Aaron Broholm - Director-Investor Relations Richard K. Smucker - Chief Executive Officer & Director Mark R. Belgya - Senior Vice President & Chief Financial Officer Mark T. Smucker - President, Consumer and Natural Foods & Director Steven Oakland - President, Coffee and Foodservice Barry C. Dunaway - Chief Administrative Officer David J.

West - President, Big Heart Pet Food and Snacks Vincent C. Byrd - Vice Chairman.

Eric R. Katzman - Deutsche Bank Securities, Inc. Kenneth B. Goldman - JPMorgan Securities LLC Christopher Growe - Stifel, Nicolaus & Co., Inc. David Cristopher Driscoll - Citigroup Global Markets, Inc. (Broker) Jason English - Goldman Sachs & Co. Alexia J. Howard - Sanford C. Bernstein & Co. LLC Farha Aslam - Stephens, Inc.

Robert Moskow - Credit Suisse Securities (USA) LLC (Broker) Mark E. Williams - Athlos Research Matthew C. Grainger - Morgan Stanley & Co. LLC Lubi Kutua - Jefferies LLC Bryan Keith Carlson - Tudor Investment Corp. Rob Dickerson - Consumer Edge Research LLC John Joseph Baumgartner - Wells Fargo Securities LLC.

Good morning, and welcome to The J.M. Smucker Company's Third Quarter 2016 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that 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 over to Aaron Broholm, Director, Investor Relations. Please go ahead, sir..

Thank you. Good morning, everyone. Thank you for joining us on our third quarter earnings conference call. With me today and presenting our prepared comments are Richard Smucker, Chief Executive Officer; and Mark Belgya, Chief Financial Officer.

Also joining us for the Q&A portion of the call is Vince Byrd, Vice Chairman; Steve Oakland, President, Coffee and Foodservice; Mark Smucker, President, Consumer Foods; Dave West, President, Pet Foods; and Barry Dunaway, President, International. As a reminder, on March 1, Barry will be assuming leadership of the pet food segment.

At that time, the International business will begin reporting to Mark Smucker. For the purpose of today's call, questions in these areas will be fielded by the current business president. 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. A replay of this call will also be available 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. It was a great pleasure to see many of you last week at CAGNY. We appreciated the opportunity to provide an update on a number of key initiatives that are going on across our businesses.

One of our takeaways from CAGNY was how aligned the CPG companies were on the trends that we're all seeing in the changing consumer perceptions and shopping habits. The real key to success is how each company responds to these changes and perceptions. We are trying to capitalize early on trends and not the fads with bigger, longer-lasting bets.

We also believe that our company, and especially our brands, are well in line with the consumer's desires and we are in a better position than most to capture more of the growth from these trends.

Today our comments will primarily focus on the third quarter financial results that we announced earlier this morning and our updated outlook for the rest of the year. I'll begin with an overview of consolidated results. First, net sales increased 37% to nearly $2 billion, driven by the addition of the Big Heart Pet Brands.

Excluding acquisitions, divestitures and foreign exchange, the sales decline of 1% was reflected in volume decline in Consumer Foods and a price decline in Coffee. Second, non-GAAP operating income grew $108 million or 44% for the third quarter.

The addition of the Big Heart business, strong coffee segment profit growth and a one-time gain on the divestiture of the U.S. Canned Milk business were all key drivers. Third, reflecting increased interest expense and a higher share count, non-GAAP earnings per share increased 14% to $1.76.

Excluding amortization, adjusted earnings per share were $2.05, an increase of 21% from the comparable measure in the prior year. Both of these EPS metrics include a $0.14 per share gain on the divestiture of the Milk business.

Lastly, we generated record free cash flow of nearly $500 million in the quarter, bringing the full year total to $962 million. Turning to our US retail segments, I'll start with coffee, which had another strong quarter as our growth initiatives, along with favorable manufacturing overhead and commodity costs, benefited results.

Looking at the key drivers, Folgers roast and ground coffee volume, based on tonnage, was up slightly compared to the prior year, while unit shipments increased even more reflecting the transition to a reduced canister size for key Folgers offerings.

With our price reduction related to small canisters and an additional list price decrease implemented in July to pass through lower green coffee costs, consumers are seeing lower price points on shelf and our market share continues to grow.

During the latest 12-week period, our brands gained three points of dollar share within the mainstream coffee segment. For our overall K-Cup portfolio, the Dunkin' Donuts brand continues to drive growth with a 12-week ACV of over 90% and a 6% dollar share of the K-Cup category. Consumer trial and repeat rates also remain strong.

We are pleased with the momentum for this business, which has helped us at declines for Folgers K-Cups. As with other mainstream brands, Folgers K-Cups continue to be impacted by the proliferation of offerings in the K-Cup space and the resulting competitive pricing. Our team is focused on improving this trend, including price improvements.

The performance of Dunkin' Donuts bag coffee was soft in the quarter, reflecting aggressive competitive pricing. However, through recent target pricing investments, which are supported by favorable green coffee cost, our price gaps have improved and we are well positioned as we move ahead.

Lastly, Cafe Bustelo brand established a new record for the quarterly sales under our ownership with double-digit gains for both roast and ground and K-Cup offerings in the quarter.

Promotional activities such as our Cafe Bustelo pop up cafes that have successfully broadened the brand awareness, and the brand continues to gain traction, especially with millennials. Turning to Consumer Foods, overall results were mixed. Specifically, the Smucker's brand performed well in the quarter.

Smucker's Uncrustables frozen sandwiches achieved a 16th consecutive quarter of double-digit volume growth. In addition, net sales for Smucker's fruit spreads were in line with last year's third quarter and the brand continues to gain volume and dollar share within the fruit spreads category.

Within natural foods, our branded business also had a strong third quarter led by double digit sales gain for our RW Knudsen family and Santa Cruz Organic brands. Volume for the Jif brand was down from the prior year, primarily attributable to a reduction in inventory levels at several key customers.

We believe this is mostly the result of timing, as scan data trends remain positive for our peanut butter business. Lastly, in the baking aisle, the overall category remains down, which we believe is partially attributable to continued growth in retailers' in-store bakeries.

Our results have been further impacted by aggressive, competitive pricing, as was expected. Our focus remains on providing value added innovation in these categories and competing responsibly. Results for our Pet Food business also fell short of expectations in the quarter.

Mainstream pet food sales continued to reflect heightened competitive activity in dry dog food, which has impacted the performance of our Kibbles 'n Bits brand. As we discussed last week, we are looking at all levers, including pricing, and are committed to improving the competitive position of our dry dog food business.

Cat food sales were also down in the quarter, however, similar to peanut butter, we view this as a timing issue with certain key customers as market share trends remain positive.

Offsetting much of these declines were the continued strong performance of our premium pet food and our Pet snack brands, which both achieved high single digit sales growth in the quarter. We have been pleased with the rollout of the Natural Balance brand into PetSmart.

Also innovation for Milk-Bone and Meow Mix brands has continued to be a key contributor to Pet snack results. Overall, while Mainstream Fog food has been challenged, we are pleased by solid results in Pet Specialty and pet snacks, which are the growing segments of the business.

With respect to both pet foods and the broader organization, we continue to make good progress on our integration activities and synergy targets. Our March 1 integration is now just a week away, and through the hard work and dedication of many individuals throughout our company, we are well-prepared for this exciting milestone.

Lastly, as Mark will discuss in a moment, we continue to expect our full year earnings per share before factoring in the gain of the sale of the Milk business to be in line with the guidance provided at the end of the second quarter.

In addition, we remain confident about our brands and the initiatives we have in place to support future growth across our key platforms of coffee, consumer foods and pet foods. Finally, I'd like to close by thanking all of our employees. This continues to be an exciting and dynamic time and we appreciate their ongoing efforts.

With that, I will now turn the call over to Mark..

Thank you, Richard, and good morning, everyone. I will start by providing additional color on our third quarter results and then conclude by updating our outlook for the year. Net sales increased by $534 million in the quarter, reflecting the addition of Big Heart.

Including Pet, sales were down as lower net pricing, primarily for coffee, detracted two percentage points from net sales. Foreign exchange was also unfavorable in the quarter, reducing net sales by about one percentage point.

Conversely, volume and mix combined to add one point of growth as strong contributions from Dunkin' Donuts K-Cups were mostly offset by declines in several key categories. GAAP earnings per share were $1.55 this quarter, 2% below the prior year.

Included in GAAP earnings were $45 million of special project costs related to merger integration activities, compared to $6 million of such costs in the prior year. Also included were $7 million of unallocated derivative gains compared to $13 million last year.

Excluding these items, non-GAAP EPS was $1.76 or an increase of 14%, which included a $0.14 per share gain on the divestiture of our U.S. Canned Milk business. Excluding the amortization expense of $52 million, adjusted EPS was $2.05, up 21% for the quarter.

Non-GAAP gross profit grew 49%, reflecting the addition of pet food and favorable volume mix for the coffee segment. The commodity costs were also favorable in the third quarter, most notably for green coffee, and were only partially offset by lower net pricing.

Combined, this resulted in a 310 basis point increase in gross margin to 38.5%, well ahead of our previous expectations for the quarter. SG&A increased at a greater rate than sales, primarily attributable to incremental marketing spend across all three US retail segments.

For the third quarter, synergy recognition totaled approximately $12 million, bringing the year-to-date total to $20 million, mostly benefiting G&A expenses. As we indicated last week, we're now on track to achieve $35 million in synergies for the full year.

Amortization expense increased $27 million in the third quarter as a result of the pet food acquisition. Factoring all of this in and including a $25 million gain on the sale of the Milk business, non-GAAP operating income increased $108 million or 44%, while operating margin increased 80 basis points to 18%.

The gain in operating income was partially offset below the line by a higher interest expense and an increase in the number of shares outstanding related to the Big Heart acquisition. Let me now provide a brief overview of the results for our segments starting with coffee.

Net sales grew 1%, as favorable volume and mix of 5% was mostly offset by lower net pricing. For the Folgers brand, net sales declined 9%, mostly attributable to a 6% reduction in net price realization. Unfavorable mix, driven by declines in Folgers K-Cups, also was a factor.

Sales for the Dunkin' Donuts brand increased 55% for the quarter, driven by Dunkin' Donuts K-Cups. And lastly, Cafe Bustelo sales were up 16% as the momentum for this brand continues. Segment profit increased 17% for the quarter.

Higher volume mix and lower manufacturing overhead more than offset a double digit increase in marketing and significantly higher selling expense due to the Dunkin' Donuts royalties. And in addition, we continue to recognize lower green coffee costs in the quarter, which was only partially offset by the lower net pricing.

As we move ahead, we anticipate fourth quarter segment profit growth to be comparable to the year-to-date rate, reflecting the momentum in the business, additional contributions from Dunkin' K-Cups and favorable coffee costs.

Factored into this outlook is ongoing marketing spend related to new products along with plans to continue supporting key price points as well as other targeted pricing investments to address competitive activity related to Dunkin' Donuts bag coffee and Folgers K-Cups.

Overall, we are very pleased with this level of profit recovery following the decline in the prior year. Turning to Consumer Foods, net sales were down 5% as lower volume, the impact is the Canned Milk divestiture and lower net price realization all contributed.

Looking at our key brands, volume for Jif peanut butter was down 7% compared to a strong prior year quarter where volume was up 7%.

As Richard indicated, we believe the current year decline is mostly the result of timing, as consumer takeaway was up slightly in the quarter based on volume trends reported in IRI's latest four- and 12-week scan periods. Volume for Smucker's Uncrustables was up an impressive 33% for the quarter, while Smucker's fruit spreads were down 2%.

However, similar to peanut butter, we're encouraged that consumer takeaway trends were much better as scan volume was up nearly 4% in the latest four- and 12-week periods for Smucker's fruit spreads. And lastly in the bake aisle, volume for the Crisco and Pillsbury brands declined 3% and 9% respectively.

Segment profit increased 6% compared to the prior year, including the $25 million gain on the Milk divestiture. A 42% increase in marketing expense, the unfavorable impact of volume, and planned increases in manufacturing overhead cost offset much of this gain.

The higher overhead costs were primarily attributable to the new peanut butter facility in Memphis, as well as temporarily under-absorbed overhead costs related to our working capital initiatives.

On a full year basis, we continue to expect Consumer Foods segment profit to be down, as the gain from the Milk sale will be more than offset by higher overhead, the unfavorable impact of lower pricing net of cost and higher marketing expenses. Net sales for our U.S. Retail Pet Foods segments were $571 million in the third quarter.

Sales for pet snacks and premium pet brands both increased high single digits, driven by distribution gains and new item launches. Conversely, mainstream pet food sales decline of low double digits resulted in a modest overall decline for the segment. Pet Foods segment profit was $97 million for the quarter.

As anticipated, we realized a sequential increase in segment profit margin from 15.6% in the second quarter to 17% this quarter, and we continue to expect another sequential step up in the fourth quarter.

Despite the softer than anticipated top line, and a slight reduction in profitability expectations for 2016, we remain on track to deliver on our target of growing full year Pet Food gross margin by 100 basis points compared to the prior year.

Lastly, net sales for International and Foodservice declined 4% in the quarter, as the addition of pet food in Canada was more than offset by a $17 million impact of FX. Combined segment profit for our International and Foodservice businesses was up 4% over the prior year, primarily in our Canadian business.

Favorable mix, along with lower selling expenses, contributed to the profit gains. The impact of foreign exchange partially offset these items. We continue to expect FX to remain a significant headwind in the fourth quarter and into fiscal 2017.

Turning to cash flow, cash provided by operations was $542 million for the quarter, compared to $428 million in the prior year.

The increase primarily reflected lower working capital needs, as the impact of higher non-cash depreciation and amortization in the current year was offset by the benefit of terminating an interest rate swap in the prior year.

Factoring in capital expenditures of $43 million, free cash flow was $499 million for the quarter, bringing the year-to-date total to $962 million. We're increasing our full year outlook for free cash flow from $925 million to $975 million.

The increase primarily reflects the strong cash flow performance through the first nine months of the year, which includes nearly $100 million of our working capital improvement target, up from our previous estimate of $60 million.

Partially offsetting this is we now project CapEx of $240 million for the year, an increase from our most recent guidance of $220 million, as we pull forward spending on certain projects into 2016. As a result, CapEx in the fourth quarter is projected at approximately $80 million.

This step-up in CapEx, along with planned inventory build and incremental tax payment are the primary cause of free cash flow increasing only modestly for the fourth quarter.

In addition to this strong free cash flow, we used the after tax proceeds from the divestiture of the Milk business of approximately $165 million to further pay down debt during the third quarter. As a result, we ended the quarter with total debt of just under $5.3 billion, and leverage currently stands at approximately 3.5 times.

Let me conclude with an update on our full year sales and earnings outlook for 2016. We now expect net sales of approximately $7.8 billion, with a reduction from our previous guidance of $7.9 billion, primarily attributable to Consumer Foods and Pet Foods segments.

For Consumer Foods, this reflects the softer-than-anticipated third quarter results, which we expect to continue into the fourth quarter, particularly for our Oils and Baking businesses. For Pet, this reflects the continuing challenges in our dry dog food.

With stronger-than-expected Coffee segment profits and an increase in synergies, we expect to offset the net sales shortfall at the bottom line. As a result, we continue to expect non-GAAP earnings per share to be consistent with our previous guidance range of $5.70 to $5.80.

Adding the $0.14 gain on the sale of the Milk business to this range, our updated guidance is now $5.84 to $5.94 for the year. Excluding the amortization expense of approximately $1.15 per share, this would result in adjusted earnings per share between $6.99 and $7.09.

As discussed last week, we expect to recognize a non-cash deferred tax benefit related to the integration of Big Heart into The Smucker Company during the fourth quarter. While not factored into our revised guidance range, we're estimating this benefit to be approximately $50 million.

In summary, we continue to be pleased with the earnings performance of the company, and in particular, the ongoing strong results for coffee.

Our overall results reflect the success of our key growth initiatives for the current year, including the launch of Dunkin' K-Cups, achieving lower price points for Folgers' Roast and Ground coffee, introduction of Natural Balance at PetSmart, at the same time while delivering on our cost savings and our working capital initiatives.

And as we move ahead, we're encouraged by the plans in place to deliver continued growth. With that, we will now open the call up to your questions. Operator, if you'd please queue up the first question..

Thank you. The question-and-answer session will begin at this time. Our first question comes from Eric Katzman with Deutsche Bank..

Hi. Good morning, everybody..

Good morning..

Good morning..

Richard, I guess you talked about some of the similarities across the companies at CAGNY last week, but I guess one of the differences we found out today was that your advertising spending is up significantly across the bulk of the business, whereas a lot of folks are cutting back on that.

But I guess the question is you didn't really see benefit in terms of shipments and so how should we think about the fact that you're spending to support the business, which is good, but not really seeing the follow-through in terms of units out?.

Yeah, I'll give it a general answer and then I'll ask the team to respond specifically, but our advertising primarily is a little more longer term and the benefits of the advertising don't just hit quarter-by-quarter. And a lot of that is brand building and we try to do it over time. We try to be consistent.

And so we wouldn't expect to see it necessarily in the quarter. But if the team has any of the specific efforts that we made this past quarter, please speak up..

Yeah, Richard. This is Mark Smucker. I would just add, Eric, that we did pull back significantly on advertising last year so we are returning our advertising more to historical levels. And, as Richard said, it is around some building of equity. We have a new Smucker's TV commercial on air.

And then it's just supporting some of our new things, as well, I know Milk-Bone. But Richard is also right that the support on advertising generally has a residual impact, but we think it's important..

Sure. And hi, Eric, Steve Oakland; I would say there's a number of factors in the Coffee business right now that are all going right, but it would be hard not to say some of the marketing materials, especially on the Dunkin' K-Cup launch. We've got awareness out very, very quickly on that. So I would hope that the Dunkin' media has been very helpful..

Okay. And then just as my second question, a follow-up more on the cash flow side of things, free cash flow very, very strong and your debt has come down pretty quickly.

I guess, Richard, as you kind of think about that cash and returning it to shareholders, is there any, I guess, adjustment in terms of the debt paydown versus buyback and kind of balancing those two opportunities?.

I'll start on that and then I'll let Mark finish up. But we look at using cash in a variety of ways. Our first choice is to look at new acquisitions, because we think that builds the business for the long term, but share buybacks is still part of our plan over time. We still think our company is a great investment.

And with the better cash flow that we have, it gives us a little bit of better ability to do that sooner rather than later. But no announcements at this point..

Eric, it's Mark. I think – basically agree with Richard. We've been pretty adamant in the last year or so as we – or last half year, I guess, as we came out of the transaction with the speeding up of the paydown and the fact that we did around three times, I think, we're at the level that we're comfortable with, three times the leverage.

So we'll hit that at the end of next year. So that just will sped up anything in terms of whether it's acquisition, buyback or other uses of the cash.

Thank you. That's all..

Thanks..

Next will be Ken Goldman of JPMorgan..

Hi, I have two questions on Pet. And Barry, not to throw you into the fire and I realize it's early, but are you expecting to make any meaningful changes to the strategy for the business overall? Because I think it's safe to say, at least from an outsider's perspective, growth has been disappointing.

Your management has talked recently about reducing prices in Kibbles 'n Bits but mainstream dog or dry dog is, I guess, what, 28% of the portfolio? So I'm just not sure how discounting one brand is enough. It just feels – I guess, again, from one outsider's perspective, like bigger changes across the board need to be made to hit your numbers..

Well, from a strategic perspective, I would say no fundamental changes in strategy. We think the snacks business really is the key driver of the Pet Food business, both in terms of sales and profits. That's where we will continue to invest and innovate.

From a dry dog perspective, clearly we're looking at what the trends are in mass premium, and we're going to step back and understand what we need to do to compete there. Similar to all our other categories that we participate in, we feel we should have a presence in every segment.

We're watching the mass premium and we'll figure out what our strategy should be there long term. But I would say no fundamental shifts in the strategy. This is about driving the business long term and it is about snacks.

Dave, would you add anything to that?.

Are you guys there?.

Yeah, that was....

Okay. So I guess my second question is....

This is Richard. Let me just add to that....

Sure..

...because we're still very excited about the Pet business. I mean, this is – it's a great business and any acquisition we've ever made historically, there's always a hiccup. I've never had an acquisition where one of the – all the cylinders fire 100%, but we are – three-quarters of this business is doing very well.

And so we'll figure out the mainstream pet soon enough, but the other businesses are right in line where we'd like them to be. And so we're still very confident and very excited about the Pet business..

Okay. I mean, I guess it's different when Godzilla hiccups versus when a gecko hiccups. This is Godzilla for you guys. It's a very big business. But I'll move on to my next question.

You've highlighted the challenges faced by Kibbles 'n Bits, right? As we look at Nielsen data sales for the brand, they've really been in steady decline for years, and I realize the rate of erosion has accelerated versus a year ago but it's similar to what it's been each of the last eight, nine months, at least in Nielsen again.

So I guess I'm not sure why the weakness this quarter was such a surprise to you..

Yeah, this is Dave West. Let me take that question. We did see a heightening competitive activity in the marketplace in the quarter in the form of price side and weight changes in bonus bags. We have corn and soybean meal continue to be trading at relative lows.

And what we have seen is that some of that favorability and commodity was reinvested in the marketplace. I think on a year-to-date basis, we would – our gross margins in the mainstream pet food business are actually up. So not all of the commodity favorability has been passed through from our perspective.

And we're using – part of our goal on the way in when we set our plans for this fiscal would've been prior to the acquisition of Big Heart by JMS. So we executed those plans.

You will see us become a bit more aggressive now as we come in to the latter part of the year and the early part of next year to respond to some of the bonus bag activity now they're relative price and size.

But I think overall, it was a little bit more – it was more down than we would have expected it to be, but the margin structure of the business is still pretty good, and there's a – fundamentally, there's a consumer who is going to continue to look at value in the marketplace, but there are other consumers who are looking for other benefits and we will go meet those other benefits in a different way.

It won't be a price lever. So I think Barry's point was we see other segments emerging. We're very pleased with our premium dog food business in this pet specialty channel and then the independent pet channels, but we are not happy where we are en masse..

Great. Thank you..

Next will be Chris Growe with Stifel..

Hi, good morning..

Good morning..

Hi. Two questions for you, if I could. First on coffee. If we look at the coffee business, and I'm looking at, again, at some IRI and Nielsen data just showing coffee excluding the Dunkin' K-Cups. Overall, coffee has been a bit weak and I think you did cite some weakness on the Folgers K-Cup side, that I think is in part the issue.

I just want to get a sense. You've increased marketing spending, I think, behind the business.

Does it require just being more promotional, or is there one piece of the business that you need to attack, if you will, to kind of firm up the non-Dunkin' K-Cup coffee business?.

Hi, Chris, Steve Oakland. The coffee business does have a couple of big segments and if you bore into that Nielsen data, you'll see that our mainstream roast and ground business all go through a lot of change this year. Remember there's an 11% smaller canister, the promotional size, and we took a 6% price decline.

So you roll those two things in and you actually see volume up.

So for mainstream volume to be up when you take 11% out of the canister, we think it's a nice rebound for that business and we're hitting price points that excite, I talk about this, both the retailer and the consumer, right? You need the price point that gets the retailer excited about merchandising it.

So that piece of business is much healthier than it's been in a while. So then you take our Dunkin' K-Cup business and it's fair to say that that business has just come out of the gates on fire. We continue to see good momentum there. So the Dunkin' K-Cup business is very strong.

And, although small, Bustelo is starting to move our share a little bit, right? It's starting to get big enough that that business is material. Now the Dunkin' bag business has been a struggle early on in the year. And I would say that we've seen price compression in premium that we've never seen before.

Part of that is driven by green and I think part of that is driven by strategy of the competitive set. And so the good news is that the pricing we have in the market we've seen today somewhat turned that around and we expect that business as green helps us to get even better.

And frankly, the legacy K-Cup business or the Folgers K-cup business is performing, I would argue, how the K-Cup category. If you take two premium brands out, you take us and the other major premium brand out of the K-Cup business, it's not been that healthy of a category.

And so the opportunity for us is to continue the momentum on the Dunkin' business and to fix our K-Cup business and we are committed – I think that's an important statement – to growing our whole K-Cup portfolio over time.

Dunkin' has given us a little bit of a tailwind there – a lot of tailwind right there, but the challenge for us is to get our legacy K-Cup business back on track..

Is that a sharper price point then, Steve? Just to go a little further on that, is that part of the key at this point, given the proliferation of brands across the shelf?.

Yeah, there's no question. You will see mainstream K-Cups will be much more price competitive across I would – it's hard to say what our competitors will do. But, we will be following that trend, and some of that pricing is actually in the market as we speak..

Steve, I would also maybe add to that, that the retailers right now are kind of resetting the categories because, I think, they've all agreed there's been too many SKUs there. And we have some very, very good SKUs that, I think, as they do resets, we'll end up with a better position over time..

Yeah, it'll be classic category management, right? With all of that growth, I think everybody just threw SKUs at it and threw space at it. And now you'll see classic category management. How many hazelnuts do you need? I mean, you can go in some sections and there's 13 hazelnuts. So I think those things will work their way out.

But we have some real work to do on our K-Cup business. The consumers told us they want them and so we have to win there..

Okay. And just a quick follow-up on the pet food side. You've been giving sales for that business in that $2.3 billion range. And given some of the pressure here in the third quarter and the fourth quarter, it seems like we're running into that $2.2 billion range.

Have you given that estimate for sales for pet food for the year?.

Chris, this is Mark. Obviously, if you take where we ended this quarter and probably somewhat similar in Q4 and take that off, I think you're going to get down more in that $2.2 billion range..

Okay. That's helpful. Thank you..

Next is David Driscoll with Citigroup..

Thank you, and good morning..

Hi, David..

Good morning..

Good morning..

So two questions. The first one, Mark, is for you.

The 10% growth guidance in fiscal 2017 is against the $5.84 to $5.94 guidance, is that correct?.

No, it's against the $5.70 to the $5.80. The milk gain – the gain, David, is a one time. What we're not excluding, of course, is the contribution, the first eight months of milk, which is in that $5.70 to $5.80. So we'll grow off that but we're not going to grow off the milk gain included..

Yeah. No, I totally understand that one-time gains are odd but I thought it was odd that you put it in the number to begin with. But thanks for clearing that up. You did not mention last week the fiscal 2018 guidance of 10% plus growth that you outlined when you bought Big Heart.

Is that still an expectation of the company?.

Yeah. Going back to your first point, I would like to clarify why we included it because I think it's important everyone understands on the call. We have historically put the expectations on our businesses, both on the positive and the negative. They're responses for the brands so that's why over time we've included amortization and impairment.

At the same time, the brand benefits if we're able to generate a gain on a sale of a brand that no longer fits the portfolio, we felt it's just as appropriate to run that through. So while you guys may exclude that, clearly that's the reason we leave it in..

Okay, but way more important, fiscal 2018, 10% plus growth is still your expectation?.

Yes..

Yeah, fine. Thank you. And then final question for me just on Natural Balance. I think you guys said that the growth in the third quarter for your specialty business, which I'm going to assume is mostly Natural Balance – I know there's another brand there, but I think it's mostly Natural Balance – was high single digits.

I think on the last call, you had said that the growth in Natural Balance was something like mid-teens or high teens. So if those statements are true, is there a bit of a deceleration in growth right there.

Number one, is that true? And then number two, kind of how do you see the growth for that business over the longer course of time, because it seems there's some fair amount of volatility here. I mean, it's good news, but it's a question of what landscape are we in, high single digits or mid-teens..

Natural Balance, David – this is Dave West. Natural Balance was up double digits in the quarter. We have the Nature's Recipe brand, which is more of a gateway brand in pet specialty as people cross over from mass. That brand was not up as much so that goes into that premium measurement that we give you.

So I think overall we're very happy with where we are in the Natural Balance expansion with the PetSmart. We continue to be pleased across the channel and across the two major pet specialty retailers, but also with distribution gains that we're getting in other independent and other parts of the channel. So pleased with where we are.

As we go forward, we haven't given a projection with respect to growth on a forward basis, and I would not want to do that, since my competitors out there probably aren't going to give me their growth projections either, so I think I'll pass..

All right. I still appreciate the comments on the brand. Thanks, guys..

Yeah, thank you..

Next is Jason English with Goldman Sachs..

Hey, good morning, folks..

Hi, Jason..

Good morning..

I hope all is well. Good seeing you last week. I wanted to pick up where Dave left off because I, too, was struck by premium only growing high single digits in the context of all the PetSmart distribution growth.

So are we overestimating how much PetSmart distribution on the Balance product has contributed, or is the business sort of kind of flattish maybe even down excluding the distribution?.

Yeah, I think one of the things that you have to understand is the measurement of how incremental truly is that distribution. So is that incremental to the retailers as we expand? Is it incremental to the category? What are the cannibalization rates? So we had an assumption on the way in of what that business would be.

Again, Natural Balance is not the only brand in that measurement when we talk about premiums. So we have other businesses that are sold in the premium intended channels, and they are not growing as rapidly. So I'm pleased with where we are with Natural Balance. I think we've done a very good job of expanding the footprint this year.

We have our first national ad campaign on the business. We've launched into a higher protein offering in the brand and we've gotten good shelf space in the major retailer PetSmart, and kept our relationships with Petco and the independents at the same time. So I think we're in good shape.

We've got double digit growth on the brand and I'm not going to apologize for double digit growth. I think that's pretty good and it's kind of within the range of acceptable for us right now..

No, I hear you. Double digit growth is always good. But I'm still not sure I'm tracking.

If we excluded the PetSmart distribution gain on Natural Balance, is your premium portfolio growing?.

Again, I'm not trying to be difficult, but I'm not going to answer the question because you can't assume that the entire set of distribution is 100% incremental. The hope would be that any time you add distribution, it's 100% incremental but that's just not the reality of it.

There's always cannibalization and consumers are going to find their way as they see distribution in new places. So I'm not going to get into disclosing the incrementality or the switching behavior of consumers.

That's something that we are measuring where we have new distribution and it's also something that we are tracking very, very closely and the rest of the channel where we have had distribution for a long period of time.

I mean, those are conversations that we'll have with all of the retailers in the channel and make sure we're supporting the brand the right way. And like we said, we're happy with where we are. And you build distribution, you build awareness and you see with how consumers are trying and are they new to the category, are they new to the retailer.

Those are things that we're measuring on a weekly basis. But like I said, I'm happy with where we are, but I don't think I'd give out any more information than that..

Okay. Understood. One more question and I'll pass it on. On coffee, congratulations for a phenomenal rebound this year, guys. Obviously, a contributor as you call out has been the positive price-to-cost surplus.

Do you think that can sustain or are we reaching a point where equilibrium, in terms of price past during the cost relief will approach or given competitive dynamics in the category, can you actually sustain the surplus for longer than you historically have?.

Okay, well, there's a couple of things we need to really look at in the numbers. We look at the price-to-cost relationship on an annual basis, right? And I think we took price down early and so you might see some of that – you saw some of that hit us in the early periods. You see now the benefit of that in later periods.

The volume is also helping our operational efficiency. And so just the nature of how some of those things fall, a lot of that fell this quarter. It's an annual number, but it falls in periods when you take that absorption. So I think we can see very good margins. We continue to see solid margin growth in this business.

We think the green market, as we look out the next quarter or so or two, looks like it will continue to help us hit those price points to invest in the things I talked about in the earlier question and maintain similar margins. So we think if we can keep all of those things, it's really three-dimensional.

It's exciting the consumer, exciting the retailer and then having those things right. We think we're going to be in good shape the next couple of quarters..

Jason....

Thank you, guys, very helpful. Oh, I'm sorry..

Jason, I'm going to add one thing to those comments is that last year when we sat here and we knew we were challenged in coffee, a lot of the activities that we've taken place this year in coffee were put into our strategy last year. Almost, in fact – for example, the change in the size of our coffee canister was a two-year project.

So we saw last year the challenges that we had in coffee. And even before that occurred, we were putting a lot of initiatives in place to make sure this year has turned out the way it is. Now obviously, we had the tailwind of a little bit with green coffee cost, but the work on getting the Dunkin' K-Cup was also a two or three-year project.

So a lot of those initiatives really are two to three years old, and now they're all coming to fruition this year. So I just want to put in perspective that when we see a tough quarter, we can't respond and the very next quarter things turn around.

So I think it's important to remember that, but it's also important to remember that we look at those things and take that long-term perspective. And so the same thing applies on our mainstream Pet Food business. And we put a number of initiatives in place and we think that over time that'll turn around also. But we're not sitting on our laurels.

We recognize those are challenges that we have and have a number of initiatives in place, but you may not see the results of those for six to nine months or a year later..

Got it. That's really helpful. Thank you, guys..

The next question is from Alexia Howard with Bernstein..

Good morning, everybody..

Hi, Alexia..

Good morning..

Hi. So two quick questions, firstly on promotional activity, we've had a number of other companies talking about how they're pruning ineffective promotions. But the sense that I'm getting is that in some of your more competitive areas, you might actually be stepping that up.

So I'd just like to hear your views on directionally are you likely to see more or less promotion over the next year or so? And then I have a follow-up..

Well, Alexia, this is Mark Smucker. I guess I'll start. So where you see more promotional activity like baking, there's no question that that has taken place. We've seen in that particular category that the depth of promotion has not yielded growth, and actually we've seen that across multiple customers.

And there are other areas where we are more focused on being more efficient in our trade spend and so over time, our goal is, as I think we've said a couple times, not to prune for the sake of pruning, but to get better at spending those dollars and putting them where they really do affect the business..

Okay. And then as the follow-up, in the U.S. Retail Consumer business, you've got pockets that seem to be working quite well like Uncrustables, and then other areas you mentioned, baking, that have been weaker.

How are you thinking about resourcing those weaker parts going forward? Are they areas that are targeted for more investment, more innovation, more marketing to fix it, or might we see a pull back on some of that investment, or maybe even further divestments, along the lines of the canned milk business? Thank you, and I'll pass it on..

So again, on baking, I think we've heard broadly from our customer base that they weren't as happy, of course, with the fall bake period, given the level of activity and the fact that the category itself continue to decline.

But what's interesting is and where we have seen good growth is on the on-trend items, like gluten-free and the more simple ingredients. Those businesses seem to be doing very well, albeit not enough to offset the declines in sort of the mainstream business. So cake, frosting – unfortunately, frosting has been down as well.

Brownies are actually doing well for some reason, but it's really in the more on-trend, authentic, simple ingredient items that we're seeing some good growth. That would also be true in our Fruit Spreads business as well.

Even though we had a down quarter in peanut butter, our Jif Natural, our no-stir natural product, is actually up significantly as well.

So from a peanut butter perspective, I think we're less concerned because the consumer takeaway has not followed our decline in shipments, and so we would expect to see some improvement over the coming months in peanut butter..

Great. Thank you very much. I'll pass it on..

The next question is from Farha Aslam with Stephens, Incorporated..

Hi, good morning..

Good morning..

Good morning..

First question is on your inventory reductions you saw in Jif and cat food.

Is it limited to just the third quarter? Are you seeing it bleed into the fourth quarter? And is it specifically with one retailer or several retailers?.

Hey, Farha, it's Mark again. In peanut butter, we do think it's probably limited to the third quarter. Again, the consumer takeaway on the scan data has not reflected that. So I think we feel cautiously optimistic about the next several months..

And cat food?.

On cat food, I think what we've seen is just that there's some shipment timing with respect to promotions and new item activity that was in year ago. We look at our market share, and on our market share in dry cat food particularly, it's as solid as it's been. And so I think you're going to have noise up and down with respect to shipment timing.

But I think I feel pretty good about the Meow Mix business particularly, and where we're headed next year with respect to innovation..

Hey, Farha, this is Vince. I think you also have to remember that there's a couple major retailers that their fiscal year ends the same as our end of our third quarter, and this is not unprecedented in terms of what's occurred historically, that there might be some destocking at the end of their fiscal year.

So it goes in cycles, but we would anticipate that not to be a long-term situation..

That's really helpful. And then just as a follow-up, the three drivers of your top line this year seem to be Dunkin' K-Cups, Uncrustables and Natural Balance. Each of them have benefited from channel fill and capacity expansion this year.

When you look longer term into next year, would you expect these businesses to continue to be able to post growth going into next year or is there something else that will take their place in terms of growth drivers?.

Hey, Farha, this is Mark Belgya. I think the expectation of those three, those are three big areas that we would continue to invest and expect to grow. Now will they be as additive as they were this year? That'll be determined. We're also, as normal courses, going to continue to introduce new products.

And then I think the other one I would add to that list is Milk-Bone, just through the innovation and Barry's comments around the strength of snack and how important that is to us..

And Bustelo. Bustelo's got double digit growth. It's small, but double digit growth..

I think that that's part of the advantage of having a broad portfolio and the size and scale that the company has, and adding another growth leg is that the innovation funnel is balanced over time and there'll be a lot of work going forward to make sure that we always have something coming down the funnel.

And that we have talked with long lead customers and have good plans in place so that we constantly refresh that. But there will obviously – continue to be certain brands, Folgers, Dunkin', Milk-Bone, Jif, et cetera that we're going to focus that innovation against because they have the brands that have the shoulders to take that kind of innovation.

But I think there'll always be something in the funnel on a forward basis, and that's just part of having the resources that the company has..

That's helpful. Thank you..

The next question is from Robert Moskow with Credit Suisse..

Hi there. I think Farha kind of asked my question I had. But if you think about the mathematics for next year to get to the 10% EPS growth, if I strip out the benefit of the synergies and the dilution, I think I'm getting to kind of a flattish EPS growth for the base business.

And you can check my math on that if you like, but – and I think that in a normal year I would call that conservative, but there are tougher comparisons in fiscal 2017.

And I appreciate the comments to grow Natural Balance and Dunkin' K-Cups and Uncrustables, but I think we've all been in that situation where what had been a great launch in the first year ends up being a tougher comp in the second year.

So I guess, is there something you could tell me a little bit more about what's going to drive the growth in those businesses while maintaining kind of the core at a flattish basis? Is it distribution? Is it advertising? What is it that's going to keep those growing?.

This is Richard. And Dave mentioned it also, just the fact that we have a much broader portfolio than we've ever had before. We've got more initiatives in place and more new product initiatives in place than we've ever had before. We also have – we still want to drive our share of market for each of our existing brands.

And the fact that our go-to-market strategy and the sales and marketing teams that we put together are much more robust than we've ever had before. So we would expect basically to pull each one of those levers, and no one is going to drive the growth.

But if you combine them all together, if we can get a little bit out of each one which is our plan, we're going to see reasonable growth. Now we're in categories that we think resonate well with the consumer today, and so we think that we're going to have some reasonable baseline growth in addition with new product growth.

But it's a challenged market out there, but we think we're well positioned and probably better positioned than most CPG companies to see that growth..

And Richard, if I can comment, this is Steve. I'll go on the Coffee business. If we look at the results that we're posting this year, we've got strong momentum on our base business. And I went through some of these earlier, we think that from what we can see should maintain – we think there's some opportunity.

If you remember, our first quarter wasn't as strong as the back nine months has been. We think that the premium green – we don't usually get into this, but different streams of green come in at different times of the year. So we think there's going to be some tailwind for our Dunkin' business in next year and we have to make that grow.

Our Dunkin' business has the opportunity to get its momentum back underneath it. And what we talked about on Folgers K-Cups. So we don't think the powder has all been spent on the coffee business. We think there's some opportunities to repeat what we've done. The largest retailer in the country did not take Dunkin' K-Cups out of the gate.

They're there now, so that will be a little bit of a tailwind. So we feel good about the coffee segment, even following the kind of numbers that we've shown you this year so....

Can I ask a follow up to Mark Belgya? Is my math just about right, Mark, that if I drop all those synergies to the bottom line and then take out the dilution from canned milk, it kind of implies like a core EPS, maybe up 1% or something like that?.

Yeah, that would be about right. I think you're probably using roughly $100 million for the synergy number which is about, I don't know, $0.55, $0.60 probably. That sounds about right.

Rob, the only other thing I would add is right now where we're at in our planning process and our synergy recognition, we feel comfortable with $100 million incremental for 2017.

But I think just on the base business, from a cost and budgeting spend, again while we've not done some of the aggressive things that some of our peers have done, we're still putting just pressure on budget management just through normal course.

So whether you call those synergies or not, I think that recognizing what you just suggested in terms of base growth, we just got to continue to try to push costs from a budget perspective. So we're in the throes of doing that now, and hopefully that'll contribute as well for 2017..

Right thing to do. Thank you..

Next is Jonathan Feeney with Athlos Research..

Good morning, this is Mark Williams on for Jon..

Good morning..

My question was on the synergies.

I'm sorry if I missed this, but what's the driving the early delivery of the synergies, and is it related in any way to perhaps the underperformance of the business?.

This is Vince Byrd. The short answer is it is not driven by the underperformance of the business. It's two areas that we have been able to realize a little quicker than we had anticipated in the administrative and operational areas, and then also some direct materials.

We made some choices about ingredients and other things that increased our synergy target from $25 to $35 million..

Okay, great. Thanks. And bigger picture on the coffee business, I was wondering what strategic options the company may have explored in the event of some change in the relationship with the newly acquired business..

I assume you're talking about KGM, Keurig?.

Yes..

Acquired by JAB? I think we made the statement earlier that we're committed to grow the K-Cup business, and I think we've done that this year. I think it's a testament to that relationship so far. We are having the kind of dialogue to candidly discuss what we've got to do with the leadership of Keurig. We can't look into what will happen in the future.

I mean, we need that – once that transaction closes, there's nothing they've said or done to-date that would suggest that we won't work together on those opportunities. But we have to be positioned to grow that business. I mean, the consumer has spoken, they want K-Cups. And so we're committed to be there.

And to-date, I think we've been with the right partner..

Okay. Thank you..

Next is Matthew Grainger with Morgan Stanley..

Hi. Good morning. Thanks..

Good morning, Matt..

Thanks. I just wanted to try with two follow-ups on the pet business. First, you mentioned that you're considering all levers to improve performance in the mainstream dry dog business.

And I know it's hard to talk prospectively about promotion, but from an innovation or brand-building standpoint, how the brand is marketed or positioned, are there any specific steps you're taking or thoughts you can share on how you might look to revitalize that? And in general terms, how are you thinking about the urgency or potential timing of taking some of those actions?.

I think Richard mentioned it, and I think it's a good thing to always pause and think about how quickly can you turn a business where you've planned with long lead customers for nine to 12 months out, and particularly in a business that tends to be everyday low priced and not a high/low business. So it's much more base than it is promotion.

It's much more difficult to move those types of businesses. And the dry dog food business in the mass channel is a business that is much more EVLT and planned with some big long lead customers. So we are looking at all levers.

So we're looking at pricing, we're looking at product packaging and we're looking at other opportunities to innovate in the business, not just in the Kibbles 'n Bits brands but across our entire mass dog food business. So we're looking at all the levers. I think in the short term, the "easiest" lever to pull is always price and promotion.

It's not generally the smartest one to pull because when you talk about poor trade spend and poor ROI, the trade spend that's deployed on a short-term basis generally doesn't have great ROI because you don't get the kind of merchandising or lift forward that you would expect. So I think we've looked at all of those things.

As I mentioned, from a profitability standpoint, when we had our investor day, the areas of focus for growth for the pet business were around pet snacks, dog snacks and cat snacks, around the premium business and particularly Natural Balance and the expansion of Natural Balance.

And then also focused on our cat business, our Meow Mix business, which is our largest brand in the pet portfolio, and innovation that we have coming on that brand next year. So the role of the dry dog food business in mass has not been one of growth. It has been one of profit maintenance, and that's the role we've taken with it.

Our margins are up for the year. Our gross margins are up. That's the role of the portfolio. As Barry said, we've looked at what we are doing. I don't want to get into specifics.

I don't think I want to be forecasting or projecting into the marketplace what I'm going to do, but we are looking at all levers and you will see some changes in terms of how we're going to market across the portfolio. But as I said, we're disappointed with those kind of results.

But overall, when I look strategically across the three growth levers that we talked about when we had our investor day back in October, we're hitting on those three levers and this was not going to be a huge area of focus for growth for us. Unfortunately right now it's down significantly, and we will take the steps that we need to fix it..

Okay. Thanks. We'll wait to hear more there. And then just on Natural Balance and pet specialty, obviously business is growing high single digit overall, double digits.

Can you give us any sense of what that implies from a market share standpoint in the channel or the natural category, and are there any metrics you can give us in terms of repeat purchase behavior at PetSmart or any of those sort of metrics that you'd be tracking at this stage in the expansion?.

We're tracking our velocity on a weekly basis. We are also doing consumer research to track trial and repeaters. So we're tracking what you would expect in any normal launch. We're looking at source of volume. We're looking at incrementality and incrementality to the category, incrementality to the brands.

So we're looking at all of those things and we evaluate it weekly. I'm not going to get into the specific numbers with you. We're pleased with where we are.

Petco and PetSmart and the pet specialty channel, in general, has been a little slower this year overall, and that's obviously affected not only probably our business but the category growth rates in general. But as I said, I'm pleased with where we are with the business.

We've gotten the kind of launch support that we needed, and we've also been able to continue to get support from the retailers who we've had distribution with for a long time. So pleased with it overall. When you see market share, it's not all inclusive. We have better visibility into it. But as stated, I'm not prepared to share..

Okay. Understood. Thanks..

The next question is from Akshay Jagdale with Jeffries..

Good morning. This is Lubi filling in for Akshay. I wanted to ask a question on your advertising spending. So you guys have increased advertising spending across a number of your businesses this year, and I think some of that will carry into next year.

So can you just talk a little bit about what your internal analytics are telling you about the effectiveness or returns on those programs? So are you generally encouraged by what you're seeing, and then maybe if you could just a little bit on these advertising mix, so digital versus traditional media, et cetera, that would be helpful. Thank you..

Let me take a kick at that one. This is Dave West. I'll start on pet because we are up significantly year-on-year, particularly in the third quarter when you look at our segment profit in the third quarter.

We're supporting the Milk-Bone brand, we're supporting Meow Mix, Irresistibles cat snacks and we're also support the Natural Balance brand as we expanded our distribution footprint. I think those three initiatives are really against trial and awareness and building.

So the ROI on them initially is tough to measure because you're trying to get to trial and repeat. So I'm not sure that the economic effectiveness of measuring it in the first quarter at the end of the first six months that it's in.

The same is going to be true on Dunkin' K-Cups and Jif peanut butter bars and a number of the other things where we're going to advertise new items. It's part of launching a new item in a quality way is that you try to stack your marketing so that you get merchandising, as well as an attractive price point plus consumer awareness.

So a lot of the marking that you're seeing from us is geared towards that across the portfolio. And then the other area where I think it's more difficult for the industry, in general, to measure is in investment in digital. And we're trying to make sure that we invest in first party data and first party relationships with consumers.

We want to reach them wherever they are and we want to make sure that we're on their path to purchase. So whether it's pre-shop or in-store as they're making decisions, we are focused on building a digital network and a digital ecosystem that reaches them there. So there's some infrastructure building there as well.

Overall, I think we continue to look at our ROIs and I think we'll fine tune them as we go along. But I think it's the right thing to do with the brand that we have to support them in the way we're supporting them..

Yeah. This is Mark Smucker. I'll just add to that. As Dave said, there's a lot of advertising being spent, particularly in pet, on what we would call initiative. So if you think about the two buckets of advertising, its meat is equity support and initiative.

And so a lot of what you're seeing in the past is more on new products and niches versus Smucker's. We're on air with a new ad that is strictly focused on equity. But in either case, they're relatively difficult to manage or measure, I should say, and so just trying to get the ROI on those isn't a quarterly exercise. It's more like a 12-month exercise.

But we do feel that obviously supporting our brands is very important and we're going to continue to do that. But I think that's it..

And the other thing we mentioned at CAGNY is we now have about 25% of our media now spent is in digital, which is up. If you measured that a couple of years ago, it was less than 10%. So we're moving in that area. But as Dave said, it's not easy to measure so we're trying to do it judiciously and trying to measure it where we can..

Thank you. That's very helpful. And then apologies if you touched on this already, and I know you're not providing specific guidance for 2017 just yet. But can you just talk maybe high level about how you're thinking about cash allocation for fiscal 2017? Because obviously, cash flow generation remains strong.

So just some thoughts on that would be helpful. Thank you..

Yes, this is Mark Belgya. I think it is pretty consistent with what we said last week at CAGNY. I don't see any significant change. So if you just think of it in terms of round numbers of about $1 billion in free cash flow, about a quarter of that is going to go to dividends.

We're going to target about $400 million to $500 million in debt repayment, and then embedded in that $1 billion of free cash flow is about, call it, $250 million of CapEx. So I think we'll see that. The only other thing we would bring into that, as we mentioned earlier, is just where share repurchases would fall into that.

Now that may cause us to borrow a bit to do such, but I think generally speaking, I would just hold to our cash deployment model we've talked about, really, since the acquisition was announced a year ago..

Thank you very much. I'll pass it on..

And the next question is from Bryan Carlson with Tudor Investment Corporation..

Good morning, guys.

Can you hear me okay?.

Yeah, Bryan, we can..

I just wanted to ask, in your slides, you had outlined a couple of factors that would be sort of headwinds heading into 2017. One of those was FX and the other was the milk divestiture.

I just wonder if you can give us some sense of what the incremental drag from the divestiture of the milk is, and at current rates, FX is an additional, I don't know, $0.05, $0.06, $0.07 of EPS headwind?.

Yeah. So, Bryan, we'll get into this in a little bit more in our fourth quarter earnings call, but in terms of the milk, that's probably, I'd say, a $0.10 to $0.15 impact of contribution. Again, just so everyone is clear, that's the milk contribution we're losing. It has nothing to do with the gain of $0.14 we recognized, but roughly that.

FX, we're still kind of working through that, but that's going to still be a pretty significant impact. I mean, we're thinking that's well over $20 million next year. If you look at what the exchange rate has done, even if you sort of averaged in this year, it's fallen well below $0.70 for a while.

So I would guess it's at least $20 million, probably even north of that..

Okay. And everything else I had has been answered already. Thank you..

The next question is from Rob Dickerson with Consumer Edge Research..

Thank you very much. Good morning. Sorry, just a couple of quick questions, I guess first, more broadly, this has been touched on a little bit. I just want a bit more clarification. So the marketing spend obviously was up and Consumer volumes still pressured. Pets coming in below planned in year one.

So if we think about fiscal 2017 and the incremental cost synergies, how should we also think about a potential for incremental needs of reinvestment to support the brands? That's one. And then, two, how should we be thinking about the three to four-year growth targets you set out on a segment basis top line back in October? Thanks..

So to the latter point, I don't think there's any significant changes in the growth rate assumptions that we laid out by the business units that ultimately got us to the 4% to 5% overall company rate.

I think we spend probably enough time thinking about how we think we're going to deliver those, so our expectations by that time period, we'll figure the dry dog out and we'll be where we are. In terms of the dollar investment and, guys, jump in here, but we would continue to invest as we were.

I think it was said earlier on our call, our marketing spend, while it's up significantly, it, quite candidly, is returning to more historical levels. So we don't see that, at least year-over-year, as another significant incremental jump in marketing as we would consider this a pretty good run rate.

So I don't think you've got to be too concerned about that being a big headwind going into it.

And again, we are kind of moving through our planning process for 2017, but the expectations is for all the things you've heard today, where we're trying to build a business, we would expect to see some benefits out of that and trying to hit sort of our normal growth rate for those business units..

Okay, great.

And then just a quick follow-up, in terms of underperforming brands and potential for divestments that we saw in the canned milk business, how has your perspective on further divestment changed? Is it the same? Are you actively looking at your baking business or oils, what have you? And I just ask because obviously there's been some longer-term pressure in some of these brands.

And obviously, they generate some cash flow.

But for thinking price/mix benefit and growth potential going forward, and potential benefit off the accelerated de-leverage, if you do divest those, why not divest them?.

Well, Rob, you just listed all the criteria that we look at continually in terms of evaluating our portfolio. So those are things that we do look at. We look at our portfolio on a regular basis.

We actually think, for the most part, we have a good portfolio right now, and it doesn't mean we're not going to look at something to divest a small brand here or there, but I don't see anything in the future in the next year or so..

Rob, this is Mark Belgya. I guess, maybe one thing that I would point to that and actually, I think, ties into a question – I can't recall who asked it earlier and a little bit to the question that was just asked in terms of growth rates by business units.

But one thing I would say that we have done is our portfolio, just number of brands have expanded. We continue to think about what roles our brands play.

So where in the past, I don't want to say this is not a categorical statement that everything was expected to grow evenly, but I do think we are setting different expectations on the brands, as is somewhat indicated by the growth rates that we've put for the four business units.

So I think that will just continue, the maturation of how we look at businesses. And if it makes sense over time, if there are brands that fall out of favor, I think through that process, it'll surface. But I agree with Richard. I think we feel pretty good about what we have. We have some areas to work on.

But for now, they're fairly positive cash generating businesses that would be a little tough to, quite honestly, would fill the dilution if we sold them..

Fair enough. Thanks so much. I appreciate it..

Next will be John Baumgartner with Wells Fargo..

Good morning. Thanks for the question.

A question for Mark Belgya, I'd like to ask in terms of this renovation you're doing with the natural ingredients across your portfolio, is there any notable drag on your margins that may be worth quantifying from the reinvestment in the food quality?.

Yes. John, this is, obviously, Mark. Right now – and again, it goes a little bit back to some of the conversations we had. Right now, we're in investment mode.

So when some of the products that Mark mentioned, under the Pillsbury and the Smucker's brand, we're clearly – whether it's spending with the trade or the intro in terms of the advertising, those are negatively affecting both the top line and profitability.

But if you think of commentary we've said in the past, we expect over time for our innovation to be mix positive. We're looking for bigger rings in bigger margin items. So once we get through that first couple years of intro period, we would expect that the comparable products would be adding margin greater than the more traditional ones.

For example, cake, we expect our simple ingredient products to be more profitable over time..

And this is Mark Smucker. I would just add that Smucker's Natural Fruit Spreads, Smucker's Fruit & Honey, as Mark just pointed out, Purely Simple, all of those products which have possibly slightly higher ingredient costs, we're able to command a premium for those.

And the consumer, by offering variety, the consumer that wants those products will choose those products. And we've actually – because we've seen growth there, it does validate the fact that the consumer is willing to choose with their pocketbook..

Okay, great. And just a follow-up, at CAGNY, the presentation referenced, I think 10% of your fiscal 2016 net sales from products launched over the past three years.

Is there a way to isolate that contribution just for the Big Heart business, and maybe where you see that going over time for Big Heart?.

Yes. Actually, I think if you look at in the Big Heart business, that number we presented should actually be higher. We've done some innovation around the Milk-Bone brand, the Milk-Bone Brushing Chews, the Milo's Kitchen brand, and some innovation that we did in the Natural Meat snack segment. We've done some things with the Meow Mix brand.

So pet has had more innovation, historically. And then in Pet Specialty there's a natural amount of innovation that just occurs every year. And I think it's almost an expectation for entry (79:23) to compete in the category, so Pet is probably a little bit higher than that on average..

Thank you..

I think I'd just add to that and in the sense that each one of our businesses does have a target in terms of innovation and what we expect their growth rate to be from innovation. And it really does depend upon each of those categories and where we think innovation really drives the category.

So although like Dave, I'm not prepared to share those numbers, each one of them has a target to go for, and each general manager has an obligation to hit those targets and it's built into their bonuses and their performance. So we look at that all the time. So thanks for the question..

Great. Thanks, Richard..

It appears there are no further questions at this time. I will now turn the conference call back to management to conclude..

I want to thank everybody for being on the call today. I appreciate your questions and look forward to having a great fourth quarter and next year. So thank you very much for joining us..

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