The J. M. Smucker Company Presents at 2013 Consumer Analyst Group of New York Conference, Feb-19-2013 05:30 PM

Feb.19.13 | About: J. M. (SJM)

J. M. Smucker Company (NYSE:SJM)

February 19, 2013 5:30 pm ET

Executives

Richard K. Smucker - Chief Executive officer and Director

Vincent C. Byrd - President, Chief Operating Officer and Director

Mark T. Smucker - President Of US Retail Coffee and Director

Sonal P. Robinson - Director of Corporate Finance, Vice President of Investor Relations and Assistant Secretary

Mark R. Belgya - Chief Financial officer and Senior Vice President

Paul Smucker Wagstaff - Director and President of U.S. Retail Consumer Foods

Analysts

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Farha Aslam - Stephens Inc., Research Division

David Driscoll - Citigroup Inc, Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Everyone could find their seats. We'll get started here. I'm John Feeney; the conference co-chairman for this year. And I wanted to -- I'm happy to introduce the management team of J.M. Smucker Company, including Chief Executive Officer, Richard Smucker; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Senior Vice President and Chief Financial Officer; Sonal Robinson, Vice President of Investor Relations; Mark Smucker, President of U.S. Retail Coffee is right there on the front row; and Paul Smucker Wagstaff, President of U.S. Retail Consumer Foods.

Before we get started, I want to take a second to thank J.M. Smucker for their sponsorship over the years and particularly for the break tomorrow. Thank you very much, John. We really appreciate it. We heard last week how Smucker's off to a good start. But longer term, there's 3 things that come to mind, I think, when thinking about James Smucker company. First is the long-term focus; second would be the strong culture; and third would be the heritage of responsible cash deployment. In short, it's exactly what you'd probably do if your name was on the door, and it just happens to be.

So without further ado, Richard, take it away.

Richard K. Smucker

Thank you very much, and he actually just gave my presentation, so I appreciate that. If you remember those 3 things, you've got it all. I'm really impressed that we have so many people in the room at 5:30 in the evening. That's quite remarkable since most of you began your day before 7:00, and so we really appreciate you being here.

Actually, I invited my wife to come because I thought she might be the only one in the audience. So she's out there somewhere. I planted a couple of questions with her also just in case. So you don't need to ask them now, dear.

Before I begin the presentation, let me remind you that certain information we will provide today is forward-looking based on current views and assumptions. Future results could differ from our estimates. You're encouraged to read our forward-looking statement in its entirety, which is included in the handout. Additionally, the company uses non-GAAP results for purposes of evaluating our performance internally. Details on the non-GAAP information can be found in our handout and on our website at smuckers.com.

Let me start by previewing the topics that we intend to cover today, and we hope to do it in the next 40 minutes or so to provide plenty of time for questions. I'll provide an overview of our strategy, highlighting the growth opportunities that we're strategically focused on, and that we're investing in. Vince will then provide an update on key initiatives within our leading coffee, peanut butter and fruit spreads businesses. Mark will conclude with the financial update, including commentary on our supply chain initiatives.

Last year at CAGNY, we discussed the effects of operating in a challenging environment, driven by high commodity cost and a very cautious consumer. Today, we are encouraged that the industry has continued to improve, and our results through the first 3 quarters of fiscal 2013 have been very solid.

Overall, we're optimistic about the year ahead. It's a privilege to be in an industry where we interact with millions of consumers on a daily basis, and have an impact on their lives. Through food, we connect with others, build relationships, create traditions and lasting bonds. And despite the ongoing economic challenges, food remains a vital and enduring industry. We, along with our peers, have a seat at the family table, helping to bring families together to share memorable meals and moments for generations.

Through our rich history, Smucker's has demonstrated the importance of sound business principles. Principles that value a balanced long- and short-term strategic perspective, and the philosophy of doing things right and doing the right things. Our adherence to these principles ensure that all of our constituents benefit, including our shareholders. Our confidence in continuing to live -- to deliver shareholder value is further based on a number of factors. And these include: Our clearly defined strategy, our proven ability to execute that strategy, a portfolio of leading brands; a history of long-term growth, strong cash generation and responsible deployment of that cash; and our unique culture, along with the continuity of management.

Culture is one of our most important assets, and we go to great lengths to nurture and preserve it. While our company has grown in size and complexity, our approach to business has remained deeply rooted in our basic beliefs. These, along with a focus on our core competencies, create a unique environment where collaboration is valued, meaningful relationships are built and the ability to implement with excellence is expected and is recognized.

Our vision is to own and market leading food brands in North America, while maintaining a global perspective. Our success in achieving this vision is best reflected in our portfolio of leading iconic brands. Note that we hold the #1 brand leadership position in 7 categories, both in the United States and in Canada. In most cases, we have a substantial market share advantage over our closest competitor. Further, these are categories with high levels of household penetration, and therefore, are relevant to both the retailer and the consumer. With this strong portfolio brands, we rank as the 10th largest shelf-stable food and beverage manufacturer within the 230 billion U.S. center of the store footprint. And if you would exclude the beverage companies, we'd rank about #7. All of our categories and brands are integral to the overall Smucker portfolio, yet our 3 largest, coffee, peanut butter and fruit spreads, represent 2/3 of our net sales last year and even a greater percent of our profits. We expect these categories and the brands that they represent to continue to be the key organic growth drivers. As such, they will be the focus of our presentation today.

You may recall our top line growth objective is to increase sales 6% annually over the long term, which we expect to achieve through a balance of acquisitions and focused organic growth opportunities. Our organic growth has been, and will be, fueled by innovation and brand building. While bringing incremental news to our categories is always a priority, we believe there is a need to increase our company's focus on a few, bigger opportunities. These include: Expanding our presence in single-serve coffee; continuing to build our frozen handheld category; and accelerating the growth of our Jif and our Smucker brands.

Let me share our approach to innovation at Smucker's. Our strategic architecture guides our product development efforts. It challenges us to find new and better ways to meet the expressed and unexpressed needs of our consumers. It drives us to offer products that make you smile, are good and good for you, and are easy for you, and it ultimately allows us to make a value proposition to our customers and to our consumers. This architecture has delivered a strong pipeline of innovation which spans across our brands and our categories.

In fiscal 2012, we launched over 60 new items, and we'll introduce an approximately 90 more this year. New products introduced in the past 3 years are expected to deliver over $550 million or nearly 10% of this year's net sales, representing the most robust period of innovation in our company's history. This includes our K-Cup offering, which will generate nearly $300 million in sales this year.

Next year's pipeline looks promising as well. We will be launching several new exciting products, including a new line of flavored coffees for Dunkin' Donuts, a gourmet line of coffee under a licensing agreement utilizing the Life is good brand, and expansion of our specialty nut butters and the natural fruit spreads product line. Vince will elaborate on these a little bit more in just a minute.

Innovation remains strong across other categories as well. We are leveraging the success of our seasonal product offerings and we'll be launching items spanning a number of brands, including Pillsbury summer seasonals. In addition, Funfetti turns 25 this year, and we will be celebrating with new business -- new birthday varieties. Finally, ice cream toppings featuring root beer and pink lemonade flavors are expected to drive impulse purchases this summer.

In addition to innovation, we continue to make investments to nurture and build our brands through a variety of marketing vehicles. These investments encompass both traditional media and the ever-changing digital arena. Our research continues to demonstrate that digital marketing has been an efficient and effective method for our marketing mix. As such, our U.S. Retail business allocates 15% of our total marketing budget to spend on digital activities across a variety of platforms. The addition of digital has enabled us to easily target key consumer groups, and in combination with traditional media, expand our consumer reach. For example, leveraging these capabilities has enabled us to expand our presence with the growing Hispanic population. Our use of integrated online and mobile campaigns, combined with traditional tactics, has further widened our market leadership position for both the Jif and Smucker brands among Hispanic consumers. Our social media efforts have furthered our ability to develop and deepen meaningful engagements with our consumers. These initiatives have ranged from: Partnering with over 75 influential food bloggers, allowing us to reach an audience of 6.5 million consumers, to initiating a Cafe Bustelo bilingual social media strategy, including a highly engaging Facebook page, which tripled the fan base for this brand. And our Folgers Facebook page has also reached a milestone, topping over 1 million likes.

We continue to see retailers pushing out on social media as well. For example, let's take a look at a recent commercial that one of our key customers launched on both television and on YouTube, highlighting leading brands in their baking aisle, including our Pillsbury brand.

[Presentation]

Richard K. Smucker

I like that egg deal, that's was great. More than ever, consumers need to feel connected, whether to other shoppers or to the companies and brands that they support. Once connected, we want to ensure that our products are available wherever they shop, including online. E-commerce continues to increase as consumer shopping habits evolve. Cantor[ph] predicts that online grocery sales will grow from 1% today to 4% by 2020. In fact, Smucker's recently became one of the first CPG food companies to have a mobile e-commerce site, as we look to capture a portion of this growing segment. While organic growth is one key element of our long-term growth strategy, growth through acquisitions is equally important. Our results reflect the success we've achieved in pushing out on this lever, demonstrating our ability not only to grow, but transform our business. Since 2000, we have completed 15 acquisitions, adding a solid roster of iconic brands.

As we view the M&A landscape, we remain focused on our disciplined, opportunistic approach to acquisitions, and believe brands and businesses will come to the market that fit nicely into our portfolio. While we always have our lines in the water for new opportunities, we continue to make good progress on the acquisitions that we added this past fiscal year, including Cafe Bustelo and the Pilon coffee brand, which Vince will review in a minute.

The foodservice coffee business acquired from Sara Lee this past year has been integrated. With the infrastructure in place, our efforts are focused on increasing distribution and growing our liquid coffee concentrate business, and in the process, expanding our reach with additional foodservice offerings. Currently, we license the Douwe Egbert brands for our liquid coffee concentrate business. Furthering our desire to expand the reach of the Folgers brand this summer, we'll be introducing Folgers in the foodservice liquid coffee segment. We believe Folgers represents a brand consumers know and trust, and will translate nicely into this space, providing a platform for continued growth.

At the opposite end of the spectrum, we continue to make progress on our planned exit from the lower margin, private label coffee business that was associated with this acquisition. Turning to our most recent transaction, since CAGNY last year, we took our initial step in establishing a presence outside of North America. And we focused our efforts on China. We acquired a minority interest in Seamild, a leader in China's rapidly growing oats category. Similar to Smucker's, Seamild has this very strong culture with deeply held values and a focus on brand leadership. Seamild's commitment to growth is reflected in a recently constructed manufacturing campus in Northern China. This new facility aids in the further expansion in the markets around Beijing. As expected, we continue to learn from each other as we build our understanding of the Chinese market and the Chinese consumers.

We also have identified other categories in China that we'd like to participate in, either through acquisitions, joint ventures or importing some of our current product offerings. We have established offices in both Shanghai and Beijing, and our team is poised to push out on these projects. While additional investments in China over the next several years are expected to be modest, probably under $200 million, we are very optimistic about the opportunities to expand in this region.

While my comments today are focused on the top line, we believe our strategy and the initiatives to support it will allow us to continue to deliver on our earnings per share growth goal of 8% plus over the long term, and an 11% total shareholder return, including dividends.

Over the past 5 years, sales and earnings per share have exceeded our targets. Additionally, we have generated nearly $2.5 billion in cash from operations over this period. We continue to demonstrate a responsible cash deployment, reinvesting in our business and returning value to our shareholders.

Over the past 10 years, we have increased our dividend an average of 11% per year. We've also repurchased approximately 10% of our shares outstanding over the past 2.5 years. In total, these actions have returned over $2 billion to our shareholders since fiscal 2008.

Before I turn the call over to Vince, let me summarize the key messages we hope that you take away from our presentation today. First, our long-term strategy remains intact. Second, we are seeking bigger opportunities in our coffee, peanut butter and fruit spreads businesses as the key drivers of our future organic growth. Third, innovations and acquisitions will continue to play key roles in achieving our top line objectives. And finally, we expect to achieve our free cash flow target, further enhancing our ability to deliver shareholder value.

With that, I'd like to thank you for your time, and I'll turn the presentation over to Vince.

Vincent C. Byrd

Thank you, Richard, and good afternoon, everyone. As Richard indicated in his comments, coffee, peanut butter and fruit spreads represents our largest and most profitable categories. And along with the respective leading brands, including Folgers, Jif and Smucker's, they're expected to remain our key organic growth drivers. I will expand on why we remain confident in our leadership position within these categories and why we are excited regarding the growth opportunities for these brands.

Throughout my comments, I'll highlight progress made towards the 5 focus areas we discussed at the start of the fiscal year. With a particular emphasis on brand building as our leading brands remain important to our consumers and retailers, we are pleased with the accomplishments today, yet remain focused on these priorities.

Turning first to coffee, a variety of factors continue to alter the at-home coffee landscape, including innovative new products, changing competitive dynamics, volatile commodity markets, evolving consumer preferences and an increased focus on sustainability. The rapid transformation of the category over the past 2 years can be seen here. Based upon IRI measure channel data, in January of 2011, the at-home coffee was approximately $6 billion category, where traditional roast and ground accounted for nearly half of the total sales and K-Cups represented only 6%. Today, it’s nearly an $8 billion category, and while pricing actions have contributed to this increase, K-Cups has grown significantly and now represents 22% of the total.

With our strong leadership position in North America, our coffee sales have also continued to grow with nearly $3 billion in sales across our company over the past 4 quarters. Approximately 80% of these sales are in our U.S. Retail business. The remaining sales fall within our foodservice channels and our growing coffee businesses in Mexico and Canada. As the at-home coffee category continues to evolve it's important to note that Smucker is the only U.S. retail company that competes in all segments and forms through our iconic brands of Folgers, Dunkin' Donuts and Cafe Bustelo. At the same time, we provide consumers with high-quality products across a variety of price points, allowing them the flexibility to move up and down the value chain while remaining in our portfolio of brands.

There is no denying that the growth in single-serve coffee, specifically K-Cups, has exceeded most expectations. The consumer has clearly demonstrated the desire for convenience in variety, and a willingness to pay a premium to satisfy these needs. In the latest 52-week period, sales in the K-Cup category nearly doubled in the measured outlets where our brands participate, such as grocery, mass retail drug and club stores. Our K-Cup brands grew at a similar rate over this period and now hold a $20 share. We expect the K-Cup segment will continue to serve as the primary catalyst for growth for the coffee category, and as such, remains a priority for us. Research indicates that K-Cups are still bringing new users into the category, at the same time, existing K-Cup consumers increase their buying rates in 2012.

Since the launch of our 6 K-Cup varieties in fiscal '11, we continue to expand our product line-up, now offering 10 items, with plans to add 2 more in fiscal '14. Our focus remains on growing our brands and the Keurig system while gaining our fair share of the total market. We have confidence in our partner, Green Mountain Coffee Roasters, whom we believe remains the industry's most technologically advanced and efficient producer of K-Cups. This is important considering the recent entry of non-licensed, branded competitors and private label offerings into the K-Cup space. In the near term, we believe these non-licensed participants will have only a modest presence. Specific to private label, ultimately, we do not expect their K-Cup share to be significantly different than their presence in the overall coffee market. We expect our K-Cup sales to reach nearly $300 million this fiscal year, an increase of 70% over fiscal 2012. While we anticipate growth rates will moderate over time, the growth potential for this business remains very strong.

Our innovation in the single-serve segment is not limited to K-Cups. Earlier this year, we launched Folgers Fresh Breaks, a premium instant coffee with more roast and ground-like taste. We are -- expect upcoming market efforts will drive its growth. This product line complements our earlier launch of Folgers Instant Sticks, packaging our familiar instant coffee in a more convenient 1-cup solution. We are extremely pleased with this performance. Our Folgers Classic Roast variety is currently the highest selling SKU among the instant stick offerings, and we see significant upside, including new distribution opportunities.

The premium segment has been, and likely will continue to be, the other key growth engine in coffee. We expect the overall premium segment to grow volume in the mid-single digit range. As a leader in the premium coffee with our Dunkin' Donuts, Folgers Gourmet Selections, Millstone and the soon-to-be-launched Life is Good brand, we expect to expand our participation within this segment and further drive its growth. Our innovation efforts have contributed significantly to the growth of the Dunkin' Donuts brand. This includes the success of our seasonal offerings for fiscal 2012 sales, more than double the prior year. Building on this successful platform, we're introducing 2 new spring varieties, supported by television advertising that we will preview in a moment.

In addition to our seasonal success, we are launching a new year-round platform for the brand, Dunkin' Donuts bakery series. Inspired by the bakery heritage of the Dunkin' Donuts franchise, we will introduce 5 new and unique flavors to the premium coffee segment later this summer. This initiative represents the latest effort to -- in expanding the breadth of our overall Dunkin' Donuts offerings, which has increased from 6 varieties launched in 2007 to nearly 20 sold today.

Within the premium segment, our Folgers Gourmet Selection brand complements our higher-end Dunkin' Donuts and Millstone product lines. Last year, we announced the restage of FGS line as an affordable entry point in the premium segment. This new position has resulted in a 5% volume growth since its launch, reversing the brand's previous declines.

Finally, we are excited to announce the launch of our fourth premium coffee brand, Life is good Coffee. Our ability to forge strong relationships enabled us to license the brand from the Boston-based apparel company whose brands continues to gain popularity with its simple message of, The Power Of Optimism. Furthering our sustainability initiative, this launch represents our first line with 100% certified coffee. Additionally, a portion of the royalty payments will benefit kids in need through Life is good's Playmakers public charity. We believe this brand will resonate with consumers in the growing premium segment.

As the coffee category transforms, we would not lose sight of the importance of the mainstream roast and ground. Driven by our leading Folgers brand, we sell more mainstream coffee than all other brands combined. Research indicates that mainstream coffee has not been significantly cannibalized by K-Cups. However, given the changing dynamics within the in-home or the at-home coffee, we also do not expect mainstream roast and ground to drive growth going forward when compared to the other segments. With that said, over the long term, we believe it will stay relevant and maintain its position as the largest segment in the at-home coffee category. As a result, we remain focused on growing share in this segment.

Since acquiring the coffee business, we've invested heavily in marketing initiatives, including a number of TV commercials. Let me share 3 recent examples starting with Folgers K-Cups spot, followed by 2 that support our Dunkin' Donuts brand.

[Presentation]

Vincent C. Byrd

We continue to capitalize on the growth potential of our Cafe Bustelo and Pilon brands. In fiscal 2012, these brands achieved over $100 million in net sales, and have grown an additional 20% through the first 9 months of 2013. We continue to see significant opportunity to expand distribution in core Hispanic markets beyond its historical roots of New York and Miami, and develop the brands further with non-Hispanic consumers.

Let me provide an update on our sustainability initiatives. Last summer, we issued our second annual corporate responsibility report, which expanded on our green coffee sustainability strategy and its 3 core elements of responsible sourcing with the goal to increase our purchases of certified green coffee, small hoarders[ph] support targeting small coffee growers in developing regions to help improve agricultural and business practices; and finally, integrating environmental support where we're partnering with third-party organizations focused on improving quality and yields. We are on track with these goals identified in the report and believe these are strong steps toward supporting the needs of all our constituents. We look forward to building on the progress and we'll share further update in our next report this summer.

Let me now transition to peanut butter and fruit spreads. Starting with peanut butter, the category remains strong, representing affordable source of protein and a staple for many U.S. consumers. Its household penetration rate of approximately 75% is 40% higher than the average across the food space. Since 2011, the category's experienced significant peanut cost increases, while resulting in substantially higher prices on the shelf, at times 30% to 50% above previous levels, peanut butter sales remain resilient. Looking at the latest 52-week scan period, total category sales were up 24% while volume only decreased 1%.

Our peanut butter sales, led by the iconic Jif brand, have grown at 7% CAGR since 2008. We hold dominant 46 [ph] share of the $2 billion category, more than 2.5x greater than the #2 branded competitor. As the leader in the category, Smucker's has delivered on innovation with successful launch of Jif-to-go, it's volume doubled in fiscal '12 and is up more than 75% through the first 9 months of fiscal 2013. Last year's launch of natural and chocolate silk varieties has contributed significantly to its growth. Jif-To-Go capitalizes on innovative ways to liberate peanut butter from the jar, providing consumers added convenience and a snacking alternative.

Furthering these efforts, we are introducing Jif whips later this spring. Jif whips expands the breadth of our peanut butter offerings and furthers our role as the only company participating in all peanut butter segments. We are confident Jif brand equity can extend beyond peanut butter. Earlier this year, we launched Jif Hazelnut, the first expansion of the brand into the fast-growing specialty nut spreads. This is a $250 million segment, growing in excess of 50% this past year. We are pleased with the launch with the product line being incremental to the Jif business and remain enthusiastic about its growth potential.

The next phase in expanding into specialty nut comes later this spring when we launch Jif Almond and Jif Cashew Butters. While representing smaller segments, Almond and Cashew butter are also increasing at rates well in excess of traditional peanut butter. These Jif offerings will represent the first national brand within these segments.

We look forward to the opportunities they present. Investing in the long-term growth of our peanut butter and nut butter business, we have made the strategic decision to expand our manufacturing footprint. Mark will share the details of this project in a moment. These investments will provide needed capacity and support our efforts to grow Jif to a billion dollar brand. Lastly, marketing remains a key component to building the Jif brand. We continue to have unmatched share of voice in peanut butter. Let's take a look at 2 of our latest TV commercials.

[Presentation]

Vincent C. Byrd

Turning to fruit spreads. We will maintain a $45 share of the $1 billion category. As a matured category, gaining share remains a primary avenue for growing our brands. We are focused on 3 key areas to enhance our fruit spread leadership. First, building our brands through innovation. Second, being the low-cost operator supported by our supply chain initiatives. And third, addressing price points and the price gaps on shelf.

The fruit spread team focus much of their energy and resources towards the supply chain project, which is referred to internally as project heritage. As we near completion, we expect to renew our focus on new products and growing the top line within fruit spreads. Similar to Jif, we believe Smucker brand has broader opportunities longer term. In the near term, we are pleased to be entering the growing segment in the fruit spreads with next month's launch of Smucker's Natural. Made with naturally sourced fruit, sugar and other ingredients, natural fruit spreads have been well received by consumers. Our offering of 4 flavors will position Smucker's brand to regain market share by providing another growth platform.

We look forward to sharing future ideas with you as it relates to our company's namesake brand. As with peanut butter, we maintain a dominant share of voice in fruit spreads, reflecting our ongoing investment in TV advertising. Here's a preview of next chapter of our popular voice TV campaign, which will begin airing next month.

[Presentation]

Vincent C. Byrd

Beyond traditional fruit spreads, we continue to explore opportunities to extend the equity of Smucker's brand into other categories and offerings. Over the years, we have found success with our Smucker's Uncrustables sandwich line, which represents another convenient way for consumers to enjoy a PB&J sandwich at any time of the day. Since fiscal 2007, sales have grown at a 6% annual compounded growth rate to reach $125 million in fiscal '12. Nearly 60% of these sales are through our U.S. retail distribution channel and the remainder through our foodservice outlets. The combination of a high-quality product and low household penetration rate presents substantial upside opportunities for Uncrustables. The historical growth has -- of this business has been somewhat constrained due to capacity limitations. As a result, a significant capital outlay to expand the capacity of our Scottsville, Kentucky manufacturing facility began this year and will continue into fiscal 2014. In closing, we are pleased with the opportunities we have identified to further expand our leading brands and progress that had been made towards our areas of focus. We remain confident in our emphasis on these areas will in turn further strengthen our leadership position within our key categories.

I'll now turn it over to Mark for an update on financial matters, including a review of our supply chain. Thank you.

Mark T. Smucker

Thank you, Vince, and I think I can officially say, good evening. Last week, we announced our third quarter results. During the call, we updated our outlook for fiscal 2013. Net sales for the year estimated to approach $5.9 billion, up over 6% compared to the prior year. Our non-GAAP EPS is expected in a range of $5.17 to $5.22. Using $5.20 as the midpoint of the range would result in a 10% increase in over -- in fiscal 2012 EPS and yield a 5% CAGR of 11%. Note that this outlook incorporates the coffee price decline announced earlier today reflecting lower green coffee cost.

As you look at our operating margin, the third quarter's 17.1% margin was the highest in 6 quarters, reflecting lower commodity cost and a favorable sales mix. Keep in mind, given our ability and our willingness to move on price to offset inflation, margins will fluctuate, but our focus ultimately remains on growing segment profit dollars. And finally, we confirm that free cash flow should exceed $650 million. This is in excess of the $500 million outlook provided at the start of the year, with much of the over delivery attributed to decreases in working capital. We expect this will partially turn in 2014 as we increase certain inventories to normalized levels. Included in the cash flow estimate is CapEx ranging from $205 million to $215 million, which includes approximately $40 million in restructuring investments. As Richard and Vince have both commented today, we are focusing on our efforts around bigger opportunities within coffee, spreads and Uncrustables. In support of these initiatives, we expect capital expenditures to exceed a run rate target of 3.5% of sales for the upcoming few years. We will provide our 2014 CapEx budget in June, but for modeling purposes, our preliminary estimate is $270 million. Longer term, we anticipate capital spending to trend downward to our desired run rate.

With a number of current and future supply chain projects, we thought it would be helpful to provide an overview of our plant locations and the status of investments related to them, beginning with peanut butter. Currently, we have 2 production facilities that support our peanut butter business. Since acquiring Jif a decade ago, we have invested nearly $100 million in our plant located in Lexington, Kentucky. The brand has grown tremendously in the process, doubling in sales since we acquired it.

While these capital enhancements have allowed us to keep pace with Jif's growth to date, the expectations we have to grow the peanuts and nut butter businesses require us to further expand capacity in Lexington while adding a third facility. To address this need, we have made the decision to convert our Memphis, Tennessee fruit spreads facility into a peanut butter plant. This location was originally scheduled to close as part of our fruit spreads restructuring project, but provides us a viable alternative in terms of both cost and location. We will also continue to produce a small amount of fruit spreads at this site. Upon completion of this expansion, we intend to move production of our specialty nut butters which are currently being co-packed into our facility in new Bethlehem, Pennsylvania. Today, this plant produces our line of natural peanut butters under the Smucker's, Laura Scudder and Adams brand, which will now transition to our Memphis facility.

The total capital investment related to these peanut and nut butter projects is estimated at $80 million, while restructuring cost will approximate $10 million, with the majority of the spend occurring over the next 2 fiscal years.

The change in plans related to the Memphis plant will not impact the total savings originally estimated for the fruit spreads restructuring project. In coffee, we have completed the $70 million expansion of our 2 facilities in New Orleans, following the planned closings of our 2 plants in Kansas City and Sherman, Texas. The New Orleans plant will produce nearly all coffee requirements for our Retail business. And additionally, through the Rowland acquisition, we acquired a plant in Miami which we intend to consolidate into our New Orleans site in the next few years. As part of the Sara Lee transaction, we acquired a state-of-the-art facility in Suffolk, Virginia, that produces liquid coffee concentrate for our foodservice business, further expanding our technical and manufacturing capabilities. In addition, we purchased the small roast and ground facility in Harahan, Louisiana, that was originally leased through this acquisition, and we now plan to operate it as specialty coffee plant. Located near our other New Orleans coffee sites, this allows us to leverage our operational footprint in the region and provide further flexibility to support our innovation efforts.

As planned, we will continue to exit the majority of the low-margin, private-label roast and ground coffee business currently produced in Harahan through the middle of fiscal 2014. And while some of this rationalization occurred in 2013, the impact on sales for next year will be approximately $50 million.

Turning now to fruit spreads. The construction of our new state-of-the-art manufacturing facility in Orrville is nearing completion. Approximately 1/2 of our retail fruit spread volume is currently being produced in the new plant. We expect the full transition to be complete later this fall with the project on time and on budget. Upon completion, we will commence with the closing of our Canadian fruit spreads plant located near Québec City.

This year, we expect to achieve $40 million in run rate savings related to the coffee and fruit spreads restructuring project. Starting next fiscal year, the amount is expected to increase to $55 million, providing an incremental benefit of $15 million. The savings from the coffee project have mostly been achieved and are reflected in our results. Most of the incremental savings next year relate to fruit spreads and provide us with the means to reinvest in the growth of the Smucker's brand.

As Vince indicated in his comments, with our confidence in the growth potential of the Uncrustables frozen sandwiches, we are in the process of increasing capacity at our facility in Scottsville, Kentucky. An $80 million investment to expand the capacity for baking bread and making sandwiches was started earlier this year and will continue through fiscal 2014. While we clearly expect to grow this brand, we recently made the strategic decision to exit a portion of the schools Uncrustables business at the end of 2013 school year. This represent sales made to school participants, which participate in the USDA's commodity peanut butter program.

The decision is in the best long-term interest of the brand, but in the short term, will reduce foodservice sales by about $30 million in 2014. We ultimately expect to offset a good portion of this with increased sales of Uncrustables through our retail channels. Our teams have put tremendous effort and resources into enhancing our strategic operational footprint. Our manufacturing facilities, consisting of 21 plants primarily in the U.S., are more efficient and more agile than ever before, and strengthen our innovation and our other growth objectives.

The ability to generate strong cash flows allows us to make these types of investments in growth. While at the same time, we have delivered on our commitment to create shareholder value as reflected on this slide. We have returned over $2 billion in cash to Smucker's shareholders since fiscal 2008. In line with our cash deployment strategy, we attempt to allocate 1/2 of our cash from operations to growth and the other 1/2 to shareholders, and as you can see, we have essentially accomplished this objective over the past 5 years.

As you may recall, last year at CAGNY, we provided our goal to double free cash flow in 5 years, targeting $850 million in fiscal 2017, and I'm pleased to report that we remain on track to achieve this goal. We hope this presentation has underscored why Smucker is uniquely positioned to continue delivering long-term profitable growth and shareholder returns.

In summary, we remain confident that our strategy is right and we'll continue to maintain a long-term perspective, utilizing our strong financial position to capitalize on opportunities that support this strategy. We remain focused on expanding our leadership positions, seeking bigger opportunities within the coffee, peanut butter and fruit spreads categories, and maintaining a strong innovation pipeline will drive our organic growth. We will remain disciplined as we explore further expanding our portfolio and building upon the success the company achieved through our acquisition approach, and lastly, we are committed to achieving our long-term cash flow objectives, reinvesting in the growth of our business and returning value to our shareholders. Much has been accomplished over the past year, and we would like to thank our employees for their ongoing efforts. At the same time, we look forward to what lies ahead, and firmly believe the best is yet to come.

We thank you for staying with us to the end, and I will now turn it over to Sonal to facility the Q&A session.

Question-and-Answer Session

Sonal P. Robinson

Let's start over here with John Feeney.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Just a question I had on coffee, and particularly, the K-Cup business. Certainly, it stands to reason that the private label penetration in K-Cup and un-licensed could ultimately be limited. But what has materialized, it seems already, are some lower price points, at least in certain retailers. As those price points appear, do you think lower price points for K-Cups broadly will expand the -- expand usage, is there elasticity? And if so, within your brand, do you see -- I mean, would you ever reach a point where lowering prices maybe has a positive payback as far as driving volume?

Richard K. Smucker

So, Mark, I'll start. We got that question on our third quarter call, and I think ultimately we view that it will probably be a 3-tiered pricing structure. Okay, and we'll play in the middle to the upper tiers of these pricing structures. If you listen to our partner, Green Mountain, they anticipate that there could be some slight margin erosion over time. We would hope as responsible marketer and as well as how much we invest in our brands, we don't anticipate hopefully having to deal it down more, but we'll see how it all plays out. We're very comfortable with the margins where they are today, but it's definitely going to become a little more competitive. But we still see a lot of growth in K-Cups.

Sonal P. Robinson

Great. Ken Goldman? Ken Goldman?

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Thank you. One question that hasn't come up today among any companies at least -- unless I missed it was about Walmart. And the release that was -- the e-mail that was leaked last week. And I know you can't talk about any particular customer. But maybe you can help us, are you seeing anything unique, hopefully not, in the negative side, in terms of retail trends that you've seen in that particular period that Walmart talked about? Or is it something where you were taken aback and maybe surprised by the release of that e-mail as well? Just curious how you saw it.

Richard K. Smucker

I would say, not in our categories. Obviously, we can't speak to everybody's category. But actually, through the month of January, we saw a good takeaway. In fact, the industry data, I think we mentioned in our call, proved that. It was up by 2.7%, I think. And that was one of the best 4-week periods of takeaway from the retailers shelves. Now maybe the inventories were, I don't know, down in some retailers, but we didn't see it.

Sonal P. Robinson

Let go back here to Jason English, please.

Jason English - Goldman Sachs Group Inc., Research Division

As free cash flow takes a step back next year with higher working capital and then also higher CapEx, would that impact your share repurchase plans?

Richard K. Smucker

I don't think so, Jason. We stand pretty committed to our allocation of capital. We've go into every year thinking somewhere in 2% of our outstanding. We're going to continue to try to manage working capital, too. So just because I mentioned that we're going to be building some inventories back up, I wouldn't read into that as a massive use of cash and would continue to look at buying shares as part of the deployment of that cash.

Sonal P. Robinson

In the back here with Alexia Howard, please.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

I just wanted to ask about the use of cash in China going forward. You mentioned $200 million over the next several years. I guess you started with the point about the clarity of your strategy in the U.S., and I think we all really understand that very well and maybe some of us are struggling a little bit more to understand how you make a switch of geography and a switch of category and now you're talking about investing more. Could you talk a little bit about the criteria you're going to use going forward to decide whether to really go forward a few years down the line or whether to maybe calm things down, but I'd be curious about that.

Richard K. Smucker

I'll start on that. First of all, I think last year at this time, we talked about our China strategy and one of the things is we made a number of -- 15 acquisitions we made this past decade, basically. We really wanted -- those were all North American based. And we said we had to focus our time and effort, management's time and effort on making sure that those work. We've been able to do that, we've proven and I think in the results. But then we said, look, it's a big world out there, and coffee, for example, we buy in 40 different countries. So we needed to look at what market we could expand in, and basically said that we have the management talent and we have the financial wherewithal to look beyond the U.S., but we want that to be a rightful approach. And so obviously China is a big market. And so we looked a long time there. We did some -- a lot of research with had a couple of third parties and found that they eat a lot of hot breakfast and mostly congee, as you know. And they're just starting to eat oats, which is their oatmeal. And so we found a great partner which actually has a lot of value similar to Smucker's, the Seamild organization, the Xie family. That was a first great first step, but we also during that research, found several other categories that we thought could fit with Smucker's. So we're still pursuing those. We can't speak to them right now. But again, this is a long-term approach, we take a generational approach. This is -- we have a fifth-generation of business today. So may not be under my watch, or my brother's and my watch, but hopefully, we have a good footing and can go forward. Also one other quick thing, just those commercials about my brother and myself, I just wanted to point out that they took artistic liberties on some of the things they made me say. I really wasn't that slow. I just want to let you know that.

Sonal P. Robinson

Let's move over to the right over there, Eric Katzman.

Eric R. Katzman - Deutsche Bank AG, Research Division

So I'm not going to touch that one between the 2 brothers. I guess, to maybe follow on Jason's question with regard to the free cash flow. You didn't change your target over 5 years and yet you're raising CapEx. So what is the offset? Is it you're expecting higher earnings growth as the offset?

Richard K. Smucker

I think, Eric, what we'll see is, I mentioned that the investments in the next couple of years will be at probably around 4.5% of sales, and then we will see that drop off as we get closer to 2017. So CapEx will return back to a more normalized level. And I think, what you also will see a focus from us is on working capital management. We still believe that we have some opportunities over that time period to drive improvement in working capital. So I think it will be those 2 components as opposed to any change as of right now on our assumptions around the earnings side of it.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Okay. And then the follow-up is just, when you think about some of the brands in our industry, a lot of them cannot bridge their way to kind of the organic channel, which is growing rapidly and is one of the segments of the population that still has money to spend. And it seems to me that we don't really often hear about like a -- the organic business, the fact that the Orchard's select product, I think, has been pretty successful. How do we -- like is there a strategy at the company to push that, how meaningful is organic in total, and how rapidly has that been kind of growing versus the more competitive...

Richard K. Smucker

I'll speak broadly about the organic. Obviously, that is important to us, and we have our Santa Cruz Organic and we also have our Knudsen line. And that business has managed separately. And we actually have a new general manager that we put in place just in the last 6 months, a very dynamic person that came from the Canadian market, and is really pushing growth in that area. So we didn't talk about it here today, but we see faster growth in that market than we've had historically. We have organic offerings in a number of our lines. And some of those brands are easy to shift over, some are harder, but certainly the Santa Cruz Organic and the Knudsen lines are naturals for those. So you're going to see, we'll in the future probably talk more about it. But it's going to grow faster than the corporate average, for sure.

Eric R. Katzman - Deutsche Bank AG, Research Division

I think, Richard, too, just because some of you may not know it because we don't talk about it. But it is about $125 million to $150 million business, just that portion. And if you layer on the organic offerings we have in our consumer, it's probably approaching $175 million to $200 million. So we are pretty well represented in that area.

Sonal P. Robinson

Over there, Farha Aslam, please.

Farha Aslam - Stephens Inc., Research Division

Richard, you've just historically been a very innovative company and focused on new products. When you think about it, how much of that new product introduction is incremental? And what do you hope those new products add in terms of margin and mix?

Richard K. Smucker

Well, a couple of things. As you said, we've had a lot of innovations certainly in the past 3 to 5 years. We're going to continue to push that. In terms of numbers, Mark, you might want to speak to the numbers, but we said is $550 million of the sales growth this year was due to new products. And that's obviously significant. We'd like to keep in that kind of range going forward, but you don't always have a K-Cup every year. And keep them on for 3 years from the date of start until they fall off in terms of what we consider a new product, until they're kind of in the marketplace. But we expect to have continued growth from the new products and innovation about, and we say 2% to 3%, well like we say 1% but it's actually been more than 2% to 3%. So I think you want to add to that.

Mark R. Belgya

I was just going to add to the margin side. If you look across the portfolio and this is probably the truest it's seen in the baking area that as we have brought products to market, they do tend to, once you get through the introductory period, do tend to have higher margin -- higher ring, higher margin items. If you look at our line of cake mixes, for example, if you compare what we brought to the market and compare that back to traditional chocolate and white icing and cake, there's a dramatic increase in both margin and ring. So -- and that holds true across our portfolio as we look to bring new products.

Sonal P. Robinson

David Driscoll?

David Driscoll - Citigroup Inc, Research Division

Thank you. Two questions. One is just a follow-up to the -- on the conference call. There was a question regarding peanut cost and how it flows through the P&L, and the question resulted in, I wasn't clear on exactly what the answer is. I feel like it should follow the crop cycle and I feel like there was both answers actually given. Can you just clear that up? Does the higher peanut cost extend until we get to the next harvest and there's a reset? And then I have a separate question.

Richard K. Smucker

So, I'll start and I will turn it over to Paul. Again, keep in mind we're the largest peanut purchaser in the United States. And we had to make a commitment last year at a certain price level in order to incentify the growers to grow peanuts. So that took our position longer than maybe some of our competitors. So we're in a higher cost period than maybe some others that didn't have to go quite as long. We are working our way through those, and we expect our peanut cost will go down, but our pricing that we just announced in the third quarter basically reflects where we think it needs to be. So we don't anticipate a major shift in our pricing over the next several months unless there's something happens with the next crop coming out a year from now basically or 9 months from now. Do you want to add to that?

Paul Smucker Wagstaff

That's right. That's correct.

David Driscoll - Citigroup Inc, Research Division

Just an unrelated question. Back to K-Cups. Could you talk a little bit more in detail on the super premium side of K-Cup offerings, and really, what is your strategy as regard that price point there. It seems to me that just given the ongoing rates of growth of that marketplace, you should really be competing in all segments, all price points there, and I'd like to hear your thoughts, please.

Richard K. Smucker

Mark, do you want to take this?

Mark T. Smucker

Sure. David, are you suggesting that ours are super premium?

David Driscoll - Citigroup Inc, Research Division

No. They...

Mark T. Smucker

That's right. I just want to doublecheck that.

David Driscoll - Citigroup Inc, Research Division

They certainly need to be.

Mark T. Smucker

Well, clearly, it's been said earlier, there are multiple tiers. At this point, we do feel that it is likely that the K-Cup landscape will settle out similar to where the coffee category is today. And we would expect that at this point, we are well positioned. As we go forward, we could evaluate whether we might enter a different tier. So the short answer is, might we do that? Yes. But at this point, we still think that we feel very good, we've been able to maintain our share quarter-to-quarter. And so at this point, I don't think that's in the cards, but certainly as the landscape evolves, we could reconsider.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Thanks for a great presentation. We'll move to the breakout room briefly after this. And thanks for a great presentation. J.M. Smucker company, thanks for the break tomorrow.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!