J M Smucker Co (SJM) 2016 Q4 法說會逐字稿

Good morning, and welcome to the J. M. Smucker Company's fourth quarter 2016 earnings conference call.

(Operator Instructions)

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

Good morning, everyone. Thank you for joining us on our fourth quarter earnings conference call. With me today, and presenting our prepared remarks are Richard Smucker, Executive Chairman; Mark Smucker, President and Chief Executive Officer; and Mark Belgya, Chief Financial Officer. Also joining us for the Q&A portion of the call are Steve Oakland, President US Food and Beverage, and Barry Dunaway, President Pet Food and Pet Snacks. Vince Byrd, Vice Chairman, is also on the line from another location.

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.

As we indicated earlier in the calendar year, we are transitioning to one non-GAAP earnings per share metric in 2017, which excludes non-cash intangible amortization. We will refer to this as adjusted EPS. Amortization expense will also be removed from our definition of segment profit, as well as non-GAAP operating income, and net income. We will file a Form 8-K later this quarter to recast prior year segment results to reflect the new definition.

We have posted to our website a couple of supplementary slides, including a bridge from our FY16 results to our FY17 adjusted EPS guidance. These slides can be accessed through the link to the webcast of this call. This document and a replay of this call will be archived 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. FY16 was a dynamic and exciting year for the Smucker Company, as our teams delivered on a number of key strategic initiatives. These included significantly improving the performance of our coffee business, reflecting launch of the Dunkin' Donuts K-Cups, and returning momentum to our mainstream coffee business, expanding distribution for our Natural Balance pet brand, executing a seamless integration of the pet food business, exceeding our synergy and working capital targets for the year, divesting our US canned milk business, all resulting in record financial performance and earnings, and cash flow that exceeded our expectations.

Let me expand on the results for the year. Net sales increased 37% to $7.8 billion, reflecting the full year contribution of Big Heart pet brand. Excluding acquisitions, divestitures and foreign exchange, sales increased 3% for the full year.

Non-GAAP operating income was up 49% to $1.28 billion, with the contributions from pet and strong coffee segment profit growth being the key drivers. Non-GAAP earnings per share were $6.57 including a one-time $[0.42] per share non-cash benefit. This compares to our most recent guidance of $5.84 to $5.94 which excluded the tax benefit.

Lastly, the Company generated free cash flow of $1.26 billion which is well above our original estimate. Reflecting this strong cash flow, we exceeded our deleveraging objective for the year, reducing total debt by nearly $750 million. We also returned over $750 million of cash to shareholders in the form of share repurchases and dividends.

There were numerous accomplishments during the past fiscal year, and this performance is a testament to the dedication of our employees, and we thank them for their continued efforts. We are well-positioned to continue this momentum into FY17.

Since the last time we spoke to many of you, we announced several executive appointments that are consistent with the Company's history of long-term succession planning, and the development of leadership to meet the current and future needs of our business, and the constituents that we serve. Effective May 1, Mark Smucker assumed the role of President and Chief Executive Officer. Mark and his experienced leadership team embody the values that have contributed to the Company's success and long-term growth. I am confident that under their direction, the Company will continue to innovate, evolve, and grow in the years to come.

Its been an honor to serve as CEO of the Smucker Company, and I am grateful to have worked alongside the most talented team in the industry. I will continue to serve the Company as Executive Chairman. Among other areas, my efforts will be focused on Board-related matters, counsel and advice on strategic decisions, enhancing customer relationships, and advancing our industry leadership efforts. My brother Tim has been appointed to the role of Chairman Emeritus, and we also look forward to his continued contributions.

Lastly, I would like to recognize Vince Byrd, who is participating in his final earnings call, as his retirement after 39 years with the Company is effective tomorrow. Vince's contributions have helped shape the Company that we are today, and will continue to be reflected in the numerous employees that he has mentored through out his career.

With that, I'll turn the call over to Mark.

Thank you, Richard. Good morning, everyone. As you know, our Company is unique, in being led by only six CEOs in its 119 year history. I am honored to succeed Richard as CEO, and serve as a steward of this great Company.

Richard has led our Company through a period of significant expansion and strategic transformation. As a result, our Company is stronger than ever. I am excited to lead our talented team, leveraging the continued counsel of Richard, Dad, and our outstanding Board to drive continued growth and shareholder value. I also would like to echo Richard's comments about Vince, and thank him for his contributions and mentorship.

The focus of my comments today will be to provide an update on our business segments, including additional color on full year 2016 performance, and initial thoughts on FY17. I'll start with our coffee business which far exceeded expectations for the year. Net sales were up 8% and segment profit increased 18% to $646 million, representing a full recovery of the segment profit decline in the prior year. This outperformance was driven by several factors including the successful launch of Dunkin' Donuts K-cups, the implementation of the planned Folgers canister downsize, a moderation in competitive activities, and the net benefit of lower commodity costs and pricing.

Providing lower pricing on Folgers roast and ground coffee resulted in improved performance for our mainstream coffee business in 2016. Tonnage for our mainstream brands was up 3%, while units shipped were up even more, given the canister downsize early in the fiscal year. In addition, our dollar share within the mainstream segment of the coffee category increased nearly 2 share points to 55% for the latest 52 week period.

We anticipate momentum in the coffee business to continue in 2017. Key initiatives include Folgers' sponsorship of the US Olympic team for the upcoming Rio games, with marketing activities already under way. In addition, last month, we implemented a 6% list price decline across much of our coffee portfolio, reflecting sustained lower green coffee costs. These lower costs have been reflected in promotional pricing for the past several quarters, and we do not anticipate promoted prices changing significantly.

With regards to Folgers K-Cups, in 2016 the brand was impacted by the ongoing proliferation of entrants into the K-Cup space, including our introduction of Dunkin' K-Cups. This year, we will invest further in the product line to improve trends, including lower pricing and new packaging that will leverage the iconic Folgers red can brand equity.

Turning to the Dunkin' Donuts brand, Dunkin' K-Cups achieved nearly $220 million in retail sales for the latest 52 week scan period, and gained a 6% dollar share of the K-Cup market, giving us an overall share of nearly 15% in the K-Cup segment. In its first year on the market, the Dunkin' Donuts original SKU has become the number one K-Cup item in the channels in which we participate. As consumer repeat rates remain strong, and with opportunities to introduce additional varieties, we anticipate further growth in 2017.

While challenged for much of 2016, performance improved for Dunkin' Donuts bagged coffee during the fourth quarter. Supported by favorable input costs, we have sharpened pricing to improve gaps to key competitors and we look for positive volume trends to continue. Lastly, within coffee, the Cafe Bustelo brand experienced a second consecutive year of double-digit sales growth behind strong performance for both roast and ground and K-Cup offerings. This exciting on-trend brand remains well-received by millennials, and its growth is expected to continue also in 2017.

Turning to consumer foods, net sales declined 3% for the year, mostly due to lapping sales from the divested canned milk business. Segment profit was flat to prior year, supported by the gain on the milk business sale which offset planned increases in manufacturing overhead costs.

Looking briefly at the key brands, we are pleased with the overall performance of our spreads business, as both Jif peanut butter and Smuckers fruit spreads grew volume share over the latest 52 week period. In addition, Smuckers Uncrustables frozen sandwiches had another strong year, with volume up 26% including a 17th consecutive quarter of double-digit volume growth in this most recent fourth quarter.

On-trend innovation continues to be a focus area for the iconic Jif and Smuckers brands. In FY17, we look to build on recent successful launches such as Smuckers Fruit & Honey Fruit Spreads and Jif snack bars. This includes the upcoming introduction of new snack bar varieties, and plans to expand into other snacking platforms. In addition, Jif, Smuckers, and Uncrustables are all participating in the 2016 Olympic sponsorship, which will be an integral part of this year's marketing efforts for the brand.

In the bake aisle, the overall category remains challenged throughout much of this past year, reflecting changing consumer preferences and aggressive competitive pricing. Our focus remains on providing value-added innovation, such as our recent gluten free and simple ingredient offerings. We are also excited to announce a licensing arrangement with the Girl Scouts of America. Under this agreement, we are launching new Pillsbury items featuring iconic Girl Scout cookie flavors.

Within natural foods, our leading R.W. Knudsen family and Santa Cruz organic brands both achieved solid sales growth in 2016. The key natural foods categories in which our brands participate are growing, which gives us confidence in maintaining our momentum in this business. We are also excited about our recent investment in the Numi brand, and the opportunities this provides in the organic tea category.

Under our first year of ownership, pet foods segment profit of $392 million was generally in line with expectations. Net sales of $2.25 billion fell 1% short of the projections provided at our October Investor Day, due to competitive challenges in mainstream dry dog food. For the year, mainstream pet food sales decreased mid single-digits, reflecting double-digit declines in dog food, and a low single-digit decline for the larger cat food business. Offsetting the lower mainstream sales was the strong performance of our pet snacks business, which was up mid single-digits over the prior year, and our premium pet food brands which grew double-digits behind expanded distribution of the Natural Balance brand.

As we enter 2017, we anticipate continued growth for Natural Balance, as we launch the brand's first national marketing campaign along with additional in-store support. Within pet snacks, innovation for the Milk-Bone and the Meow Mix brands were key contributors to 2016 results, and we expect to see -- to build on these trends with new product introductions this fiscal year. We also continue to focus on opportunities in mainstream pet food, driven by consumer preference for additional protein and natural ingredients. Lastly within the segment, we are excited about our partnership and planned in-store activities related to the animated film, the Secret Life of Pets which will be in theatres next month.

Turning to international and foodservice, we are pleased with the full year results despite the significant top and bottom line impacts of foreign currency. Reported net sales were in line with the prior year, as the addition of the pet food business and the benefit of higher net pricing in Canada offset a $[60] million top line impact related to foreign exchange. Segment profit was up 12%, mostly attributable to foodservice. The introduction of Smuckers Uncrustables into school lunch programs contributed to this growth. The strong underlying performance of our Canadian business was mostly offset by the impact of foreign exchange.

Let me conclude with an update on our integration and cost savings activities. We successfully achieved our March 1 integration milestone for the pet food business, and recognized just over $35 million in synergies for 2016. In addition, we have clear visibility and confidence in realizing an incremental $100 million in synergies this fiscal year. In total, this would provide approximately $135 million in synergies for 2017. Looking ahead, we remain confident in achieving our original goal of $200 million in annual synergies by the end of FY18.

In addition to the $200 million of synergies, we are targeting $50 million of incremental annual cost savings to be fully realized over the next few years. Related projects include further optimizing our manufacturing footprint, as over the next 18 months we will close a coffee facility in Harahan, Louisiana, and two leased natural foods facilities located in Livermore, California, with production being consolidated into existing operations. In addition, we are nearly complete with an organizational redesign aimed at further optimizing corporate resources contributing to this cost savings target.

We expect to initially invest much of these incremental savings in several identified areas. We will continue to prioritize investments that generate top and bottom line growth for key on-trend platforms. In FY17, these include opportunities related to Smuckers Uncrustables, coffee, and snacks.

We are also establishing a new growth innovation organization, which is being led by a member of my leadership team. The group is being tasked with further building capabilities related to consumer and market insights, digital, innovation, targeted market development strategies for our customers, including pricing and trade spend optimization. Lastly, we plan to invest in new growth opportunities to expand our presence in China.

In closing, 2016 was a historic year for our Company, and I would like to thank our employees for their efforts. As we enter 2017, key priorities include achieving our synergy goals, building on our product innovations, activities, and investing in new capabilities to enhance future growth. Overall, we remain confident in our long-term strategy, the strength of our brands, and our ability to deliver shareholder value in 2017 and beyond.

I will now turn the call over to Mark Belgya.

Thank you, Mark, and good morning, everyone. I will begin by providing commentary on our fourth quarter results, followed by 2016 cash flow performance, and ending with our 2017 outlook. We concluded the fiscal year with strong fourth quarter earnings. Non-GAAP earnings per share were $1.86 for the quarter, including a one-time $0.42 per share non-cash deferred tax benefit related to the integration of Big Heart into the Smucker Company, as was previewed during our third Quarter call.

This strong finish to the year was mostly attributable to coffee, including higher than anticipated volume across our mainstream and premium coffee brands, and a favorable price to cost relationship. The comparison of fourth quarter earnings between years is significantly impacted by one-time items reported in each of the respective periods. These include the deferred tax benefit in the current year, as well as the Big Heart acquisition, and financing related activities in the prior year. As a result, the remainder of my fourth quarter commentary will be focused on the business segment.

Beginning with coffee, fourth quarter net sales grew 9%, as favorable volume mix of 13% was only partially offset by lower net pricing. Sales for the Dunkin' Donuts brand doubled over the prior year, with K-Cups driving much of this growth. Double-digit gains for bagged Dunkin' Donuts coffee also contributed. For the Folgers brand, net sales declined 5% attributable to lower net price realization. And lastly, Cafe Bustelo sales were up 28%, as the momentum for this brand continued.

Segment profit increased $43 million or 39%. We recognized lower green coffee costs in the quarter, which were partially offset by lower net pricing. In addition, higher volume mix more than offset increase in marketing.

Turning to consumer foods, net sales were up 5% excluding the impact of the canned milk divestiture, with gains across the majority of our key brands. Sales for Jif grew 14% behind higher volume and net pricing, while the Smuckers brand was up 3% as Uncrustables had another strong quarter. In the bake aisle, sales for Crisco increased 6% driven by higher volume. And lastly, sales for the Pillsbury brand were up modestly, as higher price realization offset volume decline.

Segment profit declined 6%, mostly attributable to lapping the prior year earnings of the divested milk business. Planned increases in manufacturing overhead costs also contributed, reflecting the new peanut butter facility in Memphis, as well as under absorbed overhead costs related to our working capital initiatives. These factors offset lower marketing expense.

Net sales for our US retail pet foods segments were $[563] million. We estimate this represents an approximate 3% increase compared to the prior year fourth quarter, of which six weeks were reported under our ownership. Sales for our premium pet brands grew low double-digits driven by Natural Balance, while pet snacks sales increased in line with the overall segment.

Mainstream pet foods sales were flat compared to the prior year, as growth in our cat food brands offset declines in dog food. Pet food segment profit was $117 million for the quarter. As expected, we realized a sequential increase in segment profit margin from 17% in the third quarter to 20.7% this quarter, primarily reflecting lower marketing expense. Incremental synergy recognition also contributed.

Net sales for international and foodservice increased 1% in the quarter, reflecting the higher volume mix in foodservice. In Canada, the addition of pet food was essentially offset by the impact of FX. Segment profit was up 8% over the prior year driven by our foodservice business, partially offset by the impact of foreign exchange in Canada.

Free cash flow was $295 million for the quarter, bringing the 2016 total to $1.26 billion. The outperformance compared to our most recent free cash flow guidance of $975 million was attributable to exceeding our 2016 working capital improvement target, lower than projected CapEx spending, a fourth quarter tax refund of $53 million which is separate from the deferred tax adjustment impacting earnings and higher net income.

Expanding on our working capital initiatives, in 2016 we realized the majority of our finished goods inventory reduction goal of $200 million, nearly a year ahead of schedule. In 2017, we expect to achieve the remainder of the inventory reduction target, along with modest working capital improvements related to accounts payable and receivables, all of which are factored into our 2017 free cash flow outlook I will discuss in a moment.

We ended the year with debt of $5.4 billion. Based on 2016 EBITDA of $1.58 billion, our leverage stood at 3.4 times at April 30, a reduction from 4.1 times at the beginning of the year. In addition to exceeding our debt pay down target for the year, we were able to restart share repurchase activities, aided by the strong free cash flow and proceeds from the divestiture of the milk business. During the fourth quarter, we repurchased nearly 3% of shares outstanding for approximately $430 million. In 2017, the lower share count will offset the EPS impact of the eight months of lost profit related to the divested milk business.

Turning to our 2017 outlook, we anticipate reported net sales to decrease by 1% compared to the prior year, as we will lap approximately $150 million of sales related to the milk divestiture. Excluding this impact, net sales are projected to be up 1%. Favorable volume mix across each of the segments, including the benefit of new products is expected to be mostly offset by lower pricing in US retail coffee and FX in Canada. Approximately $25 million of the incremental $100 million of synergies for 2017 are expected to benefit gross profit.

Overall commodity costs are anticipated to be lower, however, our Canadian business is estimating a COGS headwind of $20 million related to FX, of which a portion is expected to be offset. As a result, we expect gross margin to approximate 39% in 2017. Further SG&A expenses are projected to be comparable to the prior year. This reflects the benefit of incremental synergies related to headcount reductions and other administrative cost savings, offset by increased marketing in support of recently launched products, our Olympic sponsorship, innovation and regulatory expenses.

We're projecting non-GAAP operating income growth of 4% in 2017, compared to $1.465 billion in the prior year, which excludes amortization, and the prior year gain on sale of $25 million. Further, excluding the $32 million of profit in last year's operating income related to the divested milk business, the growth would be 6%.

Below operating income, we expect net interest expense of approximately $165 million and a tax rate of 34%. And lastly, a weighted average share count of 116.6 million shares was used based on current shares outstanding. Factoring in all of this, we are guiding 2017 adjusted EPS in the range of $7.60 to $7.75, which excludes $1.18 per share of estimated non-cash amortization. Including the amortization, this yields a range of $6.42 to $6.57 compared to a 2016 base of $6. This results in year-over-year increases ranging from 7% to 10%.

As illustrated on the document posted on our website, we derive the $6.00 EPS for 2016, by subtracting the $0.42 deferred tax adjustment and the $0.15 milk gain from our reported non-GAAP EPS of $6.57. We anticipate much of the EPS growth for the year to be weighted toward the middle two quarters of the fiscal year due to certain factors. Last year's first quarter included the launch of Dunkin' K-Cups.

Also within coffee, this year's first quarter will be unfavorably impacted due to timing associated with the full quarter impact of the price decrease taken in July of 2015, along with the additional price decline taken in May of this year as compared to the recognition of lower costs. Other factors impacting quarterly comparison include the timing of synergy recognition, the timing impact related to trade spend recognition on a quarterly basis, and finally, the fourth quarter comparison to this year's strong fourth quarter finish.

Looking briefly at the segment, coffee profits are projected to be comparable to the record FY16 levels. For consumer foods, reported segment profit is expected to be down, given the prior year gain on the milk divestiture and the lost milk profit, but up mid single-digits when these items are excluded. Pet food segment profit is also projected to be up mid single-digits, reflecting incremental synergies and organic growth including the contributions of new products. And lastly, international and foodservice is anticipated to be down, primarily reflecting net impact of FX in Canada.

We project free cash flow will approximate $1 billion, from which we plan to pay down debt, and further reduce leverage to 3.1 times by the end of this fiscal year. This assumes projected 2017 EBITDA of $[1.63] billion. Additional assumptions related to 2017 include amortization expense of nearly $210 million, depreciation of $215 million, share-based compensation expense of $35 million, capital expenditures of $240 million, and lastly, one-time costs of $100 million which are mostly cash-related.

In closing, we are very pleased with our overall performance in 2016, as it marked a memorable year in our Company's history. It is with this momentum and excitement that we look forward to executing our plans for 2017, as we remain focused on delivering continued growth.

We thank you for your time, and we will now open up the call for your questions. Operator, if you would please queue up the first question?

Thank you.

(Operator Instructions)

Our first question comes from Andrew Lazar with Barclays.

Good morning, everybody.

Good morning, Andrew.

A quick one for me, in thinking about the underlying EPS growth guidance for FY17, as you pointed out it's roughly 7% to 10% or so. And you talked about base EPS growth in the 10% range, I think for 2017 and 2018. So I'm just trying to get a sense of what leads to that 8% at the mid point type of growth range? Is it just conservatism, is it coffee outperformed pretty dramatically this year, and therefore we need to just tailor that a little bit in our expectations for 2017, or things that I haven't mentioned? Just trying to put that in perspective.

Hey, Andrew. This is Mark Belgya. Thanks for the question.

What I would say is, Mark, and I think we reiterated, we will deliver the $100 million in synergies. We have a clear line of sight on that. Where we land in that 8% is, we are having a significant increase in marketing spend for the coming year, obviously with the sponsorship of the Olympics, and reestablishing some of the marketing spend from this year. So that is the biggest driver.

I think in terms of the coffee, I would put that more in the category of where we might land in the range. Obviously, we did have a strong year, and we need things to continue. We feel good about that, but that's probably a factor that comes into play a little bit, as well. And then the other one probably to a lesser degree is just the FX impact. As I mentioned, we're having about a $20 million headwind, and we hope to cover at least half of that, but there's a little bit of that effect in, as well.

Got it. Thanks for that, and then just a very quick one.

I noticed distribution expense, I think as a percent of sales was much lower than it is typically is this quarter. Just trying to get a sense of why that is, and is that a more sustainable level?

Thank you.

Andrew, what that might be is we are aligning the Big Heart -- basically the Big Heart P&L where certain things fall in, costs that probably were considered distribution, might have just been moved. But we can follow-up, if there's something significantly different from that response.

Thank you.

Thank you our next question comes from David Driscoll with Citigroup.

Great, thank you, and good morning.

Good morning.

Richard, congratulations on your retirement, and Mark what a big day. Congratulations here for you. And I guess, it was May 1, but for us it feels like today. So congratulations, and Vince, all the best.

Thank you.

I wanted to ask a follow-up on Andrew's question on the guidance.

So Mark a different way to look at this would be to say that $100 million of synergies -- I think that number alone gets you something like $0.57 a share in incremental EPS benefit in 2017. And that gets you to kind of the top end of the range. So maybe could you try to answer just slightly differently, and just say that if synergies gets you just to the top end of the range, doesn't it suggest that the rest of the operations are really on balance flattish?

I know there's a share count benefit, there's a milk. There's milk dilution that goes on in there. But it still just seems like the underlying expectation of the core ex the synergies is basically flat.

Yes, David, it's interesting because we've obviously went through that same line of thought. And the way I would describe it is, that you're exactly right, the $100 million is a $0.57 delivery. The market increase, I will tell you, is a significant increase there. We are up so we feel very comfortable to be able to invest with marketing dollars back in the business. So there's a little bit of a discussion here on whether or not the business is flat from a performance perspective, or it's flat because we've invested in the marketing. We would choose the latter, saying that the Marketing increase is offsetting some of that to some degree.

The other thing is, I think Mark suggested in his scripted comments is that we are also investing in innovation and growth, and also in China. So, obviously those dollars are embedded in the business portion of it when you just separate it between synergy and non-synergy. So you can draw the conclusion that it is coming from the business. But those are the two or three factors marketing, innovation and investment in China, and a little bit of FX as I mentioned that are really bringing that number back down.

Okay, and for my second question, on coffee, back at your Analyst Day, and I believe Steve had said it will be until like 2019 before the Company recovered the profitability seen in 2014. I think as of today, you've already recovered the profits. So there's two subtle questions in here. Why did this outperform so much relative to the expectation? And then what I really care about, is how does this impact going forward?

I mean, you had a very different outlook on how profits were going to move in this business. I'm not complaining by the way, this is really wonderful the profits are up so much. But I think we all then worry, that the massive outperformance in coffee profits in 2016, will somehow retard the ability of profits to grow in 2017. Was that clear?

I think it is David. Hi, Steve Oakland.

Let's talk about the coffee business briefly. If you think about the numbers, we did get there a year or two ahead of what we guided, right? And we got there on two things, really. And the most obvious one is this, the launch of Dunkin' K cups, and we all know that was one of the best launches in consumer products in the last five years, right? So that was a wonderful performance.

But really more importantly, financially if you look at the performance of our core red can business, and that's an effort that started two years ago. I mean, in the year that we struggled in our coffee business, Mark and his team went back and did the downsize, and started those processes. And then we had an opportunity in this last year to get coffee pricing right, to have both a manufacturing and a hedging strategy, to get this thing -- to get it to price points that both excited the retailer and consumer. And the retailer is a key piece of this. You've got to get that merchandising support. So we're really pleased with where we are there.

I think you saw -- I'm sure you saw there, our press release on pricing that we just took. So with all of that behind us, we feel pretty comfortable that we can repeat that performance. And to your comment earlier, that will be repeating a record performance. We actually beat the 2014 number this year, right?

So on our red can and core business and Dunkin' business, our Dunkin' K-Cup business, we feel really good. Lost in that, though, this year, was the two segments that didn't performance well as we wanted to, and that's our business in premium and our legacy K-Cup, our Folgers K-Cup business. So what we intend to do this year is do the same things to those. And so, the pricing, we leaned in early on the Dunkin' bag business. You saw some of that performance in the fourth quarter. We feel great about that going into this quarter. So we need to put ourselves back on premium growth momentum.

We will invest to do that, and we need to make sure as the K-Cup segment shakes out and it will shake out. I mean, there's so many new items, there's so much going on there, that velocities on our core legacy items are strong. And we invested right at the end of the quarter in that, as well. So I'm saying we feel comfortable we can repeat the record results in red can. The Duncan K-Cup business will be very solid this year.

And then, with what we have extra on there, we're going to invest in those other two segments. So I would hope we come out of the coffee business firing on all cylinders, versus firing on just those two big ones (multiple speakers).

Hey, David, this is Richard Smucker.

Two quick comments. One from a 50,000 square foot level, our -- 70% to 80% of our business has really good momentum, and we're firing on all eight cylinders. We're using that opportunity to make, as Mark said, investments in our business for the future, not just for next year but beyond, and this gives us the opportunity to do that. We're not making these numbers by cutting margin expenses, and it gives us the opportunity to invest back in these businesses. And so, and these brands. So I think you need to look at it from that high level. We do, and that's driving a lot of our business. It's also positioning us well for growth in the future, not just in next year but beyond.

And then finally, I don't like the word retirement, so I just want to let you know that (laughter). I am not retiring. I'm just moving to a different role. And most of the family's eggs are in one nest, and we're watching that nest very carefully, so--

Richard, that was a wonderful comment, and we certainly don't want you going anywhere. Thanks. I really appreciate the answers.

All right.

Thank you our next question comes from Chris Growe with Stifel Nicolaus.

Hi, good morning.

Good morning

I just want to ask, first if I could, please on coffee. Just understand with the list price decline and having reached some of these promoted price points in FY16, as input costs came down, I'm just trying to understand why coffee profits wouldn't be stronger in the year than the flat expectation? And also related to that, would they be stronger in first half or perhaps more challenged in the second half as you start to lap some of that? Just curious if you could give help on the phasing there, if that would be a factor for our models?

Okay, I will start that, Chris, Steve Oakland, and then maybe Mark can help me on how we look at the seasonality of the profits. If you go back to the fourth quarter of 2014, when coffee prices hit like $2.20 a pound, right, arabica. And then we saw it come down basically $1 a pound over that time. It's bumped up in the last day or so a little bit. But if you think about that, the fastest most efficient way to get that pricing to the consumer was with trade. Okay? We can impact shelf price on a promoted period immediately with trade, okay?

Yes.

So in the short-term, that's very efficient. In the long-term, it's very inefficient, because it promotes all kinds of buy in, load it, and all this inefficiency in the system, right? So over the last year, we've taken a couple of list price declines to mitigate that, to make the promotional allowance less. So we leaned into current coffee pricing on our promotional price points.

And now this has allowed us to drain that out, get a better list price to promoted price ratio, so that our every day prices get better, and we maintain the current price. So we tried to make that clear in the release that we did, to give a little more clarity on that this time. So that the costs have been reflected in total coffee pricing. This does, I think, make it, over the long term in a more efficient manner so --

The other thing, this is Mark Smucker.

The only other thing I would add Steve, is that just from a commodity standpoint, if you just look at the trends on coffee costs, the decline that we've experienced has gone on for oh, 9 months, at least 12 months. So you have seen this very consistent sustained lower coffee cost and that has allowed us to behave properly, or responsibly if you will, because we have had consistency in our underlying cost structure.

And then, Chris, this is Mark Belgya.

Just in terms of sort of seasonality if you will of your question. We are going to be lapping last year's first quarter pricing move. And as Steve mentioned, we had this year price decline, so we had the full effect of basically two price declines. So while the costs are certainly going to be lower than they were a year ago, the price declines along with the way some of the trade will hit through the quarters, will probably negatively impact the first quarter. And then obviously, balance itself out through the rest of the year.

Right. And then, that's really how those things hit, not the volumes. We feel good about where the sell-through and volume numbers are. But just how the pricing hits versus a year ago, and how we recognize trade in those periods may soften the first quarter a little bit.

Okay. That's a good thorough answer. Thank you for that.

And I had just one quick follow-up if I could, without Eric Katzman on the call, someone has to ask about free cash flow (laughter). So I did want to ask, if you just to consider, really for Mark Belgya the $1 billion versus the $1.25 billion, obviously, it sounds like the majority working capital benefits came through in FY16 with some still in FY17

Is that the main reason for cash flow being down? It also looks like CapEx is going to be up a little bit year-over-year. Just trying to get a sense of what could be dragging down the cash flow, over and above the working capital effect?

Yes, Chris, that is the primary -- that was probably $100 million of it. And then the other big thing we had this year, is we actually had two significant size tax refunds that were, what I'll call one-time, that were probably roughly $100 million, as well. So those would come out, if that gives you back to the billion dollars versus this year.

Okay, that's great. Thank you.

Thank you our next question comes from Ken Goldman with JPMorgan.

Hi, good morning.

Good morning, Ken.

Richard, I think it was you mentioned coffee ticking up the last few days, but at least as we look at the charts, Robusta and Arabica reach up maybe 20% off their recent lows. So I'm just curious can you talk about or anyone really talk about what you're seeing in the coffee commodity market, whether you think these current prices are reasonable, given current supply demand dynamics and what your outlook is from here?

Yes, Ken, actually, I think Steve gave that comment.

Sorry. (multiple speakers)

Ken, the recent run up, there's always volatility in the coffee business. We are fortunate to have teams on the ground and offices in both the two largest markets of Brazil and Vietnam. And so again, the coffee is relative to where we're priced to, relative to where we're promoted to. And then if we look, if our teams on the ground in those markets look at the coffee crop, there's been some weather noise in the last day or two that have driven it up.

But it does appear, I think our opinion is, there's going to be a greater Arabica crop this year. And so we think that coffee will trade in a price range that supports where we are priced, between our position and our opinion. The good thing about this business is we have pricing capabilities here. And not only do we have good coverage, but we have the ability to move price should we need to. So we feel pretty good about the Arabica crop as it goes forward. Robusta might be a little tighter, but we think the Arabica crop is going to be a big one and pricing should be reasonable.

Okay, that's helpful.

And then my next question, the $50 million in additional efficiencies over the next few years, frankly that's a little bit of a smaller amount than what I had expected. It's a little bit smaller, at least on a percentage of sales as, from what your packaged food peers have come up with. So, I realize you're already lean in some areas, headcount and so forth. But as we look at this, what's holding this number back from being as high as what we've seen, what you've seen, what Accenture's seen, right, from some of your other food manufacturing peers out there?

Ken, this is Mark Smucker, and thanks for the question.

I'll start, then if anybody else wants to chime in. So a couple things. As you know, as you think about our performance historically, it's been very good, and we have had historically a very strong cost discipline in multiple areas of our business. Part of what we've embarked on which really was, the catalyst was the Big Heart acquisition, was to think a little bit deeper about our overall cost savings initiatives, and how we might maybe do a little bit better. You are right, that our productivity measures versus our peers are probably better in many cases, and we are generally leaner I would say than some of our peers.

But having said that, we have an obligation, obviously, to our shareholders to make sure that we have the best cost discipline that we can have. And so, what we've been doing, and this is part of the explanation of the $50 million, is on an ongoing basis, making sure from a continuous improvement that we have the discipline in our supply chain, our operations, our purchasing and longer term as we think about how do we get more efficient in trade, all of those things should help drive, what I would call some incremental savings to the bottom line. So it isn't -- we don't think about it as the one-time benefit, but we are comfortable that we can at least deliver that. And then beyond these next couple years, we should be able to continue to deliver annual cost savings objectives, which we hold our teams to.

The good news about that, is it is as Richard mentioned, it is allowing us to invest in enhanced capabilities. And at a very high level what those capabilities are focused on is getting better at engaging with our consumer and getting better at engaging with our retail customers. And so strategically, having the right balance between our leading number one brands, which are really the engine that fuels our growth, as well as having the right emerging brands in our portfolio, is part of that strategy. And so making sure that we have dollars that can fund those enhanced capabilities, both in consumer engagement and customer engagement is really going to help drive our growth both top and bottom line long-term.

Thank you very much.

Thank you. Our next question comes from Jason English with Goldman Sachs.

Hey, good morning, folks.

Good morning.

Congratulations.

Thank you.

I wanted to stick with coffee for a minute. You mentioned in your prepared remarks, moderation in terms of competitive activity. I was hoping you could expound on that a little bit more, in terms of where you're seeing the moderation? And then also as part of your prepared remarks, you talked about sharpening price points on some of your businesses, I think you mentioned the Folgers K-Cups, Dunkin'. How do we put those two in terms of moderation and competitive activity, juxtaposed with what sounds like a bit more competitive activity coming from you?

Jason, hi, Steve Oakland. I'll try to touch on that.

I think it's difficult to paint the coffee category with one brush competitively. I think the prepared remarks probably were focused more on our mainstream red can business, right? And I do think we've seen with the Arabica falling, with the coffee prices falling where they are, we have found that price points have gotten down into those ranges, where it motivates both the competitor and the consumer and the customer, right? So all of us are in price points that really work, okay? And so, we're back in that zone and I think everybody is operating in that zone.

Now having said that I would argue that the premium segment was the most competitive we've ever seen it last year. And so, the Dunkin' bag business as you know, earlier in the year had a couple of tough quarters, and we've talked about how we leaned into that in the fourth quarter. Premium green, it's another remnant for a whole other discussion, but green coffee is not all the same. The coffee that goes into a lot of premium coffees has a much longer supply chain. You might expect lower -- coffee costs to impact us at different timing based on the type of green that it is.

So in the fourth quarter that, we were in a position to support that, we did and it has responded. So if you think about it the core red can pricing had moderated, the competitive set had moderated. The premium business probably is in that space now. And the last piece will be K-Cups, and we're going to lean into K-Cups. The proliferation of K-Cups has caused that whole segment to be competing for a slower growth base. And one of the levers that's been used in there is price. We're able now to compete in that area. So that's for, maybe the last piece of the puzzle, and we feel good about the plan we put in front of you today, will give us the dollars to support that, and return that business to growth.

Got it. That's really helpful. Thank you for that. One more question, then I'll pass it on. I wanted to switch gears, and talk about pet real quick.

First, the -- what was roughly 3% of the organic sales growth; if possible could you give us a break on volume or price for the quarter? And then your expectation of organic growth as we go into next year, any color in terms of what you're expecting between premium, snack, and mainstream would be really helpful. Thank you.

Jason, this is Mark Belgya.

Regarding the first part of that question, unfortunately, because last year's fourth quarter was split ownership, that break down isn't quite as easy as it might sound to be. I will tell you though, now that we're all on the same system as of March 1. And obviously in FY17, we'll have that full line of analysis for all businesses. So Barry, I don't know if you can add anything, but from just the absolute numbers, I think that's probably the case.

I think you, the color you provided Mark, is the best we can do at this point. Just to add Jason, as far as our growth expectations for next year, as you know our snack business has tremendous momentum behind it. So we expect our snack business to be at the high single-digit growth next fiscal year, specifically with our Milk-Bone and Pup-Peroni brands. On the pet specialty side of the business, we're lapping the expanded distribution last year in the pet specialty channel. But we would expect mid single-digit growth this coming year, as we will launch a national advertising campaign behind the Natural Balance brand.

We also, there are two major retailers in pet specialty, but there's also significant amount of sales that move through the independent trade. We have a push behind our Nature's Recipe brand. We think there's some real opportunities there. That's our gateway specialty brand, so we see some growth there. And then also, our snacks play a significant role in pet specialty. So our widely distributed brands, also there's tremendous growth opportunity there.

Food is going to be the lower growth this year, as far as the portfolio is concerned. You know what our challenges were this past year, specifically with Kibbles 'n Bits. We are encouraged that we've actually seen negative consumption trends start to decelerate at the end of this last fiscal year. We've put some bonus bags into the market. You're going to see more of those going into market in June. So a lot of effort stabilizing our dry dog food business, and trying to -- just get that business back where it needs to be. So that provide the color you were looking for?

Yes, very helpful. Thank you very much, gentlemen. I'll pass it on.

Thank you. Our next question comes from Alexia Howard with Bernstein.

Good morning, everyone.

Good morning.

Hi, so a couple of questions about your e-commerce strategy in China investments. You started talking about the e-commerce strategy at the Investor Day last year. Are you able to dimensionalize how big that is for you as of now; how fast it grew last year? I presume the key categories in there are probably coffee and pet food. Which one of those is bigger? Would just like to hear color on that, because we don't see that in the measured channels. And then you mentioned China investments. Can you just give us a little bit of color on how much spending over there now, what the strategy is over time?

Thank you, and I'll pass it on.

Alexia, this is Mark Smucker. I'll start.

The first, your first question just as it relates to e-commerce is that you're right. We are, I would say we're a little bit underdeveloped versus our peers in that space. And so, as I talked to Ken's question earlier, relative to investments and what we're trying to amp up, that is one of those things. And so, not to get into too much specifics, but as we think about -- we actually have just reorganized some of our commercial functions, that would include sales and some of our marketing areas.

But also in the digital space, we have actually beefed up our capabilities there, and are currently in process of reevaluating our total e-commerce strategy, in how we better serve our e-commerce customers. And when we think about e-commerce, that includes both the digital-only retailers like Amazon, as well as our brick-and-mortar customers that have a significant online presence, as well. So a little bit of a general answer, but suffice it to say that it is on our radar screen, and it is a priority for us to continue to develop that business.

And then on China?

On China, I think you asked? So just in terms of the financial impact, I would say that it's about $0.03 to $0.05 for the current year in FY17.

And then, any color on exactly what's happening out there, after the initial foray out there a few years ago?

Yes, Alexia, it's still a little bit early for us, I think, to be giving too many details in that area. We've talked about the fact that we have had a minority investment in an oats -- in an oatmeal business there, and that business has continued to grow year-over-year. And so, we've been pleased with that minority investment. As it relates to other things, I think it's a little bit early for us to give any specifics.

Okay, thank you very much. I'll pass it on.

Thank you. Our next question comes from Mario Contreras with Deutsche Bank.

Hi, good morning.

Hey, Mario.

So I wanted to go back to your comments from Analyst Day last year with respect to coffee. Some of the caution around getting back to FY14 coffee EBIT levels not until 2019. Some of the reason for that was related to investment around the Perfect Measures. So, obviously you've already achieved that goal of getting to the proper recovery, but wanted to understand how the investment is going in Perfect Measures, is that still a major focus point for you?

Hi, Mario.

With regard to Perfect Measures, I think we still think it has the potential, and still feel so great about it. I'll tell you the reason you put things in lead markets or in test markets is to learn, and we learned a lot. And our trial numbers candidly, were not what we needed them to be, but our repeat numbers were fantastic. And so, it tells us that we've probably got the positioning a little wrong. We've probably got some of the initial communication a little wrong, but we got the concept right.

And so this year, we're going to relaunch that with a little better packaging, little better messaging. And we're going to -- it's a heavy capital investment, because the technology is unique and we want to make sure we get it just right before we lean into it on a more national scale. We still think the concept has a lot of legs, but we're probably a year behind where we hoped to be at this point.

Those investment numbers are baked into the numbers in the guidance that Mark gave earlier, so continued investment in that.

Okay. And then, it had been mentioned a couple times that increased marketing spending and advertising is included in the guidance for this year. Is there any way you can quantify roughly what that's going to be, in terms of your dollar or percent increase?

Yes, it's going to be up high single-digits, which equates to about $40 million.

Okay. Thank you very much.

Thank you. Our next question comes from Pablo Zuanic with SIG.

Good morning, everyone.

Look, a couple of questions on coffee for Steve, and then I have a follow-up on pet food. Steve, so Starbucks, Howard Schultz there in January, he talked about, pretty much implied, threatened to walk away from a Keurig JAB. And then in the April call, he came out and said, at least three or four times in the conference call, that they have been able to renegotiate terms, at very favorable terms with Keurig. And that those terms gave them also more flexibility. So I'm wondering here, if Starbucks can do that with JAB, why can't Smuckers? So if you can comment on that. I'm just surprised they were able to renegotiate terms, now there was a change in ownership there, and apparently you haven't.

And related to that, I understand the idea of sharpening price points for Folgers and K-Cups. The category has been sticky, of course, while ground moves quite a bit. But as you do that, I would expect other competitors to also cut prices in their K-Cup brands. And then K-Cups as a category will become not sticky, but pass through as ground.

So I see a bit of a risk there. If you can comment on that, please? Thanks.

Sure. I guess, I wouldn't assume, I wouldn't take the assumption that our -- that we haven't done the same kind of work on our K-Cup contract in our relationship with JAB, because we have a legacy relationship with JAB, from the Sara Lee acquisition several years ago, and now from the Keurig remount.

So the fact that maybe we're a little less public about some of that stuff, I wouldn't assume that the same things aren't going on. So just different companies manage those things differently, right? So that process is in process, and we feel good about that relationship. They are committed to have the major brands in the category in their systems, and we read the same things you read. So our assumptions are going into the negotiations, our assumptions are similar to yours. So we feel fine there.

And with regard to K-Cups, if you dig a little deeper into the IRI and Nielsen data, you'll see that K-Cups although we don't pass through green, because green is a small portion of the overall cost structure, it's become maybe the most promoted category in total coffee. So, that it's the highest relying -- each one of the brands relies very heavily on promotion. So maybe I'm not clear enough when I talk about leaning in, we've leaned in on our promotional price point mostly.

And so, those promotional price points are basically down $1 a box from where they used to be. It's still a very profitable business, but that migration, that train has already left. So we are where we are. We might have been a little late to follow, because of the momentum we had from the Dunkin' business.

Understood. And just a quick follow-up there. So your K-Cup margins would be lower than your ground coffee margins, right?

Yes, a little bit.

Yes, a little bit.

Our ground coffee margins are obviously, because of our scale very, very good. And our K-Cup margins are although good, by consumer products standards, by Company standards aren't quite at that level.

Thank you. And then just a follow-up on pet food.

I guess, it's been touched upon already, but can you tell us where did the mix end -- after the decline in dry dog and dogs and snacks and specialty, if you can just give us, what's the mix, and a run rate at the moment? And related to that, if you can also comment on the channel mix? Because we tend to think that snacks and specialty products are mostly in the specialty channel, but just remind us where you are?

If I'm looking the FDM data from IRI or Nielsen, what percentage of your pet food business is that, and where are you in specialty? If you can provide that roughly on a current run rate, know what it was on average in 2016? Thanks.

So you're looking for the channel mix -- I want to make sure we understand the question.

Right (multiple speakers)

Are you looking for the channel?

Well, I'm asking two different questions on pet food, right? Because obviously, you explained that snacks and specialty are doing well in terms of natural organic brands, and Natural Balance and the other brands are doing well, and dry is not doing so well. So I'm just trying to understand, where did the sales mix end in terms of products in FY16?

And then, it's a separate question, is what is the channel mix, right? Because some of us -- dry dog is sold in the specialty channel, right, and snacks are sold in both. Your Natural Balance brand is only sold in specialty, I understand that. But I'm just trying to get a bit more color, in terms of what your current product mix, and separate, what's your current channel mix, if you can provide that?

From a channel perspective, of our total business about 20% of our business is in the pet specialty. And Mark, you want to take --?

Yes, Pablo, this is Mark Belgya. Just to make sure -- again I think I understand your question, and it goes back to a little bit earlier one was asked. If you look at the mix of product, okay, we benefit from a mix perspective. So where the growth has occurred as Barry described from a channel perspective, we're also benefiting from a product mix perspective. So whether it's specialty or snack, or even cat probably more than dog, those are positive mix benefits.

Obviously, Kibbles 'n Bits is a heavy product, it's a lot of volume, so that's where it's negative [goods is]. So it's a very positive mix story, and negative overall volume story because of the dry dog side of the equation.

Sorry to insist. So but dry dog would be what percent of your sales now, on a run rate now?

About 10% of total sales.

Thank you. That's good.

Only other thing I'd reiterate, because I do think it gets lost occasionally. Because particularly as I've conversations over the last few quarters, clearly, Kibbles 'n Bits has been challenged. But when you look at our food business, the cat food side of the business is a little larger, and has done okay. So it has balanced out a little bit. So while not trying to downplay the impact of the Kibbles 'n Bits and the volume, and what it had over the course of the year, but the cat food performance has allowed us to manage through the overall food a little bit more than maybe the takeaway would be.

The only other thing I would add -- this is Mark Smucker is -- just reminding everyone that the brands that participate in those two channels are very different. It's very similar to the natural space in human food, where you've got the natural channel with the Whole Foods and the Sprouts and the like. In general, there's not a lot of overlap in the brand. So the brands tend to be unique to those individual channels.

This is Richard.

And just adding to that for a second, just any acquisition that we've made, and again this acquisition is only 18 months old. Once we've integrated these businesses with our sales teams, we've seen some opportunities in channels where our existing sales team have said, hey, we're kind of weak in this channel, and with the relationships we have with these customers, we could really build the business. And that takes us a little while to identify that, and then build those additional sales with those customers, and we're just in the process of doing that.

So we're pretty optimistic about finding those key customers that we can build our business with. And so, we should see more growth this year, in a number of those channels. Don't you agree? (multiple speakers)

I do, Richard, and just maybe to add-on to the Meow Mix conversation is, some of our best innovation this year is against the Meow Mix brand. And to your point, our sales team has done an outstanding job getting acceptance of that product in the market, and especially in the grocery channel. So where we have an outstanding sales team that can execute there. So again, Mark to your point Meow Mix is one of the largest brands in our portfolio. And with some of that innovation, we see some nice growth coming from that brand this year.

Thank you. Our next question comes from Matthew Grainger with Morgan Stanley.

Hi, good morning. Thanks for the question.

I just wanted to follow-up on the net sales growth expectation, and just try and dig in a little bit more at the segment level. Thank you for the commentary on pet.

But I guess, Mark Belgya, is there any more visibility, you can give us on that 1% ex-divestiture sales growth, how FX plays into that? And how we should be thinking about it by segment across the rest of it?

What I'd say, Matt is that about -- the coffee pricing would be about 1 point the overall Company. So you can kind of dollarize that, to get how much the coffee would be. That's by far the biggest driver from the downsize.

If you take the milk loss, $150 million I mentioned earlier, and then 1% of sales, call it somewhere between $70 million to $90 million on coffee pricing, that's the two big negatives. So just do the math, and attribute to the rest of the business, that will give you a sense. Obviously, the FX has a little bit of effect, but it's actually not a big driver in the overall 1% decline to total net sales.

Okay, all right. That helps, thanks. Just a really quick follow-up on the Dunkin' K-Cup issue, you talked about some of the untapped adjacency opportunities in flavorings and line extensions. Your market share's stabilized over the past six months, and it's pretty close to where your share is in roasted ground. Right now, can you just give us a sense of where you see, in terms of growth opportunities, how much of that is dependent on holding that share, participating in category growth, as opposed to continue to push share higher into that high single-digit range, and what you think is feasible?

Well, Matthew, I think it will be -- it will vary by business. I think there's still runway for the Dunkin' business. There's some core flavors on Dunkin', and Dunkin' tends to be a more flavored-driven business. So there's new item opportunity on the Dunkin' brand.

And then, quite frankly, now that the Folgers brand is in the right price points, getting the right support growth from the retailer, and the consumer acceptance, it will be better execution of our promotion strategies on Folgers. So we'll execute better on Folgers. We'll launch new items in Dunkin', is the plan.

Okay, thanks everyone.

Thank you. Our next question comes from Akshay Jagdale with Jefferies.

Hi. Thanks for the question. So a couple of -- two questions, one on coffee. Can you just explain to us, or break out of the 18% growth that you saw in operating income or segment operating income, how much of that was a result of pricing net of commodity costs? And what is the general expectation for pricing net of commodities for 2017? That's the first question, and then I have a follow-up on pet.

I would say it's a balance. I would say, part of it is pricing, and the timing of the pricing is important to think about. We talked, I believe, in our first quarter call a year ago, that we leaned into, we took pricing early, we had good coverage, and we had an opinion of the market that we were going to get that money back in green, which we did in the fourth quarter. So in the fourth quarter, obviously, green pricing tends to cost was a bigger impact, but we sort of spend that money up front. So I would say it's a combination of that green pricing, when you get your number one, your high volume item, when you get volume up on those canisters in our facilities too, it really falls to the bottom line.

So that's very efficient for us. So I know Mark's digging for the exact percentage number as we speak. But it's a balance between the volume that's generated, and the implications of that volume all the way through the system on red cans, and then the pricing.

It's probably up a little bit heavier on the price cost maybe two-thirds, one-third-ish. But again I think that goes back to what you said Steve, quite a while ago, was just sort of the way that the timing on the price. (multiple speakers)

And the volume allowed us to bring more green in at the end, and the green at the end, was more favorable. So it's really hard to get it down to the nit on that, because you'll recognize those PBBs when the green comes in. And if your volume is up, you bring more of the green in so.

So two-thirds of the operating profit growth year-over-year in 2016 was commodity price?

The numbers that we just quoted were a quarter.

Fourth quarter.

Was your question on the full year, or just the quarter?

On the full year. Sorry, that was on the full year.

Okay, it's probably a little more 50/50-ish there.

Yes, 50/50 on the year. And it was backend-loaded because of the timing of green.

Yes. I thought you were asking the quarter specifically.

No, and then on pet, excuse my voice, on pet can you give us a little bit more color on the quality of earnings? What happened with gross profit growth for the year, and what's your expectation next year? Thanks.

There's a quality of the earnings, and I'll start, Barry, if you want to jump in. If you look over the course, I mean this quarter specifically, we knew marketing would be down from a little bit where it was, because of the timing of the spend in the products. But we also had the synergy recognition, which picked up in the latter part. So if you go back to the early part of the year, we expected quarter-over-quarter improvement on margin, which we delivered on in Q2, Q3 and Q4.

I think from a cost perspective going forward, their costs aligned very similar to what we see in our consumer foods. So if the grains continues to be favorable, I think as Barry mentioned, we are going to continue bonus bags and things like that, that might have a little bit of effect on gross profit. But then, of course, as I think as we've said over time, of the three segments of the business the natural has the lowest profitability. And I think as Barry and the team work, and as well as we integrate that into the overall Smucker Company, we should have an opportunity there, as well.

Absolutely, Mark, yes. No, our quality of earnings are solid for FY17. And as we think about mix too, just as our snacks continue to drive the business, that is where the strongest margins on the business are as well. We've seen even cat snacks, small category but tremendous upside there, so I think we have very solid quality of earnings for next year. We haven't made any significant cuts to get to our growth number from next year, year-over-year.

And just one last one for Mark. You talked about organizational structural change. Can you give us more color on that? Thanks.

Hey, Akshay, it's Mark Smucker. Not really. I don't think we can give you any more color, other than to say this was a huge year. And not only did we make the largest acquisition in our history, but that acquisition was again the catalyst to sort of think about things like, are we going to market in the most efficient way? Do we have the right capabilities to engage our consumer and our customer? We recently opened our innovation center which is very much all about our customer retail partners.

And so the long and short is, as we looked at our organization, and we took opportunity across not only our commercial functions, which would be sales and marketing and thinking about how we would organize those differently. But we looked across our supply chain network, our finance organization, some of our administrative functions as well, just to make sure that we were running them in the most efficient way.

I would say that one of the key things is that as I mentioned in the script, we have an individual from Big Heart who is leading our growth and innovation organization. And so, we are putting a renewed focus on -- not that we haven't, we've done a good job on innovation, but making sure that our muscle, where we're building muscle is really around innovation longer term. And making sure that our understanding of the consumer is sharp and that we can act against insights that we are learning about the consumer as we go forward. So I think that's probably it.

Thank you. I'll pass it on.

Thank you our next question comes from Farha Aslam with Stephens.

Good morning. This is [Gregory Nep] on for Farha.

Good morning.

I just have a quick question. So given sort of the excellent cash flow and success taking down leverage, can you share with us whether there may be opportunities for further M&A, and just your view on the M & A environment right now?

Yes, this is Mark Belgya. I'll start, and Richard or Mark, if you want to add more from a strategic perspective. But as we look at our deployment of cash, coming out of the deal last year, we obviously emphasized the importance of paying down debt over the course of three to five years, which we made great progress on. And as I said earlier, it allowed us to give back into repurchasing shares. We feel very comfortable with $1 billion of free cash flow, that we'll be able to continue that debt pay down plan, obviously continue our dividend pay out policy.

And it allows us a little bit of flexibility as to address strategic options coming in. So whether that's M&A, again, I don't think we are looking at a huge transformational, like a pet with, at least from a leverage perspective. But certainly there's M&A opportunity as well as buyback. And I think buybacks are situational. So we traditionally do not build that into our plan. But if you ask me, what is one of the opportunities for any upside of that range, you'd have to throw buyback as an opportunity in there.

And this is Richard. Just strategically, acquisitions is a key factor of our growth over long-term. And so, we still continue to look for those opportunities. And the fact that we're now in the pet food business, gives us another lake to fish in. And so, we'll continue to look there. And again those may not be strategic in the short-term but they may be more bolt-ons and smaller acquisitions, but they could be. So anyway just a short answer, but always important to us.

Plans are in water.

Got it. And there is a target leverage ratio that you would feel comfortable stabilizing at?

Target leverage ratio?

Well what we said is that its been a little bit of maturation for us as a Company. We were always pretty conservative. And I think now, sort of 3 times, we know is a pretty good number to work around. We've been pretty vocal to that in the last six to nine months. As we get closer to that 3 times, it just opens up the door a little bit more.

Got it. Great. Thank you so much.

Thank you. Our next question comes from Chuck Cerankosky with Northcoast Research.

Good morning, everyone. Great quarter.

Thank you, Chuck.

If you are looking at your largest customer, how much of their improvement in sales is reflected in some of the volume improvement you've seen, especially with regard to promotional and repricing activity?

Well, this is Richard. Just first of all, it always helps when your customers are happy and doing well, any customer. And so we're glad to see that they've turned the corner, and that's great. But they didn't drive our growth. This growth is broad-based, so that was not driving this.

And hi, Chuck, Steve Oakland.

We have brands like Folgers that index really, really well there, and those teams are working together very strongly to participate in that, and like to help drive their category growth. But I would argue that, the other traditional retailers. And we typically don't name them, but the top 10 retailers if you looked at our top 10 list, our numbers are pretty good across that whole top 10 list. But we're pleased to see those do well. I mean, we all as an industry, need them to do well to do well long-term.

And when you look at how consumers are spreading their money across your brand's premium and mainstream, what does that tell you about where the consumers' head is at right now?

Well I think the consumer is still somewhat cautious. And the great thing about our brands is our brands are pretty well-positioned to supply all of our consumers. And so, it is a cautious world out there, and we're still a good value. I mean, whether it's Folgers, or whether it's Jif or whether it's Smuckers, it's a good value to the consumer, so.

And our industry Richard had a commodity price environment that allowed us to maintain our margins, and reflect those prices to the customer base. So we've all enjoyed, not just coffee, but other commodities have been in a place where we've been able to market the brands, provide great price points, and innovate, right? So we've got innovation regardless of the business that -- in things that are very high mix and high cost, and then provide items in all of our brands, in all of our businesses to the discount channels to the growth, from the dollar industry, and those places. So we've been able to participate across the spectrum of channels pretty well, and the cost base today, and as we look forward, looks like it helps us to do that.

And Chuck, this is Mark Smucker.

Just to reiterate making sure that have -- that we are developing and growing our key mainstream brands, but also making sure that we have the right, the truRoots, the Sahale, the Natural Balance. Those are brands that aren't necessarily as big, but certainly serve a consumer need and are important to our portfolio.

All right. Thank you very much.

Thanks, Chuck.

Thank you. Our next question comes from Rob Dickerson with Consumer Edge Research.

Thanks a lot.

Just a clarification question, and more for Mark. So it sounds like you said in your commentary, that adjusted operating profit will be growing about 4%. And then, I know if you use that 116.6 in your diluted shares outstanding, that implies about another 2.5%. So that gets me to 6.5% EPS growth in 2017.

Is the assumption here that there are other, below the line, like the tax rate could be a little bit better? Or interest rate comes down a little bit, or I mean, the interest expense comes down a little bit? And then lastly, if we look at the shares you bought back in Q4, really in FY16, I mean, it's the most amount you've spent on a buyback outside of FY14. So could there be additional cash outlays in 2017 to incremental buybacks, even though you might not have as many of the one-time benefits on your working cap? Thanks.

Hey, Rob. So a couple things. I think the way you're thinking about it from a percent increase is pretty much in line. Maybe, the simple math would say 4% plus operating profit growth, 3% shares, and a point tax and interest. So that kind of gets you to the 8%. In terms of buybacks, what we've guided in direct -- and we have conversations particularly with the rating agencies, we use 2% as a long-term model. So that's a 2% buyback. So obviously, at 116 million shares, it's looking like 2.2 million shares. So that as I said, on your earlier question, we don't factor that into our plans.

I would say, our cash deployment would allow a portion of that, maybe not the whole 2% without pushing the leverage target we're going after. But certainly, and again, it's situational. So I don't want to sit here, and say we're going to go out and buy it, but if the opportunity were right, I believe we have the cash to do it, and it obviously would be incremental. Certainly, when we do it in the year, will have less of an impact [due] further into the year. But that's the beauty of getting the leverage to where we want it to be, gives us some flexibility.

Okay, great. And then just a quick follow-up. On the 4%, on the operating profit growth, if I heard you correctly, you said the coffee expectation was about the same to flat. Consumer should be down a little bit just, because, or mostly driven by milk. And then pet's up mid single-digit. So if I kind of do that quick math, I'm still getting to probably, I'd say sub 4%. So is there, are you -- I'm just trying to get a sense of how you're -- or how I should be thinking about each of the segment's growth relative, to kind of this rolled up 4% number? Thanks.

Well I think you will have some segment profit growth. It will be a little less than 4%, because as we said in our scripted comments, our SG&A is going to be flat year-over-year. So some of that SG&A clearly goes up into the businesses, but also some of it falls below, in what we would call admin support, but it's below the segment profit. So you need a little bit of that benefit to get to the 4% on an operating growth perspective.

So you're right, there's a little bit. But again to go back, part of that reason is because you put $40 million in the marketing in there. So I'm not saying, it doesn't have a P&L impact, but just to make sure we're all clear on why that is the case.

Right. So and then a bigger picture, if we go back to the Analyst Day, and how you're investing for growth et cetera. So the net-net of all of this is, you have some upside on the corporate side. You're investing a bunch back, but you're not investing it all back, so that you can still squeeze out this 3%, 4% operating profit growth? That's the goal internally and externally?

Yes, I think that's fair. The other comment on the 4%, again it gets lost a little bit, because we're saying that the buyback is offsetting the milk profit loss. If you strip out the milk profit that we incurred in the first eight months of FY16 that we owned the business, we're actually growing operating income at 6%. So we're offsetting it -- so we're being negatively impacted when you look at it on a reported basis, but you strip that out, we're actually up plus 6%.

Okay, great. Thanks, guys.

Thank you. I will now turn the conference call back to management to conclude.

Thank you very much. This is Richard. I just wanted to close by saying, that I've never been as optimistic about our business, our brands, our employees throughout the Company, the best in the industry, and the leadership team, especially the new leadership team we have.

I just think we're in a great position, and I want to thank everybody and thank our employees for the wonderful job they're doing. And thank all of the people on the phone for paying attention, and asking great questions. So thank you and more to come, best is yet to come.

Thank you, Richard. This is Mark Smucker. Just to echo Richard's comments, appreciate, of course, Richard's support, but thank all of you on the phone for your time today, and your thoughtful questions. And again, just our employees. Phenomenal job they have done to deliver this incredible year, and the future is bright. So just all of the tremendous efforts taken place this year and going forward, thank you.

Ladies and gentlemen, if you wish to access this rebroadcast after this live call, you may do so by dialing 855-859-2056 or 404-537-3406, with a passcode of 10365564. This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.