Good morning, and welcome to The J.M. Smucker Company's Fourth Quarter 2016 Earnings Conference Call. This conference is being recorded and all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. Please limit yourself to two initial questions during the Q&A session and re-queue if you then have additional questions. I will now turn the conference call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on our fourth quarter earnings conference call. With me today and presenting our prepared comments are Richard Smucker, Executive Chairman; Mark Smucker, President and Chief Executive Officer and Mark Belgya, Chief Financial Officer. Also joining us for the Q&A portion of the call are Steve Oakland, President, US Food and Beverage and Barry Dunaway, President, Pet Food and Pet Snacks. Vince Byrd, Vice Chairman is also on the line from another location. During this conference call, we will make forward-looking statements that reflect the company's current expectations about future plans and performance. These statements rely on a number of assumptions and estimates and actual results may differ materially due to risks and uncertainties. I encourage you to read the full disclosure statement in this morning's press release concerning forward-looking statements. Additionally, please note the Company uses non-GAAP results for the purpose of evaluating performance internally as detailed in the press release, which is located on our corporate website at jmsmucker.com. As we indicated earlier in the calendar year, we are transitioning to one non-GAAP earnings per share metric in 2017 which excludes non-cash intangible amortization. We will refer to this as adjusted EPS. Amortization expense will also be removed from our definition of segment profit as well as non-GAAP operating income and net income. We will file the Form 8-K later this quarter to recap prior year segment results to reflect the new definition. We have posted to our website a couple of supplementary slides including a bridge from our fiscal 2016 results to our fiscal 2017 adjusted EPS guidance. These slides can be accessed through the links of the webcast of this call. This document and a replay of this call will be archived on our website. If you have any questions after today's call please contact me. I will now turn the call over to Richard.

Thank you Aaron, good morning everyone and thank you for joining us. Fiscal 2016 was a dynamic and exciting year for The Smucker Company as our teams delivered on a number of key strategic initiatives. These included significantly improving the performance of our coffee business, reflecting the launch of the Dunkin' Donuts K-Cups and returning momentum to our mainstream coffee business, expanding distribution for our Natural Balance pet brand, executing a seamless integration of the pet food business, exceeding our synergy and working capital targets for the year, divesting our US Canned Milk business. All resulting in record financial performance and earnings and cash flow that exceeded our expectations. Let me expand on the results for the year. Net sales increased 37% to $7.8 billion reflecting the full-year contribution of Big Heart Pet Brands. Excluding acquisitions, divestitures and foreign exchange, sales increased 3% for the full year. Non-GAAP operating income was up 49% to $1.28 billion with the contributions from pet and strong coffee segment profit growth being the key drivers. Non-GAAP earnings per share were $6.57 including a one-time $0.42 per share non-cash benefit. This compares to our most recent guidance of $5.84 to $5.94 which excluded the tax benefit. Lastly, the Company generated free cash flow of $1.26 billion which is well above our original estimate. Reflecting the strong cash flow, we exceeded our deleveraging objective for the year reducing total debt by nearly $750 million. We also returned over $750 million of cash to shareholders in the form of share repurchases and dividend. There were numerous accomplishments during the past fiscal year and this performance is a testament for the dedication of our employees and we thank them for their continued effort. We are well-positioned to continue this momentum into fiscal 2017. Since the last time we…

Thank you, Richard. Good morning, everyone. As you know, our company is unique in being led by only six CEOs in its 119 year history. I am honored to succeed Richard as CEO and serve as a steward of this great company. Richard has led our company through a period of significant expansion and strategic transformation. As a result, our company is stronger than ever. I am excited to lead our talented team, leveraging the continued council of Richard’s dad and our outstanding board to drive continued growth and shareholder value. I also would like to echo Richard’s comments about Vince and thank him for his contribution and mentorship. The focus of my comments today will be to provide an update on our business segments including additional color on full year 2016 performance and initial thoughts on fiscal 2017. I will start with our coffee business which far exceeded expectations for the year. Net sales were up 8% and segment profit increased 18% to $646 million representing a full recovery of the segment profit decline in the prior year. This outperformance was driven by several factors including the successful launch of Dunkin' Donuts K-Cup, the implementation of the planned Folgers canister downsize, a moderation in competitive activities and the net benefit of lower commodity costs and pricing. Providing lower pricing on Folgers roast and ground coffee resulted in improved performance for our mainstream coffee business in 2016. Tonnage for our mainstream brands was up 3% while units shipped were up even more given the canister downsize early in the fiscal year. In addition, our dollar share within the mainstream segment of the coffee category increased nearly two share points to 55% for the latest 52 week period. We anticipate momentum in the coffee business to continue in 2017. Key initiatives…

Thank you, Mark. Good morning everyone. I will begin by providing commentary on our fourth quarter results followed by 2016 cash flow performance and ending with our 2017 outlook. We concluded the fiscal year with strong fourth quarter earnings. Non-GAAP earnings per share were $1.86 for the quarter, including a one-time $0.42 per share non-cash deferred tax benefit related to the integration of Big Heart into the Smucker Company as was previewed during our third quarter call. This strong finish to the year was mostly attributable to coffee including higher than anticipated volume for our mainstream and premium coffee brands and a favorable price to cost relationship. The comparison of fourth quarter earnings between years is significantly impacted by one-time items reported in each of the respective periods. These include the deferred tax benefit in the current year as well as the Big Heart acquisition and financing related activities in the prior year. As a result, the remainder of my fourth quarter commentary will be focused on the business segments. Beginning with coffee, fourth quarter net sales grew 9% as favorable volume mix of 13% was only partially offset by lower net pricing. Sales of the Dunkin’ Donuts brand doubled over the prior year with K-Cups driving much of this growth. Double digit gains for bagged Dunkin’ Donuts coffee also contributed. For the Folgers brand, net sales declined 5% attributable to lower net price realization and lastly Café Bustelo sales were up 28% as the momentum for this brand continued. Segment profit increased $43 million or 39%. We recognized lower green coffee costs in the quarter which were partially offset by lower net pricing. In addition, higher volume mix more than offset increased marketing. Turning to consumer foods, net sales were up 5% excluding the impact of the canned milk…

Thank you. [Operator Instructions] Our first question comes from Andrew Lazar with Barclays. Your line is open.

Good morning, everybody. Just I guess a quick one from me and thinking about the underlying EPS growth guidance for fiscal ’17, as you pointed out, it’s roughly 7% to 10% or so, and I guess you’ve talked about base EPS growth in the sort of the 10% range, I think for ’17 and ’18. So I’m just trying to get a sense of what leads to the, call it, that 8% at the midpoint type of growth range, is it just conservatism, is it coffee outperformed pretty dramatically this year and therefore, we need to just tailor that back a little bit in our expectations for ’17 or the things that I haven’t mentioned, just trying to put that in perspective?

Hey, Andrew. This is Mark Belgya. Thank you for the question. What I would say is, as Mark and I think we reiterated, we will deliver the $100 million in synergies. We have a clear line of sight on that. Where we’re landing sort of that 8% is we are having a significant increase in marketing spend for the coming year. Obviously, with the sponsorship of the Olympics and reestablishing some of the marketing expense in this year. So that is the biggest driver. I think in terms of the coffee, I would put that more in the category of where we might land in the range. Obviously, we did have a strong year and we think to continue. We feel good about that. But that’s probably a factor that comes into play a little bit as well. And then the other one is probably to a lesser degree is just the FX impact. As I mentioned, we’re having about $20 million headwind. We hope to cover at least half of that, but there is a little bit of that back in as well.

Got it. Thanks for that. And just a very quick one. I noticed that distribution expense I think as a percent of sales was much lower than I guess it typically is this quarter, just trying to get a sense of why that is and is that a sort of a more sustainable level? Thank you.

Andrew, what that might be is that I think is, we are aligning the big, basically the big heart P&L where certain things fall in, cost at probably more consider distribution might have been moved, but we can follow up if there is something significantly different from that response.

Thank you.

Thank you. Our next question comes from David Driscoll with Citigroup. Your line is open.

Great. Thank you and good morning. Richard, congratulations on your retirement and Mark, what a big day. Congratulations here for you and I guess it was May 1st, but for us, it feels like today. So congratulations, guys and Vince, all the best. Wanted to ask a follow-up on Andrew’s question on the guidance. So Mark, a different way to look at this would be to say that that $100 million of synergies, I think that number alone, gets you something like $0.57 a share in incremental EPS benefit in 2017. And that gets you to kind of the top end of the range. So maybe could you try to answer just slightly differently and just say that, if synergies kind of gets you just to the top end of the range and then it suggests that the rest of the operations are really on balance, flattish? I know there is a share count benefit, there is milk dilution that goes on in there, but it still just seems like the underlying expectation of the core, ex the synergies is basically flat?

Yeah. David, it’s interesting, because we’ve obviously went through that same line of thought and the way I would describe it is that you’re exactly right, the $100 million is a $0.57 delivery. The marketing increase I will tell you is a significant increase there. So we feel very comfortable to be able to invest the marketing dollars back into business. So there is a little bit of a discussion here on whether or not the business is flat from a performance perspective or it’s flat because we have invested in the marketing, we would choose as the latter saying that the marketing increase is offsetting some of that at some degree. The other thing is, I think Mark suggested in his prepared comments and said, we are also investing in innovation and growth, and also in China. So obviously those dollars was embedded into the business portion of it when you just separate it between synergies and non-synergies. So you can draw the conclusion that’s coming from the business, but those are the two to three factors, marketing, innovation and investment in China, a little bit of FX as I mentioned that are really kind of bringing that number back down.

Okay. And so my second question, on coffee, you know, back at your Analyst Day, and I believe Steve had said that, it would be to till like 2019 before the company recovered the profitability seen in 2014. I think as of today, you already recovered the profits. So maybe just kind of two subtle questions in here, why does this outperform so much relative to the expectation? And then what I really care about is, how does this impact kind of going forward? I mean, you had a very different outlook on how profits were going to move in this business. I am not complaining by the way, this is really wonderful that the profits are up so much. But I think we all kind of in worry that the massive outperformance and coffee profits in 2016 will somehow retard the ability of profits to grow in 2017, was that clear guys?

I think it is David. Hi, Steve Oakland. Let’s talk about the coffee business briefly. As you think about the numbers, we did get there a year or two ahead of what we guided, and we got there on two things really and the most obvious one is this, the launch of Dunkin' K-Cups and we all know that was one of the best launches in consumer products in the last five years. So that was a wonderful performance. But really more importantly financially, if you look at the performance of our core red can business and that’s an effort that started two years ago, I mean, in the year that we struggled in our coffee business, Mark and his team went back and did the downsizes, started those processes. And then we had an opportunity in this last year to get coffee pricing right to have both the manufacturing and the hedging strategy to get this thing – to get this to price points that both excited the retailer and the consumer, and the retailer is the key piece of this, you got it, get that merchandise of support. So we are really pleased with where we are there. I think you saw – I am sure, you saw that our press release on pricing that we just took. But with all of that behind us, we feel pretty comfortable that we can repeat that performance. And to your comment earlier, that would be repeating a record performance, we actually beat the 2014 number this year. So on our red can, our core business, and Dunkin' business, we feel – or Dunkin' K-Cups business we feel really good. So last in that though this year was the food segment that didn’t perform as well as we wanted to and…

That is a long answer.

David, this is Richard Smucker. Two quick comments. One, from a 50,000 square foot level, 70% to 80% of our business has really good momentum and we are firing on all eight cylinders. We are using that opportunity to make – mark that investments in our business for the future, not just for next year, but beyond and this gives us the opportunity to do that. We are not making these numbers by cutting margin expenses and it gives us the opportunity to invest back in these businesses and so - in these brands. So I think you need to look at it from that high level we do and that's driving a lot of our businesses. It’s also positioned us well for growth in the future, not just the next year but beyond. And then finally I don't like the word retirement, so I just want to let you know that. I am not retiring, I am just moving to a different role and most of the family’s eggs are in one nest and we are watching that nest carefully.

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

All right.

Thank you. Our next question comes from Chris Growe with Stifel. Your line is open.

Hi, good morning.

Good morning.

Hi. I just want to ask first if I could please on coffee, just to understand with the list price decline and having reached some of these promoted price points in fiscal '16 as input costs came down, I guess I am just trying to understand why coffee profits wouldn't be stronger in the year than the flat expectation. And also related to that would they be stronger in the first half and perhaps more challenge in the second half as you start to lap some of that. Just curious if you can give a little more help on the kind of the phasing there if that would be a factor for our models.

Okay, I will start that. Chris, it’s Steve Oakland and then maybe Mark can help me on how look at the seasonality of the profits. If you go back to the fourth quarter of 2014 when coffee prices hit like $2.20 a pound right around the company, then we saw it come down basically $1 a pound over that time. It’s bumped up in the last day or so a little bit, but if you think about that the fastest most efficient way to get that pricing for the consumer was with trade. Okay. We can impact shelf price on a promoted period immediately with trade. Okay, so in the short term that's very efficient, in the long-term it’s very inefficient, but it promotes all kinds of buying, loading, all this inefficiency in the system. So over the last year we've taken a couple of list price declines to mitigate that, to make the promotional allowance less. So we’ve leaned into to current coffee pricing on our promotional price points and now this has allowed us to sort of drain that out, get a better list price to promoted price ratio so that our everyday prices get better and we maintain the current pricing. So we try to make that clear in the release that we did to give a little more clarity on that this time so that the costs have been reflected in total coffee pricing. This make I think over the long term in a more efficient manner

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

And then – Chris, this Mark Belgya. Just in terms of sort of the seasonality if you will of your question, we are going to be lapping last year's first quarter pricing movement. As Steve mentioned, we had this year price decline, so we had the full effect of basically two price declines, so while the cost was certainly going to be lower than they were a year ago, this price declines along with ways some of the trade will hit through the quarters will probably negatively impact first quarter and then balances about through rest of the year.

And that’s really helped. Those things did knock the volumes. We feel good about where the sell through and the volume numbers are, but just how the pricing is versus a year ago and how we recognized trade in those periods may soften the first quarter a little bit.

Okay, that's a good thorough answer. Thank you for that. Just one quick follow-up if I could. Without [indiscernible] free cash flow, so I didn't want to ask if you just consider really from Mark Belgya the $1 billion versus the $1.25 billion, obviously it sounds like the majority working capital benefits came through in fiscal '16 with some still in fiscal '17. Is that the main reason for cash flow being down, also looks like CapEx will be up a little bit year-over-year? Just trying to get sense of what could be dragging down the cash flow over and above the working capital effects?

Yeah, that is the primary driver. That was probably $100 million of it. And then the other big thing we had this year, we actually had two significant type cash refunds that were called one-time, that will probably roughly 100 million as well. So those would come out that kind of gets you back to the billion dollar versus this year.

Thank you. Our next question comes from Ken Goldman with JPMorgan. Your line is open.

Richard, I think it was you, who mentioned coffee picking up the last few days but at least as we look at the charts, Robusta and Arabica they are each up maybe 20% after recent lows. So just curious can you talk about or anyone feel like talk about what you're seeing in the coffee commodity market whether you think these current prices are reasonable given current supply demand dynamics I guess and sort of what your outlook is from here?

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

You know Ken, the recent run of theirs, there is always volatility in the coffee business. We are fortunate to have teams on the ground and offices in both the two largest markets of Brazil and Vietnam. And so, again the coffee is relative to where we are priced to relative to where we are promoted to. And if we look – if our teams that are on the ground in those markets look at the coffee costs, there has been some weather noise in the last day or two that’s driven enough but it does appear I think our opinion is there is going to be a great Arabica crop this year. And so we think that coffee will trade in a price range that supports where we are priced between our position and our opinion. The good thing about this business is we have pricing; we have pricing and capabilities here. And not only do we have the coverage but we have the ability to move price should we need to. So we feel pretty good about the Arabica crop as it goes forward, Robusta might be a little tighter but we think the Arabica crop is going to be a big one this year and pricing should be reasonable.

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

Hey Ken, this is Mark Smucker and thanks for the question. I will start and then if anybody else wants to chime in. So a couple of things, as you know if you think about our performance historically has been very good and we have had historically a very strong cost discipline in multiple areas of our business. Part of what we've embarked on which really was the catalyst of Big Hard acquisition but to think a little bit deeper about our overall cost savings initiatives and how we might maybe do a little bit better you are right that our productivity measures versus our peers are probably better in many cases and we are generally leaner I would say than some of our peers but having said that we have an obligation obviously to our shareholders to make sure that we have the best cost discipline that we can have. And so what we've been doing and this is part of the explanation of the 50 million is an ongoing basis making sure from a continuous improvement that we have the discipline in our supply chain, our operations, our purchasing and longer term as we think about how do we get more efficient in trade all of those things should help drive what I would call some incremental savings for the bottom line. So it isn't - we don't think about it as a one-time benefit but we are comfortable that we can at least deliver that and beyond these next couple of years we should be able to continue to deliver annual cost savings objectives which we hold our teams too. The good news about that is it us as Richard mentioned, it is allowing us to invest and enhance capability and a very high level what those capabilities are focused on is getting better at engaging with our consumer and getting better and are engaging with our retail customers. And so, strategically, having the right balance between our leading number one brand, which are really the engine that fuel our growth as well as having the right emerging brand in our portfolio as part of that strategy. And so, making sure that we have dollars that can fund those enhanced capabilities both in consumer engagement and customer engagement is really going to help drive our growth, both top and bottom line long term.

Thank you very much.

Thank you. Our next question comes from Jason English with Goldman Sachs. Your line is open.

Hey, good morning, folks. Congratulations. I wanted to spend some time, you mentioned in your prepared remarks, a moderation in terms of added activity. I was hoping you could expand on that a little bit more in terms of where you’re seeing the moderation and then also as part of your prepared remarks, you talked about sharpening price points on some of your businesses, as you mentioned Dunkin, how do we split those two in terms of moderation and added activity and just opposed with it sounded like a bit more competitive activity coming from EMEA?

Jason, hi, Steve Oakland. I’ll try to touch on that. I think it’s difficult to paint the coffee category with one brush competitively. I think the prepared remarks probably were focused more on our mainstream red can business, right. And I do think we’ve seen with the coffee pricing falling where they are, we have found that price points have gotten down into those ranges where it motivates both the competitor and the consumer and the customer, right. So all of us are in price points that really works. Okay. And so we’re back in that zone and I think everybody is operating in that zone. So having said that, I would argue that the premium segment was maybe the most competitive we’ve ever seen it last year. And so the Dunkin bagged business, as you know, earlier in the year, had a couple of tough quarters and we’ve talked about how we went into that in the fourth quarter. Premium green, for a whole another discussion, but green coffee is not all the same. The coffee that goes into a lot of the premium coffees as a much longer supply chain, you might expect lower coffee cost to impact us at different timing based on the type of green that it is. So in the fourth quarter, we were in a position to support that, we did and it has responded. So if you think about it, the core red can pricing had moderated, competitive set had moderated, the premium business probably is in that space now and the last piece will be K-Cups and we’re going to lean into K-Cups, the proliferation of K-Cups has caused that whole segment to be competing for a slower growth base and one of the levers that’s been used in there is price. We were able now to compete in that area, but that’s maybe the last piece of the puzzle and we feel good about the plan we put in front of you today will give us the dollars to support that and return that business to growth.

Got it. That’s really helpful. Thank you for that. One more question and I’ll pass it on. I want to switch gears and talk about pet real quick. First, the – roughly 3% organic sales growth, if possible could you give us a break on volume of price for the quarter and then your expectation of organic growth as you go into next year, any color in terms of what you’re expecting between premium snack and mainstream, it would be really helpful. Thank you.

Jason, this is Mark Belgya. Regarding the first part of that question, unfortunately because last year’s fourth quarter was split ownership, that breakdown isn’t quite as easy as it might sound to be. I will tell you that now that we’re all on the same system as of March 1 and obviously in fiscal ‘17, we’ll have that full line of analysis for all of this. So Barry, I don’t know if you could anything from just the absolute number, I think that’s probably the case.

I think what the color you provided, Mark, is the best we can do at this point. Just to add Jason, as far as our growth expectations for next year, as you know, our snack business has tremendous momentum behind it. So we expect our snack business to be at high single digit growth next fiscal year, specifically with our milk bone and our pepperoni brands. On the pet specialty side of the business, we’re lapping the expanded distribution last year in the pet specialty channel. But we would expect mid-single digit growth this coming year as we will launch a national advertising campaign behind the Natural Balance. We also use our two major retailers in Pet Specialty, but there is also a significant amount of sales that move through the independent trade. We have a push behind our Nature's Recipe brand, we think there is some real opportunities there, that’s our gateway specialty brand, so we see some growth there. And then also our snacks play a significant role in Pet Specialty, so our widely distributed brands, and also there is tremendous growth opportunities there. Food is going to be the lower growth this year as far as the portfolio is concerned. You know what our challenges were this past year, specifically with [indiscernible] and Bick's. We are encouraged that we have actually seen negative consumption trends start to decelerate at the end of this last fiscal year. We’ve put some bonus bags into the market, you’re going to see more of those going into market in June. So a lot of effort stabilizing our dry dog food business and trying to get that business back where it needs to be. So that provides the color you were looking for?

Yes, very helpful. Thank you very much. Gentlemen, I will pass it on.

Thank you. Our next question comes from the line of Alexia Howard at Bernstein. Your line is open.

Good morning everyone. [Technical Difficulty] talking about the e-commerce at the Investor Day last year, are you able to dimensionalize how big that is for you as of now, how fast it grew last year? I presume the key categories in there are probably coffee and pet food, which one of those is bigger, would just like to get some color on that since we don’t see that in the measured channels. And then you mentioned China investments, can you just give us a little bit of color on how much funding over there now, what the strategy is over time? Thank you. And I will pass it on.

Alexia, this is Mark Smucker. I will start. The first -- your first question just as it relates to e-commerce is that you’re right, we are – I would say, we are a little bit underdeveloped versus our peers in that space and so as I talked to Ken’s question earlier, relative to investments and what we are trying to ramp up, that is one of the things and so not to get into too much specifics, but as we think about, we actually have just reorganized some of our commercial functions that would include sales and some of our marketing areas, but also in the digital space, we have actually destocked our capabilities there and are currently in the process of re-evaluating our total e-commerce strategy and how we better serve our e-commerce customers. And when we think about e-commerce, that includes both the digital only retailers like Amazon, as well as our brick and mortar customers that have a significant online presence as well. So a little bit of a general answer, but suffice it to say that it is on our radar screen and it is the priority for us to continue to develop that business.

And then on China?

On China, I think you asked. So just in terms of sort of the financial impact, I would say, it’s about $0.03 to $0.05 for the current year in fiscal ’17.

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

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

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

Thank you. Our next question comes from Mario Contreras with Deutsche Bank. Your line is open.

Hi. Good morning.

Good morning, Mario.

So, I wanted to go back to some of your comments from your Analyst Day last year with respect to coffee, some of the caution around getting back to fiscal 2014 coffee EBIT levels, not until 2019, some of the reason for the was related to investment around the perfect measures. So, obviously you’ve already achieved that goal of getting to the profit recovery but I wanted to understand how the investment is going in perfect measures, is that still a major focus point for you guys?

Hi Mario, with regard to Perfect Measures, I think we still think it has the potential and still feel great about it. I’ll tell you the reason you put things in lead markets or in test markets is to learn and we learned a lot. And our trial numbers candidly were not what we needed them to be, but our repeat numbers were fantastic. And so, it tells us that we probably got the positioning a little wrong, we’ve probably got some of the initial communication a little wrong but we got the concept right. And so this year we are going to relaunch that with a little better packaging, a little better messaging and we are going to - it’s a heavy capital investment because the technology is unique. And we want to make sure we get it just right before we lean into it on a more national scale. We still think the concept has a lot of legs but we’re probably a year behind where we hope to be at this point. Those investment numbers are baked into the numbers of the guidance that Mark gave earlier, so continued investment.

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

It’s going to be high-single digits which equates to about $40 million.

Thank you. Our next question Pablo Zuanic with SIG. Your line is open.

Good morning everyone, look a couple of questions on coffee for Steve and then I have a follow up on Pet Food. Steve, so Starbucks’ Howard Schultz in January, he talked about pretty much implied to – threaten to walk away from Couric job. And then in the April call, he came out and said at least 3 or 4 times in the conference call that they have been able to renegotiate terms at very favorable terms with Couric and that those terms gave some more flexibility. So I’m wondering here if Starbucks can do that with job why can't Smucker, if you can comment on that. I'm just surprised that they were able to renegotiate terms now there was a change in ownership there and apparently you haven’t. And related to that I understand that the idea of sharpening price points for Folgers and K-Cups the category has been sticky of course, well you know brown moves quite a bit but as you do that, I would expect other competitors to also cut prices in their K-Cup brands and then K-Cups as a category will become not sticky but pass through as ground, so I see a bit of risk there, if you can comment on that please. Thanks.

Sure, I guess I wouldn't assume - I wouldn't take the assumption that our - we haven't done the same kind of work on our K-Cup contracts and our relationship with JV because we have a legacy relationship with JV from the Sara Lee acquisition several years ago and now some of [indiscernible]. So the fact that may be we’re a little less public about some of that stuff wouldn't – I wouldn’t assume that the same things aren’t going on. So, because different companies manage their things differently, right. So, that process was in process and we feel good about that relationship, they are committed to have a major brand in the category in their system and we read the same things you read, so our assumptions are - going into those negotiations, our assumptions are similar to yours. So we feel fine there. And with regard to K-Cups, if you dig a little deeper into the IRI or Nielsen data, you’ll see that K-Cups although we don't pass through green because green is kind of small portion of the overall cost structure, it’s become maybe the most promoted category in total costs. So that’s the highest reliance, each one of those brands relies very heavily on promotion. So maybe I’m not clear enough when I talk about leaning in, we’ve leaned in on our promotional price points mostly and so those promotional price points were basically down a dollar a box from where they used to be. It still needs – it still a very profitable business but that migration has already, that train has already left. So we are where we are, we might have been a little late to follow because of the momentum we had from the Dunkin business.

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

Yes, a little bit. Yes, little bit. Our ground coffee margins are obviously because of our scale very, very good and our K-Cup margins are although good like by product standards, by company standards are quite [indiscernible]

Okay. And then just a follow-up on pet foods, I guess it’s been touched upon already, but can’t you tell us where did the mix and after the decline in dry dog and dogs snacks and specialty, if you can just give us what’s the mix on a run rate at the moment. And related to that if you can also comment on the channel mix, because we tend to think that snacks and specialty products are mostly in the specialty channel, but just remind us where you are if I am looking at the [indiscernible] Nielsen what percentage of your pet food business is that and where are your specialty, if you can provide that roughly on a current run rate and what it was averaging in ’16. Thanks.

So you are looking for the channel mix, I just want to make sure we understand the question, you look for the channel?

Well, I am asking two different questions in the case of pet food, right. I mean because obviously you explained that snacks and specialty are doing well in terms of your natural organic brands, natural balance and the other brands are doing well and dry is not doing so well. So, I am just trying to understand what – where are the sales mix and in terms of products in fiscal year ’16? And then it’s a separate question, what is the channel mix, right, because it – dry dog is also sold in the specialty channel, right and snacks are sold in both, your natural balance but it is only sold in specialty, I understand that. I am just trying to get a little bit more color in terms of what your current product mix and separate what your current channel mix if you can provide that.

Okay, from a channel perspective, our total business is about 20% of our business is in the pet specialty. And then Mark, you want to take –

Yeah, Pablo, this is Mark Belgya. Just to make – again I think I understand your question and it goes back to a little bit earlier [indiscernible] if you look at the mix product, okay, we benefit from mix perspective. So when the growth occurs, as Barry described from a channel perspective we are also benefitting from product introductions, so whether it’s specialty or snacks or even cat probably more than dogs, those are probably mix benefits. Obviously this is a heavy product, it is a lot of volume, so that’s where the negative associated, the very positive mix story and negative overall volume story because of the dry dog patent situation.

Sorry to insist, but so dry dog will be what percentage of sales now on a run rate now?

Yes, 10% of total sales.

Thank you.

The only other thing I would reiterate, because I do think it gets lost occasionally because particularly as I have had these conservations over the last few quarters, clearly [indiscernible] challenge, when you look at our food business, the cat food side of the business is a little bit larger and has done okay, so it has balanced out a little bit so while not trying to downsize the impact of [indiscernible] the volume and it would have had over the course of the year, the cat food has allowed us to manage through the overall food a little bit more than maybe the takeaway would be –

The only thing I would add, this is Mark Smucker, is just reminding everyone that the brands that participate in those two channels are very different. It’s very similar to the natural space in human food where you’ve got the national channel with the whole food and the sprouts and the likes, in general there is not a lot of overlap in the brand, so the brand tend to be unique. It goes to individual channels.

This is Richard and just adding to that for a second just any acquisition that we’ve made and again this acquisition is only 18 months old. Once we’ve integrated these businesses with sales teams, we’ve seen some opportunities again as per our existing sales, we’ve said, okay, we are kind of weak in this channel and with the relationships we have with these customers we could relate those businesses and it takes a little while to identify that and then build those additional sales with those customers and we are just in the process of doing that, so we are pretty optimistic about finding those key customers that we can build our business with and so we should see some more growth this year in a number of these channels.

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

Thank you. Our next question comes from Matthew Grainger with Morgan Stanley. Your line is open.

Hi. Good morning. Thanks for the question. I guess I just wanted to follow up on the net sales growth expectation and just to try and dig in a little bit more into segment level. Thank you for the commentary on pet, but I guess Mark Belgya, is there any more visibility you can give us on that 1% ex-divestiture sales growth, how FX plays into that and how we should be thinking about it by segment across the rest of the business?

I guess what I would say is that, about -- the coffee pricing would be about a point of the overall company. So you can kind of dollarize that to get how much the coffee would be. That’s by far the biggest driver from the downside, so if you take the milk loss, the $150 million that I mentioned earlier, and then you had 1% of sales, call it, somewhere between $70 million and $90 million on coffee pricing. That’s a big negative. So, just do the math and kind of attribute to the rest of the business. Obviously, the FX having a little bit of effect, but it’s actually not, it’s not a big driver of the overall 1% decline in total net sales.

Okay. All right. That helps. Thanks. And I guess just really quick follow-up on the Dunkin takeup issue, you talked about some of the untapped adjacency opportunities in flavorings and line extensions, your market share has sort of stabilized over the past 6 months, and it’s pretty close to where your share has been in roast and ground. Right now, can you just give us a sense of sort of where you see, in term of growth opportunities, how much of that is depending on holding that share, participating in category growth as opposed to continuing to push share higher in to that high single digit range and what you think is feasible?

Matthew, I think it will be, it will vary by business. I think there is still runway for the Dunkin business, there is some core flavors on Dunkin and Dunkin tends to be a more flavor driven business. So there is some new item opportunity on the Dunkin brand and then quite frankly, now that the Folgers brand is in the right price point, getting the right support growth from the retailer and the consumer acceptance, it will be better execution of our promotional strategy on Folgers. So we’ll execute better on Folgers once the item is planned.

Okay. Thanks, everyone.

Thank you. Our next question comes from Akshay Jagdale with Jefferies. Your line is open.

Hi. Thanks for the question. So a couple of, two questions, one on cost fees. Can you just explain to us or break out of the 18% growth that you saw in operating income, segment operating income, how much of that was a result of pricing net of commodity costs and what is the general expectation for pricing, net of commodities for ’17. That’s the first question and then I have a follow-up on pet?

I would say it’s a balance, I would say part of it is pricing and the timing of the pricing is important to think about, we talked, I believe in our first quarter call a year ago, that we leaned into, we took pricing early, we have good coverage and we had an opinion in the market that we were going to get that money back in green, which we did in the fourth quarter. So, in the fourth quarter, obviously, green pricing to the cost was a bigger impact, but we sort of spent that money upfront. So I would say, it’s a combination of that, green pricing, when you get, number one your high volume item, when you get volume up on those facilities, it really -- it falls for the bottom line, So that’s very efficient for us. So Mark, I know Mark is digging for the exact percentage number as we speak, but it’s a balance between the volume that’s generated and the implications of that volume all the way through to the system on red can and then the pricing.

Yeah. It’s probably a little bit heavier on the price, cost, maybe two-thirds, one-thirdish. But again I think that goes back to the quite a while ago, it was just sort of the way the timing on the prices.

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

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

The numbers that we just quoted were a quarter, fourth. Was your question on full year or just the quarter?

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

Okay, it’s probably a little more 50-50-ish.

Yes, 50-50 on the year with backend loaded because of the timing of the -

Sorry, I thought you were asking specifically this quarter.

And then on pet, can you give us a little bit more color on the quantity of earning, what happened with gross profit growth for the year, what’s your expectation next year?

So the quality of the earnings – and I will start, Barry is going to jump in. If you look over the course, I mean, this quarter specifically, we knew marketing was going to be down little bit from what it was, because it’s the timing of getting the product. So we also had the synergy recognition, which picked up in the latter part. So if you go back to the early part of the year, we expected quarter-over-quarter improvement on margin, which we delivered in Q2, Q3, and Q4. I think from a cost perspective going forward, the costs are lying very similar to what we see in our consumer food, so [indiscernible] continue to be favorable. I think as Barry mentioned, we are going to continue to bounce back and things like that and I have a little bit of gross profit. But then of course I think we have said overtime, of the three segments of the business, the Natural has the lowest profitability, and I think Barry and team worked, and as well as we integrate that into the overall Smucker Company from opportunities there as well.

Absolutely, Mark. Our [indiscernible] solid for F17. If you think about the mix, our staffs continue to drive the business, that is where the strongest margins on the business are as well. We have seen – even cat snack is a small category, but tremendous upside there, so I think we have very solid quality of earnings for next year. We haven’t made any significant cuts to get to our growth number for next year, year-over-year.

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

Hey, Akshay. It’s Mark Smucker. Not really – I don’t think we really can give you any more color other than to say that, as we – this was a huge year, and not only did we make the largest acquisition in our history, but that acquisition was again the catalyst to sort of think about things like are we going to market in the efficient way, do we have the right capabilities to engage our consumer and our customer. We have recently opened our innovation center, which is very much all about our customer retail partners. And so the long and short of it is, as we looked at our organization and we took some opportunity across not only our commercial functions, which would be sales and marketing, and thinking about how we would organize those differently. But we looked across our supply chain networks, our finance organization, our – some of our administrative functions as well, just to make sure that we were running them in the most efficient way. I would say that the – one of the key things is that we have, as I mentioned in the script, we have an individual from Big Heart, who is leading our growth in innovation organization and so we are putting sort of a renewed focus on, not that haven’t, we have done a good job on innovation, but making sure that our muscle, where we are building muscle is really around innovation longer term, and making sure that our understanding of the consumer is sharp and that we can act against insight that we are learning about the consumer as we go forward. So I think that’s it.

Thank you. I will pass it on.

Thank you. Our next question comes from the Farha Aslam with Stephens, Inc. Your line is open.

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

This is Mark Belgya. I will start and Richard or Mark if you want add more from a strategic perspective, but as we look at our deployment of cash coming out of the deal last year, we obviously emphasize the importance of paying down debt over the course of you know three to five years which we have made great progress on as I said earlier it allowed us to get back into repurchasing shares. We feel very comfortable with the billion dollars of free cash flow that we will be able to continue that debt pay down plan, obviously continue our dividend payout policy. And it allows us a little bit of flexibility as strategic options come in, so whether that’s M&A, again I don't think we're looking at a huge transformational like a pet at least from a leverage perspective but certainly there is M&A opportunity as well as some buyback. And I think you know buyback is situational, so we traditionally do not build that into our plan but if you ask me what is one of the opportunities for the upside of that range you would have to provide that with an opportunity in there.

And this is Richard, just strategically acquisitions are the key factor of our growth over the long term. And so we still continue to look for those opportunities in fact we’re now in the Pet Food business because this is another late decision. And so we’ll continue to look there and again those may not be strategic of the short-term but there may be more bolt-ons and smaller acquisitions but there could be so many – the short answer it’s always important to us.

Is there a target leverage ratio that you would feel responsible for stabilizing it?

Well, what we said is that you know there has been a little bit of maturation for us as a company we were always very conservative and I think now two or three, we know it’s a pretty good number to work around and we've been pretty vocal to that last six to nine months as we get closer to that three times that just opened up the door a little bit more.

Thank you. Our next question comes from Chuck Cerankosky with Northcoast Research. Your line is open.

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

This is Richard, just first of all you know it always helps when you're customers are happy and doing well, any customer and so we’re glad to see that they kind of turned the corner and that's great but they didn’t drive our growth, this growth is broad-based, so that was not driving us.

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

And when you look at how consumers are spreading their money across your brands premium and mainstream what does that say about where the consumers head at is right now?

So I think the consumer is still somewhat cautious and the great thing about our brand is our brands are pretty well-positioned to supply all of our consumers. And so, it is a cautious world out there and we're still a good value. I mean, our Folgers, or whether it’s Jif or whether it’s Smuckers it's a good value to consumer, so our industry which has had a commodity price environment that’s allowed us to be - maintain our margins and reflect those prices to the customer base. So we've all enjoyed not just coffee but the other commodities have been. But then in the place where we've been able to market the brand, provide great price points and innovate, right. So we've got innovation regardless of the business and things that are very high mix and high cost and then provide items in all of our brands and all of our businesses to the discount channels for the growth in the dollar industry and those places, so we’ve been able to participate across the spectrum of channels that pretty well in the cost base today and as we look forward looks like it’s going to help us do that.

And, Chuck, this is Mark Smucker. Just to reiterate, making sure that we are developing and growing our key mainstream brands but also making sure that we have the right, the truRoots, the Sahale, the Natural Balance, those are brands that aren’t necessarily as big, but certainly served a consumer need and are important to our portfolio.

All right, thank you very much.

Thanks, Chuck.

Thank you. Our next question comes from Rob Dickerson with Consumer Edge Research. Your line is open.

Thanks a lot. Just a clarification question and more for Mark. So it sounds like you’ve said in your commentary net adjusted operating profit will be growing about 4% and then I know if you kind of like use that 116.6 in your diluted shares outstanding that implies about another 2.5%, so that gets me to 6.5% EPS growth in’17. Is the assumption here that there are other kind of below the line like the tax rate could be a little bit better, interest rates comes down a little bit or the interest expense comes down a little bit? And then lastly, if we look at the shares you bought back in Q4, really in fiscal ’16, I mean that’s the most amount you’ve ever spent on a buyback outside of fiscal ’14. So could there be like additional cash outlays in ’17 to incremental buybacks even though you might not have as many of the one-time benefits on your working cap? Thanks.

So, Rob, so a couple of things. I think the way you are thinking about it from a percent increase, it’s pretty much in line, maybe simple math would say 4% plus operating profit growth, 3% shares and a point tax and interest so that kind of gives you the 8%. In terms of buyback, what we’ve guided indirect and we have conservations particularly with the ratings is we kind of use a 2% as a long term model, so that’s a 2% buyback, so obviously in 116 million shares of 2.2 million shares. So, that as I said on your earlier question, we don’t factor that into our plan. I would say, our cash deployment would allow a portion of that, maybe not the whole 2% without pushing the leverage part we are going after, but certainly, and again it’s situational, so I don’t want to sit here and say we are going to go out and buy it, but the opportunity will rise. I believe we have the cash to do it and then obviously it would be incremental. Certainly when we do it in the year we will have less of an impact to do further end of the year, but that’s the beauty of being in leverage where we wanted to be to get some flexibility.

Okay, great. And then just a quick follow-up, on the 4% in the operating profit growth, if I heard you correctly, you said the coffee expectation is about the same if consumer is - should be down a little bit just because or mostly driven by milk and then pets is up mid single digits, so if I kind of do that quick math and still get in, I am getting to probably as a sub-4%, so is there – are you – I am just trying to get a sense as to how you are or how I should be thinking about the segment’s growth relative to kind of this rolling up 4% number. Thanks.

Well, I think that – I think you will have some segment profit growth that will be a little less than 4% because as we said in our scripted comments, our SG&A is going to be flat year-over-year, so some of that said SG&A clearly goes up into the businesses, but also some of it falls below in what we would call admin support, but it’s below the segment profit, so you need a little bit of that benefit to get to the 4% on an operating profit growth perspective, but you are right, there is a little bit – but again to go back, part of the reason is because some $40 million of marketing is there, [indiscernible] just to make sure we are all clear on why that is the case.

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

Yes, I think that’s fair. The other comment on the 4%, again it gets lost a little bit because we are saying that the buyback is offsetting the milk profit/loss. If you strip out the milk profit that we incurred in the first eight months of fiscal ’16 that we owned the business. We’re actually growing operating income at 6%. So, we’re offsetting it, so we’re being negatively impacted when you look at it on a reported basis. But if you strip that out, we’re actually up plus 6%.

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

Thank you very much. This is Richard. I just wanted to close by saying that I’ve never been as optimistic about our business, our brands, our employees throughout the company, the best in the industry and the leadership team, plus the new leadership team we have. I just think we’re in a great position and want to thank everybody and thank our employees for the wonderful job they’re doing and thank all the people on the phone for paying attention and asking great questions. So thank you and more to come. The best is yet to come.

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

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