

Adding the $0.14 gain on the sale of the milk business to this range, our updated guidance is now $5.84 to $5.94 for the year. Excluding the you amortization expense of approximately $1.15 per share, this would result in adjusted earnings per share between $6.99 and $7.09.

As discussed last week, we expect to recognize a non-cash deferred tax benefit related to the integration of Big Heart into the Smucker Company during the fourth quarter. While not factored into our revised guidance range we're estimating this benefit to be approximately $50 million.

In summary, we continue to be pleased with the earnings performance of the Company and in particular the ongoing strong results for Coffee. Our overall results reflect the success of our key growth initiatives for the current year, including the launch of Dunkin' K-Cups, achieving lower price points for Folgers roast and ground coffee, the introduction of Natural Balance at PetSmart, at the same time while delivering on our cost savings and our working capital initiatives. As we move ahead, we're encouraged by the plans in place to deliver continued growth.

With that, we'll now open the call up to your questions. Operator, if you'd please queue up the first question.

(Operator Instructions)

Our first question comes from Eric Katzman with Deutsche Bank.

Hi, good morning, everybody. Richard, you talked about some of the similarities across the companies at CAGNY last week. One of the differences, we found out today, is that your advertising spending is up significantly across the bulk of the business, whereas a lot of folks are cutting back on that. The question is, you didn't really see the benefit in terms of shipments, so how should we think about the fact that you're spending to support the business, which is good, but not really seeing the follow-through in terms of units out?

I'll give a general answer and then I'll ask the team to respond specifically. But our advertising primarily is a little more longer term, and the benefits of the advertising don't just hit quarter by quarter. A lot of that is brand building, and we try to do it over time. We try to be consistent. So, we wouldn't expect to see it necessarily in the quarter. But if the team has any of the specific efforts that we made this past quarter, please.

Mark Smucker Yes, Richard, this is Mark Smucker. I would just add, Eric, that we did pull back significantly on advertising last year. So, we are returning our advertising more to historical levels. And as Richard said, it is around some building of equity. We have a new Smuckers TV commercial on air just supporting some of our new things, as well -- Milk-Bone. But Richard is also right, the support on advertising generally has a residual impact, so we think it's important.

Steve Oakland. I would say there's a number of factors in the Coffee business right now that are all going right. But it would be hard not to say some of the marketing materials, especially on the Dunkin' K-Cup launch, we've got awareness out very quickly on that. So, I would hope that the Dunkin' media has been very helpful.

Okay. And then just as my second question, a follow-up more on the cash flow side of things. Free cash flow very strong and your debt has come down pretty quickly. Richard, as you think about that cash and returning it to shareholders, is there any adjustment in terms of the debt paydown versus buyback and balancing those two opportunities?

I'll start on that, then I'll let Mark finish up. But we look at using cash in a variety of ways. Our first choice is to look at new acquisitions, because we think that builds the business for the long term. But share buybacks is still part of our plan over time. We still think our Company is a great investment, and, with the better cash flow that we have, gives us a little bit of better ability to do that sooner rather than later. But no announcements at this point.

Eric, it's Mark. I basically agree with Richard. We've been pretty adamant the last year or so, or last half year, as we came out of the transaction that with the speeding up of the paydown and the fact that we did around 3 times, that's a level that we're comfortable with, 3 times leverage. We'll hit that end of next year. That just will speed up anything in terms of whether it's acquisition, buyback or other uses of the cash.

Thank you.

Next will be Ken Goldman of JPMorgan.

Hi. I have two questions on Pet. Barry, not to throw you into the fire, and I realize it's early, but are you expecting to make any meaningful changes to the strategy for the business overall? Because I think it's safe to say, at least from an outsider's perspective, growth has been disappointing. Management has talked recently about reducing prices in Kibbles 'n Bits but mainstream dog or dry dog is, what? -- 20% of the portfolio? So, I'm not sure how discounting one brand is enough. It just feels, again, from one outsider's perspective, like bigger changes across the board need to be made to hit your numbers.

From a strategic perspective I would say no fundamental changes in strategy. We think the snacks business really is the key driver of the Pet Food business, both in terms of sales and profits. That's what we'll continue to invest and innovate.

From a dry dog perspective, clearly we're looking at what the trends are in mass premium and we're going to step back and understand what we need to do to compete there. Similar to all our other categories that we participate in, we feel we should have a presence in every segment. We're watching the mass premium and we'll figure out what our strategy should be there long-term.

But I would say no fundamental shift in strategy. This is about driving the business long term and it is about snacks. Dave, would you add anything to that?

This is Richard. Let me just add to that, because we're still very excited about the pet business. It's a great business. Any acquisition we've ever made historically, there's always a hiccup. I've never had an acquisition where all the cylinders fire 100%. But three-quarters of this business is doing very well.

So, we'll figure out the mainstream pet soon enough. But the other businesses are right in line where we like them to be. So, we're still very confident and very excited about the pet business.

Okay. I guess it's different when Godzilla hiccups versus when a gecko hiccups, and this is Godzilla for you guys. It's a very big business. But I'll move on to my next question. You highlighted the challenges faced by Kibbles 'n Bits. As we look at Nielsen data, sales for the brand have really been in steady decline for years. And I realize the rate of erosion has accelerated versus a year ago, but it's similar to what it's been each of the last eight, nine months, at least in Nielsen again. So, I'm not sure why the weakness this quarter was such a surprise to you.

This is Dave West. Let me take that question. We did see heightened competitive activity in the marketplace in the quarter, in the form of price size and weight changes and bonus bags. We have corn and soybean meal continue top be trading at relative lows. And what we have seen is some of that favorability in commodities was reinvested in the marketplace.

I think on a year-to-date basis our gross margins in the mainstream Pet Food business are actually up. So, not all of the commodity favorability has been passed through, from our perspective. We're using part of our goal on the way in when we set our plans for this fiscal would have been, prior to the acquisition, Big Heart by JMS. We executed those plans.

You will see us become a bit more aggressive now as we come into the latter part of the year and the early part of next year to respond to some of the bonus bag and activity and other relative price and size. But I think overall it was more down than we would have expected it to be, but the margin structure of the business is still pretty good. Fundamentally there's a consumer who is going to continue to look at value in the marketplace. But there are other consumers who are looking for other benefits and we will go meet those other benefits in a different way. It won't be a price lever.

So, I think Barry's point was we see other segments emerging. We're very pleased with our premium dog food business in the specialty channel and in the independent pet channel, but we are not happy with where we are in mass.

Great, thank you.

Next will be Chris Growe with Stifel.

Hi, good morning. I had two questions for you, if I could. First, on Coffee, if we look at the coffee business, I'm looking again at some IRI and Nielsen data, just showing coffee excluding the Dunkin' K-Cups, overall coffee has been a bit weak. And I think you did cite some weakness on the Folgers K-Cup side of that, is in part the issue. I just want to get a sense -- you've increased marketing spending, I think, behind the business. Does it require just being more promotional? Or is there one piece of the business that you need to attack here, if you will, to firm up the non Dunkin' K-Cup coffee business?

Hi, Chris, Steve Oakland. The Coffee business does have a couple of big segments. If you bore into that Nielsen data, you'll see that our mainstream roast and ground business, although through a lot of change this year -- remember, there's an 11% small canister, the promotional size, and we took a 6% price decline -- you roll those two things in and you actually see volume up.

For mainstream volume to be up when you take 11% out of the canister we think is a nice rebound to that business. And we're hitting price points that excite and -- I talk about this -- both the retailer and the consumer. You need the price point to get the retailer excited about merchandising it. So, that piece of business is much healthier than it's been in a while.

Then you take our K-Cup business and it's fair to say that business has just come out of the gates on fire. We continue to see good momentum there. So the Dunkin' K-Cup business is very strong. And although small, Bustelo is starting to move our share a little bit. It's starting to get big enough that that business is material.

Now, the Dunkin' bag business has been a struggle early on in the year. I would say that we've seen price compression in premium that we've never seen before. Part of that's driven by green and I think part of that's driven by strategy of the competitive set.

The good news is, the pricing we have in the market we've seen today turn that around, somewhat turn that around. And we expect that business as green helps us to get even better. And, frankly, the legacy K-Cup business, or the Folgers K-Cup business, is performing, I would argue, how the K-Cup category. If you take two premium brands out, and you take us and the other major premium brand out of the K-Cup business, it's not been that healthy of a category.

The opportunity for us is to continue the momentum on the Dunkin' business and to fix our K-Cup business. And we are committed -- I think that's an important statement -- to growing our whole K-Cup portfolio over time. Dunkin' has given us a little bit of a tailwind there, a lot of tailwind right there. But the challenge for us is to get our legacy K-Cup business back on track.

Is that a sharper price point, then, Steve, just to go a little further on that, is that probably the key at this point given the proliferation of brands across the shelf?

Yes, there's no question. You will see mainstream K-Cups will be much more price competitive across -- it's hard to say what our competitors will do, but we will be following that trend. And some of that pricing is actually in the market, as we speak.

Steve, I would also maybe add to that, that the retailers right now are resetting the categories because I think they've all agreed there's been too many SKUs there. And we have some very good SKUs that I think, as they do resets, we will end up with a better position over time.

Yes. It will be classic category management. With all of that growth, I think everybody just threw SKUs at it and threw space at it. And now you'll see classic category management. How many hazelnuts do you need? You can go in some sections and there's 13 hazelnuts.

I think those things will work their way out. But we have some real work to do on our K-Cup business. The consumers told us they want them, so we have to win there.

Okay. And just a quick follow-up on the Pet Food side, you've been giving sales for that business in that $2.3 billion range. Given some of the pressure here in the third quarter and the fourth quarter, seems like we're around that $2.2 billion range. Have you given that estimate for sales for Pet Food for the year?

Chris, it's Mark. Obviously if you take where we ended this quarter and probably somewhat similar in Q4, and take that off, I think you're going to get down more in that $2.2 billion range.

Okay, that's helpful. Thank you.

Next is David Driscoll with Citigroup.

Thank you. And good morning. Two questions. The first one, Mark, is for you. The 10% growth guidance in FY17 is against the $5.84 to $5.94 guidance? Is that correct?

No. It's against a $5.70 to $5.80. The gain, David is a one-time. What we're not excluding, of course, is the contribution in the first eight months of milk, which is in that $5.70 to $5.80. So, we'll grow off that but we're not going to grow off the milk gain included.

I totally understand one-time gains are odd but I thought it was odd that you put it in the number to begin with. But thanks for clearing that up. You did not mention last week the FY18 guidance of 10%-plus growth that you outlined when you bought Big Heart. Is that still an expectation of the Company?

Yes. To go back to your first point, I would like to clarify why we include it. I think it's important everyone understands on the call. We have historically put the expectations on our businesses, both on the positive and the negative, they're responsible for the brands. That's why over time we've included amortization and impairment.

At the same time, the brand benefits, if we're able to generate a gain on a sale of a brand that no longer fits the portfolio, we felt it's just appropriate to run that through. So, while you guys may exclude that, that's the reason we leave it in.

Okay. But the way more important, FY18 10%-plus growth is still your expectation?

Yes.

Fine. Thank you. And then final question from me just on Natural Balance, I think you guys said that the growth in the third quarter for your specialty business, which I'm going to assume is mostly Natural Balance -- I know there's another brand there, but I think it's mostly Natural Balance -- was high single digits. I think on the last call you had said that the growth in Natural Balance was something like mid teens or high teens. So, if those statements are true, is there a bit of a deceleration in growth rate there? Number one, is that true?

And then, number two, how do you see the growth for that business over the longer course of time, because it seems there's some fair amount of volatility here? It's good news but it's a question of what landscape are we in, high single digits or mid-teens.

Natural Balance, David -- this is Dave West -- was up double digits in the quarter. We have the Nature's Recipe brand, which is more of a gateway brand in pet specialty as people cross over from mass. That brand was not up as much, so that goes into that premium measurement that we give you.

I think overall we're very happy with where we are in the Natural Balance expansion into PetSmart. We continue to be pleased across the channel, across the two major pet specialty retailers, but also with distribution gains that we're getting in other independent and other parts of the channel. So, pleased with where we are.

As we go forward, we haven't given a projection with respect to growth on a forward basis and I would not want to do that since my competitors out there probably aren't going to give me their growth projections either. So I think I'll pass.

All right. I still appreciate the comments on the brand. Thanks, guys.

Next is Jason English with Goldman Sachs.

Hey, good morning, folks. Hope all is well. Good seeing you last week. I wanted to pick up where Dave left off because I, too, was struck by premium only growing high single digits in the context of all the PetSmart distribution growth. Are we over-estimating how much PetSmart distribution on the Balance product has contributed? Or is the business flattish, maybe even down excluding the distribution?

One of the things that you have to understand is the measurement of how incremental truly is that distribution. Is that incremental to the retailer as we expand? Is it incremental to the category? What are the cannibalization rates?

We had an assumption on the way in of what that business would be. Again, Natural Balance is not the only brand in that measurement when we talk about premium. We have other businesses that are sold in the premium and independent channels, and they are not growing as rapidly.

I'm pleased with where we are with Natural Balance. I think we've done a very good job of expanding the footprint this year. We have our first national ad campaign on the business. We've launched into a higher protein offering in the brand. And we've gotten good shelf space in the major retailer PetSmart and kept our relationships with Petco and the independents at the same time.

So, I think we're in good shape. We've got double-digit growth on the brand and I'm not going to apologize for double-digit growth. I think that's pretty good and it's within the range of acceptable for us right now.

I hear you. Double-digit growth is always good. But I'm still not sure I'm tracking. If we excluded the PetSmart distribution gain on Natural Balance, is your premium portfolio growing?

Again, I'm not trying to be difficult but I'm not going to answer the question because you can't assume that the entire set of distribution is 100% incremental. The hope would be that any time you add distribution it's 100% incremental but that's just not the reality of it. There's always cannibalization and consumers are going to find their way as they see distribution in new places.

I'm not going to get into disclosing the incrementality of the switching behavior of consumers. That's something we're measuring where we have new distribution, and it's also something we are tracking very closely in the rest of the channel where we have had distribution for a long period of time. Those are conversations that we'll have with all of the retailers in the channel, make sure we're supporting the brand the right he way.

As I said, we're happy with where we are. You build distribution, you build awareness and you see how consumers are trying and are they new to the category, are they new to the retailer. Those are things that we're measuring on a weekly basis, but like I said, I'm happy with where we are. But I don't think I'd give out any more information than that.

Okay. Understood. One more question and I'll pass it on, on coffee. Congratulations for a phenomenal rebound this year, guys. Obviously a contributor, as you call out, has been the positive price to cost surplus. Do you think that can sustain or are we reaching a point where equilibrium in terms of price pass-through and the cost relief will approach, or given competitive dynamics in the category, can you actually sustain a surplus for longer than you historically have?

There's a couple of things we need to really look at in the numbers. We look at the price to cost relationship on an annual basis. And I think we took price down early. You saw some of that hit us in the early periods. You see now the benefit of that in later periods.

The volume is also helping our operational efficiency. So, just the nature of how some of those things fall, a lot of that fell this quarter. It's an annual number but it falls in periods when you take that absorption. I think we can see very good margins. We continue to see solid margin growth in this business.

We think the green market, as we look out the next quarter or so, or two, looks like it will continue to help us hit those price points, to invest in the things I talked about in the earlier question, and maintain similar margins. We think, if we can keep all of those things -- it's really three dimensional -- it's exciting the consumer signing the retailer, and then having those things right. We think we're going to be in good shape the next couple of quarters.

Jason, I'm going to add one thing to those comments. Last year when we sat here and we knew we were challenged in coffee. A lot of the activities that we've taken place this year in coffee were put into our strategy last year. For example, the change in the size of our coffee canister was a two-year project.

We saw last year the challenges that we had in coffee and even before that occurred we were putting a lot of initiatives in place to make sure this year has turned out the way it is. Now, obviously we had the tailwind of a little bit of green coffee cost. But the work on getting the Dunkin' K-Cup was also a two- or three-year project. So, a lot of those initiatives really are two to three years old and now they're all coming to fruition this year.

I just want to put in perspective that when we see a tough quarter we can't respond and the very next quarter things turn around. I think it's important to remember that. But it's also important to remember that we look at those things and take that long-term perspective.

The same thing applies on our mainstream pet food business. We've put a number of initiatives in place that we think over time that will turn around, also. But we're not sitting on our laurels. We recognize those are challenges that we have and have a number of initiatives in place. But you may not see the results of those for six or nine months or a year later.

Got it. That's really helpful. Thank you, guys.

The next question is from Alexia Howard with Bernstein.

Good morning, everybody. Two quick questions. Firstly, on promotional activity, we've had a number of other companies talking about how they're pruning ineffective promotions. But the sense that I'm getting is that in some of your more competitive areas you might actually be stepping that up. So, I'd just like to hear your views on directionally are you likely to see more or less promotion over the next year or so. And then I have a follow-up.

Alexia, this is Mark Smucker. I'll start. Where you've seen more promotional activity, like baking, there's no question that has taken place. We've seen in that particular category that the depth of promotion has not yielded growth. And actually we've seen that across multiple customers.

And there are other areas where we are more focused on being more efficient in our trade spend. So, over time our goal is, as I think we've said a couple times, not to prune for the sake of pruning, but to get better at spending those dollars and putting them where they really do affect the business.

Okay. And then as the follow-up, in the US Retail Consumer business, you've got pockets that seem to be working quite well, like Uncrustables, and then other areas, you mentioned baking, that have been weaker. How are you thinking about resourcing those weaker parts going forward? Are they areas that are targeted for more investment, more innovation, more marketing to fix it? Or might we see a pull-back on some of that investment or maybe even further divestments along the lines of the canned milk business? Thank you and I'll pass it on.

Again, on baking, I think we've heard broadly from our customer base that they weren't as happy, of course, with the fall bake period, given the level of activity and the fact that the category itself continued to decline. But what's interesting, and where we have seen good growth, is on the on-trend items like gluten-free and the more simple ingredients. Those businesses seem to be doing very well, albeit not enough to offset the decline in the mainstream business.

So, cake, frosting -- unfortunately, frosting has been down, as well. Brownies are actually doing well, for some reason. But it's really in the more on-trend, authentic, simple ingredient items that we're seeing some good growth. That would also be true in our fruit spread business, as well.

Even though we had a down quarter in peanut butter, our Jif Natural, our no stir natural product, is actually up significantly, as well. So from a peanut butter perspective, I think we're less concerned because the consumer take-away has not followed our decline in shipments. So, we would expect to see some improvement over the coming months in peanut butter.

Great. Thank you very much. I'll pass it on.

The next question is from Farha Aslam with Stephens Inc.

Hi, good morning. First question is on your inventory reductions you saw in Jif and cat food. Is it limited to just the third quarter or are you seeing it bleed into the fourth quarter? And is it specifically with one retailer or several retailers?

Farha, it's Mark again. In peanut butter we do think it's probably limited to the third quarter. Again, the consumer take-away on the scan data has not reflected that, so I think we feel cautiously optimistic about the next several months.

And cat food?

On cat food, I think what we've seen is just there's some shipment timing with respect to promotions and new item activity that was in year ago. If we look at our market share, our market share in dry cat food, particularly, is as solid as it's been. So, I think you're going to have noise up and down with respect to shipment timing, but I think I feel pretty good about the Meow Mix business particularly and where we're headed next year with respect to innovation.

Farha, this is Vince. I think you also have to remember that there's a couple major retailers that their fiscal year ends the same as the end of our third quarter. And this is not unprecedented in terms of what's occurred historically, that there might be some destocking at the end of their fiscal year. It goes in cycles. But we would anticipate that not to be a long-term situation.

That's really helpful. And then just as a follow-up, the three drivers of your top line this year seem to be Dunkin' K-Cups, Uncrustables and Natural Balance. Each of them have benefited from channel fill and capacity expansion this year. When you look longer term into next year, would you expect these businesses to continue to be able to post growth going into next year? Or is there something else that will take their place in terms of growth drivers?

Farha, this is Mark Belgya. I think the expectation of those three, those are three be big areas that we would continue to invest and expect to grow. Now, will they be as additive as they were this year? That will be determined. We're also, as normal course, going to continue introduce new products. And then I think the other one I would add to that list is Milk-Bone, just through the innovation and Barry's comments around the strength of snack and how important that is to us.

And Bustelo. Bustelo has got double-digit growth. It's small, but double-digit growth.

I think that's part of the advantage of having a broad portfolio and the size and scale that the Company has and adding another growth leg is that the innovation funnel is balanced over time. There will be a lot of work going forward to make sure that we always have something coming down the funnel, and that we've talked with long-lead customers and have good plans in place so that we constantly refresh that.

But there will obviously continue to be certain brands -- Folgers, Dunkin' Milk-Bone, Jif, et cetera -- that we're going to focus that innovation against because they have the brands that have the shoulders to take that kind of innovation. But I think there will always be something in the funnel on a forward basis. That's just part of having the resources that the Company has.

That's helpful. Thank you.

The next question is from Robert Moskow with Credit Suisse.

Hi, there. I think Farha asked my question I had. But if you think about the mathematics for next year to get to the 10% EPS growth, if I strip out the benefit of the synergies and the dilution, I think I'm getting to a flattish EPS growth for the base business. You can check my math on that if you like. And I think that in a normal year I would call that conservative. But there are tougher comparisons in FY17. And I appreciate the comments to grow Natural Balance and Dunkin' K-Cups and Uncrustables, but I think we've all been in that situation where what had been a great launch in the first year ends up being a tougher comp in the second year.

So, is there something you can tell me a little bit more about what's going to drive the growth in those businesses while maintaining the core at a flattish basis? Is it distribution? Is it advertising? What is it that's going to keep those growing?

This is Richard. And Dave mentioned it also, just the fact that we have a much broader portfolio than we've ever had before. We've got more initiatives in place and more new product initiatives in place than we've ever had before.

We also have, we still want to drive our share of market for each of our existing brands, and the fact our go-to-market strategy and the sales and marketing teams that we've put together are much more robust than we've ever had before. So, we would expect basically to pull each one of those levers. No one is going to drive the grow but if you combine them all together, if we can get a little bit out of each one, which is our plan, we're going to see reasonable growth.

Now, we're in categories that we think resonate well with the consumer today, so we think that we're going to have some reasonable baseline growth in addition with new product growth. It's a challenged market out there, but we think we're well positioned and probably better positioned than most CPG companies to see that growth.

If I can comment -- this is Steve Oakland -- on the Coffee business. If we look at the results that we're posting this year, we got strong momentum on our base business. I went through some of these earlier. We think that, from what we can see, should maintain. We think there's some opportunity.

If you remember, our first quarter wasn't as strong as the back nine months has been. We think that the premium green -- we don't usually get into this, but different streams of green come in at different times of the year -- so we think there's going to be some tailwind the for our Dunkin' business next year. And we have to make that grow. Our Dunkin' business has the opportunity to get its momentum back underneath it. And what we talked about on Folgers K-Cups,

We don't think the powder's all been spent on the coffee business. We think there's some opportunities to repeat what we've done. The largest retailer in the country did not take Dunkin' K-Cups out of the gate. They're there now so that will be a little bit of tailwind. We feel good about the Coffee segment even following the numbers we've shown.

Can I ask a follow to Mark Belgya? Is my math just about right, Mark, that if I drop all those synergies to the bottom line and then take out the dilution from canned milk, it implies a core EPS maybe up 1% or something like that?

Yes, that would be about right. I think you're probably using roughly $100 million for the synergy number which is about $0.55, $0.60 probably. So, that sounds about right.

Rob, the only other thing I would add is, right now where we're at in our planning process in our synergy recognition, we feel comfortable with $100 million incremental for 2017. But I think just on the base business from a cost and budgeting spend, again, while we've not some of the aggressive things that some of our peers have done, we're still putting just pressure on budget management just through normal course. So, whether you call those synergies or not, I think that recognizing what you just suggested in terms of base growth, we've just got to continue to try to push cost from a budget perspective. We're in the throes of doing that now and hopefully that will contribute, as well, for 2017.

It's the right thing to do. Thank you.

Next is Jonathan Feeney with Athlos Research.

Good morning. This is Mark Williams on for John. My question was on the synergies. I was just wondering, I'm sorry if I missed this, but what's driving the early delivery of the synergies? Is it related in any way to perhaps the underperformance of the business?

This is Vince Byrd. The short answer is it is not driven by the underperformance of the business. It's two areas that we have been able to realize a little quicker than we had anticipated in the administrative and operational areas, and then also some direct materials. We made some choices about ingredients and other things that increased our synergy target from $25 million to $35 million.

Okay. Great. Thanks. And bigger picture on the Coffee business, I was wondering what strategic options the Company may have explored in the event of some change in the relationship with the newly acquired business.

I assume you're talking about KGM, Keurig?

Yes.

Acquired by JAB. I think we made the statement earlier that we're committed to grow the K-Cup business and I think we've done that this year. I think it's a testament to that relationship so far. We are having the kind of dialogue to candidly discuss what we've got to do with the leadership of Keurig.

You can't look into what will happen in the future once that transaction closes. There's nothing they've said or done to date that would suggest that we won't work together on those opportunities. But we have to be positioned to grow that business. The consumer has spoken. They want K-Cups. So we're committed to be there, and to date I think we've been with the right partner.

Okay. Thank you.

Next is Matthew Grainger with Morgan Stanley.

Hi. Good morning. Thanks. I just wanted to try with two follow-ups on the pet business. First, you mentioned that you're considering all levers to improve performance in the mainstream dry dog business. And I know it's hard to talk prospectively about promotion, but from an innovation or brand building standpoint how the brand is marketed or positioned, are there any specific steps you're taking or thoughts you can share on how you might look to revitalize that? And in general terms, how are you thinking about the urgency or potential timing of taking some of those actions?

I think Richard mentioned, and I think it's a good thing to always pause and think about how quickly can you turn a business where you plan with long-lead customers for 9 to 12 months out, and particularly in a business that tends to be everyday low price and not a high-low business, so it's much more base than it is promotion. It's much more difficult to move those types of businesses. And the dry dog food business in the mass channel is a business that is much more EVLP and planned with some big long-lead customers.

We are looking at all levers. We're looking at pricing, we're looking at product packaging, we're looking at other opportunities to innovate in the business, not just in the Kibbles 'n Bits brands but across our entire mass dog food business. We're looking at all the levers.

I think in the short term the easiest, quote-unquote, easiest lever to pull is always price and promotion. It's not always generally the smartest one to pull because when you talk about poor trade spend and more poor ROI, the trade spend that's deployed on a short-term basis generally doesn't have great ROI because you don't get the kind of merchandising or lift for it that you would expect. We've looked at all of those things.

As I mentioned, from a profitability standpoint, when we had our Investor Day, the areas of focus for growth for the pet business were around pet snacks, dog snacks and cat snacks, around the premium business, particularly Natural Balance and the expansion of Natural Balance, and then also focused on our cat business, our Meow Mix business, which is the largest brand in the pet portfolio, and innovation that we have coming on that brand next year. The role of the dry dog food business in mass has not been one of growth. It has been one of profit maintenance and that's the role we've taken with it.

Our margins are up for the year, our gross margins are up. That's the role of the portfolio. As Barry said, we've looked at what we're doing. I don't want to get into specifics. I don't think I want to be forecasting or projecting into the marketplace what I'm going to do. But we are looking at all levers and you will see some changes in terms of how we're going to market across the portfolio.

But, as I said, we're disappointed with those results but overall, when I look strategically across the three growth levers that we talked about when we had our Investor Day back in October, we're hitting on those three levers. And this was not going to be a huge area of focus for growth for us. Unfortunately right now it's down significantly and we'll take the steps that we need to, to fix it.

Okay. We'll wait to hear more there. Then just on Natural Balance and pet specialty, obviously business is growing high single digit overall, double digits. Can you give us any sense of what that implies from a market share standpoint in the channel or the natural category? And are there any metrics you can give us in terms of repeat purchase behavior at PetSmart, or any of those metrics that you'd be tracking at this stage in the expansion?

We're tracking our velocity on a weekly basis. We are also doing consumer research to track trial and repeat and repeat repeaters. So we're tracking what you would expect in any normal launch. We're looking at source of volume. We're looking at incrementality, and incrementality to the category, incrementality to the brand.

So, we're looking at all those things. We evaluate it weekly. I'm not going to get into the specific numbers with you. We're pleased with where we are. Petco, PetSmart and the pet specialty channel in general has been a little slower this year overall, and that's obviously affected not only probably our business, but category growth rates in general.

But, as I said, I'm pleased with where we are with the business. We've gotten the kind of launch support that we needed and we've also been able to continue to get support from the retailers who we've had distribution with for a long time. So, pleased with it overall. When you see market share it's not all inclusive. We have better visibility into it but it's data that I'm not prepared to share.

Okay. Understood. Thanks.

The next question is from Akshay Jagdale with Jefferies.

Good morning. This is Lubi filling in for Akshay. I wanted to ask a question on your advertising spending. You guys have increased advertising spending across a number of your businesses this year. And I think some of that will carry into next year. Can you just talk a little bit about what your internal analytics are telling you about the effectiveness or returns on those programs? Are you generally encouraged by what you're seeing?

And then maybe if you could just touch a little bit on the advertising mix, digital versus traditional media, et cetera, that would be helpful. Thank you.

Let me take a kick at that one. This is Dave West. I'll start on Pet because we are up significantly year on year, particularly in the third quarter when you look at our segment profit in the third quarter. We're supporting Milk-Bone, the Milk-Bone brand, we're supporting Meow Mix Irresistible Cat Snacks, and we're also supporting the Natural Balance brand as we expanded our distribution footprint.

Those three initiatives are really against trial and awareness and building. The ROI on them initially is tough to measure because you're trying to get to trial and repeat. So, I'm not sure that the economic effectiveness of it measuring it in the first quarter, or the first six months that it's in.

The same is going to be true on Dunkin' K-Cups and Jif peanut butter bars, and a number of other things where we're going to advertise new items. It's part of launching a new item in a quality way. You try to stack your marketing so that you get merchandising, as well as an attractive price point plus consumer awareness.

A lot of the marketing that you're seeing from us is geared towards that across the portfolio. And then the other area where I think it's more difficult for the industry in general to measure is an investment in digital. We're trying to make sure that we invest in first-party data and first-party relationships with consumers.

We want to reach them wherever they are and we want to make sure that we're on their path to purchase. So, whether it's pre-shop or in-store as they're making decisions, we are focused on building a digital network and the digital ecosystem that reaches them there. There's infrastructure building there, as well.

Overall, I think we continue to look at our ROIs and we'll fine-tune them as we go along. But I think it's the right thing to do, the brands that we have to support them in the way that we're supporting them.

This is Mark Smucker. I'll just add to that. As Dave said, there's a lot of advertising being spent, particularly in pet on what we would call initiatives. If you think about the two buckets of advertising, it's equity support and initiative. A lot of you're seeing in pet is more on new products, initiatives, versus Smuckers we're on air with a new ad that is strictly focused on equity.

Again, but in either case they're relatively difficult to measure, so just trying to get to ROI on those isn't a quarterly exercise. It's more like a 12-month exercise. But we do feel that obviously supporting our brands is very important and we're going to continue to do that. I think that's it.

I think the only other thing we mentioned at CAGNY is we now have about 25% of our media now spend is in digital, which is up. If you read it a couple years ago, it was less than 10. We're moving in that area. As Dave said it's not easy to measure so we're trying to do it judiciously and trying to measure it where we can.

Thank you. That's very helpful. And then apologies if you touched on this already, I know you're not providing specific guidance for 2017 just yet, but could you just talk maybe high level about how you're thinking about cash allocation for FY17? Obviously cash flow generation remains strong. So just some thoughts on that would be helpful. Thank you.

This is Mark Belgya. I think it's pretty consistent with what we said last week at CAGNY. I don't see any significant change. If you just think of it in terms of round numbers of about $1 billion in free cash flow, about a quarter of that's going to go to dividends. We're going to target about $400 million to $500 million in debt repayment. And then embedded in that $1 billion of free cash flow is about, call it, $0.25 billion of CapEx. So I think we'll see that.

The only other thing we would bring into that is we mentioned earlier is just where share repurchases would fall into that. That may cause us to borrow a bit to do such. But I think generally speaking I would just hold to our cash deployment model we've talked about really since the acquisition was announced a year ago.

Thank you very much. I'll pass it on.

The next question is from Bryan Carlson with Tudor Investment Corp.

Good morning, guys. I just wanted to ask, in your slides you had outlined a couple of factors that would be headwinds heading into 2017. One of those was FX and the other was the milk divestiture. I was just wondering if you can give us some sense of what the incremental drag from the divestiture of the milk is. And at current rates FX is an additional, I don't know, $0.05, $0.06, $0.07 of EPS headwind?

Bryan, we'll get into this a little bit more in our fourth-quarter earnings call. But in terms of the milk, that's probably, I'd say, a $0.10 to $0.15 impact of contribution. Again, just so everyone's clear, that's the milk contribution we're losing. That has nothing to do with the gain of $0.14 we recognized. So, roughly that.

FX, we're still working through that. But that's going to still be a pretty significant impact. We're thinking that's well over $20 million next year. If you look at what the exchange rate has done, even if you averaged in this year, it's fallen well below $0.70 for a while. I would guess it's at least $20 million or probably even north of that.

Okay. Everything else I had has been answered already. Thank you.

The next question is from Rob Dickerson with Consumer Edge Research.

Thank you very much. Good morning. Just a couple quick questions. First, more broadly, this has been touched on a little bit, I just want a bit more clarification. The marketing spend obviously was up in consumer. Volume's still pressured. Pet's coming in below plan in year one. If we think about FY17 and incremental cost synergies, how should we also think about a potential for incremental need of reinvestment to support the brands. That's one.

And then, two, how should we be thinking about the three- to four-year growth targets you set out on a segment basis top line back in October? Thanks.

To the latter point, I don't think there's any significant changes in the growth rate assumptions that we laid out by the business units that ultimately got us the 4% to 5% overall Company rate. I think we spent probably enough time talking about how we think we're going to deliver those. Our expectations by that time period we'll figure the dry dog out and we'll be where we are.

In terms of the dollar investment -- and, guys, jump in here -- we would continue to invest as we were. I think it was said earlier on our call, our marketing spend, while it's up significantly, it, quite candidly, is returning to more historical levels. We don't see that, at least year over year, as another significant incremental jump in marketing as we would consider it a pretty good run rate. I don't think you've got to be too concerned about that being a big headwind going into it.

And then, again, we're moving through our planning process for 2017 but the expectations is for all things you've heard today, where we're trying to build the business, we would expect to see some benefits out of that, and trying to hit our normal growth rate for those business units.

Okay, great. And then just a quick follow-up. In terms of underperforming brands and potential for divestments that we saw in the canned milk business, how is your perspective on further divestment changed? Is it the same? Are you actively looking at your baking business or oils, what have you?

I just ask because obviously there's been some longer term pressure in some of these brands and obviously they generate some cash flow. But for thinking price-mix benefit and growth potential going forward and potential benefit off the accelerated deleverage if you do divest those, why not divest them?

Rob, you just listed all the criteria that we look at continually in terms of evaluating our portfolio. Those are the things that we do look at. We look at our portfolio on a regular basis. We actually think, for the most part, we have a good portfolio right now. That doesn't mean we're not going to look at something to divest, a small brand here or there. But I don't see anything in the future in the next year or so.

This is Mark Belgya. Maybe one thing I would point to that, and it actually, I think, ties into a question, I can't recall who asked it earlier, and a little bit to the question that was just asked in terms of growth rates by business unit. But one thing I would say that we have done is our portfolio, just number of brands, has expanded. We continue to think about what roles our brands play.

So, where in the past, I don't want to say -- this is not a categorical statement that everything was expected to grow evenly -- but I do think we are setting different expectations on the brands, as somewhat indicated by the growth rates that we've put for the four business units. I think that will just continue the maturation of how we look at businesses. If it makes sense over time, if there are a brand or brands that fall out of favor, I think through that process it will surface.

But I agree with Richard. I think we feel pretty good about what we have. We have some areas to work on but for you now they're fairly positive cash generating businesses. It would be a little tough to -- quite honestly, we would feel the dilution if we sold them.

Fair enough. Thanks so much. Appreciate it.

Next will be John Baumgartner with Wells Fargo.

A question for Mark Belgya. I'd like to ask in terms of this renovation you're doing with the natural ingredients across your portfolio, is there any notable drag on your margins that may be worth quantifying from the reinvestment in the food quality?

John, this is obviously Mark. Right now -- and, again, it goes a little bit back to some of the conversations we had -- we're in investment mode. With some of the products that Mark mentioned under the Pillsbury and the Smuckers brand, we're clearly, whether spending with the trade or the intro in terms of the advertising, those are negatively affecting both top line and profitability.

But if you think of commentary we've said in the past, we expect over time for our innovation to be mix positive. We're looking for bigger rings and bigger margin items. Once we get through that first couple years of intro period we would expect that comparable products would be adding margin level greater than the more traditional ones. For example cake, we would expect our simple ingredient products to be more profitable over time.

And this is Mark Smucker. I would just add that Smuckers Natural Fruit Spreads, Smuckers Fruit and Honey, as Mark just pointed out, Purely Simple, all of those products, which have possibly slightly higher ingredient costs, we're able to command a premium for those. And the consumer, by offering variety, that wants those products will choose those products. And we've actually, because we've seen growth there, it does validate the fact that the consumer is willing to choose with their pocketbook.

Okay. Great. Just a follow-up. And CAGNY, the presentation reference, I think 10% of your FY16 net sales from products launched over the past three years, is there a way to isolate that contribution just for the Big Heart business and maybe where you see that going over time for Big Heart?

It's actually, I think if you look at it in the Big Heart business, the number presented should actually be higher. We've done some innovation around the Milk-Bone brand, Milk-Bone Brush and Chews, the Milo's Kitchen brand, and some innovation that we did in the natural meat snack segment. We've done some things with the Meow Mix brand.

Pet has had more innovation historically. And then in pet specialty there's a natural amount of innovation that just occurs every year. I think it's almost an expectation or ante to compete in the category. Pet probably a little bit higher than that on average.

I think I'd just add to that in the sense that each one of our businesses does have a target in terms of innovation and what we expect their growth rate to be from innovation. And it really does depend upon each of those categories and where we think innovation really drives the category. So, although, like Dave, I'm not prepared to share those numbers, each one of them has a target to go for, and each general manager has an obligation to hit those targets. It's built into their bonuses and their performance. We look at that all the time. Thanks for the question.

Thanks, Richard.

It appears there are no further questions at this time. I will now turn the conference call back to management to conclude.

I want to thank everybody for being on the call today. Appreciate your questions and look forward to having a great fourth quarter and next year. Thank you very much for joining us.

Ladies and gentlemen, if you wish to access the rebroadcast after this live call you may do so by dialing 888-203-1112 or 719-457-0820 with a pass code of 8098493. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.