J M Smucker Co (SJM) 2017 Q3 法說會逐字稿

Good morning and welcome to the J.M. Smucker Company fiscal 2017 third-quarter earnings conference call. (Operator Instructions). I will now turn the conference over to Aaron Broholm, Vice President Investor Relations. Please go ahead, sir.

Good morning, everyone, thank you for joining us on our third-quarter earnings conference call. Mark Smucker, President and CEO, and Mark Belgya, Vice Chair and CFO, will provide our prepared comments this morning. Also participating in the Q&A are Steve Oakland, Vice Chair and President US Food & Beverage, and Barry Dunaway, President Pet Food and Pet Snacks.

During the 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 risk and uncertainty. I encourage you to read the full disclosure concerning forward-looking statements in this morning's press release which is located on our corporate website at JMSmucker.com.

Additionally, please note the Company uses non-GAAP results for the purpose of evaluating performance internally, as detailed in the press release. These non-GAAP results exclude certain items that affect comparability. One such item for the third quarter was a $76 million or $0.44 per share non-cash impairment charge related to certain trademarks of the Pet Food business representing approximately 1% of the Company's total non-goodwill intangible assets. This charge is excluded from segment profit in the non-GAAP profit measures we will discuss this morning.

We have posted to our website a supplementary slide deck summarizing the quarterly results which can be accessed through the link to the webcast of this call. These slides and a replay of this call will be archived on our website.

We will be presenting at the CAGNY investor conference next Wednesday at 8:00 AM Eastern Time. A live webcast of the presentation will be available through our website. We look forward to sharing a more comprehensive update on our strategy and key initiatives at that time. As a result, our prepared comments today will be primarily focused on third-quarter results and our full-year outlook. If you have additional questions after today's call please contact me. I will now turn the call over to Mark Smucker.

Thank you, Aaron. Good morning, everyone, and thank you for joining us. We are making good progress positioning the business to meet our long-term objectives for top- and bottom-line growth while delivering against our consumer centric vision to engage, delight and inspire our consumers.

Central to our strategy is capitalizing on the strength of our leading brands such as Folgers, Smucker's, Jif and Milk-Bone while supporting the growth potential of smaller on-trend brands like Smucker's Uncrustables, Cafe Bustelo and Sahale Snacks. Investing in these growth initiatives requires us to continue generating fuel in the form of ongoing cost management.

Touching on a few of the key accomplishments in the quarter, we had a successful start to the launch of our Nature's Recipe premium dog food in grocery and mass channels as shipments began during the last week of the quarter. Retailer response to the introduction has been very enthusiastic as evidenced by significant display and merchandising activities in the past couple weeks.

As we announced plans to construct a new -- we also announced plans to construct a new Smucker's Uncrustables frozen sandwich factory outside of Denver which will double our existing manufacturing capacity for this growing brand. During the quarter companywide Smucker's Uncrustables volume 8% on top of a plus 38% volume comp in the prior year.

Our actions for Jif peanut butter and Kibbles 'n Bits dog food reversed the recent volume declines for each brand. We also had strong top-line growth for the Dunkin' Donuts and Cafe Bustelo coffee brands, including continued growth from Dunkin' Donuts K-Cups.

Lastly, while overall net sales were down from the prior year, operating income and earnings per share were up on a comparable basis. This is a testament to our diligence around cost management and a continuous improvement and mindset which are providing bottom-line support and fuel for our long-term investments.

During the quarter we realized incremental synergies of $26 million. By accelerating our synergy capture we now expect to achieve $120 million in incremental synergies this year, an increase of $20 million from our previous guidance. We look forward to providing updates on our current and future cost reduction programs and targets as well as our growth initiatives next week during our presentation at CAGNY.

Let me turn to a brief overview of our third-quarter financial results. Excluding the impact of a divestiture, net sales declined 2.5% from the prior year. Approximately half of the decline was due to the net impact of commodity driven pricing actions across a number of categories. Lower mainstream coffee volume also contributed to the decline.

Excluding the prior year profit and gain related to the divested milk business, adjusted operating income for the third quarter was up compared to 2016 as the decreases in net sales was more than offset by lower input costs and SG&A expenses. Adjusted earnings per share grew 5% compared to 2016 excluding the gain.

Despite the top-line weakness in our business we expect full-year earnings per share to be generally in line with guidance issued at the outset of the year. Accelerating synergies and a concentrated effort to manage discretionary spending across the Company allowed us to continue to deliver bottom-line growth.

Within Coffee, market share of total mainstream Coffee business remains relatively unchanged in the latest 4- and 12-week periods and remains up over the past year. However, net sales for our Folgers brand fell short of our projections for the quarter, primarily due to three factors. First, a change in the size and timing of our list price increase. Second, aggressive competitive price points in both mainstream Coffee and K-Cups which we chose not to match. And third, a delay of expected shipments to certain customers with January fiscal year end.

Some of the stepped-up competitive pricing has carried into the fourth quarter influencing our Coffee forecast for the year. However, based on shipments to date in February and plans for incremental merchandising activity, we expect a sequential improvement in Folgers top-line trends for the fourth quarter.

The Dunkin' Donuts and Cafe Bustelo brands each delivered double-digit percent volume mix growth in the third quarter. With the strong performance of Dunkin' Donuts K-Cups, sales for the product line are now up on a year-to-date basis even while lapping the tremendous 2016 launch. In addition, Dunkin' Donuts K-Cups have crossed the $250 million threshold in annual retail sales sooner than originally anticipated.

During the third quarter we began to recognize higher green coffee costs. In response we increased list prices by 6% across most of our portfolio in early January, consistent with our practice of being transparent in coffee pricing with retailers and consumers. While our price-to-cost relationship was unfavorable in the third quarter, this is not unusual in quarters when we announce price increases as we manage profitability on a longer-term basis.

Within Consumer Foods, segment profit grew 26% excluding the prior year impact of the milk business. This was driven by a favorable price-to-cost relationship as the benefits of a more efficient peanut butter supply chain and other cost management efforts are reflected in our results. While lower and more efficient marketing expense also contributed to segment profit growth, we expect marketing spend within the segment to be up on a full-year basis.

Excluding the impact of the divestiture, Consumer Food sales were down slightly in the third quarter mostly attributable to anticipated declines for the Smucker's brand. Late in the second quarter we increased list prices on our fruit spread products by 9% to reflect higher commodity costs resulting in an initial volume impact that was consistent with our expectations.

Sales for Jif Peanut Butter recovered after a considerable decline last quarter in part due to the timing of shipments. In addition, sales of Jif snack bars continue to grow at a robust double-digit rate, confirming our innovation efforts are on point with consumers.

In Pet Food, our Kibbles -- our change in pricing strategies to improve the competitive positioning of Kibbles 'n Bits in the mainstream dog food category drove 12% volume growth for the brand in the quarter, along with a modest increase in net sales and profits.

We have additional strategic actions planned to support further growth for the Kibbles 'n Bits brand. This along with the expansion of Nature's Recipe premium dog food into grocery and mass are part of a broader strategy we are executing to strengthen our overall dog food portfolio in this channel.

For Meow Mix top-line performance lagged the prior year as forecasted, but trends improved on a sequential basis. With the introduction of our new Meow Mix Bistro offering and support from ongoing TV advertising, we are excited about the growth prospects for this brand.

For our Natural Balance premium pet food brand sales decreased as the impact of slower traffic in the pet specialty channel was partially offset by high-double-digit increases in online sales compared to the prior year. In addition, sourcing challenges related to a key ingredient in one of the brand's leading SKUs impacted third-quarter results with the ingredient shortage expected to continue into the fourth quarter.

Sales for our pet snack brands declined as they lapped a promotional event and a high-single-digit comp in the prior year. The exit of certain private-label businesses and competitive activity at a key retailer particularly impacting our Milo's Kitchen brand also contributed to the lower sales. Nonetheless, with the power of our Pet Snacks portfolio and significant efforts to expand our long-term innovation pipeline, we have the right elements to drive future growth.

While growth for the pet business is trailing initial expectations, we are confident in the plans we have in place to improve performance and remain optimistic about the long-term growth potential of this business.

Lastly, I would like to highlight the performance of both our International and Foodservice businesses which delivered volume and sales growth across nearly all major categories during the past quarter. Innovation for our Canadian business and distribution gains for our US Foodservice business continue to be key drivers of results.

In closing, I would like to thank our employees for their commitment to delivering results, building on our product innovation activities, expanding our capabilities to enhance our future growth and achieving our synergy and cost savings goals. These efforts position the Company well to achieve our long-term objectives and deliver shareholder value. I will now turn the call over to Mark Belgya.

Thank you, Mark. And good morning, everyone. Let me begin by providing further detail on the non-cash impairment charge reflected in our third-quarter GAAP results. As we disclosed in our 10-Q filed in November, we performed an impairment analysis on the goodwill and indefinite lived intangible assets related to the Pet Food segment during the second quarter.

Although our annual impairment testing date is in February of each year, this interim analysis was performed due to the previously announced reduction in our fiscal 2017 sales outlook for the Pet segment. The results of the second-quarter analysis indicated no required write down of Pet-related goodwill or indefinite lived intangible assets. However, as we disclosed, both items were sensitive to a hypothetical increase in the discount rate using the calculation.

Given this sensitivity and a subsequent increase in the risk free interest rates, we re-performed this analysis during the third quarter to reflect a higher weighted average cost of capital used to discount the assumed future cash flows. Other assumptions utilized including growth rate did not change materially from the second-quarter analysis.

The results of this updated analysis continue to indicate no impairment of goodwill. However, it did indicate a fair value that was less than book value for certain indefinite lived intangible assets resulting in a non-cash charge of $76 million or $0.44 per share in the third quarter.

Moving ahead, the Pet Food-related goodwill and intangible assets remain sensitive to the risk of further impairment if the risk-free interest rate or other market factors used in the calculation of the weighted average cost of capital increase.

Let me now provide additional color on the rest of our third-quarter results; I will then conclude with an update on our full-year outlook.

Net sales decreased by $95 million or 5% in the third quarter, including a 2 percentage point impact from the prior year divestiture of the canned milk business. Unfavorable volume mix, primarily related to the Folgers brand, and lower net price realization each contributed somewhat equally to the remaining decline.

GAAP earnings per share were $1.16 this quarter, a decline from $1.55 in the prior year driven by the impairment charge. Excluding this charge and reflecting other non-GAAP adjustments for unallocated derivative gains and losses, amortization expense and special project costs, which are summarized in this morning's press release, adjusted EPS was $2.00 a share. This reflects a 5% increase over the prior year's adjusted EPS of $1.91, which excludes $0.14 gain on the milk divestiture.

Included in this quarter's adjusted EPS is approximately $7 million or $0.04 per share of costs associated with the product recall and the write off of assets related to a discontinued product line.

Adjusted gross profit decreased $38 million or 5% with gross margin flat at 38.5%. The lower gross profit was mostly attributable to coffee volume mix and lapping prior year's gross profit of $13 million related to the milk business. In addition, while overall input costs were lower in the quarter, this was more than offset by the impact of lower net pricing.

SD&A decreased $44 million in the third quarter or 12% compared to 2016. Approximately half of the decline was attributable to incremental synergies compared to the prior year. Reduced marketing and selling expenses also contributed. While full-year marketing spend is now expected to be lower than our previous projection, we continue to anticipate an increase in the fourth quarter compared to the prior year.

This lower SD&A led to adjusted operating income of $383 million, up 3% over the prior year, once you exclude the $25 million gain and $11 million of operating profit related to the divested milk business included in last year's third-quarter results.

Below the operating income line lower interest expense, a lower tax rate and a decrease in the number of shares outstanding further benefited earnings per share. We now expect the full-year effective tax rate to be approximately 32.5% compared to our previous guidance of 33%.

Let me now expand on our segment results. Beginning with Coffee, third-quarter net sales decreased 7% driven by lower volume mix of 11% for the Folgers brand, partially offset by gains for Dunkin' Donuts and Cafe Bustelo of 11% and 10% respectively. Net price realization was 1% lower compared to the prior year as the impact of the 6% list price decrease in May of 2016 was mostly offset by reduced trade spend in the current quarter and the initial impact of last month's 6% list price increase.

The lower volume and an unfavorable price-to-cost relationship in the quarter caused Coffee segment profits to decline 12% compared to the prior year. With Folgers volume expected to remain soft into the fourth quarter we now anticipate full-year Coffee segment profit to be down mid-single-digits compared to our previous guidance of being flat to the prior year.

In Consumer Foods net sales declined 2% compared to 2016 excluding the canned milk divestitures. Looking at the key brands, Jif and Pillsbury sales were comparable to the prior year. Sales for the Smucker brands were down 4% reflecting the volume impact of our recent price increase of fruit spreads while Crisco declined 3% on lower volume.

Lastly, sales declined significantly in the quarter for our truRoots brand due to reduced distribution. However, this was partially offset by growth in our private label grains business.

Consumer Foods segment profit declined 8% in the quarter. This was attributable to lapping $9 million of prior year operating earnings related to the divested milk business and the $25 million gain on the sale. Excluding these items segment profit was up 26% reflecting reduced manufacturing costs, higher price realization and lower marketing expense. On a full-year basis we continue to anticipate Consumer Food segment profit to be up mid-single-digits excluding the impact of the milk divestiture.

Net sales for our Pet Food segment decreased 4% reflecting price investments across a number of brands in our portfolio which were supported by lower commodity costs. This led to an overall increase in volume for this segment, most notably for our Kibbles 'n Bits brand. The higher volume offset unfavorable mix.

Pet Food segment profit was up 2% compared to the prior year as the lower sales were offset by reduced input costs and marketing expense, as well as incremental synergy realization compared to the prior year. Excluding the impact of a product recall segment profit was up 6%.

As we kick off our trade and marketing support for the Nature's Recipe launch during the fourth quarter we continue to project full-year segment profit will be down slightly for the Pet Foods business.

Net sales for International and Foodservice were up 6% compared to the prior year with strong top-line performance across each of the underlying business areas. Segment profit decreased 7% reflecting $2 million of a one-time asset disposal cost in the current year and the lapping of $1 million of prior year profit related to the divested milk business. Excluding these items segment profit was flat as the higher sales were offset by an unfavorable impact of foreign currency on our cost of goods sold during the quarter.

Turning to cash flow, cash provided by operations was nearly $420 million for the quarter. This compares to $542 million in the prior year, which includes benefits related to our working capital initiatives. Factoring in capital expenditures of $53 million, free cash flow was $367 million in the third quarter and this brings the year-to-date total to nearly $660 million.

Factoring in the sum of our earnings forecast, non-cash depreciation and amortization and a modest working capital contribution for the fourth quarter, we expect full-year free cash flow to range between $950 million and $1 billion. This range continues to reflect a CapEx estimate of $240 million.

Let me conclude with an update on our full-year sales and earnings outlook. We now anticipate net sales for the fourth quarter will be comparable to the prior year. The reduction from our previous expectation of mid-single-digit increase for the quarter reflects a lower forecast for Coffee and, to a lesser extent, Consumer Foods. This would result in full-year net sales being down approximately 3% compared to 2016 excluding 2 percentage point impact of the divested business.

We now project adjusted earnings per share to be in that narrow range of $7.60 to $7.70 factoring in the revised sales forecast along with acceleration of synergies and lower tax rate.

In closing, while the challenges to revenue growth persist in certain categories, our teams continue to address both tactical and strategic solutions to turn our top-line trend. At the same time we will continue to focus on cost take-out to help fuel these initiatives and deliver earnings growth.

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

(Operator Instructions). Ken Goldman, JPMorgan.

I hope I don't -- I hope this question is taken in the intent it has, which is actually find an answer and not really to sound too harsh. But, Mark, management talked today about growth coming back in Pet and Coffee. I think Mark Belgya said that in the impairment analysis of Pet the Company didn't even meaningfully adjust the outlook for sales growth.

But looking back your Coffee sales have grown by a total, if my numbers are right, but of only 4% in the last five years -- not CAGR, but total. Pet sales are down over the last three years including when you didn't own it. These are long-term trends, right, not just short-term hiccups. So why is it reasonable to assume that sales will rebound?

And I am not talking about minor stuff like the timing of Coffee shipments which you mentioned. I am talking about getting back to your long-term guidance of 3% organic sales per year. And it's a target you are or to miss now I think for five straight years. So again, I am not trying to sound harsh; I really just want to know what the answers are, how we get back to that level.

Ken, thanks for the question. This is Mark Smucker. I would start -- so first of all, let me just acknowledge there has been softness, as you know, and you clearly pointed out. At the end of the day the shifts that we have made in our strategy and the investments that we are making in innovation over the short- and long-term, we are pretty confident that that is going to help reverse those trends.

So, for example -- and we will share more with you guys next week at CAGNY. But given the consumer -- sort of the changing consumer landscape, those are the trends that indeed drove the shift in our strategy to not only focus on leading iconic brands, but also to focus on some of these emerging brands as well as innovation across all of that.

So we have always been good at the singles and doubles as we call them, the line extensions, the short-term innovation. We will continue to be good at that. And then as it relates to sort of the longer stuff, we are going to start thinking about -- or we are starting to think about platforms like Uncrustables as just one example of how we can think about more meaningful innovation to come out in the next one to two to three years.

And so, that is what we are laser focused on. We have had a tremendous amount of work done on our long-term innovation pipeline. And actually I feel great about what is going to be coming in the next couple years. So in the meantime we are going to continue to focus on, in Coffee, for example, being present and leading in all of the segments and thinking about the innovation that can come not only in the short-term, but also some of the triples and home runs that we hope to bring to bear in the marketplace going forward.

Okay, great. Thank you very much, Mark.

David Driscoll, Citi.

So for my two questions I wanted to spend time on Coffee and then just cost savings in a bigger broader sense. On Coffee, maybe to follow on on Ken's point, there really is an area of growth in Coffee but it is in K-Cups and it's in the margin -- in the mix movement. But the K-Cup business for you guys has just been a struggle.

And I guess I would just really like to hear what is the plan to move forward on K-Cups to really accelerate that business. Because that does look like -- but maybe you disagree, that does look like the area where you could really chop some wood. The Folgers brand just continues to be a struggle within K-Cups, but we see other brands that are not too dissimilar from that one that are doing well. So I really would appreciate some diagnostics here on what is wrong and how you really turn that into a big tailwind.

Second question would just be to Mark and Mark -- I like saying that, by the way -- that -- what is the story with the cost savings longer-term, back to the whole SG&A comments and SG&A as a percent of sales. It really does look like the Company has an opportunity here. But I am serious just how much you guys are really looking at that and, maybe at some future date, might have something to truly say about increased cost savings. Thank you.

Okay, why don't I start, hi, David, Steve Oakland. And I think this might help for some of Ken's comments as well. Let me take you through the Coffee business and the structure of the Coffee business and where we see growth, where we think both the near-term opportunity and the longer-term opportunities are.

So to understand our Coffee business you really have to look at three basic components. There is the premium roast and ground business, the mainstream roast and ground business and our K-Cup business. In the premium roast and ground business we have two brands, and we talked a little bit about them in the prepared comments. But we have the Dunkin' brand which is growing nicely both in sales and profits.

And we are pleased to say we have got a robust pipeline. We are right in the middle right now of launching an at home Dunkin' cold brew kit. So working with our partners at Dunkin' Brands we've got a nice pipeline of innovation that ties to their stores nicely, ties to their brand nicely.

The other brand that we don't talk a lot about in there other than its growth, it's still relatively small, but Cafe Bustelo. And Cafe Bustelo has been growing at double-digits for a number of quarters. And that sales and profit growth is nice and when you combine that with Dunkin' we have a broad consumer message in that premium segment. But that brand is bringing a very diverse and a much younger consumer into the portfolio.

So our premium brands are positioned well. As they grow they will be big enough over time to offset some of the decline in the mainstream roast and ground segment.

So let's talk about mainstream roast and ground. That is our biggest segment, it is our Folgers brand, it is where we have scale. And when we talk about cost reduction, when we talk about leverage there, that is where it ends. That business is big enough so that when the Coffee business contributes its portion of the cost savings that is where it comes from.

Now you do have, like you have this current period, you have times when cost volatility, green coffee volatility passes through that mainstream segment. We tend to do it with list price change; our competitor tends to do it with trade. So you have bumps in the road there. But if you look at our share, our share has been flat to up a little bit over the last five, six, seven years, so over the time we have owned Folgers.

So the goals there are two use innovation, leverage and cost reduction to drive profits out of that segment, maintain our share flat to grow it a tiny bit. We don't kid ourselves there. But that is fueling a lot of the other investment.

Then your question on K-Cup is a great one. We were a very early adopter to K-Cups, we got out very quickly. But what comes with that is a legacy supply chain arrangement. And I know there has been a lot of comment by some of the other players about the potential for new supply chain arrangements and how much they can impact their business. We see that opportunity.

So we project our K-Cup business in total to be up this year driven by Dunkin', we are managing a tough cost situation frankly on our legacy business, our Folgers business. We think there is an opportunity as our contracts roll off to improve that dramatically. So we see K-Cups as growing for us, we see it as unleashing a lot of earnings power probably starting 12 months or so from now and then rolling on over about a three-year period.

So our premium business is growing, our mainstream business has great profit potential, and our K-Cup business in the relatively near-term will allow us to unlock the value of that and we think it will drive profits for the future.

David, this is Mark Smucker. I will take your second question and if Mark has anything to add he certainly can. So just on the cost take out, what I would start by saying is, number one, we are very pleased we have been able to accelerate the current target, we have been able to deliver more, we will deliver more this year, so that's great.

Number two, cost take-out is an ongoing effort. And our teams, our employees understand that it is a continuous improvement mindset. It is something that we have to do every day, not just a one-time thing. And so, coming out of this, the targets that we've laid out for you guys, we will be continuing to look at other ways to take cost out. And I will submit that there are opportunities.

I would also submit that if you think about us versus our peers, from an organization standpoint we are starting from a relatively lean place, we have got just over 7,000 employees. So from that perspective we feel like we are in pretty good shape. But there other opportunities over time to continue to look and get better.

We have a proven ability in the supply chain. We've consolidated facilities. We have moved around our distribution network. We have done a lot of things in the supply chain and we will continue to. But as you point out, there other opportunities to do that and we will share some more of those ideas with you guys next week.

This is Mark Belgya. Maybe just to add a little bit to that last comment. As we have been able to deliver [the year] the acceleration of synergies have helped. We also have been pretty aggressive in looking at certain expenses across the Company, both G&A and other. And we firmly believe that what might be viewed as temporary cost reductions just to deliver a year can become permanent. So we would expect that to play in.

I will tell you that we put the challenge out to the organization as part of our budgeting process for fiscal 2018 planning to take a harder look at budgeting, probably harder than we have ever done.

And then the only other thing here, and I just [weigh this], I think you guys know this. But sometimes you have to be a little cautious. I know it is easy to compare things like SD&A, but companies do treat things a little differently. For example, I know distribution can be in SD&A, it can be in COGS. So I'd just wave that flag a little bit when you do side-by-side comparisons.

But that said we are still going to challenge all those components to see where we have some opportunities. And again, I think next week you will get a little bit better sense of how we see the synergies playing out through the rest of next year and then maybe some other cost opportunities as well.

Thank you so much.

Chris Growe, Stifel.

I just had a question for you, in terms of the -- on Coffee, the price/cost relationship being a little imbalanced this quarter. Does that get fixed relatively quickly in 4Q with the pricing coming through and some of the adjustments to trade promotion spending?

Hi, Chris, Steve Oakland. We get a little bit of that back in fourth, but it really starts in the first quarter of next year.

Okay, so the fourth quarter may still have a little bit of a negative price/cost relationship, is that right?

Yes, it will -- Chris, this is Mark Belgya. If you kind of think back to what Coffee costs did over the last call it three to four months, remember we had a period where we saw arabica cross $1.70. And you know, we've talked many times about our hedging, where we are constantly hedging over -- and so we are kind of moving that average.

So through the third quarter and into the fourth quarter we are sort of averaging at the high end of that and that will start coming down a little bit and that will align itself with where we priced ourselves as we move forward.

I see, okay, thank you. And then just to follow up, if I could, on the cost savings. I want to understand, Mark, are those -- if I missed this pardon me. But are the cost savings being sort of pulled forward? Is that the way to look at the incremental savings this year? And then as the overall program change that you're still looking for 200 I think. But is this simply just a full forward into 2017?

Yes, that is right, Chris. This is Mark Belgya again. That is correct. We just accelerated the recognition and the variety of buckets we've talked about the last couple of years.

Okay, thanks so much.

Robert Moskow, Credit Suisse.

I was hoping you could just take a step back for a second and talk about EBIT growth this year. If I look at the new guidance it really implies no EBIT growth if I take the new tax rate. But you had $120 million of savings that was -- I thought would originally in the beginning of the year drop to the bottom line.

Can you help us just understand how that got absorbed? Was it absorbed in lower Coffee sales than expected? Was it incremental investments you needed to make in Pet Food to kind of get the sales going again? And maybe take a step forward to 2018 and give us a sense of what would make us feel more comfortable that those savings could drop to the bottom line in 2018 instead?

Hey, Rob, this is Mark Belgya. So you are correct. We had the $100 million plus of synergies. A lot of it -- just candidly, a lot of that came from the volume softness that we've reported on over the course of the year. Now we have experienced some -- sort of like some favorable commodity input that has helped from a cost perspective. But just the volume shortfall to -- that sales shortfall has impacted most of that if you just look at it from the highest level.

Now so -- and I will let Barry or Steve talk in a moment. But -- and if we just kind of fast forward to next year a little bit, I mean I think there is a couple of things. One is that we are going to continue to have the opportunity to have synergies so that again will temper anything from a top line.

But I think as we will talk next week at CAGNY with some of the innovation and then just with the programs that both Steve and Barry have in terms of just the businesses that they are running, we would not expect to have some of the softness that we experienced in the past year from a top-line perspective. So, maybe guys, if you just want to comment on that a little bit.

Sure, Mark, this is Barry. Let me just comment from a Pet perspective. With the launch of Nature's Recipe, that was a strategic decision we made to enter the premium segment in dog food. And in order to drive that business especially to speak to the consumers about that consumer proposition, we will be making some significant investments in marketing in F 2018. So we will expect growth out of our base business, but with that investment in the Nature's Recipe launch, that will have an impact on our F 2018 expectations.

Okay, I appreciate that. And maybe Steve Oakland, just a follow up. I think you said that you think you have opportunities to negotiate better supply chain arrangements on K-Cup. I imagine that is with your major partner in K-Cups. What gives you confidence that those supply chain arrangements can be negotiated better? What kind of leverage do you have there?

Well, Rob, I think there is a couple things. Number one, there are options that never existed when these agreements were originally done, right. So the options, both with our current partner and outside our current partner, are significant. But more importantly, I think the relationship with a partner and their understanding that they need a healthy Folgers business in this category and they need Dunkin'.

The Dunkin' original SKU is the number one SKU in K-Cups. They need that SKU invested in, they need that SKU healthy for the growth of the system long-term. So I wouldn't suggest that our goals are necessarily incongruent, that doesn't mean that we don't see what is going on around us and the public comments about how favorable some of the other arrangements have become.

Now those things roll off at different times, we were an early adopter. The agreements, as you can imagine, that were written at the beginning are very different than what an agreement would be written today. And so, we are confident from the dialogue we have had with them, from the options we see around us that there is significant opportunity for us to improve that profitability.

Rob, this is Mark Smucker. You know from just your tenure on covering us that we were the first one in the system. We have had great relationships with that partner over time. As their leadership has changed we have continued to have great relationships. And over that same time period we have -- it is an ongoing dialogue. And so, we make modifications, as have other partners, to those agreements over time and this is just another one of those opportunities to do that.

Thank you very much.

Rob Dickerson, Deutsche Bank.

Just a couple questions. First question I had is just with respect to kind of reinvestment needs relative to cost savings. I know if you do let's say announce next week that there are additional measures that can improve those -- improve your own savings, I mean do you foresee just because of the pressure obviously the industry is experiencing in mainstream and general and mass and center of the store category that maybe you need more firepower to compete effectively?

Hey, Rob, this is Mark Belgya. Let me to start and then I will ask the guys to jump in. So let me set a couple of things. First of all in terms of investments, we have talked candidly for the last two years since we acquired the Pet business and as we got into the synergies -- the synergy recognition was $200 million first, bottom line, identified an additional $50 million that we were very specific that every dollar would be reinvested.

Some of that is on capabilities but clearly the majority of that is intended to be reinvested back into brands. Some of our brands just candidly just need additional support. So that is piece one.

As we look forward what we say is continuous improvement in the mindset that we have and will continue to focus on in the Company. And what we want to do is we want to balance our cost savings and our future cost savings basically such, and we think about this as an organization is we are very focused on innovation, but we also are focused on cost take-out.

The issue is that you don't look at these things mutually exclusive. So what we are trying to do is build this mental model where the whole organization is focused on cost such that we can provide the fuel to support the top-line growth.

So we feel at this point in time -- and again, we'll speak a little bit more on this next week at CAGNY. But we feel that the programs that we have in place, things that we have identified from a cost perspective, and then just the work that each of the respective businesses do on a daily basis to identify take-out costs such as Steve suggested. That will all provide adequate support over time to support the innovation that is going to be so important to turn around the top line.

Yes, Rob, this is Mark Smucker. I would just add to that the other component, clearly the idea and the concept that fuel is inextricably linked to our ability to drive top-line growth, that is what Mark was talking about. The second component of that that we have gotten better at is prioritizing where the dollars go.

So to the extent that we haven't had a ton more dollars to put against marketing, and we have made some very strategic choices like Nature's Recipe. We have gotten a lot better at making sure that the most important opportunities get the resources, rather than sprinkling a little dollars across every brand, we are getting a lot more strategic about where the dollars and resources go. And that would also be true as we think about how we go to market as well with our customers.

Okay, perfect. Appreciate that. And then, Mark Belgya, just a simple question for you. The free cash flow target came in a bit, but CapEx stays the same. Is the CapEx number this year, is there -- there is no incremental that we should be building in for the Uncrustables plant? Or is there some incremental next year or is all of that already in guidance?

So, good question. So there is nothing coming in this year, so the $240 million was our original guidance. Next year's will be up; we will give a little bit more obviously as we move through the next -- at our next call [and guide]. But I would say is that in our press release that we said it was $170 million to $200 million -- $170 million to $200 million is the next phase. That will not all be incremental to next year.

So, it will be above the $240 million, but it won't all be additive to the $240 million. So, we are still finalizing our plans, but just to give you that as some general guidelines. It will probably top off someplace a little over $300 million for next year.

Okay, great. And then just a quick last one with respect to share repurchase. I don't want to assume let's say that your shares might be down a bit today, but at some point they get to a level that share repurchase actually looks attractive. I am assuming though that, for the time being at least, the main priority is still deleveraging getting to those targets.

It is still important to delever, but I will say that when we talk about deployment now, as we are getting closer to that three times, we do -- it does open up the door for more what we will call strategic uses of cash be it M&A and share repurchase.

We still feel share repurchase is a key to long-term valuation growth. And so, when it is the right time we would certainly entertain opportunities to look at that. So, I wouldn't take away the comment that we are just focused on debt deleveraging.

Okay, great. Thanks so much. And I will see you next week.

Alexia Howard, Bernstein.

So two questions. First of all, we are hearing from a number of companies that the retailer environment is getting a lot sharper on pricing. And I am just curious about whether you are feeling that, how you are seeing that playing out across your three categories. I am particularly thinking about list pricing and promotional activity that seems to be kind of a theme for this year.

And then secondly, just on the Pet Food business. We have seen a marked drop off on the pet treats side of the business, that was always a really strong growth part. Would just be curious about what is causing the pressure on that side of the business and when you think things might start to stabilize and recover there? Thank you.

Why don't I start, Alexia? Steve -- and then Barry can speak to pet treats. With regard to the pricing environment with the customer. Yes, I would agree with your statement that it is as intense as ever. But one of the questions we get a lot is why do we take pricing up and down in Coffee and why don't we spend trade or why would we do that?

We have got great respect of our customers of the transparency of our commodity-based businesses. And the fact that we take them down makes frankly taking them up a bit easier. So they trust that when those commodity costs swing we will swing it back the other way.

So we work really hard on pricing, we work really hard on that relationship with the retailer and them understanding why. Having said that, I would agree that it is about as difficult an environment as I have seen. But I think the fact that we have those relationships has gotten us through it. So, Barry.

Sure. Good morning, Alexia, it is Barry. Let me comment on the snacks category. We continue to believe there is tremendous growth opportunities in snacks. As the leader of the snacks category we have driven growth of that category through innovation. And as we stepped back over the last several months in looking at our brand strategies and our innovation pipeline, we have rebuilt that pipeline with some big ideas that we can bring to market. So we think that is going to be fundamental to driving the category growth.

I would also speak to our brand strength. When we think of Milk-Bone, it's probably one of our big -- or our strongest brands across the Smucker portfolio. And based on our deep consumer insights we think that brand can play in a number of segments where it currently doesn't participate. I'll just give one example of that.

We are launching a Milk-Bone toy that will drive incremental treat sales. But I think that is just one example where we think we can take the Milk-Bone brand into new segments that will also drive incremental growth. And then from and M&A perspective, we think there are some enabling and bolt-on opportunities in the treat area, so that will also be part of our growth strategy.

Thank you very much. I will pass it on.

Evan Morris, Bank of America Merrill Lynch.

I just have a broader top-line question. It has been a couple of quarters in a row I guess now where you have had to revise your expectations lower. Think about it more from an organic sales standpoint. But the commentary seems to be it is going to get better, it is going to get better, we are going to grow.

I feel like you can listen to a lot of the comments that your peers have made over the past year or two as well, it has been sort of the same pattern, saying things are going to get better but ultimately having to revise down.

So I guess I look at sort of your business now and how it is tracking from a top-line standpoint. And I understand there is certain things that may be a little bit of a drag, some of the commodity type stuff. But if I think about it going forward into next year and -- why, I guess why isn't this more the new normal?

Why isn't this sort of the new pattern of where sales trend versus getting -- versus the expectation of improvement again? Because it seems like this -- again, this broader pattern in the food space of taking numbers down as opposed to sales moving higher.

Hey, Evan, Mark Belgya here, then I will turn back to Mark. So a couple things. And I do want to call out one point that you made on the commodities, is that with all due respect to our peers, I suspect we may see as much flow-through commodity pricing as anybody. So any period of time, especially in the downturn commodity costs we are probably of little bit more affected. But that aside --.

So I think it just reinforces what you have heard throughout the course of the morning is that we recognize that we are in a boat with a lot of other folks in terms of what we are seeing in volume and so forth. But we do feel confident in the fact that we have brands that are iconic brands with large share of market, take Milk-Bone, Smucker's, Jif, Folgers, in categories that are very important to the retailer that are not necessarily affected as much by the negative things you hear around bad ingredients.

So we have got a great core. But where we think we can add what maybe is a little different than a few years ago is what we talk about this enhanced vision. And this is the focus on these emerging brands. Some of those will be acquired over time, but candidly we are very fortunate to have what we say, and albeit they are still small.

But when you take Uncrustables, Uncrustables is a $200 million business and we are going to build this facility, which means we are going to push $500 million in the next five years, roughly, on that business. You take Cafe Bustelo, which is addressing an entirely different consumer base, bringing the millennial in, which right now is one of the biggest issues that a lot of the iconic brands we see across the food space are being challenged by. And then the Sahale Snacks which we think is just an up and comer that has a lot of legs to grow.

So, yes, they are small, and maybe it is hard to extrapolate those into the kind of growth that maybe you want to see. But we feel strong about that and that is where our resources and focuses are going to be.

That was a great answer. I don't really have anything to add to that. This is Mark Smucker. I guess I would just emphasize that it is a journey and the shifts that we have made both in our priorities and our strategy are critical to driving long-term growth. And I am confident that over the next year and beyond we will see those types -- the types of growth that we have been talking about.

And in the meantime we will continue to focus on the close in things that can drive top-line growth. So appreciate the question. I think that it is the question that is being asked of our industry right now. But again, the shifts that we have made do position us indeed for continued growth in the long-term.

Okay. And just my second question, it might still be a little early, but you have invested in revenue growth management team and capabilities. Just any sort of learnings from there and anything that you think that you will be able to apply to fiscal 2018? And could you see any benefit from some of your early work?

Yes, so, basically where we are in that journey is we have restructured our go-to-market organization in total and basically allowing us to focus more on where we need to play strategically. Part of that is our GM. We are just now in the process of -- are almost finished getting that organization fully staffed. So over the course of the next fiscal year what our focus will be is on driving efficiencies and finding the low hanging fruit.

Longer term we will be implementing new tools, new analytics, that would be more in the next 12 to 18 months, that will give us even better visibility to where those efficiencies are. So it will start this year and will continue on over the next couple years until we really have all of the tools and capabilities that we need to continue to be more effective in that area.

Perfect, thank you. I will pass it along.

Andrew Lazar, Barclays.

I guess, Steve, just thinking about mainstream roast and ground coffee -- I know your commentary suggested that is the part of the Coffee business with the scale and where a lot of the synergy can flow through. I think over the last few years you have tried a number of things I think from an innovation standpoint, different platforms and such, again, in mainstream roast and ground.

So I'm trying to get a sense of if your commentary is different at all with respect to the desire to do more innovation or platform work, again, within that mainstream piece? Or is the thought now maybe some of that didn't play out as expected and it is now much more of a focus around synergy specifically in that very large and I know very profitable segment?

Hi, Andrew. I would say we have not given up on innovation in the Folgers mainstream business. I think we are realistic about it. I think we understand that maybe in premium Coffee that is an easier hill to climb. We are in the process this month of re-launching the Perfect Measures. That is a concept that has tested amazingly well.

And the reason you go to a lead market or a test market is to get learning. And I think the learning that we got we are re-launching. The original customers have expanded the product. So there may be something there.

So I would say Folgers probably has a much stronger cost reduction culture than we have talked about in the past. But that culture is really alive and well and they have identified a number of things both in the near-term and the forward-term. So we will continue to do that.

There will be some focus on innovation. I wouldn't say at all we have abandoned it, but we do know that we have got to drive cost, we have got to drive fuel from that mainstream business to invest in our premium business, to invest in the other initiatives across the Company. And then I spoke to the K-Cup opportunity. We need to offset that K-Cup margin drag in the interim until K-Cups start to carry their own weight.

Thanks for that, thank you for that. Yes, that is very helpful. Thank you. And then Mark Belgya, just a quick one. I think some companies more recently have had to think about I guess changing the way they treat their kind of cash EPS treatment given some various inquiries and whatnot from the financial accounting boards and such. Is that something that Smucker's needs to potentially think about in the way they report sort of the cash EPS numbers or does that not really affect how you guys are thinking about it?

Sure, great question. Right now we feel comfortable. As everyone knows on the call, we have redefined the beginning of the fiscal year to add back amortization and impairment charges. A couple of comments around that.

Obviously we will see how things play out from an SEC perspective and if there is more challenges and so forth. But the reason we feel good about it is that if you look back over time we have been very consistent for the last several years in our definition of what we report as non-GAAP EPS.

And so, we have always had merger and integration costs, we have always had restructuring charges and we feel confident that between our disclosures and our consistency that we are providing the investors with the proper information. And that we'll just sort of monitor as time plays out as the SEC does their thing in terms normal course of quarterly and K reviews and see if we need to course correct. But at this point we feel comfortable.

Thank you all and see you next week.

Farha Aslam, Stephens.

Could we talk about the dog food portfolio and kind of how you think about the growth at Natural Balance, Nature's Recipe and Kibbles 'n Bits going forward?

Good morning, Farha, it is Barry, let me take that. First, you know as we entered into this fiscal year entered into this fiscal year our priority was to stabilize the Kibbles 'n Bits business. And I think we have demonstrated that we have done that. This last quarter we actually saw growth both in terms of volume and dollar sales. So we -- and we are really encouraged as we have focused on the fundamentals really of pricing against that brand.

We still think that that brand makes a lot of sense in our portfolio as we think about playing in every segment. So value with Gravy Train. We think about Kibbles 'n Bits as a mainstream brand. We think about Nature's Recipe as a premium brand and then Natural Balance as a super premium brand within the pet specialty channel. So that is how we think across the portfolio.

I just want to complement our team on the rollout of that Nature's Recipe launch. From decision time to shipment was 17 weeks. And the execution was just incredible. And I think that speaks to a great portfolio of brands, deep knowledge -- consumer insights and knowledge regarding our brand portfolio. And then our go-to-market capabilities and leveraging the scale of the broader Smucker organization. So that really came to light.

Just some commentary. Early days as far as the launch, that the Nature's Recipe brand is now on shelf. We have had some earlier indications from retailers that the product is performing at least -- even greater than expectations. And feedback we received from one retailer is 50% of the purchases so far are from consumers who did not shop the pet aisle previously in the grocery and the US retail channel. So it just speaks to the incrementality that we expect to see from that brand.

And then relative to Natural Balance, that is our flagship brand in Pet Specialty. With crossing Nature's over into the US retail channel allows us to be laser focused on that brand. And so, our Pet Specialty team is focused on growing that brand in that channel. We are launching some great innovation; at the end of the fourth quarter we will be bringing a high-protein limited ingredient offering which really speaks to the equity of Natural Balance.

And then from an e-com perspective, our sales of Natural Balance to the e-com channel are 50% greater than what we expected them to be this year. So, when we think about the growth opportunities with e-com and particularly with Natural Balance, we see a lot of upside there. So that is how we are thinking about the dog food portfolio.

That is helpful. And then just, again, follow up on Pet. Do you still see this Pet business as having the capability to grow in that 3% to 4% range when you bought the business now that you have repositioned the portfolio? Or should we think of it as a lower growth rate business maybe in that 2% range?

Yes, we are still confident in the growth expectations around the Pet business. Certainly 3% near-term; I think as we look at some longer-term opportunities when we bring some big bets from an innovation perspective. And then I spoke earlier about some bolt-on and enabling acquisitions, we think we will get back to that 4% to 5% longer-term. So, yes, still very confident regarding the growth opportunities about Pet. It is a great category to be in, we have amazing brands and so we do expect to see that grow.

That is helpful, thank you.

John Baumgartner, Wells Fargo.

Maybe a few for Barry. I would like to ask, sticking with Pet, can you quantify how much the pet supers channel declined in the quarter and your outlook for traffic there moving forward? And then maybe how much of the pressure in Natural Balance was due to anything that was more brand specific or execution-related relative to just the [inability] for growth in e-com to fully offset the declines in bricks and mortar?

Good morning, John, it's Barry. Let me just speak to the Pet Specialty channel. I think we all -- like our competitors, we all saw some declines in-store traffic especially this past quarter. And I think it was close to 5% declines in traffic across all the major retailers. So it is not unlike our competitors, I think that was part of the challenge.

We spoke to an ingredient issue. So with our Natural Balance product and our proposition we have some unique proteins. Unfortunately with one of those proteins in a lead item we have experience some such shortages. Our supply chain team is focused on replenishment and we will get back to a continuous supply I think probably by the end of the fourth quarter.

Okay. And then maybe just as a follow-up, can you speak to the influence of the natural value segment evolving in terms of -- how much of a headwind is that to the established brands such as Natural Balance? Is development of that natural value segment having more of an impact on the business than expected kind of going forward?

No. I don't think it is having a significant impact. No.

Thank you.

Akshay Jagdale, Jefferies.

I think it is for Steve and Mark. But just going back to your commentary on Coffee, very helpful how you are thinking about it. But can you help frame that entire sort of perspective or give us some perspective relative to sort of commodity cost movements and your long-term EBIT growth expectations for that business?

So basically over the -- before this quarter, the trailing six quarters before this you had significant growth in EBIT in that segment. It was double-digits, I think 12% on average, and you had lower commodity costs and you had the successful launch of Dunkin' helping you there.

So when you have commodity costs sort of rising should we think of a different growth algorithm than when commodity costs are coming down? And how does that really play through because it does seem to imply that when costs are going up for a period of time you are going to be sort of below what the normal EBIT growth rate for that business should be.

And I know you are saying you need to make a push or be better in innovation. Can you help us understand what you are doing there to be better? Perfect Measures is a good recent example where you thought it was a big bet and I guess it hasn't played out as well. So that is my question.

I would say a couple of things. I think volatility is more difficult in the short-term in our mainstream business then rising cost. We can manage rising cost and we have got a history of that, but when we have situations like we have where we have commodities spike for short periods of time, where we have got -- our own position and our competitive position have different cost structures of them. Then you see funds fall through in trade, funds fall through in different methods.

So I think that creates those difficult periods that you are referencing. I think over the long-term we are convinced we can -- with the mix of businesses we have, with the growth of our premium business, the cost reduction focus on our mainstream, over time we can give you that EBIT growth, especially once we get our K-Cup business to contribute at the levels that it used to when it first started. So we will get that back.

We have overcome -- and we haven't talked a lot about the different components like this before. We have overcome the price compression in the K-Cup business over the last year or two in the numbers that you reference. So, I think we will have some -- when we have periods like we just experienced where it is really volatile, we may have some tough quarters in the mainstream business. Generally price inflation or deflation, as long as it is consistent and over time, we can manage that.

So in periods like this you have got to look a little longer-term. And with regard to innovation, I think we have a portfolio now that is broad enough between the three segments that we can bring enough innovation to bear. Like I said in an earlier question, we are not giving up on our Folgers business, it has got great equity, it has still got 23 million households across the country. It has got the largest household penetration by far.

The number one premium brand has 8 million households, the total private-label K-Cup, the fastest growing part of K-Cups had 10 million households all brands combined. So the Folgers business is still a really important business, there is a large customer base out there. We have got some work to do to find the right insight, those things that target them. So we are not giving up on it, but we also have some other places to play both in K-Cups and premium.

In the interest of time I will pass it on. Thank you.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I would like to turn the call back to management to conclude.

Again, just wanted to thank all of you for your interest this morning. I know there is -- one of our peers is on their call right now, so thank you for your attention, thanks for listening. And we really look forward to seeing many of you next week at CAGNY. Have a great weekend.

Ladies and gentlemen, if you wish to access the rebroadcast after this live call you may do so by dialing 855-859-2056 or 404-537-3406 with a pass code of 44189768. This concludes our conference call for today. Thank you for all your participation. Have a nice day. All parties may now disconnect.