J M Smucker Co (SJM) 2015 Q4 法說會逐字稿

Good morning and welcome to The J.M. Smucker Company's fourth-quarter 2015 earnings conference call. At this time I would like to inform you that the conference is being recorded and all participants are in a listen-only mode.

(Operator Instructions)

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

Good morning everyone and welcome to our fourth-quarter earnings conference call. Thank you for joining us today.

Here with me on the call are Richard Smucker, Chief Executive Officer; Vince Byrd, Vice Chairman; Mark Belgya, Chief Financial Officer; Barry Dunaway, President, International and Chief Administrative Officer; Steve Oakland, President, Coffee and Foodservice; Mark Smucker, President, Consumer Natural Foods; and Dave West, President, Pet Food and Snacks.

Our prepared comments this morning will be organized as follows. Richard will begin with an overview of our fiscal 2015 performance and initial thoughts as we head into fiscal 2016. Vince will then provide color on the results for our business segments and Mark will close with additional comments on our fourth-quarter results and an overview of our 2016 outlook.

During this conference call we will make forward-looking statements that reflect the Company's current expectations about future plans and performance. These forward-looking statements rely on a number of assumptions and estimates and actual results may differ materially due to risks and uncertainties. I encourage you to read the full disclosure statement in the 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 our press release located on our corporate website at jmsmucker.com. Given the significant impacts of the Big Heart Pet Brands acquisition on our fourth-quarter and full-year results, a reconciliation of non-GAAP earnings per share excluding these impacts was provided in this morning's press release.

A replay of this call will be available on our website. If you have any follow-up 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.

Since the last time we spoke with many of you we announced two exciting milestones that have strengthened our business and support our objective of delivering long-term growth. First, we closed the Big Heart Pet Brands acquisition on March 23 ahead of our original schedule. I'd like to once again welcome Dave West to Smucker's as we look forward to his continuing leadership as President of the pet food business and as a member of our Board of Directors.

After the close our teams immediately hit the ground running with a focus on welcoming the Big Heart employees to our Company, gaining a deeper understanding of the business and beginning to execute on our integration plans. The more we learn the more excited and confident we have in the pet food business and its people and its fit with the Smucker Company.

Second, during the fourth quarter we expanded our partnership with Dunkin' brands and Keurig Green Mountain through agreements which provide us exclusive rights to distribute and market Dunkin' Donuts K-Cup in grocery, mass and other retail channels where our K-Cups are currently sold. Our initial shipments began May 1 and we've been extremely pleased with the customer and consumer response to date.

We anticipate Dunkin' Donuts K-Cups will be a key driver of top- and bottom-line growth for our coffee segment in fiscal 2016. We will share more on both of these topics during our call today.

Let me now provide a brief overview of our fiscal 2015 results. The challenges we have spoken to over the past two quarters in our coffee business resulted in total Company net sales and earnings per share performance falling short of our original expectations for the year. That said we still firmly believe coffee is a great category and expect to achieve mid-single-digit percentage segment profit growth in 2016.

We were pleased with the 2015 performance of our consumer foods segment which achieved record profit performance of $433 million this past year. Volume performance in the segment was led by Jif, Crisco and Smucker's Uncrustables brands with Uncrustables achieving its third consecutive year of double-digit volume growth in US retail. New product launches across our consumer foods portfolio also contributed to 2015 results.

In addition during the year we completed the acquisition of the Sahale Snack brand providing a new snacking platform that we look to leverage throughout our businesses.

Our international foodservice and natural foods segment was significantly impacted by foreign currencies along with the planned foodservice business rationalization. Despite these headwinds segment profit was comparable to the prior year. Further, we are encouraged by the third- and fourth-quarter trends for this segment and remain confident in the underlying businesses as we move ahead.

Looking at a few other accomplishments this past year our innovation pipeline continued to generate results as sales from products launched in the past three years contributed approximately 7% to our 2015 net sales. Products introductions this past fiscal year included Cafe Bustelo K-Cups, Jif To Go Dippers and Pillsbury Purely Simple baking mixes just to name a few.

We continued to invest in our manufacturing footprint to support future innovation and growth. Approximately $230 million in CapEx was spent in 2015 excluding the pet food business. Key activities included the completion of our new peanut butter facility in Memphis, Tennessee along with investments in our New Orleans coffee facilities.

While investing in the business we also remain committed to returning cash to shareholders. This past year we increased our quarterly dividend rate by 10% representing our 13th consecutive year of dividend growth and our 56th consecutive year of dividend payments. We enter fiscal 2016 as a larger, stronger and more diversified Company and we are excited about the opportunities that lie ahead.

While Mark will provide more details in our guidance for the year in a moment let me highlight a few focused areas for 2016. These include, first, integrating the pet food business and beginning to capitalize on the synergies and growth opportunities presented by this transaction.

Second, we are focusing our bigger growth opportunities that we've spoken to previously, particularly within coffee and the Jif, Smucker's and Uncrustable brands while we continue our innovation momentum across our key product lines including pet food. We are also strengthening our marketing efforts in support of these innovations along with the initial initiatives around our sponsorship of the 2016 Summer Olympic Games next year. And fourth, we're increasing our focus on our working capital efficiencies in order to meet our deleveraging activities.

Lastly, on October 20 of this year we will celebrate the 50th anniversary of Smucker's being listed on the New York Stock Exchange. In conjunction with this event we'll be hosting an Investor Day at the exchange. We'll provide more details as the date approaches and we hope to see many of you there.

In closing 2015 was a year of significant change for our Company, culminating with the largest M&A transaction in the Company history. We'd like to thank all of our employees for their hard work and dedication over this past year and once again I'd like to welcome all of the Big Heart team to the Smucker Company. Looking ahead we remain confident in our long-term strategy, the strength of our brands and our ability to deliver growth in 2016 and beyond.

With that I will turn the call over to Vince.

Thank you, Richard, and good morning everyone. I will begin by previewing the key points for our business segments.

First, fourth-quarter results for the base Smucker business were in line with the guidance we provided in February. Second, we continue to be pleased with the overall performance of our consumer foods and international foodservice and natural food segments. As expected, consumer foods' fourth-quarter results were softer than the prior year while international foodservice and natural foods had a strong finish to 2015.

Third, the competitive dynamics in the coffee remained a headwind in the fourth quarter, impacting volume and segment profit performance as anticipated. However, as we enter the new fiscal year we are executing our plans that will further strengthen our coffee business and remain confident in future growth.

Lastly, our teams have been hard at work developing the organization structure and plans for a successful integration of the pet food business. We remain excited about the potential of this business and are well-positioned to capitalize on growth and cost-saving opportunities.

With that I will provide some additional color on our segments starting with US retail coffee. Fourth-quarter volume trends declined sequentially from the third quarter reflecting continuing competitive dynamics in the category and consumer response to higher price points.

Promoted prices in the fourth quarter of the fiscal year were significantly higher than in the prior year given the underlying green coffee cost. However, behind the higher net pricing and favorable mix, net sales only declined marginally in the quarter compared to last year.

As we enter 2016 we expect the coffee segment to deliver both net sales and segment profit growth for the year. A few of the key factors supporting our confidence are as follows.

First, we expect to recognize lower green coffee costs as we proceed through the year which we have begun passing through to our customers and consumers in the form of lower promoted price points on the Folgers mainstream offerings. Second, we are on track to complete the conversion of our Folgers large can to a reduced canister size later this summer.

These cost savings will also be passed along to our customers and consumers resulting in a further improvement in price points. While we anticipate Folgers volume decreasing modestly as a result of the downsizing, units sold are expected to be up.

Third our Dunkin' Donuts K-Cups launch is off to a strong start. Our teams have done a great job executing our plans and we have received strong support from our partners, Keurig Green Mountain and Dunkin' Brands. Over time we project these offerings could double our current K-Cup business which approached $300 million in net sales this past year.

Fourth we have good momentum in our Cafe Bustelo brand driven by growth in the core mainstream canister as well as the K-Cups following the successful launch. Lastly, we remain committed to supporting the long-term health of our coffee brands. To that end, fiscal 2016 plans include resetting our marketing investments in support of our base business and new products, most notably our introduction of Folgers Perfect Measures in several lead markets.

Turning to our US retail consumer foods business we are pleased with this performance achieving 10% segment profit growth for the fiscal year. However, as expected segment profit was below the prior year in the fourth quarter. In fiscal 2015 both the back-to-school and holiday periods were some of the most successful in the Company's history.

Here are a few highlights by category. The Jif brand volume grew 2% for the year. With our cost position now improved we have better everyday price points and are seeing contributions from innovation such as Jif To Go Dippers.

Volume for the Smucker's fruit spread was in line with the prior year. Driven by our natural offerings we continue to gain both volume and dollar share in the latest 12- and 52-week periods.

Smucker's Uncrustables frozen sandwiches achieved a 13th consecutive quarter of double-digit volume growth and ended the full-year up 17%. The Crisco brand had a second consecutive strong year aided by moderating cost commodity cost. While competitive activity in the oils category has increased of late we are pleased with Crisco's overall performance for the year.

The baking category was challenged by shifts in consumer behavior and aggressive competitive pricing which has continued into fiscal 2016. Accordingly our Pillsbury brand was an area of softness in the consumer foods portfolio for the year as it performed in line with the category.

Lastly, during the fourth quarter we completed the integration of the Sahale Snacks acquisition. We remain focused on pursuing distribution opportunities for Sahale Snacks brand and are pleased with the initial results as we exceeded our 2015 sales projections for this business and look forward to a strong growth in 2016.

For the overall consumer foods business we anticipate lower commodity cost in 2016. We also look for innovation momentum to continue including product launches spanning all of our key brands. We have marketing initiatives planned to support these new products and overall brand equity.

Lastly we are pleased with our Memphis peanut butter facility, was completed on time and on budget providing additional capacity and flexibility to support future growth of the Jif brand.

The international foodservice and natural food segment achieved 10% segment profit growth in the fourth quarter following a 13% increase in the third quarter. Full-year 2015 net sales and segment profit were in line with the prior year. We are pleased with these results given the significant impacts of foreign currency and the planned rationalizations within our foodservice business.

As we enter fiscal 2016, the effects of foreign currency is expected to increase due to a weekend Canadian dollar versus the prior year. We are estimating incremental profit headwind of approximately $20 million or $0.11 a share for our Canadian business. As our underlying performance in Canada remains strong we look to build on the volume marketshare gains we achieved across nearly all of our categories this past year and pursue opportunities to offset the foreign currency challenge.

Within foodservice we have strong momentum with our Smucker's branded portion control offerings, Folgers roasted ground coffee and Uncrustables frozen sandwiches as we look for these trends to continue. Specific to Uncrustables we realized the initial benefits from reentering the USDA schools program in the fourth quarter and anticipate regaining the exited business over the next two years. Overall, our foodservice portfolio is well-positioned for profitable growth.

Lastly, in natural foods the strong performance of our branded beverage portfolio continued in the fourth quarter. For our truRoots brand more stability in quinoa cost has allowed us to improve our pricing position heading into fiscal 2016 and we expect trends in this business to improve significantly.

Finally, within the pet food segment Smucker's fourth quarter included approximately six weeks of operating results for Big Heart. Looking at the full fiscal year on a standalone basis and before purchase accounting adjustments net sales fell slightly below our 2015 projection of $2.3 billion and adjusted EBITDA was approximately $420 million to $430 million compared to our previous estimate of $450 million.

On the top line the shortfall was driven by softness in mainstream pet food due to a continued deflationary pricing environment. The lower than projected EBITDA primarily reflected marketing investments in the fourth quarter in support of brand building efforts for our mainstream pet food and pet snacks brands.

We also chose to invest in promotional support behind Natural Balance in advance of expanding the brand's footprint in the pet specialty channel which is scheduled to occur in the first half 2016. This expansion fuels our optimism regarding the growth prospects for our pet food business.

While we expect mainstream pet food to remain challenged by the current competitive dynamics we anticipate strong growth for both our pet snacks and premium pet food brands.

In addition to planned distribution expansion in the pet specialty channel innovation is expected to be a key contributor. Building on the successful launch of Milk-Bone Brushing Chews this fiscal year we are introducing Milk-Bone Good Morning, a line of daily vitamin treats for dogs and Meow Mix Irresistible, a line of cat treats.

We also look to leverage our recent launch of Wild Pursuit, an on-trend high-protein line extension for the Natural Balance brand. Further, we see growth potential for the pet food business in Canada as the brands are underindexed in this market compared to our US business.

As Richard indicated a significant focus in the near-term will be the seamless integration of the pet food business and beginning to achieve our synergy targets. Our collective teams have been actively reviewing business processes and learning from each other in order to identify and implement best practices. We are working to validate our initial integration assumptions and we'll finalize specific timing over the next couple of months.

In closing let me reinforce that we are excited about the initiatives we have in place to grow all of our businesses. We have great brands and what we believe is one of the best teams in the industry to execute on our plans. I will now turn the call over to Mark.

Thank you, Vince, and good morning everyone. Let me start with a few additional comments on the fourth quarter. I will then discuss 2015 cash flow performance and conclude with our 2016 outlook.

Fourth-quarter earnings were significantly impacted by several non-comparable items related to the Big Heart acquisition as noted in this morning's press release resulting in a reported net loss for the quarter. In the release we included a reconciliation of reported results to what our estimated non-GAAP earnings per share would have been excluding the acquisition and financing activities. This was done to provide a comparison of our annual performance to the updated annual guidance we provided in February which excluded any impact related to these items.

The reconciliations reflect fourth-quarter EPS of $0.98 and full-year non-GAAP EPS of $5.38 which was in line with expectations. Cash provided by operations was $222 million for the fourth quarter bringing the full-year total to $733 million. Factoring in CapEx of $248 million, free cash flow was $485 million for 2015.

We ended the year with $226 million in commercial paper borrowings and $5.9 billion in long-term debt with a combined debt of nearly $6.2 billion in pro forma EBITDA of approximately $1.5 billion for 2015. We ended the fiscal year with a leverage ratio of just over 4 times.

Turning to our 2016 outlook we anticipate net sales to approximate $8 billion driven by the addition of the pet food business along with organic growth. Profit contributions from the acquired pet food business, initial synergy savings and base business growth, particularly in the coffee segment, are expected to result in non-GAAP operating income in the range of $1.2 billion to $1.25 billion. Reflecting incremental interest expense and a higher weighted average share count we are guiding non-GAAP EPS to a range of $5.65 to $5.80 for the year.

It is important to note this range includes approximately $210 million or $1.15 per share of estimated noncash amortization for 2016. This compares to approximately $100 million, or $0.65 per share of amortization in our adjusted non-GAAP EPS for 2015 before the impact of the acquisition.

As the pet food transaction significantly increased our intangible assets and annual amortization expense we are going to emphasize earnings per share excluding amortization as an additional metric. We believe this supplemental information allows investors to better evaluate the Company's performance compared to our peers and provides a proxy for cash earnings per share which is important given the significant increase in the Company's debt position and our stated deleveraging objective.

To that end our 2016 guidance range would be $6.80, $6.95 excluding amortization. Assuming the midpoint of this range this would represent an approximate 15% increase over the comparable EPS measure for 2015.

Let me provide further color on specific components of our 2016 guidance. Included in our net sales outlook is approximately $2.4 billion of total pet food sales. For the remaining business we anticipate organic sales growth of approximately 3% with Dunkin' Donuts K-Cups and other new products being key contributors.

We anticipate net commodity cost to be favorable primarily due to lower green coffee cost beginning in the second quarter of the fiscal year. However, the continued weakness in the Canadian dollar is expected to result in higher cost of goods sold for international business.

Overall we anticipate gross margin of approximately 37% in 2016. We estimate that SG&A will be approximately 19% of net sales. In addition to expenses associated with the pet food business we anticipate increases related to refitting our marketing and our incentive compensation budgets.

Regarding synergies we continue to project a total of approximately $200 million on a run rate basis by the end of fiscal 2018. We are focused on achieving these cost savings by leveraging our scale as an $8 billion Company and recently engaged a well-regarded consulting firm with significant expertise in this area to help us maximize the results of these efforts.

While we remain confident in achieving our overall synergy target within our initial time frame we are being thoughtful in the process to ensure a successful integration. As a result we have included a synergy estimate of approximately $25 million in our operating income guidance for 2016.

Below operating income net interest expense of approximately $180 million is anticipated reflecting our current debt structure and expectations of interest rates and debt repayments. Our guidance range assumes an effective tax rate in line with 34.1% rate for 2015 and lastly a weighted average share count of 119.7 million shares was used reflecting a 15% increase over fiscal 2015 due to shares issued in connection with the pet food acquisition. We do not anticipate any repurchase of shares in 2016.

We expect much of the EPS growth over the prior year to be back-half loaded due to several factors. These include the timing of the synergy recognition, green coffee cost decreasing through the year, the impact of unfavorable FX weighted toward the front half of the year and finally a strong first quarter but a softer second half in fiscal 2015.

Looking briefly at the segments much of the 2016 profit growth will come from the full-year addition of the pet food business. We anticipate the remaining segment profit growth to be driven almost entirely by an estimated 5% to 6% increase for the coffee segment.

Consumer foods segment profit will be impacted by overhead related to the new Memphis facility in 2016. However, future growth of our Jif business is expected to absorb these additional costs over time.

Segment profit for our international foodservice and natural food segments will be impacted by foreign currency headwinds of approximately $20 million or $0.11 per share which is expected to mostly offset gains in the underlying businesses of this segment.

We project free cash flow will approximate $850 million for 2016 using the midpoint of our EPS guidance range. In addition to previously mentioned amortization expense key drivers include depreciation and share-based compensation expense of approximately $250 million, restructuring and merger integration costs of approximately $110 million of which half are expected to have a cash impact, capital expenditures of $200 million and lastly we are exploring opportunities to improve our working capital efficiency as part of the previously noted consulting project. We anticipate this may provide some upside to our free cash flow estimate for 2016.

As we've indicated previously we intend to apply a significant portion of our future free cash flow to meet our deleveraging objectives. Given the recent changes in our Company and the new management structure announced in late fiscal 2015 we are currently evaluating the related impact on our reportable segments. To the extent this evaluation results in any changes to our segments we intend to file a Form 8-K this summer announcing any such changes and recasting prior-year results to reflect the new reporting structure.

Further regarding the leadership changes let me briefly summarize how we intend to handle the questions specific to business segment results on today's call. While the changes were effective in April the individuals who oversaw the segment for the majority of the past year will take the lead in addressing the questions. Specifically Mark will cover coffee, Vince for consumer foods, (technical difficulty) for international foodservice and natural foods and Dave of course will address questions related to the pet food business.

And also as a reminder we will be participating in a consumer industry investor conference in Paris next Wednesday. If you would like to listen to our presentation the live webcast will be available through our Investor Relations website.

With that we will open up the call to your questions. Operator, please queue up the first question.

(Operator Instructions) David Driscoll, Citi.

Thank you, good morning. I wanted to start off with the pet food business. Can you tell us what's the expected EBIT margin for Big Heart in 2016 and then in addition can you talk about the plans for Natural Balance?

We see the Natural Balance brand on the PetSmart website and I'm pretty interested in that. Would love to understand what kind of growth you expect in the brand and just simply what's the promotional program that you have tied in with these events?

Dave, I'll start. This is Mark Belgya. And then I will let Dave cover the business.

Specific to the question on EBIT we're not going to provide that. We wouldn't typically do that for any of our other businesses.

What I would say is and I think we may have said this back when we acquired the business that obviously it is a good profit business at a gross margin level, we said we're going to be all in at 37% for the year. And their business clearly will help support that growth from what we had this past year.

Good morning, David how are you doing? And respect to the Natural Balance you know we've completed the acquisition a little bit more than a year ago so we are in the process now of evaluating the strategy for the business on a forward basis.

We want to make sure that consumers who shop in pet specialty or independent channels have the opportunity to buy the Natural Balance brand wherever they are shopping. It's not unusual for brands in pet specialty and independent pet to start in one place and then move across the channel over time. So our focus for Natural Balance and the strategy building the brand is to get it across the channels wherever consumers want to meet the brand.

So we're pretty confident that expanding the distribution footprint at this point more broadly is the right thing to do both for the consumers and the brand franchise health. We recognize the unique nature of programming in the channel. In the prepared comments Vince mentioned that we in the fourth quarter we were spending some promotional dollars and what we're really doing across the retail landscape in pet specialty and independent is making sure the brand has the right kind of awareness and saliency and programming as we expand.

So we really are comfortable about doing it. You will see it in the first half of the year.

We value the relationships with all of the retailers across pet specialty and independent. And I'm not going to get into specifics but you will see unique programming and unique assortment across the channel. With the Natural Balance brand our goal is to have it available everywhere by the end of the year.

And if I could ask one question on coffee, Richard, just kind of big picture coffee profits were down something like 14% in 2015 but you guys are giving guidance of up mid single digits. So like on its own mid single digit sounds good but when you look at the decline in 2015 that's not so good.

What's your opinion here of what's happening within your coffee operations? Why only a partial recovery here? Are you satisfied with what's happening in coffee?

This is Richard. I'll start and then I will turn it over to Mark and Steve to talk about next year. A couple of things.

One is first of all we recognize in the first quarter we're going to be challenged because we still have some high cost coffee and so our margins in the first quarter aren't going to be where we'd like them to be. So most of the gain is going to come in the last half of the year. So if you were looking on a full-year basis it's probably almost a double-digit gain but not over because of the first quarter and partly in the second quarter you won't see that this year.

But it will probably take us, it took us about 18 months to get where we are. It will probably take us 12 months to get back but it's going to be in the last half of the year. But it's still a great business.

It still great margins. Our raw material costs are coming back in line. Our pricing on the retail shelf is getting much better.

And so I think you're going to definitely see that. But you're going to see the pricing early in this year but our margins will actually benefit us in the latter half of the year.

Yes, I guess -- this is Mark Smucker. I would just point out too, David, that the prior year was clearly a record year, a year that truly the stars all aligned, we had all of the tailwinds we needed.

Going into this year we are in the fourth quarter we saw probably the largest gap year over year in terms of commodity cost. And so those will moderate as we go forward but as Richard pointed out the moderation is really more significant after the first quarter.

Well and to pile on here, Steve Oakland. The other thing I think we look out there's some exciting innovation in this category for next year. And so we've returned the marketing to more historic levels and we're investing in the lead markets for Perfect Measures.

We think that's the first real innovation in roasted and ground in a number of years and we want to make sure that we have enough spending to drive that. Additionally you're going to see some tailwind behind the Dunkin' K-cup launch and that's off to a fantastic start but again we're going to make sure that's funded as well. So we're going to make sure that the marketing budgets behind both of those key initiatives assure their success.

Thank you.

Eric Katzman, Deutsche Bank.

Good morning everybody. I should say Bonjour.

I guess one of the questions that seems to be being pinged to us is the synergy target that you talked about at CAGNY for this coming year versus the $25 million that you listed today. Is the difference A&P spending in pet or is there something else explaining that difference?

Hi, Eric, it's Vince. Let me start. A couple of things.

First of all we remain comfortable with our $200 million target over three years. Given what's going on in our industry by a couple of CPG companies we felt we needed to take pause and as Mark said in his formal remarks engage a well-regarded consulting firm in this space to really challenge our cost structure across our new $8 billion Company.

So that along with trying to ensure that we leverage the best practices of both companies as opposed to maybe just integrating into the existing Smucker model has forced us to take pause on some of our original assumptions as it relates to integration. So accordingly although we feel very comfortable at this point with the $200 million we felt it was only prudent to reduce the year-one guide to ensure we met our guidance down to the $25 million.

I would also say that as Mark said in his prepared remarks, though, we're also looking at a working capital objective, too, that we feel very comfortable with. So the bottom line is it's just a matter of timing at this point and we feel very comfortable over the long-term of achieving the $200 million.

Okay. And then I guess maybe this is to Mark, so I wasn't really thinking about a $0.10 FX headwind from Canada and then maybe there's another, the difference I guess maybe versus consensus and where you're guiding to is also tied to the dissynergies. Is that kind of the way to think about the differences versus maybe consensus?

Yes, Eric. Let me walk through because you basically hit it. If you do look at what consensus is out there I think there's four pieces of the puzzle of which three probably offset.

In our scripted comments we talked about what our annual estimate for amortization interest are versus where we were a couple of months ago. So that actually they were both positive so that's ballpark-ish about $0.14 or $0.15.

If you take the synergy impact that's about $0.14 to $0.15 going the other way. So that's kind of a wash.

So what remains or that other fourth item is really the Canadian FX. So it is $0.11, $20 million. The anticipation is we'll be able to offset some of that.

There's initiatives being put in place but obviously those have to pan out over time and those will be back half. So I think the way you've described it is exactly how we would suggest where the street might be versus where sort of the mid- to upper part of our range would be for our guidance.

Okay, thank you. I will pass it on.

Chris Growe, Stifel.

Hi, good morning. I just wanted to ask if I could on the consumer foods business in some of the areas where you've taken some more aggressive pricing actions in relation to the input costs being down, oils and peanut butter in particular, we've seen relatively soft volumes.

I was surprised by that here in the fourth quarter. So I wanted to get a sense of your reaction to that or how is that promotional inefficiency that's occurring there? And then your expectations for fiscal 2016 in that division, should we see that volume softness persist?

Chris, this is Vince. Let me just say that overall we're very happy with our results of our peanut butter business in 2015.

First of all we grew core volume and innovation contributed to some of that growth and we brought up a brand-new facility in our fourth quarter which was on time and on budget. So I would say from first from a macro perspective we're very happy with the peanut butter business.

You may recall we were upside down on some peanut costs from two years ago. Those costs are back in line and we feel comfortable where our pricing is and our margins going forward. The issue is what we're talking about Mark in his formal remarks about our consumer business being down is a direct result of the incremental overhead costs that we will be experiencing from the Memphis facility.

But there was some softness in the fourth quarter. But we really don't anticipate that trend continuing into the new year and plan to grow the peanut butter business.

Yes, this is Mark Smucker here. Just to build on what Vince said, we do think we have some really nice plans in place for the fall period coming up. And we do expect, particularly in the peanut butter area as well as in the fruit spreads with new products and focus on the core, we should be able to continue to grow those businesses.

Thank you. Just a quick question if I could on Dunkin' K-Cups. So do those ship then would that have been in the first quarter of fiscal 2016?

Was there any benefit in the fourth quarter is my question then. Vince, you made a comment about the size of this business potentially perhaps significantly increasing your overall K-Cup exposure. It indicated a pretty significant potential increase I guess is what you were saying there.

I'm just curious kind of the backdrop for that assumption. Could it be $300 million-plus in sales would indicate a pretty substantial marketshare of the K-Cup segment. So just curious on your comments there.

Hi Chris, this is Steve again. Yes we are very excited. They started shipping May 1 and when we say May 1 it was like 12:01 a.m.

Our customer base was really excited about it and in fact within a week it was on display and on feature ad across its core markets. So the Dunkin' brand is so strong and the idea to have that at home in a K-Cup format has been well received so far by the trade and by the customer.

So we think it does have the potential to reach somewhere close to the numbers you quoted. And we think we're not sure if we'll get all of that this year or if it will take an extra year. Just there's timing of major retailer resets and those kinds of things but I can tell you that all the retailers are finding space for it and it's on the floor.

Another exciting thing I think as we look forward is the opportunity to merchandise the entire Dunkin' line. The margins, when you have three parties in an agreement, aren't the same as they are when there's just two. So the bag business will benefit from this, all those things will benefit from it. So we're excited about this being a driver for the whole Dunkin' business across Smucker.

Okay, thank you for your time.

Ken Goldman, JPMorgan.

Hey, good morning everybody. A question, I'm a bit confused and if you addressed this, forgive me, but I'm curious why your coffee costs aren't coming down a little more quickly this year. You no longer break this out, but you used to talk about the average lag between stock beans and when they hit your numbers being around four months. Coffee has been very cheap since pretty early this year. It's been over four months.

So I'm just asking, I guess, is it safe to say you locked in beans at unfavorable prices for a bit longer than usual, or maybe I'm missing something? But why are you not getting that benefit right away this year?

Hey, Ken, it's Mark Smucker. As you know, we haven't really talked about our position. Our coverage philosophy hasn't really changed significantly, but I kind of go back to a comment we made earlier just that in the fourth quarter we were experiencing some of our higher costs. And we're not seeing -- we're not getting down to market rates until probably sometime in the second quarter.

We have though, Ken -- this is Steve Oakland -- we have been able to lean in for the first quarter. And I think if you look across the promoted pricing across the trade literally today, you will see promoted pricing well below what we had in the fourth quarter and the trade merchandising around that.

So I think you'll see sequentially better pricing in the first quarter, and then I think it will get -- between the downsized container which gives us even more room, you'll see even better pricing as we go into the rest of the year.

Okay, and then one follow-up. In recent months we've seen some pretty large food manufacturers, Kraft and Nestle, talk about improving the product quality of some core items.

Kraft is taking out artificial colors from mac & cheese. Nestle has really talked about removing salt and I think sugar from a lot of items across the board. Is doing something similar at all a priority for Smucker?

Because one of the pushbacks I hear is that some items in the product portfolio, jams, peanut butter, there's a lot of sugar in those items. And the bears on the stocks will tell me look these are just not necessarily in line with where better-for-you trends are going.

So I kind of agree with that statement a little bit and I'm curious what you guys are doing to take these core items? Not line extensions, but the basic big SKUs that you sell and maybe say you know what, can we improve the product quality a little bit and take some of the not so good items for you out of it?

Well, we've been doing that for the last three to four years. So for example just first on trans fat, we've basically have taken trans fats out of all our products.

In fact even Crisco about four years ago we took trans fats out of Crisco. It used to be the poster child for trans fats and now it's without trans fats.

Also in every single line product that we're in we've added new products. For example in the baking isle we have Purely Simple this year which is a very simple ingredients in our baking mixes and the Pillsbury baking mixes. So we've done it in every category.

If you think about the categories that we're in peanut butter has always been there's not a lot of sugar in peanut butter to be perfectly honest. It's very high-protein. There's a little bit but there's not a lot, never has been.

Fruit spreads we just came out with a line of fruit spreads sweetened with honey which we just came out with a couple few months ago and that's actually being very well received by the consumer. So actually you see a lot of our innovations throughout being driven by better ingredients, simpler ingredients and those have contributed in total about 7% of our sales this past year. And we're trying to do that in our main line, too, but and most of our main line whether it's coffee or peanut butter are pretty good products for you.

In fact coffee has got a new halo and the more coffee you drink it's better for your health and we like to see those reports that come out and those medical studies. So we feel really good about our portfolio and those products that we can improve in terms of simplifying ingredients we are but we're pushing in those areas.

Okay. Thanks very much.

You know, Ken, I would just add of course we have a whole natural foods division and plays in this space every day that has been growing fairly significantly over the past few years. And of course their focus is on both natural and organic offerings. So I think we feel pretty good about our positionings.

I appreciate that.

Jason English, Goldman Sachs.

Hey, good morning folks. Thanks for the question.

I wanted to start with the top line. 3% organic would be a pretty impressive achievement in context of the last couple of years. Can you talk about maybe the volume and price contributions that you're expecting from that?

Yes, Jason this is Mark Belgya. A couple of thoughts.

On volume of course we always have this kind of ongoing discussion because of the breadth of our portfolios and whether you're talking flour or K-Cup. But I think a couple of comments around volume.

Volume will be impacted a little bit by the previously mentioned downsizing of the Folgers canister. So while we expect volume as measured in tonnage decline there obviously growth in the K-Cup goes on a favorable mix for us. And also we would expect units of Folgers in a downsized canister to grow.

So volume is a wash there if you will. Clearly the top-line growth coming from mix/new products. So Dunkin' K-Cups and just the innovation we talked about in each of the business areas will contribute significantly to that 3% growth rate.

So we feel pretty good about it because the products, particularly a fairly large portion of those are either in markets like K-Cups Dunkin' today or will be soon to get the full-year benefit of those.

In context of easing input costs across your portfolio do you expect to be able to hold prices or do you plan to give it back as you typically have in the past?

Jason, as we have done every year I mean we will evaluate the situation on a case-by-case basis. But typically we are transparent with our pricing and we'll pass those cost savings on or whatever we need to do to meet competitive -- the competitive landscape.

All right. So probably a little bit of price give back in one form or another, a little bit of volume and a fair amount of mix contribution. Is that the right way to think about it?

Yes.

Great, thanks a lot. I will pass it on.

Alexia Howard, Bernstein.

Good morning, everyone. Can I ask about competitive dynamics in the pet food business? I think you mentioned in the prepared remarks that that's given you some pressure.

It looks as though the sales year on year we done quite a bit across the pet foods business. I'm just curious about what you're seeing there, when you expect the sales growth to stabilize and whether you're worried that as the category premiumizes that some of those mainstream brands will get left behind. Thank you.

Thanks, Alexia. We did have in the mainstream part of the portfolio particularly in dry food there was some deflationary pressure. We've seen corn and the soy complex come down and that's been pass-through.

In the third quarter when you look at third-quarter results we had some sharper price points in-market both on an EDLP basis and on a promoted basis. In the fourth quarter we had a little bit less with respect to promotional dollars and we floated some price points up and that's where you see some of the decline in the fourth quarter. When you look at a 52-week share particularly in dry dog for example our business was roughly flat in share for the 52-week period.

So we had some softness in the early part of the year. We changed our promotional strategy in the third quarter and then kind of backed off of that in the fourth quarter.

So across the year we held our share and as you look forward into the next year we certainly believe that we're going to have pricing strategy that holds our share for the year. So it's deflationary. In terms of relevance of those brands those are pet food in the mass market is a huge category.

It's a traffic drawing category for retailers. It gets a lot of focus from them with respect to space so it's going to be relevant.

Obviously we want to have brands that are affordable and accessible to all so whether it's Gravy Train and Kibbles 'n Bits in dry dog food and some mass outlets all the way up to Natural Balance in the new line extension we have which is Wild Pursuit which has high protein sources you can buy pet food anywhere from $9.99 to $59.99. And it's a consumer choice model and we play across the entire portfolio. So I think we remain relevant and the categories are really relevant to all consumers.

Great, thank you. And I guess just as a quick follow-up so in terms of when those negative prices stop playing out year on year does that happen in the next couple of quarters and should we expect to see sales fairly flat year on year from there on out? Or maybe even growing a little bit?

Yes, my preference is to not talk about forward pricing policy and the way we're thinking about it from competitive dynamics I don't think that's appropriate. We're going to do what we need to do to protect our share.

What I think while the mainstream food business is certainly under some deflationary pressure we're really very pleased about the premium pet specialty business as we continue to expand our portfolio across the channel and our dog snack and cat snacks business we've got great new

line extensions. We expect very strong growth in both the pet snacks business as well as in the pet specialty businesses. So across the portfolio we feel good about the growth rates and the growth targets that we've talked about.

Great, thank you very much. I will pass it on.

Robert Moskow, Credit Suisse.

Hi, thank you. You might have covered this briefly already but lowering your synergy targets this early into the acquisition, I know you haven't lowered the long-term target, but can you just give me a little more detail as to what specifically it is causing the synergies to be lower in the first year and explain a little bit more why we should feel confident that the $200 million is still going to be intact and maybe not get pushed out?

Robert, this is Vince. We did address that I think it was the first or second question. I guess I would just reiterate a couple of points.

First of all we feel comfortable with the $200 million. The primary reason for the postponement is that we took pause and hired a well-regarded consultant given what's going on in our industry and felt that we needed to look at our cost structure across the $8 billion new Company enterprise.

And that along with some of the learnings that we've had to date coupled with the fact that we wanted to ensure that we were acknowledging best practices by both companies rather than just integrated into the Smucker Company as we have done business, all of those things just postponed some of the integration activities. And so at this point we chose to be maybe a little more conservative or significantly more conservative in our year-one target. But there's been no learnings at this point that would suggest that we can't still achieve the $200 million.

Robert, this is Richard. I will just add to that and just our confidence in the $200 million.

We have strong confidence in the $200 million and the fact we've done a number of integrations of acquisitions before. And the most important thing is that you do that integration right in the first 12 months. And our cautious nature as you know us if we think we can do an integration better by pushing some of those synergies back by we're talking about $25 million from one year to the next but it makes a better integration, that you have a better team in place and that you have better programs in place we're going to do that. So it's maybe our conservative Midwest nature but we think it was the right thing to do but we're very confident that we're going to hit the number.

But can I ask has this consulting firm given you some advice about changes in how you integrate the business already that makes you think that maybe we should be slowing things down a bit?

Well, we're going to learn a lot from we're just in the middle of the work with them. And in fact we actually brought them in a little late because we said hey, we're not just looking at Big Heart here we're looking at the entire Smucker Company. So we're looking across $8 billion not just across $2.5 billion.

So that I guess backed us up maybe a month or two but it's all for the right reasons. It's going to get us better more confident numbers and get us probably a better integration. And we do when we look at integration if there are reasons to change how we're doing it for all the right reasons we do that.

So we've learned a little bit. And they are actually looking at best practices across all the consumer goods companies and they are going to bring -- they are bringing some good learnings to us.

Okay, I will leave it there.

John Baumgartner, Wells Fargo.

Good morning, thanks for the question. I just wanted to ask about coffee in terms of the Dunkin' bags, the volume decline there was pretty significant and I guess it coincides with the McCafe rollout and maybe similar to what we saw a few years ago when Gevalia came into the market.

So did the performance there or maybe inability to defend that, how can that be improved at all? And is there a reason to think that maybe the bag performance for Dunkin' is down in 2016?

Yes, John this is Mark Smucker. I will start.

So a couple of things, and this is a theme across all of our legacy Smucker businesses. And that is as commodities moderated across many of our categories we chose to pass along some of that moderation in the front half as in promotional spending and you saw a number of pricing, list pricing adjustments in the back half. In the case of Dunkin' specifically that would have been the case so we were very competitive in the front half but as we were continuing to realize elevated green coffee costs we chose to pull back on promotional frequency in the back half knowing full well that the McCafe was coming in.

If you look at our share trends and you go back on an annualized basis if you look at the 52-week trends you will see that in our Dunkin' business we are still holding volume share ahead of two years ago and expected a bit of a decline here in this last quarter. So I think -- and even though you have Gevalia coming in and they have gained call it a 5 or 6 share we have held onto our position.

And so as Steve said as well going forward very early reads on K-Cups. It looks like that K-Cup business is also helping to pull along the bag business as well. But we feel very good about the Dunkin' brand and our future prospects.

The only thing I would add, John, this is Steve, is that with McCafe's launch the other probably the largest premium coffee company was very aggressive. And so there was a lot of noise in that segment in the last four- to six-month and so I think as that settles out the merchandising gets back to normal and the new leverage we have with K-Cups I think we'll see a little better trends. But the pricing from the biggest guy in that segment has been lower than what we've seen in the past and I think that was to compete with the new entry of McCafe.

Okay. So is it fair to think that Dunkin' bag the sales there will be up in fiscal 2016?

Yes, we would expect growth.

Okay, great, thanks Mark.

Akshay Jagdale, KeyBanc Capital Markets.

Good morning. So I just want to ask a quick question on coffee. Can you give us an overall view of share trends and roast and grounds, the various segments in fiscal 2015 and what you expect in 2016?

Obviously on the K-Cup side we've seen a stabilization in your sales. But you've lost a couple of points a share over the last couple of years. And the part of the business that I really would like you to focus on from a share perspective is roast and ground, it's been really unusual movement there.

So can you just talk a little bit about where you ended up in fiscal 2015 in terms of share trends and what your expectations are in 2016? Because the business is setting up to what I think have a pretty good year.

So Akshay it's Mark Smucker. I will start. So it goes back to the comment on the last question, if you look at whether it's mainstream roast and ground or the bagged premium roast and ground, in both cases we tend to look at volume share in those and that's IRI.

There was a question earlier that we pointed to the fact that in our record year of fiscal 2014 we had achieved share that was about 47%, 48% in the mainstream segment only. As we did see erosion in this past year I can assure you that our shares basically came back to the levels they were in the prior year which would have been our fiscal 2013.

So the declines you saw in the business as we've talked over the last couple of quarters the shift to K-Cup is sort of as expected in sort of low-single-digit numbers. But the declines particularly in our roast and ground business in the back half of the year were a little bit more due to the absolute price point and some switching to other roast and ground players including private label. So bottom line in both of those roast and ground segments I think having our share remained at or above two years ago we feel that we're in pretty good shape going forward.

And if we talk if we jump to K-Cups clearly with all of the noise in K-Cups our business grew in total dollars but we didn't grow nearly as fast as the category and so we lost share in K-Cups on a growing business. Having said that we think the numbers we talked about earlier we have a significant opportunity with Dunkin' K-Cups. So we would expect the fastest share growth of our business this year will be in K-Cups.

So just going back to Mark so do you expect roast and ground to gain share? I mean you've got this new packaging which is in line with your competitor, lower price points.

Is it fair to expect that you should gain share in roast and ground and in the bag segment at least maintain your share? And obviously in K-Cups it seems like you should be gaining share. Is that the right way to think about it?

Yes it is. Yes we feel good about the merchandising, price points, sizes. Dollar share will be better than volume share because of the downsize but we expect units to be up significantly this year.

Okay, and just on the pet food side you mentioned two factors that drove the sales and EBIT for the fiscal year to be a little bit lower that you had expected. Can you talk specifically about the two factors?

You mentioned one was marketing which is good for future growth and the other was promotional dollars. I'm wondering if the promotional additional promotional expense is more defensive or offensive and why, can you talk a little bit about why the plan changed on the marketing side to spend more?

Is it just timing or something more strategic? Thank you.

With respect to let me just say with respect to pricing we have in all of our businesses across the pet portfolio we have elasticity models and we monitor our price competitive price gaps and there are certain trigger points that we reach in certain channels. And so we spend appropriately we think to defend our share in particularly in the dry dog food business. So there's going to be periods of time given that it's an EDLP category pricing tends to move around a lot more at shelf in that business than you might see in others because it's much more of an EDLP business.

So it doesn't typically move the same way as you'd expect a high low category to move. So we think we can defend our share and feel good about the brands. We were encouraged as we started to think about putting the two businesses together by a couple of programs that we had in market and in place.

And with early conversations as we brought the two companies together we decided to accelerate some marketing spending particularly behind new products in pet snacks. And so and also as we ready our portfolio in pet specialty to expand our Natural Balance distribution footprint. So we think we've made some very smart investments as we closed the year which will help us grow those businesses into F16.

Okay, I'll pass it on.

Farha Aslam, Stephens.

Hi, good morning. When you look at innovation and marketing in your business this year outside of the Dunkin' K-Cups, could you share with us your new product activity scale this year versus last year and any particular area that you're focusing on that we should think about in terms of baking, consumer, etc.? And then also the same how much would you say your marketing budget is up and where would that be concentrated?

This is Mark Belgya. I will just answer the last part of that question.

Overall and if you look at just I will call it just base Smucker it is up low double digits for the Company. And as we talked about throughout the past fiscal year we were trimming marketing budgets across the business so I think it's fair to say that all the brands have reestablished their marketing spend to more historical level. So I don't think it's concentrated in one area.

And our innovation pipeline is pretty full right now. Last year we introduced over 100 new products. We have that same type of goal this coming year and all of those I think I spoke to earlier a lot of them are around healthy alternatives for the consumer right along with consumer trends.

So we have and that's also in pet food too. So we're continuing that, as I said 7% of our sales last year are from new products we didn't have three years ago. So we expect that to continue.

We're also entering snacking in a big way, not just the Sahale acquisition certainly helped but we have a number of snacking items not only in the pet food side but snacking in peanut butter, our Jif To Go. We now have a new line of Jif bars which are actually outstanding. So we're pushing on all those areas and so innovation is really key to us and healthy innovation is really key to us.

Yes, this is Mark Smucker. Just to build on Richard, it is about clean labels, launching products with cleaner labels. It is about snacking and I would submit that in every given year it's not about the number of new products that we want to launch, it's about making sure that we launch the right new products.

So some years we may choose to focus on fewer bigger ideas. Perfect Measures we believe might be one of those and so we're focused there. Another years there's more what we would call maybe horizon one innovations but again it's all about priorities.

You know, there's been a couple of articles recently as we've all seen about processed foods and the challenge processed foods are under but our portfolio we feel very good about. We're in categories coffee obviously has a good halo about it and is a staple that everyone uses every day. Peanut butter is one of the lowest cost proteins you can possibly have. And so we think we're in a lot of good categories that go against the grain which in this day and age is where we want to be.

And maybe I will close on that. The lead markets for Perfect Measures will ship late summer.

And that's a concept that we've spent a lot of time and a lot of money on, research and development. And we want to make sure that we get the right read on that. So the marketing spend even though it's a lead market launch will be at national weight levels.

So that's one of the reasons we talked earlier about the marketing spend returning to coffee and where some of that spend is going but we want to get the right read on that and then determine how fast to pour investment in. So we feel good about that. It will ship it this summer and if we get the results that we're hoping on we will roll it as quickly as we can.

That's helpful. And just as a follow-up, incentive compensation, what's the swing year over year that we should think about in Smucker's?

It's about $0.06 to $0.07. Well actually it's about $0.05 to $0.06. $0.05 to $0.06.

Thank you very much.

Rob Dickerson, Consumer Edge Research.

Okay, great. Thanks a lot. I just had a question on free cash flow, didn't really hear much focus on it on today's call but I think it is important.

The key question I have is I think originally you said when you announced the Big Heart pet transaction that the cash from ops on average should be about $1.1 billion over the next three years, so 2016 to 2018, but then at the same time it should be increasing on average each year. So then when I look at your free cash flow projection for 2016 which is $850 million or approximately a 75% increase from this year's level and you're telling me that cash from ops should be about $1.05 billion, leaving CapEx at $200 million I step back and say okay, well is there upside to the $1.1 billion guidance on average that you gave originally from cash from ops or should we be thinking that CapEx in 2016 is just let's say a bit low relative to what we should be thinking about for 2017 and 2018?

So overall I'm just looking for color for your free cash flow guidance over the next three years. Thank you.

Hey, Rob, this is Mark. A couple of things here. One is and I'll point this out in terms of this year's free cash flow I think it is important to realize some of the debt cost and those deal costs are flowing through there. So that would be a little artificially low but specifically your question, I think there is upside opportunity for cash from operations.

I will push it out a little bit. I will say maybe more a three- to five-year window as Vince suggested as part of this consulting project we are looking at working capital. So we do think that the expectation is that we generate some cash from operations from that perspective.

As it relates to CapEx if you just do the numbers this year is about 2.5% which is clearly below our longer-term objective of 3% to 3.5%. And I don't think I'd read anything else more into that other than we have concluded a number of significant projects.

We over the last five to six years we've spent just on our plants about $800 million. A lot of those we talked about over the last several quarters on conference calls.

So we've reached to a point where those are complete. We're sort of in run model with either brand-new plants or virtually new plants.

So we're still sticking to our 3% to 3.5% of sales over time so that will increase from this year but nothing dramatic. So our hope is that the upside comes from the working capital management project. And we will see a bump over the next three to five years.

Okay, great. Then just quickly on the synergy side the $25 million projected for this year obviously is a bit short to what you said earlier and I know there's a question that was asked earlier about it. The tone today seems like a bit, people become incrementally nervous because you cut the short-term guidance expectation but then you're also telling us that you're hiring a consulting firm that you're currently working with that is looking at the integration but also then looking at the entire business.

So I guess if we say okay the $200 million still seems feasible longer-term, it's just a timing issue then what about the rest of the work that that firm is doing? Is this an overall profitability, the entire ship rises even though the synergy number long-term stays the same? Thanks.

I'll start and maybe look to Vince or Richard. I think first of all that the hiring of the consultants I think as Vince said in light of today's world we just thought it was very prudent to take a step back and not make the assumption that we're going to layer this business onto existing Smucker.

We've been very impressed with the process and people as we've interacted over the last two months we've owned the business. And I kind of reinforce we've owned this business for 10 weeks but we have spent every day of those 10 weeks learning more about this. So again I don't think I'd read anything more into the delay.

Ideally there may be some upside. We're still too early into the project to say that. I think the important thing for the investor to hear is that we are confirming the $200 million.

If there is upside we'll talk about that in the days to come but again it's really the timing issue. At the end of the day we're pushing $25 million into next year and the year after that. In short of that we will tell you more when we get to that point.

Okay, great. And then lastly very simplistically, when does the lockup period end for your private equity ownership interest?

I'm sorry Rob, we had a little hard time -- could you just repeat that please?

I thought there was a specified lockup period for the ownership that was transferred by a stock on the Big Heart pet piece. I just wanted to clarify that's the case and if there is a period that's locked up if you just tell me when that expires.

It was the 90 days following the close. So that was what March 23 so yes, we're getting close here.

Okay, great. I will just leave it at that. Thanks a lot.

If there are no other questions I just want to thank everybody for being on today. We look forward to seeing everybody sometime next week or somebody next week in Paris and then when we do our 50th anniversary in October in New York we'd love to see as many of you there as possible.

So thank you very much. Have a great summer.

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