Good morning and welcome to The J. M. Smucker Company's Fiscal 2018 Third Quarter Earnings Conference Call. This conference is being recorded and all participants are in a listen-only mode. At the request of the Company, we'll open the conference up for questions after the prepared remarks. Please limit yourself to two questions during the Q&A session and re-queue if you have additional questions. I will now turn the conference call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us on our fiscal 2018 third quarter earnings conference call, particularly given the early time of our call, due to a number of CPG companies releasing earning later this morning. As we will provide an update on our strategic initiatives at CAGNY Conference on Wednesday, our specific comments this morning will be focused on third quarter results and our full year outlook. Mark Smucker, President and CEO; and Mark Belgya, Vice Chair and CFO will provide our prepared comments. Also participating in the Q&A are Steve Oakland, Vice Chair and President, U.S. Food and Beverage; Barry Dunaway, President, Pet Food and Pet Snacks; and Dave Lemmon, President, Canada and International and U.S. Away From Home. During today's call, we will make forward-looking statements that reflect the Company's current expectations about future plans and performance. These statements rely on assumptions and estimates and actual results may differ materially due to risks and uncertainties. I encourage you to read the full disclosure concerning forward-looking statements in this morning's press release which is located on our corporate website at jmsmucker.com. Additionally, please note the Company uses non-GAAP results to evaluate performance internally as detailed in the press release. We have posted to our website a supplementary slide deck, summarizing the quarterly results and our fiscal 2018 outlook, which can be accessed through the link to the webcast of this call. These slides and a replay of this call will be archived on our website. If you have additional questions after today's call, please contact me. I will now turn the call over the Mark Smucker.

Thank you, Aaron. Good morning everyone and thank you for joining us. Our efforts to position our business for growth continue to pay off this quarter. We achieved year-over-year sales growth driven by key brands in every business and delivered strong adjusted earnings per share growth. Initial benefits of tax reform and ongoing costs discipline helped fuel EPS growth. We will continue to deliver long-term top and bottom line growth by executing our strategic road map, supporting a portfolio of leading and emerging brand and guided by a deep focus on consumer and customer insights. During our CAGNY presentation, next week, we will provide a more thorough update on our strategic roadmap and the four foundational pillars of innovation, investments, cost savings and acquisitions. This morning let me highlight our progress is reflected in our third quarter results. We achieved strong sales performance, for leading -- for key leading brands in the quarter, demonstrating the ability of our brands to win in today’s environment. This included mid-single digit sales growth for Jif, Smucker's Fruit Spreads and Milk-Bone. In addition, we achieved low-single digit growth for Folgers, driven by our Away From Home Coffee business. These gains were partially offset by reduced sales for the Crisco brand reflecting loss distribution at a key customer, and a timing related decline for Natural Balance. Net sales for our U.S. K-Cup portfolio grew 14% in the quarter with gains for all of our brands. Dunkin' Donuts and Café Bustelo K-Cups continued to deliver double-digit increases and Folgers K-Cups returned to growth in the quarter. In addition, margins on our K-Cups improved significantly all of which reflects the benefits of our enhanced partnership with Keurig Green Mountain. We're now a year into the grocery and mass channel rollout of our Nature's Recipe premium dog food…

Thank you, Mark. Good morning everyone. I will start by providing additional color on two significant items included in our reported results for the third quarter. First, let me summarize the benefits of the recently enacted U.S. income tax legislation on our tax provision. During the third quarter, we recognized a non-recurring net tax benefit of $756 million. This primarily reflects the benefit from the re-measurement of our deferred tax assets and liabilities, which was slightly offset by expense related to the transition tax on the undistributed foreign earnings. This net tax benefit has been excluded from our adjusted earnings per share results that I will discuss in a moment. Third quarter adjusted earnings per share did however include a tax benefit of approximately $0.35 a share, related to truing up our year-to-date tax rate as a result of income tax reform. For fiscal 2018, we expect a full year effective tax rate of 28%. This resulted in an effective tax rate of 19.7% for the third quarter in order to adjust the rate on year-to-date basis down to 28%. For fiscal 2019, we project our effective tax rate will further decline to 23%, reflecting a full year benefit from income tax reform. We will provide any update to this estimate when we issue fiscal 2019 guidance, during our year-end earnings call in June. The second item impacting third quarter earnings with a non-cash impairment charge of $177 million attributable to goodwill and certain trademarks within the pet food segment. The charge primarily reflects reduction in our pet food outlook from what was previously modeled, notably over the next five years as we now project long-term organic net sales growth for the pet food business 2% to 3%. With that background, let me provide an overview of third quarter results.…

Thank you. The question-and-answer session will begin at this time. [Operator Instructions] Our first question comes from David Driscoll from Citigroup. Your line is now open.

Couple of questions here, so the first on just on coffee. Would like you guys just spend a little bit of time to talk about single-serve coffee? You numbers in Nielsen, the Nielsen data that we can see. They look good. It looks like things are really starting to turn the corner. But would just like to hear a little bit more about kind of the plans that you executed on Folgers, and how -- maybe you can describe a little bit more about the opportunity in single-serve as you progress with this new advantage contract? That will be my first question.

Sure, hi, David, Steven Oakland. To really think about our single-serve business this quarter and the journey we're on, we'll go back to maybe the data we show that back-to-school, that’s the first time we showed graphically. We broke down our coffee business and how it breaks down across the different segment with how the category breaks down, and if you remember our one cup business was in that high 20s, maybe 25% to 27% at the time. And category was a high 30s, 37% at the time. So, we knew that that was the biggest opportunity in front of us. Yes, there is also growth in premium coffee et cetera, but the most important thing for us was to position ourselves in that category. So one quarter in, we saw our growth rates for the quarter were about double with the category group for the quarter, driven by Dunkin' because that’s our biggest business clearly, but great growth in Bustelo. So our Bustelo brand continues to grow and really, we're pleased by mid-single digit growth on Folgers, our legacy business. So I think the contract, we talked a lot about and you mentioned advantage, I don’t that its advantage, I think it's much more competitive today and much more advance compared to how we were. I talked a lot about pricing, yes, our economics are better but our access is better. What I mean by that is we have more pack sizes, we're unrestricted and unbound as far as channel, as far as customers, as far as how many items and we put that in either given channel or given customer. So I think when you combine all of those things, the strength of the brand. And quite frankly, we've had some retailers get behind the platform over the holiday season. We saw that growth. So all of those things together we think led to a growth that about double the category and I will expect that they continue into the next quarter.

Just to follow up. In coffee, you guys had pretty big expectations for the back half of the year, particularly the fourth quarter, although third quarter notably up as well. Can you just confirm that that those expectations are all being net and that you're pleased with the direction of coffee profitability?

David, this is Mark Belgya. Yes, we're still aligned with that, I think in one of our scripted comments, we called that out. In the fourth quarter, the benefit will come more from the green coffee. If you compare to a year's ago fourth quarter that was a still kind of a high period of cost. So we get the benefit this coming quarter. Everything else is in line.

Last question for me. Just gross profit margin, I think you said it's now flat. It used to be at 50. Can you describe the factors that have affected the gross margin?

Yes, I'd call out three. The one is just the ongoing impact of the, the freight that we called out. It continues to increase. The second was the obsolescence charge. We plan obsolescence across the organization every year by nearby quarter. We just exceeded that, so flows through in our costing set up through our COGS and thus affects gross margin. And I'd say the third thing probably it's just mix. Obviously, we've given a little bit of range in terms of where we expect at the end of the year and although it hasn't really changed. Some of the mix has changed and I would just say, some of the higher mixed estimates have come down a little bit. So, those are probably the three biggest drivers.

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

So just a quick question. We think about the tax reform and the benefits coming in fiscal 2019 without trying to get ahead of ourselves here in terms of guidance, but how should we think about that in terms of your desire to want to reinvest some of those benefits back behind the business? Or are you going to let that all flow through the bottom line, is it, are you will talk about that yet?

Chris, it's Mark Belgya. So obviously, we're like other companies that are not calendar year end and that we will end up with blended rate. So what I would say, well, we'll comment on this more next week at CAGNY, but we are using, as we said in both our release and our quoted comments that we're going to spend back against the business, we’re going to spend back against our employees and also spend back by some increase in our charitable giving. We will be more specific, but we are going to get a nice step up obviously in 2018 and 2019. And at the same time still be able to invest pretty significant growth in our marketing spend to support particularly the two innovation platforms that, again we'll talk about next week in a much more color.

And then just related to the pet division, you had the obsolescence charge. I think you've had a recall recently as well. Is that an expense more likely for the fourth quarter, and if you have any color around that in relation to that recall?

Hi Chris, it's Barry. Let me just provide a little color on that. Clearly, we just learned about this issue about a week ago when it was brought to our attention. So, we quickly began an investigation. We partnered with the FDA on that. Both independently concluded, there were no pet health safety concerns. But out of an abundance of concern, we did implement a volunteer withdrawal of that product. So, we're working with our retailers to get that product out of the market place right now. From a cost standpoint, that's not reflected in any of our numbers. Yes, we're still trying to get our arms around what that cost will be. Clearly, as we investigated and work with the supplier who was involved in that situation, we would look to recover those costs. There may be a timing difference. So we may incur some of those costs this year and then depending on the cost recovery, it just may be a timing issue. So that's, that's how we're managing that.

Okay then just to be clear maybe Mark for the obsolescence charges. Is that sort of a one-time event you go through when you account for obsolescence and say in fact his quarter?

Well, a couple of points Chris. So, it obviously what Barry just said, that charge did not include any of the impact. I wouldn't say it's a one-time of thing, as I mentioned, we plan obsolescence across the board for a variety of reasons. And it does peaks and valleys and depending on what the driver of the reason kind of not only drive the time but also the dollar amount. So I wouldn’t call it one-time review of anything, it just a third situation that we charge through P&L whenever it occurs.

Thank you. Our next question comes from Kenneth Goldman from JP Morgan. Your line is open.

All three food companies that reported this morning, they missed The Street's gross margin estimates by pretty wide margin. And everyone's point to freight and obviously we could see the number on how bad that is, but I did have a couple of questions on that. First, is it harder to pass along freight then more food stuff related cost? I've heard that from some people, yes, and from some people, no. I'm curious, what your take is? And second, is there any read thought beyond freight here on that manufacturer- retailer power relationship? I know you talked in the recent past how and it's been a little harder to get pricing through with the same sort of lack already that you had in the past. So I'm just curious if that sort of relationship is getting harder, if the pendulum of power swing for the retailer. Just how you think about that would be helpful?

Hi, Ken, it's Steve. I'll start. With regard to freight, it is difficult to pass freight because it isn't -- we can't predict it. And if you have to get a spot load today, you’re going to pay significantly more than we pay for a contracted load. So when we get into a situation where we're moving freight between the manufacturing location and between one of our DCs or a customer brings some order up quicker than we had planned, and we go to our spot freight system, that’s a sort of a place for all of us for years, right. Well, those charges are coming in at a multiple what they used to be. So for us to even be able to tell you what that next load is going to cost, is sometimes impossible, depending on how busy the link. So the key there is that we keep it on our contracted carriers, we keep it in our -- we keep our forecasting system with the customer as tight as we can, so we could plan on that distribution. That this doesn’t happen, I mean, the customer comes to us with a special request, we have something breakdown or something goes wrong, and we have to move to a load spot. I know it doesn’t sound like a lot, but it's really difficult. The trucking industry right now is pretty tight. So a spot low is a very difficult to do. So that’s a freight issue. And with regard to customer, I wouldn’t say so, I think we saw an environment over the last year or the larger retailers took the hard discounters very seriously, they make some strong positioning statements around certain key categories, I think they've been very aggressively. But I wouldn't suggest that anything in the quarter or anything in our outlook reflects more difficultly with the customer. I think we have a pretty good sense, so there's probably going to be a tiny bit of inflation as we go forward in some of our raw materials and I think freight is going to be something that the industry looks for the near-term.

Hey Ken, this is Mark. Just maybe to put some numbers behind the margins change. So the two items we called out, the freight and the inventory obsolescence charge. On our 9 billion sales for the quarter, it accounted for almost 100 basis points of margin. So it really was driven by those two factors.

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

I had question on the pet food side maybe for the mass market on Barry. So when you bought Big Heart, you talk about 5% growth I believe mid single digit, dog and cat, low single digit high treats high. Now, you've lowered that to 2% to 3%. Remind us, what has changed? But more important than that, there are other pet food companies in the market and those involved particularly in natural premium, growing pretty much high single digits. So it would seem to me that when we think about this market evaluation and the feedback we get from our investors is about your categories and your brands, I mean there's an opportunity here for you to double down on pet food and improve the growth profile of that business with better brands and not necessarily have to get the guidance from 5% to 2%, 3%. So if you can comment on that. Why did you cut the guidance long-term for pet food? And where does you are in need of new brands there? I would ask you the question in terms of the related comments. The Nature's Recipe launch has been very successful and very impressed how quickly you got it through all the stores out there, but you're lapping it now and what's going to happen after that? Where is the underlying sell-through rate? And can you extend that brand into wet or treats? It seems like it's move limited.

Pablo, this is Mark. I'll start with the first question and Barry will follow up with the rest. So if we go back, turn the clock back a few years when we announced the transaction, looked at where both the industry and Big Heart was performing. I think you call out the numbers as well. So, the base dog and cat, which is about half of the business that was averaging, modest low single digit growth and that was really being managed by the previous owners to drive profit that they could invest in the other half of the business. The other half of the business, which was a little bit heavier skewed to the snack side within a period of growth of both industry-wise and Milk-Bone specific, a large innovation that the Big Heart team had brought forward. And so, we carry that growth expectation not as much, but certainly above the low single digits of the base dog and cat food. And then lastly, especially channel, as a channel was growing dramatically, high single digits, low double digits and I think as we've reported and others have reported there's just been a significant decline that as e-commerce has come into play and for a whole lot of variety of factors within the industry and we've kind of followed that. So it really is the ladder to that had driven most of that change. There has been some competitive challenges in the snacks arena. So Barry, I don’t know if you can add, but that was basically how we arrived at sort of that 4% to 5% that you quoted. And I think just reflecting where the industry is particularly in that, in the specialty channel and just some with our competitors, we just feel more comfortable with the growth rates that we quoted.

Great summary, Mark. And then Pablo let me focus on the second half of your question. First, we have a great portfolio of iconic brands that we still think have a lot of runway. We think about Milk-Bone in particular, our objective is to take that brand into new segments into some of these growth segments. So our innovation efforts are really to focus on how we take our brand into growth areas across snacks and across the entire portfolio. Let me talk about dog food and you referenced Nature's Recipe. If you look at our consumption, we were up 27% across the entire dog portfolio for the latest 13 weeks, which is just outstanding. And that is across the entire portfolio. So Nature's is a big driver of that, but we're trying to manage the portfolio across value, mainstream and premium, and that all of those brands are performing well as we manage that entire portfolio, velocities continue to increase quarter-over-quarter, our velocities with Nature's Recipe are up about 17% THIS quarter in units and 16% in dollars, so again just nice to see that those velocities continue. We're going to sharpen our marketing and support behind that brand, as we go into this next year, some learnings based on the fact we've been in the market for the last months, and so we're going to take those learnings and we think we can drive even greater effectiveness with the marketing support behind that that brand. As far as just adding to the portfolio other brands, we've always been an acquisitive company and we will continue to look for brand that would make sense in our portfolio across food and snacks. And then as far as taking Nature's Recipe into other segments and categories, yes, absolutely we do think that brand can play in categories like cat and like snacks, and it's just a matter of us prioritizing when we move into some of the segments and how we approach those opportunities. So that’s under radar screen, we wanted to get dog we thought that was the right place to start. We're going to expand some of our wet offerings coming into this early year or early this summer. And packaging refresh, we’re going to actually swap out some other items that we think we can be fast returning. So, a lot of momentum behind that brand, we want to keep that going and then look to launch into other segments.

That’s very helpful. Can I squeeze one on coffee? Maybe for Steve, Steve, we talked about K-Cups but just on roast and ground. It seems to me that there is still opportunity there for Dunkin to get a little more exposure and accelerate the premiumization of roast and ground. Is that realistic? And related to that, my only concern when I hear take up growth much faster than roast and ground is we're shifting into lower margin category. Am I missing something there? Or if you're swapping a serving of roast and ground for a swapping for a serving in K-Cups in dollars terms that’s actually would swap, if you can talk about on that please?

Certainly, Pablo. Well, we set upgrade for cat gain. We're going to show innovation in the premium sector both in a new platform in Dunkin. So we felt K-Cup have -- we had to address K-Cup quickly, and I would suggest that K-Cup are not dilutive. And if you look at the quarter for us to have flat volume 2% net sales for that in 6% profit at 33.1% that would suggest that the mix was pretty good. So, if anytime we have a flat roast and ground quarter, we're winning. I mean our model obviously includes slight declines in that. So when decline slower than the segment or don’t decline like we did in this quarter, it really improves the model. So you're going to see investor in those other things, quarterly we have to have a larger presence in premium coffee and we have to fix K-Cup first, we’re on way to doing that and the next effort as you will see next week frankly is on premium.

Pablo, this is Mark Smucker. Just on the margin that what I would tell you is that, as it relates to these all the different segments, we talk about mainstream premium and single-serve. The dynamics in the category are such in the way we manage the business such that at this point in time, margins are generally consistent across all of those categories and all of our segment I should say and they are all profitable.

Pablo, this is Barry. Just one other point that I should have made when we're talking about Nature's, as we look at the performance of that brand, pre-launching into mass and when it was just in pet specialty, based on where we on this fiscal year, we were projecting that brand and retail sales is going to be up about $80 million or 70%. We see, we still have the presence in specialty and then by moving that brand over to mass channel, just tremendous growth on at retail just want the other indication about the strength of that brand and the potential that it has.

Thank you. And our next question comes from Scott Mushkin from Wolfe Research. Your line is open.

So I did have a kind of philosophical question as we move into CAGNEY and just kind your thoughts on your business, as we move into accelerating investments and rolling out new platforms. What's your tolerance for actually seeing EBITDA come down to do this?

Scott, this is Mark Belgya. I'll start and if anyone wants to chip in and welcome, welcome back. I think that the earlier question around marketing investments, we’re going through the planning process for 2019 and even next week at CAGNEY, we’ll give a little bit but certainly not our outlook. We feel that tax reform is obviously beneficial for a whole number of reasons, but as many of our peers have said also, it does provide an opportunity to support whether it's marketing investment or just investment innovation, and we still want to grow our segment profitability even with the investments in the marketing. So we're going to continue to try to grow EBITDA and EBIT and operating margin as we move forward. And again, it's a little hard until we are specific in June with our guidance, but we're not necessarily backing off profitability growth, it's just nice that we do have some flexibility from an EPS perspective to utilize some of the tax reform to support that.

Yes, Scott the other Mark Smucker. Just agree with Mark. I mean we still have an obligation to our shareholders to grow earnings but we also have an obligation to grow our businesses and so, as Mark said, the tax reform does give us a unique window. Obviously, we are doing some significant cost savings as well and we do expect marketing to be up significantly next year. But I would also point out that what we have really been dealing as we execute this strategic roadmap is get our foundation in order and make sure that we're prioritizing the investments to those areas where we know we can grow. Consumer foods is a very good example of that, so where you will -- would have potentially seen that marketing has not increased in aggregate this year on consumer, it has increased in those areas where we need to invest like Uncrustables and Jif and things like that. So, we maybe deemphasizing some stock in order to invest where we really think we can get the biggest bang for our buck.

Perfect. And then just a quick follow-up, I don't know if you guys have any comments on the Pillsbury brand, but I know you've been trying to get that one moving a little bit and then all yield?

Hi, Scott, this is Steve. I think there is a great example of what Mark mentioned and enroll the brand. When there are times when there are -- when our cost structures right, when things are right, and you may see volume declined on some businesses, as you'll see the overall segments that those businesses operate in performed pretty well. I mean our consumer foods business did really well, and we had great numbers on Jiff, great numbers on fruit spreads, we can forecast on Uncrustables. Well, that had to comfort somewhere and it came from our baking business, right. So, there are times when some of these businesses are managed for profit, they may have the opportunity to grow with times, and we'll take those opportunities. And there'll be other times when we take the opportunity for them to generate fuel and this was one of those types.

Scott, it's Mark Smucker again. The other thing I just point out on Pillsbury, just to build on what Steve said is. We have made some conscious decisions when we see that the competitive environment is such that in order -- an investment in a brand might actually create a situation profit is just too challenged. I think that sort of been the case, with Pillsbury this past year, we consciously chose not to go deep, if you will. That said, we do have some nice innovation coming out on Pillsbury in the next year. So, it's not that we're ignoring it and it's not that we're just letting it stagnate, but we do have some nice innovation. We will continue to support that that business going forward.

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

A question on coffee then a bit on pet. My apologies I got distracted and jumped on a little bit late. So you've maybe already disclosed this, but in terms of margin expansion of coffee. Can you unpack how much of it was driven by lower green coffee cost? And how much related to the new Keurig contract? And on that contract whether you sort of at full scale now or whether those benefits will continue to sequentially mount as we move through into the fourth quarter?

Let me -- Jason, I will try to do that for you. This is Steve Oakland. I would say it's all of those things. We talk about green, as you know we went through an expensive green cycle at the beginning of the year. We leaned in to get our pricing on roast and ground. Green was basically flat for the quarter. The green, as Mark Belgya I think said either one of the Q&A or the script to comments that green will benefit us in the fourth quarter and going forward. So green was not a headwind or tailwind this quarter. I think volume was positive and if you look across all of our businesses, the volume mix component was good, the K-Cup agreement was good and the K-Cup as I said earlier is really good on. Yes, the economics better. There is no question, but the access is better. So we're able to put K-Cup into some places we couldn’t before. So would say all of those things, all of those things added up that let to where we're, our forecast for that kind of mix go into the next quarter, so it's hard to project coffee out to far but it look like the occurred momentum should continue into the next quarter.

Question for Barry on pet. Barry you mentioned the velocity momentum quarter-on-quarter. When we unpacked the data, we see the same thing but we also see you have installed out since November, so you're kind of flattening across and you're running on Nature's Recipe. At less than half the velocity rate and the category and well below some other premium brands, some of them even more new to the market like blue. Do you see that velocity sort of flat lining in relative under index as a getting factor for further distribution growth? Or do you think something you can see ramp overtime?

Yes, there is no question Jason that there is no competition on those segments without a doubt. But we're confident that we can continue to keep those velocities moving in the right direction, I mentioned some more targeted advertising where I think as we learned over the last year, as we see what the competitor messages, how do we hone message on Nature's, I think with some of the new items we're bringing in to replace some of that items that we're little more slower moving and those can help as well. So, I we can get the -- continue to keep the velocities moving in the right direction. So we were optimistic about that.

And I think Mark Belgya, I think it was Mark Belgya mentioned that pet snacks grew 6% this quarter, which is in sharp contrast to what we see in Nielsen. And if you look at Nielsen, it looks like snacks are going through the same thing that food did a lot of premiumization, a lot of fragmentation with you as the largest share donor. What's the disconnect between what you're reporting and what we're seeing in the data?

Let me start there. First, you’re right, there was a disconnect between consumption and our sales. A couple of things to keep in mind, we have significant businesses with customers and channels that are not measured and so we are seeing some great performance with those customers and channel. So that's one area. Last year, we had made some investments behind some of our stack businesses in terms of coupons and intro and so there was a timing issue as we think about the performance metrics and then there has been some market price compression relative to where we're seeing units are up, but dollars are down on a couple select items. So those would be a couple of things that be contributing to that. I would say, as we look at where the retailers are today, looking at their assortments for the next year we were really encouraged we're seeing some nice increases and points of distribution, a number of our major customers. So we're enthusiastic about that. We have just recently launched some new innovation across our Milk-Bone is pretty close in, but we've had tremendous acceptance of that item. In the natural meat segment that's been driving a lot of growth and sausage or pepperoni brand, kind of bumped up against that segment, where we're bringing out a new item. We're going to accelerate the launch of that. Normally we'd bring it out in June. We're going to start some early shipments of that. We think that's going to accelerate some growth across pepperoni and then going, as we think about the natural meats segment where that growth is coming, we're bringing some innovation out in, under the Milo's kitchen brand. Had some, some good solid acceptance there and increases in distributions. So, I think you, yes we've seen some of that disconnect this quarter, but based on some of the things I mentioned, again, we're optimistic that the consumption numbers will match up a little closer with our sales numbers.

Got it, and thanks a lot. Look forward to seeing you guys in Florida.

Thanks.

Before we go to the next question, this is Mark Smucker. Just recognizing want to be respectful of everyone's time. We know that several of you may drop off at the bottom of the hour, for a couple of the other earnings calls, but we will continue, we have a handful more questions if we would like to answer them. So for those of you that will stay on, we will take a handful more questions.

Thank you. And our next question comes from Akshay Jagdale from Jefferies. Your line is open.

I do want to ask you a coffee question. So with -- can you give us an update on what you're seeing in terms of the installed base and K-Cups, obviously Keurigs now back in the public realm, so we'll get more inflammation from them I'm sure going forward. But can you give us an update on what you're seeing there? There's some excitement from them on building the installed base instead of being a lot more focused and you know, I know your sales results for your brand and K-Cup really good, and we hadn’t seen Folgers growing a while and K-Cups but overall it looks like even their brands saw for the first time in a long time, a stabilization of share. So just at a high level install base and has this shake out sort of stabilize there, like we sort of in a steady state market share for all the brands in your opinion? And then I will just pass it on.

Akshay, I think we did see a small step change over the holiday. And what I think there is and I think our team would agree is that we entered in with this $49 machine right, the machine we're able to sell for $150 for the holidays. And they full lot of those, if you saw the distribution around it, was pretty solid. I do not see personally what, and I think we will know over the next few months what we will think the house will penetration move to. But I do think they reached a new consumer. And as we know regardless of consumer demographics, convenience is still an important an important decision factor for every consumer and so the fact that we could have lower price machine in the net set of house hold. I think will broaden the category. We think there is a great opportunity and quite frankly that they aligned with, really aligned with our brands we're very strong sell there, we're very strong with folder there and I think that’s probably why we saw those group numbers, where they grew there install base is directly aligned with where we really successful with our brands. So we feel good about that. Have been said that, I think we're going to see at some point, some kind of stabilization in that I think they took one step change, we also see roast and ground. We're excited to show you what we're going to show you next week at CAGNY because we think the premium roost to ground will also continue to grow. I think the category dynamics are pretty good the next year to coffee pricing, green coffee pricing looks stable, looks we have a large summer, the robust across is getting better from damage of the year so, go. So I think we’re going to have stable supply and pretty good dynamics over the next year.

Thank you. Our next question comes from Robert Moskow from Credit Suisse. Your line is open.

I wanted to kind jump ahead to like the first half of fiscal '19 with respect to your green coffee position. I imagine you're going to have a very easy comp in the first half there as well. But as I look at the commodity prices, it seems to be just very, very low compared to last year and may be they are taking a little lower. Is there any risk that you might have to consider a list price reduction on coffee? And then also, do you look at your competitors in ground coffee as being relatively stable and there pricing decisions, private label pricing does that consider? Do you think that’s stable? Or do you think there is rest that goes lower too?

Obviously, anytime we have low green coffee pricing, there is the potential for competitive activity that focuses on that. The private label company tend to be shorter, the branded guys tend to be longer, this premium guide tend to be very long just because the supply chain and premium coffee is much more converse in this supply chain and main stream coffee. So I would expect that. I would not any competitive activity beyond that that can be funded with green and what I mean by that is I wouldn’t it to hurt margins, right. So if there is competitive activity in the category, it'll be funded by green. I wouldn't expect it to be funded by margin. And I think there's another important dynamic happening, as we grow K-Cups, double digits the larger K-Cups and premium become as a percentage of our portfolio. The less dependent we are on green, the green coffee pricing is a very small component of the K-Cup business, right. It's really your conversion costs and we've addressed that. So, I would argue our business is more stable this year and going forward than it was last year.

And so do you think it's fair to say that the ongoing margin for coffee can kind of hang around here at 30, low 30s kind of margin?

Hey Rob, this is Mark Belgya. Yes, that's exactly right. I think last quarter we've made the comment realizing that we have reached well below than we’re mid 20s last quarter and we’ve said that if we deliver Q3 and Q4 as we expected that we should give back over that 30%. And then on a forward basis driven by all the comments that Steve had, our expectations still sort of low 30% segment profit.

Thank you. Our next question comes from Rob Dickerson from Deutsche Bank. Your line is open.

Thank you very much. One quick one is just, if there's an update on Wesson, just seems like it's taking a bit longer than it normally does?

Sure, it's Steve Oakland. We've been involved in the second request process, which provided the information they requested. I don't know that this isn't taking maybe a little longer, I'm not sure that, I wouldn't read anything into that, I would read it more into the fact that organization isn't fully staffed. So we would expect to know when we know it’s just one of these things we can't drive. So, we are anxiously awaiting their thoughts as you are.

Okay, fair enough. And then just I guess back to coffee and kind of what's implied in Q4. I think originally at some point you said you would expect operating profit to decline like low single digit, I think for the year and kind of how it's tracking, is it implies let’s say, I don't know, 30% plus year-over-year in Q4 as a last time we saw that, which I think was Q4 2016, was when coffee costs maybe where getting lower year-over-year. So I am just curious is the profit potential uptick in Q4 is like yes, it's driven by coffee but there's also this maybe a little tailwind coming from the mix benefit on K-Cup, just trying to right size what, what's implied for Q4 in coffee segment operating profit year-over-year relative to what we've seen historically based upon where the price of coffee is -- cost of coffee?

Yes, hey Rob, this is Mark again. So a couple of comments, one is that I think it was in our scripted comments that we would expect Q4 segment profit, your operating profit as you call it would be up sequentially over Q3. And so, we will continue to benefit out of it compared to a year ago, fourth quarter with the benefits of the new contract. So that will be sort of continuation of what you saw in Q3. The new news is the impact of green coffee. It seems that that was basically a neutral in Q3 that we will benefit in Q4 and that's driving, that what we'll call the incremental improvements sequentially over Q3.

Okay, and then just, I'm not sure how much you can say or we'll say on 2019 in terms of free cash flow. You know we saw this morning, you’re increasing your target for free cash flow for 2018, but it seems like obviously with tax reform and even that investment and where inventories could be given lower coffee cost. Is the expectation that free cash flow hopefully in '19 there could be a material increase or there other investment? And I fully understand you're not giving guidance for '19, but say any commentary you can provide on free cash flow growth potential over next year?

Sure. Well, obviously, I can't say what the number is, and I can't -- we all have our own definition of material, but what I can say is that the incremental benefit of just tax, to just go 2024, is about because $50 million to $60 million incremental over what with and this year. All things to be in equal, you would expect to see some increase from that. I guess I will just hold on that until we give you a more of an update in the end of the year. Obviously that is coming to play is, working capital expectation. So we would expect to be because of tax.

And then last quick one for Mr. Smucker. I came up to Ken's point earlier on, number of U.S. companies feeling gross margin pressure but then also a number of companies saying we have a tax benefit and we might reinvest that backup. So I was just curious just kind of general feel, if we look out over the next year that in everyone where the plan to increase that investment that marking spend for building what have you. How does that play out? Does that -- how does that change to be total industry, if everybody is spending more?

On marketing specifically you're asking Rob.

Sure,yes, before you go to your budget process and see there is how much we're going to spend, I think you probably think well hopefully, as just as much or more than others would spend and each of our given categories where we want to focus. So as you do that, even if it's casual conversations. I am just curious as how you think, it's everybody spends then does it kind remain in constant it's all relative?

Clearly our industry is very competitive and I think at the end of the day, it's hard for me to comment on what others might do, but I think going back to my earlier comments, our goal is really to invest in military as we really think that the growth can come from. And so we’ve done and you will hopefully will feel this, we've done a lot of work very diligent work on understanding the consumer, what consumer need are and how we're uniquely positioned to meet some of those consumer needs. So it's not to say that other company doing those same things but where we're choosing to invest is probably the most important thing I could say. And so and broadly if everybody invest more in the consumer, I think it's quite frankly I think its good for the industry because I think it help consumers continue to regain trust in big food if you will and the brand that we represent. And so I think we have an obligation to our consumers to invest and to communicate directly with them as much as possible particularly in the digital age.

Thank you. Our next question comes from Farha Aslam from Stephens. Your line is open.

One quick question just as a follow-up to your last answer. I just want to understand, are you going to try and get pricing to offset the freight inflation? And in terms of marketing spend, do you expect that to take the form of pricing, slotting, increased consumer oriented advertising, give some color on how much and where you're planning to spend that marketing dollar?

Well, Farha, this is Steve, I’ll cover on the freight piece. When we look at pricing, we look at the whole gambit of cost. We look at freight, we look at raw materials packaging, all of those things. So you know we will operate under that and if we get to a point where we have just applied the price and today pricing is just - price, right, what makes sense, we’ll do that. So I don't think freight has pushed us over that line on a business of our size, that $7 million, or $8 to $10 million a quarter, its material to our results but it's not material across a couple of billion dollars in sales in our business. So, we probably haven't gotten there yet.

Yes. Farha, it's Mark. And I guess the answer to your second question. We talk about marketing generally we're talking about marketing aimed at the consumer. Obviously, there'll be innovation related intro type cost that will -- we’ll be trade, but basically when we speak to market, we're talking about consumer directed spend.

So that could be mass media, mass media, digital advertising, experiential advertising and consumer directly?

But it's not price promotion.

No, that's trade and customer related and that's a different line item on the income statement.

Thank you. And our final question will come from John Baumgartner from Wells Fargo. Your line is open.

Just wanted to ask about consumer. I apologize if I missed this, but the concerns pertaining to private label a kind of been a drag there and just looking at the Nielsen takeaway data, store brands are gaining some share in baking mixes in salad oils, the peanut butter looks as though maybe pricing is a bit sharper, given some of the higher spot costs, we're seeing for peanuts. So can you maybe just speak a bit to what you're seeing in the environment? How much of this is just kind of commodity past relative to anything more strategic and how do you feel about your price points going into fiscal 2019?

John, I guess, we've talked a little bit too. We did see some competitive activity baking for the economics so that didn't make sense, plus we invested in fruit spreads, we had nice growth, our peanut butter business is solid. You'll see some innovation in that next week. And then you know, as we look across the other things Uncrustables and Sahale, the two pieces that we think that o accelerate growth, both did. Yes, I think and I've spoken to this a number of times. I think there are some categories that we participate in some of those, peanut butter might be one, baking, baking is one where hard discount wants to make a stand where our discount retailer wants to have a key price point on a key size. And we see that, but I don't think that's going to change the competitive dynamics that much for us. I think as we're the number one brand or number two brand with exceptional baking in all those segments that we understand the competitive set, we understand the merchandising, we need to do, on the peanut butter business, we tiled fruit spreads, we've got a lot of multiplying leverage there, we do for merchandising. And so, I think we're positioned well for that. I would expect the retailer to continue to use private label, to position themselves within the marketplace, within the certain customer demographic and against the certain competitor set. So we're not suggesting that is going to change but we're prepared, we have a strategy to compete in that different world.

John, this is Mark Smucker. Just to comment on the share. Particularly in the last share numbers we buy IRI data. I think what we see is that leading brand particularly number one brand tend to fair well, even when private labels making a push. And the number that we're seeing reflects that. And so you will see this number two and three brands particularly in this last period generally looks down versus some of our brands that are in number one spot.

Okay so a little bit of pressure overall but nothing really ordinary.

That’s a fair synopsis.

Thank you. And I'm showing no further questions from our phone lines, I would now like to turn the conference call back over to management for any concluding remarks.

Just want to thank everybody for their time, appreciate it’s a busy day for most of you. Just want to reiterate that it's been lot of time this past year making sure our foundation is strong and making sure that we're investing in a right thing, and so we look forward to seeing you all and sharing more about that with you guys next week at CAGNY. Thank you.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.