smucker (jm) (sjm) earnings report: q4 2016 conference ... · welcome to the j. m. smucker...

CompanyName:JMSmuckerCoCompanyTicker:SJMSector:ConsumerGoodsIndustry:Food&Beverage

EventDescription:Q42016EarningsCallMarketCapasofEventDate:15.88BPriceasofEventDate:144.1215

©2014TheStreet,Inc.Al l R ightsReserved Page1of30

Smucker(JM)(SJM)EarningsReport:Q42016ConferenceCallTranscriptThefollowingSmucker(JM)conferencecalltookplaceonJune9,2016,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

AaronBroholm;JMSmuckerCompany;InvestorRelationsRichardSmucker;JMSmuckerCompany;ExecutiveChairmanMarkSmucker;JMSmuckerCompany;President&CEOMarkBelgya;JMSmuckerCompany;CFOVinceByrd;JMSmuckerCompany;ViceChairmanSteveOakland;JMSmuckerCompany;President,USFoodandBeverageBarryDunaway;JMSmuckerCompany;President,PetFoodandPetSnacks

OtherPart icipants

AndrewLazar;BarclaysCapital;AnalystDavidDriscoll;Citigroup;AnalystChrisGrowe;StifelNicolaus;AnalystKenGoldman;JPMorgan;AnalystJasonEnglish;GoldmanSachs;AnalystAlexiaHoward;SanfordC.Bernstein&Co;AnalystMarioContreras;DeutscheBank;AnalystPabloZuanic;SIG;AnalystMatthewGrainger;MorganStanley;AnalystAkshayJagdale;JefferiesLLC;AnalystGregoryNep;StephensInc;AnalystChuckCerankosky;NorthcoastResearch;AnalystRobDickerson;ConsumerEdgeResearch;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheJ.M.SmuckerCompany'sfourthquarter2016earningsconferencecall.

(OperatorInstructions)

IwillnowturntheconferencecallovertoAaronBroholm,VicePresident,InvestorRelations.Pleasegoahead,sir.

AaronBroholm(InvestorRelations):

Goodmorning,everyone.Thankyouforjoiningusonourfourthquarterearningsconferencecall.

WithmetodayandpresentingourpreparedremarksareRichardSmucker,ExecutiveChairman;MarkSmucker,PresidentandChiefExecutiveOfficer;andMarkBelgya,ChiefFinancialOfficer.AlsojoiningusfortheQ&AportionofthecallareSteveOakland,PresidentUSFoodandBeverage,andBarry




Dunaway,PresidentPetFoodandPetSnacks.VinceByrd,ViceChairman,isalsoonthelinefromanotherlocation.

Duringthisconferencecall,wewillmakeforward-lookingstatementsthatreflecttheCompany'scurrentexpectationsaboutfutureplansandperformance.Thesestatementsrelyonanumberofassumptionsandestimates,andactualresultsmaydiffermateriallyduetorisksanduncertainties.

Iencourageyoutoreadthefulldisclosurestatementinthismorning'spressreleaseconcerningforward-lookingstatements.Additionally,pleasenotetheCompanyusesnon-GAAPresultsforthepurposeofevaluatingperformanceinternallyasdetailedinthepressrelease,whichislocatedonourcorporatewebsiteatjmsmucker.com.

Asweindicatedearlierinthecalendaryear,wearetransitioningtoonenon-GAAPearningspersharemetricin2017,whichexcludesnon-cashintangibleamortization.WewillrefertothisasadjustedEPS.

Amortizationexpensewillalsoberemovedfromourdefinitionofsegmentprofit,aswellasnon-GAAPoperatingincome,andnetincome.

WewillfileaForm8-Klaterthisquartertorecastprioryearsegmentresultstoreflectthenewdefinition.

Wehavepostedtoourwebsiteacoupleofsupplementaryslides,includingabridgefromourFY16resultstoourFY17adjustedEPSguidance.Theseslidescanbeaccessedthroughthelinktothewebcastofthiscall.Thisdocumentandareplayofthiscallwillbearchivedonourwebsite.

Ifyouhaveanyquestionsaftertoday'scall,pleasecontactme.

IwillnowturnthecallovertoRichard.

RichardSmucker (ExecutiveChairman):

Thankyou,Aaron.Goodmorning,everyone.Thankyouforjoiningus.

FY16wasadynamicandexcitingyearfortheSmuckerCompany,asourteamsdeliveredonanumberofkeystrategicinitiatives.Theseincludedsignificantlyimprovingtheperformanceofourcoffeebusiness,reflectinglaunchoftheDunkin'DonutsK-Cups,andreturningmomentumtoourmainstreamcoffeebusiness,expandingdistributionforourNaturalBalancepetbrand,executingaseamlessintegrationofthepetfoodbusiness,exceedingoursynergyandworkingcapitaltargetsfortheyear,divestingourUScannedmilkbusiness,allresultinginrecordfinancialperformanceandearnings,andcashflowthatexceededourexpectations.

Letmeexpandontheresultsfortheyear.Netsalesincreased37%to$7.8billion,reflectingthefullyearcontributionofBigHeartpetbrand.Excludingacquisitions,divestituresandforeignexchange,salesincreased3%forthefullyear.

Non-GAAPoperatingincomewasup49%to$1.28billion,withthecontributionsfrompetandstrongcoffeesegmentprofitgrowthbeingthekeydrivers.Non-GAAPearningspersharewere$6.57includingaone-time$[0.42]persharenon-cashbenefit.Thiscomparestoourmostrecentguidanceof$5.84to$5.94whichexcludedthetaxbenefit.

Lastly,theCompanygeneratedfreecashflowof$1.26billionwhichiswellaboveouroriginalestimate.Reflectingthisstrongcashflow,weexceededourdeleveragingobjectivefortheyear,reducingtotaldebtbynearly$750million.Wealsoreturnedover$750millionofcashtoshareholdersintheformofsharerepurchasesanddividends.

Therewerenumerousaccomplishmentsduringthepastfiscalyear,andthisperformanceisatestamentto




thededicationofouremployees,andwethankthemfortheircontinuedefforts.Wearewell-positionedtocontinuethismomentumintoFY17.

Sincethelasttimewespoketomanyofyou,weannouncedseveralexecutiveappointmentsthatareconsistentwiththeCompany'shistoryoflong-termsuccessionplanning,andthedevelopmentofleadershiptomeetthecurrentandfutureneedsofourbusiness,andtheconstituentsthatweserve.EffectiveMay1,MarkSmuckerassumedtheroleofPresidentandChiefExecutiveOfficer.MarkandhisexperiencedleadershipteamembodythevaluesthathavecontributedtotheCompany'ssuccessandlong-termgrowth.Iamconfidentthatundertheirdirection,theCompanywillcontinuetoinnovate,evolve,andgrowintheyearstocome.

ItsbeenanhonortoserveasCEOoftheSmuckerCompany,andIamgratefultohaveworkedalongsidethemosttalentedteamintheindustry.IwillcontinuetoservetheCompanyasExecutiveChairman.Amongotherareas,myeffortswillbefocusedonBoard-relatedmatters,counselandadviceonstrategicdecisions,enhancingcustomerrelationships,andadvancingourindustryleadershipefforts.MybrotherTimhasbeenappointedtotheroleofChairmanEmeritus,andwealsolookforwardtohiscontinuedcontributions.

Lastly,IwouldliketorecognizeVinceByrd,whoisparticipatinginhisfinalearningscall,ashisretirementafter39yearswiththeCompanyiseffectivetomorrow.Vince'scontributionshavehelpedshapetheCompanythatwearetoday,andwillcontinuetobereflectedinthenumerousemployeesthathehasmentoredthroughouthiscareer.

Withthat,I'llturnthecallovertoMark.

MarkSmucker (President&CEO):

Thankyou,Richard.Goodmorning,everyone.

Asyouknow,ourCompanyisunique,inbeingledbyonlysixCEOsinits119-yearhistory.IamhonoredtosucceedRichardasCEO,andserveasastewardofthisgreatCompany.

RichardhasledourCompanythroughaperiodofsignificantexpansionandstrategictransformation.Asaresult,ourCompanyisstrongerthanever.Iamexcitedtoleadourtalentedteam,leveragingthecontinuedcounselofRichard,Dad,andouroutstandingBoardtodrivecontinuedgrowthandshareholdervalue.IalsowouldliketoechoRichard'scommentsaboutVince,andthankhimforhiscontributionsandmentorship.

Thefocusofmycommentstodaywillbetoprovideanupdateonourbusinesssegments,includingadditionalcoloronfullyear2016performance,andinitialthoughtsonFY17.I'llstartwithourcoffeebusinesswhichfarexceededexpectationsfortheyear.Netsaleswereup8%andsegmentprofitincreased18%to$646million,representingafullrecoveryofthesegmentprofitdeclineintheprioryear.ThisoutperformancewasdrivenbyseveralfactorsincludingthesuccessfullaunchofDunkin'DonutsK-cups,theimplementationoftheplannedFolgerscanisterdownsize,amoderationincompetitiveactivities,andthenetbenefitoflowercommoditycostsandpricing.

ProvidinglowerpricingonFolgersroastandgroundcoffeeresultedinimprovedperformanceforourmainstreamcoffeebusinessin2016.Tonnageforourmainstreambrandswasup3%,whileunitsshippedwereupevenmore,giventhecanisterdownsizeearlyinthefiscalyear.Inaddition,ourdollarsharewithinthemainstreamsegmentofthecoffeecategoryincreasednearly2sharepointsto55%forthelatest52weekperiod.

Weanticipatemomentuminthecoffeebusinesstocontinuein2017.KeyinitiativesincludeFolgers'




sponsorshipoftheUSOlympicteamfortheupcomingRiogames,withmarketingactivitiesalreadyunderway.Inaddition,lastmonth,weimplementeda6%listpricedeclineacrossmuchofourcoffeeportfolio,reflectingsustainedlowergreencoffeecosts.Theselowercostshavebeenreflectedinpromotionalpricingforthepastseveralquarters,andwedonotanticipatepromotedpriceschangingsignificantly.

WithregardstoFolgersK-Cups,in2016thebrandwasimpactedbytheongoingproliferationofentrantsintotheK-Cupspace,includingourintroductionofDunkin'K-Cups.Thisyear,wewillinvestfurtherintheproductlinetoimprovetrends,includinglowerpricingandnewpackagingthatwillleveragetheiconicFolgersredcanbrandequity.

TurningtotheDunkin'Donutsbrand,Dunkin'K-Cupsachievednearly$220millioninretailsalesforthelatest52weekscanperiod,andgaineda6%dollarshareoftheK-Cupmarket,givingusanoverallshareofnearly15%intheK-Cupsegment.

Initsfirstyearonthemarket,theDunkin'DonutsoriginalSKUhasbecomethenumberoneK-Cupiteminthechannelsinwhichweparticipate.Asconsumerrepeatratesremainstrong,andwithopportunitiestointroduceadditionalvarieties,weanticipatefurthergrowthin2017.

Whilechallengedformuchof2016,performanceimprovedforDunkin'Donutsbaggedcoffeeduringthefourthquarter.Supportedbyfavorableinputcosts,wehavesharpenedpricingtoimprovegapstokeycompetitorsandwelookforpositivevolumetrendstocontinue.Lastly,withincoffee,theCafeBustelobrandexperiencedasecondconsecutiveyearofdouble-digitsalesgrowthbehindstrongperformanceforbothroastandgroundandK-Cupofferings.Thisexcitingon-trendbrandremainswell-receivedbymillennials,anditsgrowthisexpectedtocontinuealsoin2017.

Turningtoconsumerfoods,netsalesdeclined3%fortheyear,mostlyduetolappingsalesfromthedivestedcannedmilkbusiness.Segmentprofitwasflattoprioryear,supportedbythegainonthemilkbusinesssalewhichoffsetplannedincreasesinmanufacturingoverheadcosts.

Lookingbrieflyatthekeybrands,wearepleasedwiththeoverallperformanceofourspreadsbusiness,asbothJifpeanutbutterandSmuckersfruitspreadsgrewvolumeshareoverthelatest52weekperiod.Inaddition,SmuckersUncrustablesfrozensandwicheshadanotherstrongyear,withvolumeup26%includinga17thconsecutivequarterofdouble-digitvolumegrowthinthismostrecentfourthquarter.

On-trendinnovationcontinuestobeafocusareafortheiconicJifandSmuckersbrands.InFY17,welooktobuildonrecentsuccessfullaunchessuchasSmuckersFruit&HoneyFruitSpreadsandJifsnackbars.Thisincludestheupcomingintroductionofnewsnackbarvarieties,andplanstoexpandintoothersnackingplatforms.Inaddition,Jif,Smuckers,andUncrustablesareallparticipatinginthe2016Olympicsponsorship,whichwillbeanintegralpartofthisyear'smarketingeffortsforthebrand.

Inthebakeaisle,theoverallcategoryremainschallengedthroughoutmuchofthispastyear,reflectingchangingconsumerpreferencesandaggressivecompetitivepricing.Ourfocusremainsonprovidingvalue-addedinnovation,suchasourrecentglutenfreeandsimpleingredientofferings.WearealsoexcitedtoannouncealicensingarrangementwiththeGirlScoutsofAmerica.Underthisagreement,wearelaunchingnewPillsburyitemsfeaturingiconicGirlScoutcookieflavors.

Withinnaturalfoods,ourleadingR.W.KnudsenfamilyandSantaCruzorganicbrandsbothachievedsolidsalesgrowthin2016.Thekeynaturalfoodscategoriesinwhichourbrandsparticipatearegrowing,whichgivesusconfidenceinmaintainingourmomentuminthisbusiness.WearealsoexcitedaboutourrecentinvestmentintheNumibrand,andtheopportunitiesthisprovidesintheorganicteacategory.

Underourfirstyearofownership,petfoodssegmentprofitof$392millionwasgenerallyinlinewithexpectations.Netsalesof$2.25billionfell1%shortoftheprojectionsprovidedatourOctoberInvestor




Day,duetocompetitivechallengesinmainstreamdrydogfood.Fortheyear,mainstreampetfoodsalesdecreasedmidsingle-digits,reflectingdouble-digitdeclinesindogfood,andalowsingle-digitdeclineforthelargercatfoodbusiness.Offsettingthelowermainstreamsaleswasthestrongperformanceofourpetsnacksbusiness,whichwasupmidsingle-digitsovertheprioryear,andourpremiumpetfoodbrandswhichgrewdouble-digitsbehindexpandeddistributionoftheNaturalBalancebrand.

Asweenter2017,weanticipatecontinuedgrowthforNaturalBalance,aswelaunchthebrand'sfirstnationalmarketingcampaignalongwithadditionalin-storesupport.Withinpetsnacks,innovationfortheMilk-BoneandtheMeowMixbrandswerekeycontributorsto2016results,andweexpecttosee--tobuildonthesetrendswithnewproductintroductionsthisfiscalyear.

Wealsocontinuetofocusonopportunitiesinmainstreampetfood,drivenbyconsumerpreferenceforadditionalproteinandnaturalingredients.Lastlywithinthesegment,weareexcitedaboutourpartnershipandplannedin-storeactivitiesrelatedtotheanimatedfilm,theSecretLifeofPetswhichwillbeintheatresnextmonth.

Turningtointernationalandfoodservice,wearepleasedwiththefullyearresultsdespitethesignificanttopandbottomlineimpactsofforeigncurrency.Reportednetsaleswereinlinewiththeprioryear,astheadditionofthepetfoodbusinessandthebenefitofhighernetpricinginCanadaoffseta$[60]milliontoplineimpactrelatedtoforeignexchange.Segmentprofitwasup12%,mostlyattributabletofoodservice.

TheintroductionofSmuckersUncrustablesintoschoollunchprogramscontributedtothisgrowth.ThestrongunderlyingperformanceofourCanadianbusinesswasmostlyoffsetbytheimpactofforeignexchange.

Letmeconcludewithanupdateonourintegrationandcostsavingsactivities.WesuccessfullyachievedourMarch1integrationmilestoneforthepetfoodbusiness,andrecognizedjustover$35millioninsynergiesfor2016.Inaddition,wehaveclearvisibilityandconfidenceinrealizinganincremental$100millioninsynergiesthisfiscalyear.

Intotal,thiswouldprovideapproximately$135millioninsynergiesfor2017.Lookingahead,weremainconfidentinachievingouroriginalgoalof$200millioninannualsynergiesbytheendofFY18.

Inadditiontothe$200millionofsynergies,wearetargeting$50millionofincrementalannualcostsavingstobefullyrealizedoverthenextfewyears.Relatedprojectsincludefurtheroptimizingourmanufacturingfootprint,asoverthenext18monthswewillcloseacoffeefacilityinHarahan,Louisiana,andtwoleasednaturalfoodsfacilitieslocatedinLivermore,California,withproductionbeingconsolidatedintoexistingoperations.Inaddition,wearenearlycompletewithanorganizationalredesignaimedatfurtheroptimizingcorporateresourcescontributingtothiscostsavingstarget.

Weexpecttoinitiallyinvestmuchoftheseincrementalsavingsinseveralidentifiedareas.Wewillcontinuetoprioritizeinvestmentsthatgeneratetopandbottomlinegrowthforkeyon-trendplatforms.InFY17,theseincludeopportunitiesrelatedtoSmuckersUncrustables,coffee,andsnacks.

Wearealsoestablishinganewgrowthinnovationorganization,whichisbeingledbyamemberofmyleadershipteam.Thegroupisbeingtaskedwithfurtherbuildingcapabilitiesrelatedtoconsumerandmarketinsights,digital,innovation,targetedmarketdevelopmentstrategiesforourcustomers,includingpricingandtradespendoptimization.Lastly,weplantoinvestinnewgrowthopportunitiestoexpandourpresenceinChina.

Inclosing,2016wasahistoricyearforourCompany,andIwouldliketothankouremployeesfortheirefforts.Asweenter2017,keyprioritiesincludeachievingoursynergygoals,buildingonourproduct




innovations,activities,andinvestinginnewcapabilitiestoenhancefuturegrowth.Overall,weremainconfidentinourlong-termstrategy,thestrengthofourbrands,andourabilitytodelivershareholdervaluein2017andbeyond.

IwillnowturnthecallovertoMarkBelgya.

MarkBelgya(CFO):

Thankyou,Mark.Goodmorning,everyone.

Iwillbeginbyprovidingcommentaryonourfourthquarterresults,followedby2016cashflowperformance,andendingwithour2017outlook.Weconcludedthefiscalyearwithstrongfourthquarterearnings.

Non-GAAPearningspersharewere$1.86forthequarter,includingaone-time$0.42persharenon-cashdeferredtaxbenefitrelatedtotheintegrationofBigHeartintotheSmuckerCompany,aswaspreviewedduringourthirdQuartercall.

Thisstrongfinishtotheyearwasmostlyattributabletocoffee,includinghigherthananticipatedvolumeacrossourmainstreamandpremiumcoffeebrands,andafavorablepricetocostrelationship.

Thecomparisonoffourthquarterearningsbetweenyearsissignificantlyimpactedbyone-timeitemsreportedineachoftherespectiveperiods.Theseincludethedeferredtaxbenefitinthecurrentyear,aswellastheBigHeartacquisition,andfinancingrelatedactivitiesintheprioryear.Asaresult,theremainderofmyfourthquartercommentarywillbefocusedonthebusinesssegment.

Beginningwithcoffee,fourthquarternetsalesgrew9%,asfavorablevolumemixof13%wasonlypartiallyoffsetbylowernetpricing.SalesfortheDunkin'Donutsbranddoubledovertheprioryear,withK-Cupsdrivingmuchofthisgrowth.Double-digitgainsforbaggedDunkin'Donutscoffeealsocontributed.FortheFolgersbrand,netsalesdeclined5%attributabletolowernetpricerealization.Andlastly,CafeBustelosaleswereup28%,asthemomentumforthisbrandcontinued.

Segmentprofitincreased$43millionor39%.Werecognizedlowergreencoffeecostsinthequarter,whichwerepartiallyoffsetbylowernetpricing.Inaddition,highervolumemixmorethanoffsetincreaseinmarketing.

Turningtoconsumerfoods,netsaleswereup5%excludingtheimpactofthecannedmilkdivestiture,withgainsacrossthemajorityofourkeybrands.SalesforJifgrew14%behindhighervolumeandnetpricing,whiletheSmuckersbrandwasup3%asUncrustableshadanotherstrongquarter.

Inthebakeaisle,salesforCriscoincreased6%drivenbyhighervolume.Andlastly,salesforthePillsburybrandwereupmodestly,ashigherpricerealizationoffsetvolumedecline.

Segmentprofitdeclined6%,mostlyattributabletolappingtheprioryearearningsofthedivestedmilkbusiness.Plannedincreasesinmanufacturingoverheadcostsalsocontributed,reflectingthenewpeanutbutterfacilityinMemphis,aswellasunderabsorbedoverheadcostsrelatedtoourworkingcapitalinitiatives.Thesefactorsoffsetlowermarketingexpense.

NetsalesforourUSretailpetfoodssegmentswere$[563]million.Weestimatethisrepresentsanapproximate3%increasecomparedtotheprioryearfourthquarter,ofwhichsixweekswerereportedunderourownership.Salesforourpremiumpetbrandsgrewlowdouble-digitsdrivenbyNaturalBalance,whilepetsnackssalesincreasedinlinewiththeoverallsegment.

Mainstreampetfoodssaleswereflatcomparedtotheprioryear,asgrowthinourcatfoodbrandsoffset




declinesindogfood.Petfoodsegmentprofitwas$117millionforthequarter.Asexpected,werealizedasequentialincreaseinsegmentprofitmarginfrom17%inthethirdquarterto20.7%thisquarter,primarilyreflectinglowermarketingexpense.Incrementalsynergyrecognitionalsocontributed.

Netsalesforinternationalandfoodserviceincreased1%inthequarter,reflectingthehighervolumemixinfoodservice.InCanada,theadditionofpetfoodwasessentiallyoffsetbytheimpactofFX.Segmentprofitwasup8%overtheprioryeardrivenbyourfoodservicebusiness,partiallyoffsetbytheimpactofforeignexchangeinCanada.

Freecashflowwas$295millionforthequarter,bringingthe2016totalto$1.26billion.Theoutperformancecomparedtoourmostrecentfreecashflowguidanceof$975millionwasattributabletoexceedingour2016workingcapitalimprovementtarget,lowerthanprojectedCapExspending,afourthquartertaxrefundof$53millionwhichisseparatefromthedeferredtaxadjustmentimpactingearningsandhighernetincome.

Expandingonourworkingcapitalinitiatives,in2016werealizedthemajorityofourfinishedgoodsinventoryreductiongoalof$200million,nearlyayearaheadofschedule.In2017,weexpecttoachievetheremainderoftheinventoryreductiontarget,alongwithmodestworkingcapitalimprovementsrelatedtoaccountspayableandreceivables,allofwhicharefactoredintoour2017freecashflowoutlookIwilldiscussinamoment.

Weendedtheyearwithdebtof$5.4billion.Basedon2016EBITDAof$1.58billion,ourleveragestoodat3.4timesatApril30,areductionfrom4.1timesatthebeginningoftheyear.

Inadditiontoexceedingourdebtpaydowntargetfortheyear,wewereabletorestartsharerepurchaseactivities,aidedbythestrongfreecashflowandproceedsfromthedivestitureofthemilkbusiness.

Duringthefourthquarter,werepurchasednearly3%ofsharesoutstandingforapproximately$430million.In2017,thelowersharecountwilloffsettheEPSimpactoftheeightmonthsoflostprofitrelatedtothedivestedmilkbusiness.

Turningtoour2017outlook,weanticipatereportednetsalestodecreaseby1%comparedtotheprioryear,aswewilllapapproximately$150millionofsalesrelatedtothemilkdivestiture.Excludingthisimpact,netsalesareprojectedtobeup1%.Favorablevolumemixacrosseachofthesegments,includingthebenefitofnewproductsisexpectedtobemostlyoffsetbylowerpricinginUSretailcoffeeandFXinCanada.Approximately$25millionoftheincremental$100millionofsynergiesfor2017areexpectedtobenefitgrossprofit.

Overallcommoditycostsareanticipatedtobelower,however,ourCanadianbusinessisestimatingaCOGSheadwindof$20millionrelatedtoFX,ofwhichaportionisexpectedtobeoffset.Asaresult,weexpectgrossmargintoapproximate39%in2017.FurtherSG&Aexpensesareprojectedtobecomparabletotheprioryear.Thisreflectsthebenefitofincrementalsynergiesrelatedtoheadcountreductionsandotheradministrativecostsavings,offsetbyincreasedmarketinginsupportofrecentlylaunchedproducts,ourOlympicsponsorship,innovationandregulatoryexpenses.

We'reprojectingnon-GAAPoperatingincomegrowthof4%in2017,comparedto$1.465billionintheprioryear,whichexcludesamortization,andtheprioryeargainonsaleof$25million.Further,excludingthe$32millionofprofitinlastyear'soperatingincomerelatedtothedivestedmilkbusiness,thegrowthwouldbe6%.

Belowoperatingincome,weexpectnetinterestexpenseofapproximately$165millionandataxrateof34%.Andlastly,aweightedaveragesharecountof116.6millionshareswasusedbasedoncurrentsharesoutstanding.




Factoringinallofthis,weareguiding2017adjustedEPSintherangeof$7.60to$7.75,whichexcludes$1.18pershareofestimatednon-cashamortization.Includingtheamortization,thisyieldsarangeof$6.42to$6.57comparedtoa2016baseof$6.Thisresultsinyear-over-yearincreasesrangingfrom7%to10%.

Asillustratedonthedocumentpostedonourwebsite,wederivethe$6.00EPSfor2016,bysubtractingthe$0.42deferredtaxadjustmentandthe$0.15milkgainfromourreportednon-GAAPEPSof$6.57.WeanticipatemuchoftheEPSgrowthfortheyeartobeweightedtowardthemiddletwoquartersofthefiscalyearduetocertainfactors.Lastyear'sfirstquarterincludedthelaunchofDunkin'K-Cups.

Alsowithincoffee,thisyear'sfirstquarterwillbeunfavorablyimpactedduetotimingassociatedwiththefullquarterimpactofthepricedecreasetakeninJulyof2015,alongwiththeadditionalpricedeclinetakeninMayofthisyearascomparedtotherecognitionoflowercosts.Otherfactorsimpactingquarterlycomparisonincludethetimingofsynergyrecognition,thetimingimpactrelatedtotradespendrecognitiononaquarterlybasis,andfinally,thefourthquartercomparisontothisyear'sstrongfourthquarterfinish.

Lookingbrieflyatthesegment,coffeeprofitsareprojectedtobecomparabletotherecordFY16levels.Forconsumerfoods,reportedsegmentprofitisexpectedtobedown,giventheprioryeargainonthemilkdivestitureandthelostmilkprofit,butupmidsingle-digitswhentheseitemsareexcluded.Petfoodsegmentprofitisalsoprojectedtobeupmidsingle-digits,reflectingincrementalsynergiesandorganicgrowthincludingthecontributionsofnewproducts.Andlastly,internationalandfoodserviceisanticipatedtobedown,primarilyreflectingnetimpactofFXinCanada.

Weprojectfreecashflowwillapproximate$1billion,fromwhichweplantopaydowndebt,andfurtherreduceleverageto3.1timesbytheendofthisfiscalyear.Thisassumesprojected2017EBITDAof$(1.6)billion.Additionalassumptionsrelatedto2017includeamortizationexpenseofnearly$210million,depreciationof$215million,share-basedcompensationexpenseof$35million,capitalexpendituresof$240million,andlastly,one-timecostsof$100millionwhicharemostlycash-related.

Inclosing,weareverypleasedwithouroverallperformancein2016,asitmarkedamemorableyearinourCompany'shistory.Itiswiththismomentumandexcitementthatwelookforwardtoexecutingourplansfor2017,asweremainfocusedondeliveringcontinuedgrowth.

Wethankyouforyourtime,andwewillnowopenupthecallforyourquestions.

Operator,ifyouwouldpleasequeueupthefirstquestion?

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

AndrewLazarwithBarclays.

AndrewLazar (Analyst-BarclaysCapital):

Goodmorning,everybody.


Goodmorning,Andrew.





Aquickoneforme,inthinkingabouttheunderlyingEPSgrowthguidanceforFY17,asyoupointedoutit'sroughly7%to10%orso.AndyoutalkedaboutbaseEPSgrowthinthe10%range,Ithinkfor2017and2018.SoI'mjusttryingtogetasenseofwhatleadstothat8%atthemidpointtypeofgrowthrange?

Isitjustconservatism,isitcoffeeoutperformedprettydramaticallythisyear,andthereforeweneedtojusttailorthatalittlebitinourexpectationsfor2017,orthingsthatIhaven'tmentioned?

Justtryingtoputthatinperspective.

MarkBelgya(CFO):

Hey,Andrew.ThisisMarkBelgya.Thanksforthequestion.

WhatIwouldsayis,Mark,andIthinkwereiterated,wewilldeliverthe$100millioninsynergies.Wehaveaclearlineofsightonthat.Wherewelandinthat8%is,wearehavingasignificantincreaseinmarketingspendforthecomingyear,obviouslywiththesponsorshipoftheOlympics,andreestablishingsomeofthemarketingspendfromthisyear.Sothatisthebiggestdriver.

Ithinkintermsofthecoffee,Iwouldputthatmoreinthecategoryofwherewemightlandintherange.Obviously,wedidhaveastrongyear,andweneedthingstocontinue.Wefeelgoodaboutthat,butthat'sprobablyafactorthatcomesintoplayalittlebit,aswell.AndthentheotheroneprobablytoalesserdegreeisjusttheFXimpact.AsImentioned,we'rehavingabouta$20millionheadwind,andwehopetocoveratleasthalfofthat,butthere'salittlebitofthateffectin,aswell.


Gotit.Thanksforthat.Andthenjustaveryquickone.

Inoticeddistributionexpense,Ithinkasapercentofsaleswasmuchlowerthanitistypicallyisthisquarter.Justtryingtogetasenseofwhythatis,andisthatamoresustainablelevel?

Thankyou.

MarkBelgya(CFO):

Andrew,whatthatmightbeiswearealigningtheBigHeart--basicallytheBigHeartP&Lwherecertainthingsfallin,coststhatprobablywereconsidereddistribution,mighthavejustbeenmoved.Butwecanfollow-up,ifthere'ssomethingsignificantlydifferentfromthatresponse.


Thankyou.

Operator :

DavidDriscollwithCitigroup.

DavidDriscoll(Analyst-Citigroup):

Great,thankyou,andgoodmorning.


Goodmorning.





Richard,congratulationsonyourretirement,andMarkwhatabigday.Congratulationshereforyou.AndIguess,itwasMay1,butforusitfeelsliketoday.Socongratulations,andVince,allthebest.

VinceByrd (ViceChairman):

Thankyou.


Iwantedtoaskafollow-uponAndrew'squestionontheguidance.

SoMarkadifferentwaytolookatthiswouldbetosaythat$100millionofsynergies--Ithinkthatnumberalonegetsyousomethinglike$0.57ashareinincrementalEPSbenefitin2017.Andthatgetsyoutokindofthetopendoftherange.Somaybecouldyoutrytoanswerjustslightlydifferently,andjustsaythatifsynergiesgetsyoujusttothetopendoftherange,doesn'titsuggestthattherestoftheoperationsarereallyonbalanceflattish?

Iknowthere'sasharecountbenefit,there'samilk.There'smilkdilutionthatgoesoninthere.Butitstilljustseemsliketheunderlyingexpectationofthecoreexthesynergiesisbasicallyflat.

MarkBelgya(CFO):

Yes,David,it'sinterestingbecausewe'veobviouslywentthroughthatsamelineofthought.AndthewayIwoulddescribeitis,thatyou'reexactlyright,the$100millionisa$0.57delivery.Themarketincrease,Iwilltellyou,isasignificantincreasethere.Weareupsowefeelverycomfortabletobeabletoinvestwithmarketingdollarsbackinthebusiness.Sothere'salittlebitofadiscussionhereonwhetherornotthebusinessisflatfromaperformanceperspective,orit'sflatbecausewe'veinvestedinthemarketing.Wewouldchoosethelatter,sayingthattheMarketingincreaseisoffsettingsomeofthattosomedegree.

Theotherthingis,IthinkMarksuggestedinhisscriptedcommentsisthatwearealsoinvestingininnovationandgrowth,andalsoinChina.So,obviouslythosedollarsareembeddedinthebusinessportionofitwhenyoujustseparateitbetweensynergyandnon-synergy.Soyoucandrawtheconclusionthatitiscomingfromthebusiness.Butthosearethetwoorthreefactorsmarketing,innovationandinvestmentinChina,andalittlebitofFXasImentionedthatarereallybringingthatnumberbackdown.


Okay,andformysecondquestion,oncoffee,backatyourAnalystDay,andIbelieveStevehadsaiditwillbeuntillike2019beforetheCompanyrecoveredtheprofitabilityseenin2014.Ithinkasoftoday,you'vealreadyrecoveredtheprofits.Sothere'stwosubtlequestionsinhere.Whydidthisoutperformsomuchrelativetotheexpectation?AndthenwhatIreallycareabout,ishowdoesthisimpactgoingforward?

Imean,youhadaverydifferentoutlookonhowprofitsweregoingtomoveinthisbusiness.I'mnotcomplainingbytheway,thisisreallywonderfultheprofitsareupsomuch.ButIthinkweallthenworry,thatthemassiveoutperformanceincoffeeprofitsin2016,willsomehowretardtheabilityofprofitstogrowin2017.Wasthatclear?

SteveOakland (President,USFoodandBeverage):

IthinkitisDavid.Hi,SteveOakland.

Let'stalkaboutthecoffeebusinessbriefly.Ifyouthinkaboutthenumbers,wedidgetthereayearortwoaheadofwhatweguided,right?Andwegotthereontwothings,really.Andthemostobviousoneisthis,




thelaunchofDunkin'Kcups,andweallknowthatwasoneofthebestlaunchesinconsumerproductsinthelastfiveyears,right?Sothatwasawonderfulperformance.

Butreallymoreimportantly,financiallyifyoulookattheperformanceofourcoreredcanbusiness,andthat'saneffortthatstartedtwoyearsago.Imean,intheyearthatwestruggledinourcoffeebusiness,Markandhisteamwentbackanddidthedownsize,andstartedthoseprocesses.

Andthenwehadanopportunityinthislastyeartogetcoffeepricingright,tohavebothamanufacturingandahedgingstrategy,togetthisthing--togetittopricepointsthatbothexcitedtheretailerandconsumer.Andtheretailerisakeypieceofthis.You'vegottogetthatmerchandisingsupport.Sowe'rereallypleasedwithwherewearethere.

Ithinkyousaw--I'msureyousawthere,ourpressreleaseonpricingthatwejusttook.Sowithallofthatbehindus,wefeelprettycomfortablethatwecanrepeatthatperformance.Andtoyourcommentearlier,thatwillberepeatingarecordperformance.Weactuallybeatthe2014numberthisyear,right?

SoonourredcanandcorebusinessandDunkin'business,ourDunkin'K-Cupbusiness,wefeelreallygood.Lostinthat,though,thisyear,wasthetwosegmentsthatdidn'tperformancewellaswewantedto,andthat'sourbusinessinpremiumandourlegacyK-Cup,ourFolgersK-Cupbusiness.Sowhatweintendtodothisyearisdothesamethingstothose.Andso,thepricing,weleanedinearlyontheDunkin'bagbusiness.Yousawsomeofthatperformanceinthefourthquarter.Wefeelgreataboutthatgoingintothisquarter.Soweneedtoputourselvesbackonpremiumgrowthmomentum.

Wewillinvesttodothat,andweneedtomakesureastheK-Cupsegmentshakesoutanditwillshakeout.Imean,there'ssomanynewitems,there'ssomuchgoingonthere,thatvelocitiesonourcorelegacyitemsarestrong.Andweinvestedrightattheendofthequarterinthat,aswell.SoI'msayingwefeelcomfortablewecanrepeattherecordresultsinredcan.TheDuncanK-Cupbusinesswillbeverysolidthisyear.

Andthen,withwhatwehaveextraonthere,we'regoingtoinvestinthoseothertwosegments.SoIwouldhopewecomeoutofthecoffeebusinessfiringonallcylinders,versusfiringonjustthosetwobigones…

(MultipleSpeakers)


Hey,David,thisisRichardSmucker.

Twoquickcomments.Onefroma50,000squarefootlevel,our--70%to80%ofourbusinesshasreallygoodmomentum,andwe'refiringonalleightcylinders.We'reusingthatopportunitytomake,asMarksaid,investmentsinourbusinessforthefuture,notjustfornextyearbutbeyond,andthisgivesustheopportunitytodothat.We'renotmakingthesenumbersbycuttingmarginexpenses,anditgivesustheopportunitytoinvestbackinthesebusinesses.Andso,andthesebrands.SoIthinkyouneedtolookatitfromthathighlevel.Wedo,andthat'sdrivingalotofourbusiness.It'salsopositioninguswellforgrowthinthefuture,notjustinnextyearbutbeyond.

Andthenfinally,Idon'tlikethewordretirement,soIjustwanttoletyouknowthat(laughter).Iamnotretiring.I'mjustmovingtoadifferentrole.Andmostofthefamily'seggsareinonenest,andwe'rewatchingthatnestverycarefully,so--


Richard,thatwasawonderfulcomment,andwecertainlydon'twantyougoinganywhere.Thanks.Ireally




appreciatetheanswers.


Allright.

Operator :

ChrisGrowewithStifelNicolaus.

ChrisGrowe (Analyst-StifelNicolaus):

Hi,goodmorning.


Goodmorning


Ijustwanttoask,firstifIcould,pleaseoncoffee.JustunderstandwiththelistpricedeclineandhavingreachedsomeofthesepromotedpricepointsinFY16,asinputcostscamedown,I'mjusttryingtounderstandwhycoffeeprofitswouldn'tbestrongerintheyearthantheflatexpectation?

Andalsorelatedtothat,wouldtheybestrongerinfirsthalforperhapsmorechallengedinthesecondhalfasyoustarttolapsomeofthat?Justcuriousifyoucouldgivehelponthephasingthere,ifthatwouldbeafactorforourmodels?


Okay,Iwillstartthat,Chris,SteveOakland,andthenmaybeMarkcanhelpmeonhowwelookattheseasonalityoftheprofits.Ifyougobacktothefourthquarterof2014,whencoffeepriceshitlike$2.20apound,right,arabica.Andthenwesawitcomedownbasically$1apoundoverthattime.It'sbumpedupinthelastdayorsoalittlebit.Butifyouthinkaboutthat,thefastestmostefficientwaytogetthatpricingtotheconsumerwaswithtrade.Okay?Wecanimpactshelfpriceonapromotedperiodimmediatelywithtrade,okay?


Yes.


Sointheshort-term,that'sveryefficient.Inthelong-term,it'sveryinefficient,becauseitpromotesallkindsofbuyin,loadit,andallthisinefficiencyinthesystem,right?Sooverthelastyear,we'vetakenacoupleoflistpricedeclinestomitigatethat,tomakethepromotionalallowanceless.Soweleanedintocurrentcoffeepricingonourpromotionalpricepoints.

Andnowthishasallowedustodrainthatout,getabetterlistpricetopromotedpriceratio,sothatoureverydaypricesgetbetter,andwemaintainthecurrentprice.Sowetriedtomakethatclearinthereleasethatwedid,togivealittlemoreclarityonthatthistime.Sothatthecostshavebeenreflectedintotalcoffeepricing.Thisdoes,Ithink,makeit,overthelongterminamoreefficientmannerso--


Theotherthing,thisisMarkSmucker.




TheonlyotherthingIwouldaddSteve,isthatjustfromacommoditystandpoint,ifyoujustlookatthetrendsoncoffeecosts,thedeclinethatwe'veexperiencedhasgoneonforoh,9months,atleast12months.Soyouhaveseenthisveryconsistentsustainedlowercoffeecostandthathasallowedustobehaveproperly,orresponsiblyifyouwill,becausewehavehadconsistencyinourunderlyingcoststructure.

MarkBelgya(CFO):

Andthen,Chris,thisisMarkBelgya.

Justintermsofsortofseasonalityifyouwillofyourquestion.Wearegoingtobelappinglastyear'sfirstquarterpricingmove.AndasStevementioned,wehadthisyearpricedecline,sowehadthefulleffectofbasicallytwopricedeclines.Sowhilethecostsarecertainlygoingtobelowerthantheywereayearago,thepricedeclinesalongwiththewaysomeofthetradewillhitthroughthequarters,willprobablynegativelyimpactthefirstquarter.Andthenobviously,balanceitselfoutthroughtherestoftheyear.


Right.Andthen,that'sreallyhowthosethingshit,notthevolumes.Wefeelgoodaboutwherethesell-throughandvolumenumbersare.Butjusthowthepricinghitsversusayearago,andhowwerecognizetradeinthoseperiodsmaysoftenthefirstquarteralittlebit.


Okay.That'sagoodthoroughanswer.Thankyouforthat.

AndIhadjustonequickfollow-upifIcould,withoutEricKatzmanonthecall,someonehastoaskaboutfreecashflow(laughter).SoIdidwanttoask,ifyoujusttoconsider,reallyforMarkBelgyathe$1billionversusthe$1.25billion,obviously,itsoundslikethemajorityworkingcapitalbenefitscamethroughinFY16withsomestillinFY17

Isthatthemainreasonforcashflowbeingdown?ItalsolookslikeCapExisgoingtobeupalittlebityear-over-year.Justtryingtogetasenseofwhatcouldbedraggingdownthecashflow,overandabovetheworkingcapitaleffect?

MarkBelgya(CFO):

Yes,Chris,thatistheprimary--thatwasprobably$100millionofit.Andthentheotherbigthingwehadthisyear,isweactuallyhadtwosignificantsizetaxrefundsthatwere,whatI'llcallone-time,thatwereprobablyroughly$100million,aswell.Sothosewouldcomeout,ifthatgivesyoubacktothebilliondollarsversusthisyear.


Okay,that'sgreat.Thankyou.

Operator :

KenGoldmanwithJPMorgan.

KenGoldman (Analyst-JPMorgan):

Hi,goodmorning.





Goodmorning,Ken.


Richard,Ithinkitwasyoumentionedcoffeetickingupthelastfewdays,butatleastaswelookatthecharts,RobustaandArabicareachupmaybe20%offtheirrecentlows.SoI'mjustcuriouscanyoutalkaboutoranyonereallytalkaboutwhatyou'reseeinginthecoffeecommoditymarket,whetheryouthinkthesecurrentpricesarereasonable,givencurrentsupplydemanddynamicsandwhatyouroutlookisfromhere?


Yes,Ken,actually,IthinkStevegavethatcomment.


Sorry…

(MultipleSpeakers)


Ken,therecentrunup,there'salwaysvolatilityinthecoffeebusiness.WearefortunatetohaveteamsonthegroundandofficesinboththetwolargestmarketsofBrazilandVietnam.Andsoagain,thecoffeeisrelativetowherewe'repricedto,relativetowherewe'repromotedto.Andthenifwelook,ifourteamsonthegroundinthosemarketslookatthecoffeecrop,there'sbeensomeweathernoiseinthelastdayortwothathavedrivenitup.

Butitdoesappear,Ithinkouropinionis,there'sgoingtobeagreaterArabicacropthisyear.Andsowethinkthatcoffeewilltradeinapricerangethatsupportswherewearepriced,betweenourpositionandouropinion.Thegoodthingaboutthisbusinessiswehavepricingcapabilitieshere.Andnotonlydowehavegoodcoverage,butwehavetheabilitytomovepriceshouldweneedto.SowefeelprettygoodabouttheArabicacropasitgoesforward.Robustamightbealittletighter,butwethinktheArabicacropisgoingtobeabigoneandpricingshouldbereasonable.


Okay,that'shelpful.

Andthenmynextquestion,the$50millioninadditionalefficienciesoverthenextfewyears,franklythat'salittlebitofasmalleramountthanwhatIhadexpected.It'salittlebitsmaller,atleastonapercentageofsalesas,fromwhatyourpackagedfoodpeershavecomeupwith.So,Irealizeyou'realreadyleaninsomeareas,headcountandsoforth.Butaswelookatthis,what'sholdingthisnumberbackfrombeingashighaswhatwe'veseen,whatyou'veseen,whatAccenture'sseen,right,fromsomeofyourotherfoodmanufacturingpeersoutthere?


Ken,thisisMarkSmucker,andthanksforthequestion.

I'llstart,thenifanybodyelsewantstochimein.Soacouplethings.Asyouknow,asyouthinkaboutourperformancehistorically,it'sbeenverygood,andwehavehadhistoricallyaverystrongcostdisciplineinmultipleareasofourbusiness.Partofwhatwe'veembarkedonwhichreallywas,thecatalystwastheBigHeartacquisition,wastothinkalittlebitdeeperaboutouroverallcostsavingsinitiatives,andhowwemightmaybedoalittlebitbetter.Youareright,thatourproductivitymeasuresversusourpeersare




probablybetterinmanycases,andwearegenerallyleanerIwouldsaythansomeofourpeers.

Buthavingsaidthat,wehaveanobligation,obviously,toourshareholderstomakesurethatwehavethebestcostdisciplinethatwecanhave.Andso,whatwe'vebeendoing,andthisispartoftheexplanationofthe$50million,isonanongoingbasis,makingsurefromacontinuousimprovementthatwehavethedisciplineinoursupplychain,ouroperations,ourpurchasingandlongertermaswethinkabouthowdowegetmoreefficientintrade,allofthosethingsshouldhelpdrive,whatIwouldcallsomeincrementalsavingstothebottomline.

Soitisn't--wedon'tthinkaboutitastheone-timebenefit,butwearecomfortablethatwecanatleastdeliverthat.Andthenbeyondthesenextcoupleyears,weshouldbeabletocontinuetodeliverannualcostsavingsobjectives,whichweholdourteamsto.

Thegoodnewsaboutthat,isitisasRichardmentioned,itisallowingustoinvestinenhancedcapabilities.Andataveryhighlevelwhatthosecapabilitiesarefocusedonisgettingbetteratengagingwithourconsumerandgettingbetteratengagingwithourretailcustomers.Andsostrategically,havingtherightbalancebetweenourleadingnumberonebrands,whicharereallytheenginethatfuelsourgrowth,aswellashavingtherightemergingbrandsinourportfolio,ispartofthatstrategy.Andsomakingsurethatwehavedollarsthatcanfundthoseenhancedcapabilities,bothinconsumerengagementandcustomerengagementisreallygoingtohelpdriveourgrowthbothtopandbottomlinelong-term.


Thankyouverymuch.

Operator :

JasonEnglishwithGoldmanSachs.

JasonEnglish (Analyst-GoldmanSachs):

Hey,goodmorning,folks.


Goodmorning.


Congratulations.


Thankyou.


Iwantedtostickwithcoffeeforaminute.Youmentionedinyourpreparedremarks,moderationintermsofcompetitiveactivity.Iwashopingyoucouldexpoundonthatalittlebitmore,intermsofwhereyou'reseeingthemoderation?

Andthenalsoaspartofyourpreparedremarks,youtalkedaboutsharpeningpricepointsonsomeofyourbusinesses,IthinkyoumentionedtheFolgersK-Cups,Dunkin'.Howdoweputthosetwointermsofmoderationandcompetitiveactivity,juxtaposedwithwhatsoundslikeabitmorecompetitiveactivitycomingfromyou?





Jason,hi,SteveOakland.I'lltrytotouchonthat.

Ithinkit'sdifficulttopaintthecoffeecategorywithonebrushcompetitively.Ithinkthepreparedremarksprobablywerefocusedmoreonourmainstreamredcanbusiness,right?AndIdothinkwe'veseenwiththeArabicafalling,withthecoffeepricesfallingwheretheyare,wehavefoundthatpricepointshavegottendownintothoseranges,whereitmotivatesboththecompetitorandtheconsumerandthecustomer,right?Soallofusareinpricepointsthatreallywork,okay?Andso,we'rebackinthatzoneandIthinkeverybodyisoperatinginthatzone.

NowhavingsaidthatIwouldarguethatthepremiumsegmentwasthemostcompetitivewe'veeverseenitlastyear.Andso,theDunkin'bagbusinessasyouknow,earlierintheyearhadacoupleoftoughquarters,andwe'vetalkedabouthowweleanedintothatinthefourthquarter.Premiumgreen,it'sanotherremnantforawholeotherdiscussion,butgreencoffeeisnotallthesame.Thecoffeethatgoesintoalotofpremiumcoffeeshasamuchlongersupplychain.Youmightexpectlower--coffeecoststoimpactusatdifferenttimingbasedonthetypeofgreenthatitis.

Sointhefourthquarterthat,wewereinapositiontosupportthat,wedidandithasresponded.Soifyouthinkaboutitthecoreredcanpricinghadmoderated,thecompetitivesethadmoderated.Thepremiumbusinessprobablyisinthatspacenow.AndthelastpiecewillbeK-Cups,andwe'regoingtoleanintoK-Cups.TheproliferationofK-Cupshascausedthatwholesegmenttobecompetingforaslowergrowthbase.Andoneoftheleversthat'sbeenusedinthereisprice.We'reablenowtocompeteinthatarea.Sothat'sfor,maybethelastpieceofthepuzzle,andwefeelgoodabouttheplanweputinfrontofyoutoday,willgiveusthedollarstosupportthat,andreturnthatbusinesstogrowth.


Gotit.That'sreallyhelpful.Thankyouforthat.Onemorequestion,thenI'llpassiton.Iwantedtoswitchgears,andtalkaboutpetrealquick.

First,the--whatwasroughly3%oftheorganicsalesgrowth;ifpossiblecouldyougiveusabreakonvolumeorpriceforthequarter?Andthenyourexpectationoforganicgrowthaswegointonextyear,anycolorintermsofwhatyou'reexpectingbetweenpremium,snack,andmainstreamwouldbereallyhelpful.Thankyou.

MarkBelgya(CFO):

Jason,thisisMarkBelgya.

Regardingthefirstpartofthatquestion,unfortunately,becauselastyear'sfourthquarterwassplitownership,thatbreakdownisn'tquiteaseasyasitmightsoundtobe.Iwilltellyouthough,nowthatwe'reallonthesamesystemasofMarch1.AndobviouslyinFY17,we'llhavethatfulllineofanalysisforallbusinesses.SoBarry,Idon'tknowifyoucanaddanything,butfromjusttheabsolutenumbers,Ithinkthat'sprobablythecase.

BarryDunaway(President,PetFoodandPetSnacks):

Ithinkyou,thecoloryouprovidedMark,isthebestwecandoatthispoint.JusttoaddJason,asfarasourgrowthexpectationsfornextyear,asyouknowoursnackbusinesshastremendousmomentumbehindit.

Soweexpectoursnackbusinesstobeatthehighsingle-digitgrowthnextfiscalyear,specificallywithourMilk-BoneandPup-Peronibrands.Onthepetspecialtysideofthebusiness,we'relappingtheexpandeddistributionlastyearinthepetspecialtychannel.Butwewouldexpectmidsingle-digitgrowth




thiscomingyear,aswewilllaunchanationaladvertisingcampaignbehindtheNaturalBalancebrand.

Wealso,therearetwomajorretailersinpetspecialty,butthere'salsosignificantamountofsalesthatmovethroughtheindependenttrade.WehaveapushbehindourNature'sRecipebrand.Wethinkthere'ssomerealopportunitiesthere.That'sourgatewayspecialtybrand,soweseesomegrowththere.Andthenalso,oursnacksplayasignificantroleinpetspecialty.Soourwidelydistributedbrands,alsothere'stremendousgrowthopportunitythere.

Foodisgoingtobethelowergrowththisyear,asfarastheportfolioisconcerned.Youknowwhatourchallengeswerethispastyear,specificallywithKibbles'nBits.Weareencouragedthatwe'veactuallyseennegativeconsumptiontrendsstarttodecelerateattheendofthislastfiscalyear.We'veputsomebonusbagsintothemarket.You'regoingtoseemoreofthosegoingintomarketinJune.Soalotofeffortstabilizingourdrydogfoodbusiness,andtryingto--justgetthatbusinessbackwhereitneedstobe.Sothatprovidethecoloryouwerelookingfor?


Yes,veryhelpful.Thankyouverymuch,gentlemen.I'llpassiton.

Operator :

AlexiaHowardwithBernstein.

AlexiaHoward (Analyst-SanfordC.Bernstein&Co):

Goodmorning,everyone.


Goodmorning.


Hi,soacoupleofquestionsaboutyoure-commercestrategyinChinainvestments.Youstartedtalkingaboutthee-commercestrategyattheInvestorDaylastyear.Areyouabletodimensionalizehowbigthatisforyouasofnow;howfastitgrewlastyear?Ipresumethekeycategoriesinthereareprobablycoffeeandpetfood.Whichoneofthoseisbigger?Wouldjustliketohearcoloronthat,becausewedon'tseethatinthemeasuredchannels.AndthenyoumentionedChinainvestments.Canyoujustgiveusalittlebitofcoloronhowmuchspendingovertherenow,whatthestrategyisovertime?

Thankyou,andI'llpassiton.


Alexia,thisisMarkSmucker.I'llstart.

Thefirst,yourfirstquestionjustasitrelatestoe-commerceisthatyou'reright.Weare,Iwouldsaywe'realittlebitunderdevelopedversusourpeersinthatspace.Andso,asItalkedtoKen'squestionearlier,relativetoinvestmentsandwhatwe'retryingtoampup,thatisoneofthosethings.Andso,nottogetintotoomuchspecifics,butaswethinkabout--weactuallyhavejustreorganizedsomeofourcommercialfunctions,thatwouldincludesalesandsomeofourmarketingareas.

Butalsointhedigitalspace,wehaveactuallybeefedupourcapabilitiesthere,andarecurrentlyinprocessofreevaluatingourtotale-commercestrategy,inhowwebetterserveoure-commercecustomers.Andwhenwethinkaboute-commerce,thatincludesboththedigital-onlyretailerslike




Amazon,aswellasourbrick-and-mortarcustomersthathaveasignificantonlinepresence,aswell.Soalittlebitofageneralanswer,butsufficeittosaythatitisonourradarscreen,anditisapriorityforustocontinuetodevelopthatbusiness.


AndthenonChina?


OnChina,Ithinkyouasked?Sojustintermsofthefinancialimpact,Iwouldsaythatit'sabout$0.03to$0.05forthecurrentyearinFY17.


Andthen,anycoloronexactlywhat'shappeningoutthere,aftertheinitialforayoutthereafewyearsago?


Yes,Alexia,it'sstillalittlebitearlyforus,Ithink,tobegivingtoomanydetailsinthatarea.We'vetalkedaboutthefactthatwehavehadaminorityinvestmentinanoats--inanoatmealbusinessthere,andthatbusinesshascontinuedtogrowyear-over-year.Andso,we'vebeenpleasedwiththatminorityinvestment.Asitrelatestootherthings,Ithinkit'salittlebitearlyforustogiveanyspecifics.


Okay,thankyouverymuch.I'llpassiton.

Operator :

MarioContreraswithDeutscheBank.

MarioContreras (Analyst-DeutscheBank):

Hi,goodmorning.


Hey,Mario.


SoIwantedtogobacktoyourcommentsfromAnalystDaylastyearwithrespecttocoffee.SomeofthecautionaroundgettingbacktoFY14coffeeEBITlevelsnotuntil2019.

SomeofthereasonforthatwasrelatedtoinvestmentaroundthePerfectMeasures.So,obviouslyyou'vealreadyachievedthatgoalofgettingtotheproperrecovery,butwantedtounderstandhowtheinvestmentisgoinginPerfectMeasures,isthatstillamajorfocuspointforyou?


Hi,Mario.

WithregardtoPerfectMeasures,Ithinkwestillthinkithasthepotential,andstillfeelsogreataboutit.I'lltellyouthereasonyouputthingsinleadmarketsorintestmarketsistolearn,andwelearnedalot.Andourtrialnumberscandidly,werenotwhatweneededthemtobe,butourrepeatnumberswerefantastic.




Andso,ittellsusthatwe'veprobablygotthepositioningalittlewrong.We'veprobablygotsomeoftheinitialcommunicationalittlewrong,butwegottheconceptright.

Andsothisyear,we'regoingtorelaunchthatwithalittlebetterpackaging,littlebettermessaging.Andwe'regoingto--it'saheavycapitalinvestment,becausethetechnologyisuniqueandwewanttomakesurewegetitjustrightbeforeweleanintoitonamorenationalscale.Westillthinktheconcepthasalotoflegs,butwe'reprobablyayearbehindwherewehopedtobeatthispoint.

ThoseinvestmentnumbersarebakedintothenumbersintheguidancethatMarkgaveearlier,socontinuedinvestmentinthat.Okay.Andthen,ithadbeenmentionedacoupletimesthatincreasedmarketingspendingandadvertisingisincludedintheguidanceforthisyear.Isthereanywayyoucanquantifyroughlywhatthat'sgoingtobe,intermsofyourdollarorpercentincrease?

MarkBelgya(CFO):

Yes,it'sgoingtobeuphighsingle-digits,whichequatestoabout$40million.


Okay.Thankyouverymuch.

Operator :

PabloZuanicwithSIG.

PabloZuanic (Analyst-SIG):

Goodmorning,everyone.

Look,acoupleofquestionsoncoffeeforSteve,andthenIhaveafollow-uponpetfood.Steve,soStarbucks,HowardSchultzthereinJanuary,hetalkedabout,prettymuchimplied,threatenedtowalkawayfromaKeurigJAB.AndthenintheAprilcall,hecameoutandsaid,atleastthreeorfourtimesintheconferencecall,thattheyhavebeenabletorenegotiateterms,atveryfavorabletermswithKeurig.Andthatthosetermsgavethemalsomoreflexibility.SoI'mwonderinghere,ifStarbuckscandothatwithJAB,whycan'tSmuckers?Soifyoucancommentonthat.I'mjustsurprisedtheywereabletorenegotiateterms,nowtherewasachangeinownershipthere,andapparentlyyouhaven't.

Andrelatedtothat,IunderstandtheideaofsharpeningpricepointsforFolgersandK-Cups.Thecategoryhasbeensticky,ofcourse,whilegroundmovesquiteabit.Butasyoudothat,IwouldexpectothercompetitorstoalsocutpricesintheirK-Cupbrands.AndthenK-Cupsasacategorywillbecomenotsticky,butpassthroughasground.

SoIseeabitofariskthere.Ifyoucancommentonthat,please?Thanks.


Sure.Iguess,Iwouldn'tassume,Iwouldn'ttaketheassumptionthatour--thatwehaven'tdonethesamekindofworkonourK-CupcontractinourrelationshipwithJAB,becausewehavealegacyrelationshipwithJAB,fromtheSaraLeeacquisitionseveralyearsago,andnowfromtheKeurigremount.

Sothefactthatmaybewe'realittlelesspublicaboutsomeofthatstuff,Iwouldn'tassumethatthesamethingsaren'tgoingon.Sojustdifferentcompaniesmanagethosethingsdifferently,right?Sothatprocessisinprocess,andwefeelgoodaboutthatrelationship.Theyarecommittedtohavethemajorbrandsinthecategoryintheirsystems,andwereadthesamethingsyouread.Soourassumptionsaregoingintothenegotiations,ourassumptionsaresimilartoyours.Sowefeelfinethere.




AndwithregardtoK-Cups,ifyoudigalittledeeperintotheIRIandNielsendata,you'llseethatK-Cupsalthoughwedon'tpassthroughgreen,becausegreenisasmallportionoftheoverallcoststructure,it'sbecomemaybethemostpromotedcategoryintotalcoffee.So,thatit'sthehighestrelying--eachoneofthebrandsreliesveryheavilyonpromotion.SomaybeI'mnotclearenoughwhenItalkaboutleaningin,we'veleanedinonourpromotionalpricepointmostly.

Andso,thosepromotionalpricepointsarebasicallydown$1aboxfromwheretheyusedtobe.It'sstillaveryprofitablebusiness,butthatmigration,thattrainhasalreadyleft.Sowearewhereweare.Wemighthavebeenalittlelatetofollow,becauseofthemomentumwehadfromtheDunkin'business.


Understood.Andjustaquickfollow-upthere.SoyourK-Cupmarginswouldbelowerthanyourgroundcoffeemargins,right?


Yes,alittlebit.

MarkBelgya(CFO):

Yes,alittlebit.


Ourgroundcoffeemarginsareobviously,becauseofourscalevery,verygood.AndourK-Cupmarginsarealthoughgood,byconsumerproductsstandards,byCompanystandardsaren'tquiteatthatlevel.


Thankyou.Andthenjustafollow-uponpetfood.

Iguess,it'sbeentoucheduponalready,butcanyoutelluswheredidthemixend--afterthedeclineindrydoganddogsandsnacksandspecialty,ifyoucanjustgiveus,what'sthemix,andarunrateatthemoment?Andrelatedtothat,ifyoucanalsocommentonthechannelmix?Becausewetendtothinkthatsnacksandspecialtyproductsaremostlyinthespecialtychannel,butjustreminduswhereyouare?

IfI'mlookingtheFDMdatafromIRIorNielsen,whatpercentageofyourpetfoodbusinessisthat,andwhereareyouinspecialty?Ifyoucanprovidethatroughlyonacurrentrunrate,knowwhatitwasonaveragein2016?Thanks.


Soyou'relookingforthechannelmix--Iwanttomakesureweunderstandthequestion.


Right…

(MultipleSpeakers)


Areyoulookingforthechannel?





Well,I'maskingtwodifferentquestionsonpetfood,right?Becauseobviously,youexplainedthatsnacksandspecialtyaredoingwellintermsofnaturalorganicbrands,andNaturalBalanceandtheotherbrandsaredoingwell,anddryisnotdoingsowell.SoI'mjusttryingtounderstand,wheredidthesalesmixendintermsofproductsinFY16?

Andthen,it'saseparatequestion,iswhatisthechannelmix,right?Becausesomeofus--drydogissoldinthespecialtychannel,right,andsnacksaresoldinboth.YourNaturalBalancebrandisonlysoldinspecialty,Iunderstandthat.ButI'mjusttryingtogetabitmorecolor,intermsofwhatyourcurrentproductmix,andseparate,what'syourcurrentchannelmix,ifyoucanprovidethat?


Fromachannelperspective,ofourtotalbusinessabout20%ofourbusinessisinthepetspecialty.AndMark,youwanttotake--?

MarkBelgya(CFO):

Yes,Pablo,thisisMarkBelgya.Justtomakesure--againIthinkIunderstandyourquestion,anditgoesbacktoalittlebitearlieronewasasked.Ifyoulookatthemixofproduct,okay,webenefitfromamixperspective.SowherethegrowthhasoccurredasBarrydescribedfromachannelperspective,we'realsobenefitingfromaproductmixperspective.Sowhetherit'sspecialtyorsnack,orevencatprobablymorethandog,thosearepositivemixbenefits.

Obviously,Kibbles'nBitsisaheavyproduct,it'salotofvolume,sothat'swhereit'snegative[goodsis].Soit'saverypositivemixstory,andnegativeoverallvolumestorybecauseofthedrydogsideoftheequation.


Sorrytoinsist.Sobutdrydogwouldbewhatpercentofyoursalesnow,onarunratenow?


About10%oftotalsales.


Thankyou.That'sgood.


OnlyotherthingI'dreiterate,becauseIdothinkitgetslostoccasionally.BecauseparticularlyasI'veconversationsoverthelastfewquarters,clearly,Kibbles'nBitshasbeenchallenged.

Butwhenyoulookatourfoodbusiness,thecatfoodsideofthebusinessisalittlelarger,andhasdoneokay.Soithasbalancedoutalittlebit.SowhilenottryingtodownplaytheimpactoftheKibbles'nBitsandthevolume,andwhatithadoverthecourseoftheyear,butthecatfoodperformancehasallowedustomanagethroughtheoverallfoodalittlebitmorethanmaybethetakeawaywouldbe.


TheonlyotherthingIwouldadd--thisisMarkSmuckeris--justremindingeveryonethatthebrandsthatparticipateinthosetwochannelsareverydifferent.It'sverysimilartothenaturalspaceinhumanfood,whereyou'vegotthenaturalchannelwiththeWholeFoodsandtheSproutsandthelike.Ingeneral,there'snotalotofoverlapinthebrand.Sothebrandstendtobeuniquetothoseindividualchannels.





ThisisRichard.

Andjustaddingtothatforasecond,justanyacquisitionthatwe'vemade,andagainthisacquisitionisonly18monthsold.Oncewe'veintegratedthesebusinesseswithoursalesteams,we'veseensomeopportunitiesinchannelswhereourexistingsalesteamhavesaid,hey,we'rekindofweakinthischannel,andwiththerelationshipswehavewiththesecustomers,wecouldreallybuildthebusiness.Andthattakesusalittlewhiletoidentifythat,andthenbuildthoseadditionalsaleswiththosecustomers,andwe'rejustintheprocessofdoingthat.

Sowe'reprettyoptimisticaboutfindingthosekeycustomersthatwecanbuildourbusinesswith.Andso,weshouldseemoregrowththisyear,inanumberofthosechannels.Don'tyouagree?

(MultipleSpeakers)


Ido,Richard,andjustmaybetoadd-ontotheMeowMixconversationis,someofourbestinnovationthisyearisagainsttheMeowMixbrand.Andtoyourpoint,oursalesteamhasdoneanoutstandingjobgettingacceptanceofthatproductinthemarket,andespeciallyinthegrocerychannel.Sowherewehaveanoutstandingsalesteamthatcanexecutethere.

Soagain,MarktoyourpointMeowMixisoneofthelargestbrandsinourportfolio.Andwithsomeofthatinnovation,weseesomenicegrowthcomingfromthatbrandthisyear.

Operator :

MatthewGraingerwithMorganStanley.

MatthewGrainger (Analyst-MorganStanley):

Hi,goodmorning.Thanksforthequestion.

Ijustwantedtofollow-uponthenetsalesgrowthexpectation,andjusttryanddiginalittlebitmoreatthesegmentlevel.Thankyouforthecommentaryonpet.

ButIguess,MarkBelgya,isthereanymorevisibility,youcangiveusonthat1%ex-divestituresalesgrowth,howFXplaysintothat?Andhowweshouldbethinkingaboutitbysegmentacrosstherestofit?

MarkBelgya(CFO):

WhatI'dsay,Mattisthatabout--thecoffeepricingwouldbeabout1pointtheoverallCompany.Soyoucankindofdollarizethat,togethowmuchthecoffeewouldbe.That'sbyfarthebiggestdriverfromthedownsize.

Ifyoutakethemilkloss,$150millionImentionedearlier,andthen1%ofsales,callitsomewherebetween$70millionto$90milliononcoffeepricing,that'sthetwobignegatives.Sojustdothemath,andattributetotherestofthebusiness,thatwillgiveyouasense.Obviously,theFXhasalittlebitofeffect,butit'sactuallynotabigdriverintheoverall1%declinetototalnetsales.


Okay,allright.Thathelps,thanks.Justareallyquickfollow-upontheDunkin'K-Cupissue,youtalkedaboutsomeoftheuntappedadjacencyopportunitiesinflavoringsandlineextensions.Yourmarketshare'sstabilizedoverthepastsixmonths,andit'sprettyclosetowhereyourshareisinroastedground.




Rightnow,canyoujustgiveusasenseofwhereyousee,intermsofgrowthopportunities,howmuchofthatisdependentonholdingthatshare,participatingincategorygrowth,asopposedtocontinuetopushsharehigherintothathighsingle-digitrange,andwhatyouthinkisfeasible?


Well,Matthew,Ithinkitwillbe--itwillvarybybusiness.Ithinkthere'sstillrunwayfortheDunkin'business.There'ssomecoreflavorsonDunkin',andDunkin'tendstobeamoreflavored-drivenbusiness.Sothere'snewitemopportunityontheDunkin'brand.

Andthen,quitefrankly,nowthattheFolgersbrandisintherightpricepoints,gettingtherightsupportgrowthfromtheretailer,andtheconsumeracceptance,itwillbebetterexecutionofourpromotionstrategiesonFolgers.Sowe'llexecutebetteronFolgers.We'lllaunchnewitemsinDunkin',istheplan.


Okay,thankseveryone.

Operator :

AkshayJagdalewithJefferies.

AkshayJagdale (Analyst-JefferiesLLC):

Hi.Thanksforthequestion.Soacoupleof--twoquestions,oneoncoffee.Canyoujustexplaintous,orbreakoutofthe18%growththatyousawinoperatingincomeorsegmentoperatingincome,howmuchofthatwasaresultofpricingnetofcommoditycosts?Andwhatisthegeneralexpectationforpricingnetofcommoditiesfor2017?That'sthefirstquestion,andthenIhaveafollow-uponpet.


Iwouldsayit'sabalance.Iwouldsay,partofitispricing,andthetimingofthepricingisimportanttothinkabout.Wetalked,Ibelieve,inourfirstquartercallayearago,thatweleanedinto,wetookpricingearly,wehadgoodcoverage,andwehadanopinionofthemarketthatweweregoingtogetthatmoneybackingreen,whichwedidinthefourthquarter.

Sointhefourthquarter,obviously,greenpricingtendstocostwasabiggerimpact,butwesortofspendthatmoneyupfront.SoIwouldsayit'sacombinationofthatgreenpricing,whenyougetyournumberone,yourhighvolumeitem,whenyougetvolumeuponthosecanistersinourfacilitiestoo,itreallyfallstothebottomline.

Sothat'sveryefficientforus.SoIknowMark'sdiggingfortheexactpercentagenumberaswespeak.Butit'sabalancebetweenthevolumethat'sgenerated,andtheimplicationsofthatvolumeallthewaythroughthesystemonredcans,andthenthepricing.

MarkBelgya(CFO):

It'sprobablyupalittlebitheavieronthepricecostmaybetwo-thirds,one-third-ish.ButagainIthinkthatgoesbacktowhatyousaidSteve,quiteawhileago,wasjustsortofthewaythatthetimingontheprice…

(MultipleSpeakers)





Andthevolumeallowedustobringmoregreeninattheend,andthegreenattheend,wasmorefavorable.Soit'sreallyhardtogetitdowntothenitonthat,becauseyou'llrecognizethosePBBswhenthegreencomesin.Andifyourvolumeisup,youbringmoreofthegreeninso.


Sotwo-thirdsoftheoperatingprofitgrowthyear-over-yearin2016wascommodityprice?

MarkBelgya(CFO):

Thenumbersthatwejustquotedwereaquarter.


Fourthquarter.

MarkBelgya(CFO):

Wasyourquestiononthefullyear,orjustthequarter?


Onthefullyear.Sorry,thatwasonthefullyear.

MarkBelgya(CFO):

Okay,it'sprobablyalittlemore50/50-ishthere.


Yes,50/50ontheyear.Anditwasbackend-loadedbecauseofthetimingofgreen.

MarkBelgya(CFO):

Yes.Ithoughtyouwereaskingthequarterspecifically.


No,andthenonpet,excusemyvoice,onpetcanyougiveusalittlebitmorecoloronthequalityofearnings?Whathappenedwithgrossprofitgrowthfortheyear,andwhat'syourexpectationnextyear?Thanks.

MarkBelgya(CFO):

There'saqualityoftheearnings,andI'llstart,Barry,ifyouwanttojumpin.Ifyoulookoverthecourse,Imeanthisquarterspecifically,weknewmarketingwouldbedownfromalittlebitwhereitwas,becauseofthetimingofthespendintheproducts.Butwealsohadthesynergyrecognition,whichpickedupinthelatterpart.Soifyougobacktotheearlypartoftheyear,weexpectedquarter-over-quarterimprovementonmargin,whichwedeliveredoninQ2,Q3andQ4.

Ithinkfromacostperspectivegoingforward,theircostsalignedverysimilartowhatweseeinourconsumerfoods.Soifthegrainscontinuestobefavorable,IthinkasBarrymentioned,wearegoingtocontinuebonusbagsandthingslikethat,thatmighthavealittlebitofeffectongrossprofit.Butthen,ofcourse,asIthinkaswe'vesaidovertime,ofthethreesegmentsofthebusinessthenaturalhasthelowestprofitability.AndIthinkasBarryandtheteamwork,andaswellasweintegratethatintotheoverallSmuckerCompany,weshouldhaveanopportunitythere,aswell.





Absolutely,Mark,yes.No,ourqualityofearningsaresolidforFY17.Andaswethinkaboutmixtoo,justasoursnackscontinuetodrivethebusiness,thatiswherethestrongestmarginsonthebusinessareaswell.We'veseenevencatsnacks,smallcategorybuttremendousupsidethere,soIthinkwehaveverysolidqualityofearningsfornextyear.Wehaven'tmadeanysignificantcutstogettoourgrowthnumberfromnextyear,year-over-year.


AndjustonelastoneforMark.Youtalkedaboutorganizationalstructuralchange.Canyougiveusmorecoloronthat?Thanks.


Hey,Akshay,it'sMarkSmucker.Notreally.Idon'tthinkwecangiveyouanymorecolor,otherthantosaythiswasahugeyear.Andnotonlydidwemakethelargestacquisitioninourhistory,butthatacquisitionwasagainthecatalysttosortofthinkaboutthingslike,arewegoingtomarketinthemostefficientway?Dowehavetherightcapabilitiestoengageourconsumerandourcustomer?Werecentlyopenedourinnovationcenterwhichisverymuchallaboutourcustomerretailpartners.

Andsothelongandshortis,aswelookedatourorganization,andwetookopportunityacrossnotonlyourcommercialfunctions,whichwouldbesalesandmarketingandthinkingabouthowwewouldorganizethosedifferently.Butwelookedacrossoursupplychainnetwork,ourfinanceorganization,someofouradministrativefunctionsaswell,justtomakesurethatwewererunningtheminthemostefficientway.

IwouldsaythatoneofthekeythingsisthatasImentionedinthescript,wehaveanindividualfromBigHeartwhoisleadingourgrowthandinnovationorganization.Andso,weareputtingarenewedfocuson--notthatwehaven't,we'vedoneagoodjoboninnovation,butmakingsurethatourmuscle,wherewe'rebuildingmuscleisreallyaroundinnovationlongerterm.Andmakingsurethatourunderstandingoftheconsumerissharpandthatwecanactagainstinsightsthatwearelearningabouttheconsumeraswegoforward.SoIthinkthat'sprobablyit.


Thankyou.I'llpassiton.

Operator :

FarhaAslamwithStephens.

GregoryNep(Analyst-StephensInc):

Goodmorning.Thisis(GregoryNep)onforFarha.


Goodmorning.


Ijusthaveaquickquestion.Sogivensortoftheexcellentcashflowandsuccesstakingdownleverage,canyousharewithuswhethertheremaybeopportunitiesforfurtherM&A,andjustyourviewontheM&Aenvironmentrightnow?




MarkBelgya(CFO):

Yes,thisisMarkBelgya.I'llstart,andRichardorMark,ifyouwanttoaddmorefromastrategicperspective.Butaswelookatourdeploymentofcash,comingoutofthedeallastyear,weobviouslyemphasizedtheimportanceofpayingdowndebtoverthecourseofthreetofiveyears,whichwemadegreatprogresson.AndasIsaidearlier,itallowedustogivebackintorepurchasingshares.Wefeelverycomfortablewith$1billionoffreecashflow,thatwe'llbeabletocontinuethatdebtpaydownplan,obviouslycontinueourdividendpayoutpolicy.

Anditallowsusalittlebitofflexibilityastoaddressstrategicoptionscomingin.Sowhetherthat'sM&A,again,Idon'tthinkwearelookingatahugetransformational,likeapetwith,atleastfromaleverageperspective.Butcertainlythere'sM&Aopportunityaswellasbuyback.AndIthinkbuybacksaresituational.Sowetraditionallydonotbuildthatintoourplan.Butifyouaskme,whatisoneoftheopportunitiesforanyupsideofthatrange,you'dhavetothrowbuybackasanopportunityinthere.


AndthisisRichard.Juststrategically,acquisitionsisakeyfactorofourgrowthoverlong-term.Andso,westillcontinuetolookforthoseopportunities.Andthefactthatwe'renowinthepetfoodbusiness,givesusanotherlaketofishin.Andso,we'llcontinuetolookthere.Andagainthosemaynotbestrategicintheshort-termbuttheymaybemorebolt-onsandsmalleracquisitions,buttheycouldbe.Soanywayjustashortanswer,butalwaysimportanttous.


Plansareinwater.


Gotit.Andthereisatargetleverageratiothatyouwouldfeelcomfortablestabilizingat?


Targetleverageratio?

MarkBelgya(CFO):

WellwhatwesaidisthatitsbeenalittlebitofmaturationforusasaCompany.Wewerealwaysprettyconservative.AndIthinknow,sortof3times,weknowisaprettygoodnumbertoworkaround.We'vebeenprettyvocaltothatinthelastsixtoninemonths.Aswegetclosertothat3times,itjustopensupthedooralittlebitmore.


Gotit.Great.Thankyousomuch.

Operator :

ChuckCerankoskywithNorthcoastResearch.

ChuckCerankosky(Analyst-NorthcoastResearch):

Goodmorning,everyone.Greatquarter.





Thankyou,Chuck.


Ifyouarelookingatyourlargestcustomer,howmuchoftheirimprovementinsalesisreflectedinsomeofthevolumeimprovementyou'veseen,especiallywithregardtopromotionalandrepricingactivity?


Well,thisisRichard.Justfirstofall,italwayshelpswhenyourcustomersarehappyanddoingwell,anycustomer.Andsowe'regladtoseethatthey'veturnedthecorner,andthat'sgreat.Buttheydidn'tdriveourgrowth.Thisgrowthisbroad-based,sothatwasnotdrivingthis.


Andhi,Chuck,SteveOakland.

WehavebrandslikeFolgersthatindexreally,reallywellthere,andthoseteamsareworkingtogetherverystronglytoparticipateinthat,andliketohelpdrivetheircategorygrowth.ButIwouldarguethat,theothertraditionalretailers.Andwetypicallydon'tnamethem,butthetop10retailersifyoulookedatourtop10list,ournumbersareprettygoodacrossthatwholetop10list.Butwe'repleasedtoseethosedowell.Imean,weallasanindustry,needthemtodowelltodowelllong-term.


Andwhenyoulookathowconsumersarespreadingtheirmoneyacrossyourbrand'spremiumandmainstream,whatdoesthattellyouaboutwheretheconsumers'headisatrightnow?


WellIthinktheconsumerisstillsomewhatcautious.Andthegreatthingaboutourbrandsisourbrandsareprettywell-positionedtosupplyallofourconsumers.Andso,itisacautiousworldoutthere,andwe'restillagoodvalue.Imean,whetherit'sFolgers,orwhetherit'sJiforwhetherit'sSmuckers,it'sagoodvaluetotheconsumer,so.

MarkBelgya(CFO):

AndourindustryRichardhadacommoditypriceenvironmentthatallowedustomaintainourmargins,andreflectthosepricestothecustomerbase.Sowe'veallenjoyed,notjustcoffee,butothercommoditieshavebeeninaplacewherewe'vebeenabletomarketthebrands,providegreatpricepoints,andinnovate,right?

Sowe'vegotinnovationregardlessofthebusinessthat--inthingsthatareveryhighmixandhighcost,andthenprovideitemsinallofourbrands,inallofourbusinessestothediscountchannelstothegrowth,fromthedollarindustry,andthoseplaces.Sowe'vebeenabletoparticipateacrossthespectrumofchannelsprettywell,andthecostbasetoday,andaswelookforward,lookslikeithelpsustodothat.


AndChuck,thisisMarkSmucker.

Justtoreiteratemakingsurethathave--thatwearedevelopingandgrowingourkeymainstreambrands,butalsomakingsurethatwehavetheright,thetruRoots,theSahale,theNaturalBalance.Thosearebrandsthataren'tnecessarilyasbig,butcertainlyserveaconsumerneedandareimportanttoourportfolio.





Allright.Thankyouverymuch.


Thanks,Chuck.

Operator :

RobDickersonwithConsumerEdgeResearch.

RobDickerson (Analyst-ConsumerEdgeResearch):

Thanksalot.

Justaclarificationquestion,andmoreforMark.Soitsoundslikeyousaidinyourcommentary,thatadjustedoperatingprofitwillbegrowingabout4%.Andthen,Iknowifyouusethat116.6inyourdilutedsharesoutstanding,thatimpliesaboutanother2.5%.Sothatgetsmeto6.5%EPSgrowthin2017.

Istheassumptionherethatthereareother,belowtheline,likethetaxratecouldbealittlebitbetter?Orinterestratecomesdownalittlebit,orImean,theinterestexpensecomesdownalittlebit?Andthenlastly,ifwelookatthesharesyouboughtbackinQ4,reallyinFY16,Imean,it'sthemostamountyou'vespentonabuybackoutsideofFY14.Socouldtherebeadditionalcashoutlaysin2017toincrementalbuybacks,eventhoughyoumightnothaveasmanyoftheone-timebenefitsonyourworkingcap?Thanks.

MarkBelgya(CFO):

Hey,Rob.Soacouplethings.Ithinkthewayyou'rethinkingaboutitfromapercentincreaseisprettymuchinline.Maybe,thesimplemathwouldsay4%plusoperatingprofitgrowth,3%shares,andapointtaxandinterest.Sothatkindofgetsyoutothe8%.Intermsofbuybacks,whatwe'veguidedindirect--andwehaveconversationsparticularlywiththeratingagencies,weuse2%asalong-termmodel.Sothat'sa2%buyback.Soobviously,at116millionshares,it'slookinglike2.2millionshares.SothatasIsaid,onyourearlierquestion,wedon'tfactorthatintoourplans.

Iwouldsay,ourcashdeploymentwouldallowaportionofthat,maybenotthewhole2%withoutpushingtheleveragetargetwe'regoingafter.Butcertainly,andagain,it'ssituational.SoIdon'twanttosithere,andsaywe'regoingtogooutandbuyit,butiftheopportunitywereright,Ibelievewehavethecashtodoit,anditobviouslywouldbeincremental.Certainly,whenwedoitintheyear,willhavelessofanimpact[due]furtherintotheyear.Butthat'sthebeautyofgettingtheleveragetowherewewantittobe,givesussomeflexibility.


Okay,great.Andthenjustaquickfollow-up.Onthe4%,ontheoperatingprofitgrowth,ifIheardyoucorrectly,yousaidthecoffeeexpectationwasaboutthesametoflat.Consumershouldbedownalittlebitjust,because,ormostlydrivenbymilk.Andthenpet'supmidsingle-digit.SoifIkindofdothatquickmath,I'mstillgettingtoprobably,I'dsaysub4%.Soisthere,areyou--I'mjusttryingtogetasenseofhowyou're--orhowIshouldbethinkingabouteachofthesegment'sgrowthrelative,tokindofthisrolledup4%number?Thanks.

MarkBelgya(CFO):

Well,Ithinkyouwillhavesomesegmentprofitgrowth.Itwillbealittlelessthan4%,becauseaswesaid




inourscriptedcomments,ourSG&Aisgoingtobeflatyear-over-year.SosomeofthatSG&Aclearlygoesupintothebusinesses,butalsosomeofitfallsbelow,inwhatwewouldcalladminsupport,butit'sbelowthesegmentprofit.Soyouneedalittlebitofthatbenefittogettothe4%onanoperatinggrowthperspective.

Soyou'reright,there'salittlebit.Butagaintogoback,partofthatreasonisbecauseyouput$40millioninthemarketinginthere.SoI'mnotsaying,itdoesn'thaveaP&Limpact,butjusttomakesurewe'reallclearonwhythatisthecase.


Right.Soandthenabiggerpicture,ifwegobacktotheAnalystDay,andhowyou'reinvestingforgrowthetcetera.Sothenet-netofallofthisis,youhavesomeupsideonthecorporateside.You'reinvestingabunchback,butyou'renotinvestingitallback,sothatyoucanstillsqueezeoutthis3%,4%operatingprofitgrowth?That'sthegoalinternallyandexternally?

MarkBelgya(CFO):

Yes,Ithinkthat'sfair.Theothercommentonthe4%,againitgetslostalittlebit,becausewe'resayingthatthebuybackisoffsettingthemilkprofitloss.IfyoustripoutthemilkprofitthatweincurredinthefirsteightmonthsofFY16thatweownedthebusiness,we'reactuallygrowingoperatingincomeat6%.Sowe'reoffsettingit--sowe'rebeingnegativelyimpactedwhenyoulookatitonareportedbasis,butyoustripthatout,we'reactuallyupplus6%.


Okay,great.Thanks,guys.

Operator :

Thankyou.Iwillnowturntheconferencecallbacktomanagementtoconclude.


Thankyouverymuch.ThisisRichard.Ijustwantedtoclosebysaying,thatI'veneverbeenasoptimisticaboutourbusiness,ourbrands,ouremployeesthroughouttheCompany,thebestintheindustry,andtheleadershipteam,especiallythenewleadershipteamwehave.

Ijustthinkwe'reinagreatposition,andIwanttothankeverybodyandthankouremployeesforthewonderfuljobthey'redoing.Andthankallofthepeopleonthephoneforpayingattention,andaskinggreatquestions.Sothankyouandmoretocome,bestisyettocome.


Thankyou,Richard.ThisisMarkSmucker.JusttoechoRichard'scomments,appreciate,ofcourse,Richard'ssupport,butthankallofyouonthephoneforyourtimetoday,andyourthoughtfulquestions.Andagain,justouremployees.Phenomenaljobtheyhavedonetodeliverthisincredibleyear,andthefutureisbright.Sojustallofthetremendouseffortstakenplacethisyearandgoingforward,thankyou.

Operator :

Ladiesandgentlemen,ifyouwishtoaccessthisrebroadcastafterthislivecall,youmaydosobydialing855-859-2056or404-537-3406,withapasscodeof10365564.Thisconcludesourconferencecallfortoday.




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