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The J. M. Smucker (NYSE:SJM)

Q4 2012 Earnings Call

June 07, 2012 8:30 am ET

Executives

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

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

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

Steven T. Oakland - President Of International, Foodservice And Natural Foods

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

Analysts

Eric R. Katzman - Deutsche Bank AG, Research Division

Andrew Lazar - Barclays Capital, Research Division

Eric Gottlieb - Stephens Inc., Research Division

David Driscoll - Citigroup Inc, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Mitchell B. Pinheiro - Janney Montgomery Scott LLC, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

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

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Robert Dickerson - Consumer Edge Research, LLC

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good morning, and welcome to the J.M. Smucker Company's Fourth Quarter 2012 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference over to Sonal Robinson, Vice President of Investor Relations. Please go ahead, Ms. Robinson.

Sonal P. Robinson

Good morning, everyone, and welcome to our Fourth Quarter Earnings Conference Call. Thank you for joining us today.

On the call with me are Richard Smucker, Chief Executive Officer; Vince Byrd, President and Chief Operating Officer; Mark Belgya, Chief Financial Officer; Steve Oakland, President, International, Foodservice and Natural Foods; Mark Smucker, President, U.S. Retail Coffee; and Paul Smucker Wagstaff, President, U.S. Retail Consumer Foods.

After this brief introduction, I will turn the call over to Richard for an overview of fiscal 2012 and initial thoughts as we head into 2013. Vince will then provide commentary on our business segments, and Mark will close with additional comments on our financial results and our outlook for 2013.

During the call today, we may make forward-looking statements that reflect the company's current expectations about future plans and performance. These forward-looking statements rely on a number of assumptions and estimates, and actual results may differ materially due to risk and uncertainties. I invite you to read the full disclosure statement in the press release concerning forward-looking statements.

Let me also remind you that the company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is detailed in our press release located on our website at smuckers.com. A replay of this call will also be available on the website. If you have any follow-up questions or comments after today's call, please contact me or Mark Belgya.

I will now turn the call over to Richard.

Richard K. Smucker

Thank you, Sonal. Good morning, everyone, and thank you for joining us.

As we look back over the past year, one marked by unprecedented levels of commodity cost increases and an uncertain macroeconomic environment, we are pleased to have delivered another year of record sales and year-over-year earnings per share growth. Let me begin by recapping our key accomplishments during the past fiscal year.

Sales increased 15% to more than $5.5 billion for the year, as each of our business segments achieved strong sales growth. In addition, non-GAAP earnings per share increased to $4.73 compared to $4.69 in the prior year. Through responsible pricing leadership, we addressed cost inflation exceeding $500 million for the year, resulting in prices increasing by double digits in several categories. Like many other food companies, the combination of these higher prices and economic uncertainty impacted our overall value. 2012 marked a record year for the company's innovation efforts. Sales from new products exceeded $300 million representing over 5% of net sales. The continued success of our K-Cup offering contributed significantly to these sales, exceeding our plan for the year. Notably, IRI recently recognized our K-Cup introduction as the #1 new beverage launch in calendar 2011. Innovation also played a key role in gaining the #2 market share position in the baking mixes and frosting category.

During the past year, we continued to execute on our acquisition strategy, completing 3 transactions. Following the Rowland Coffee and the Sara Lee food service beverage acquisitions earlier in the year, we took our first step in March towards achieving a meaningful presence in China by acquiring a minority interest in Seamild, an established leader in China's rapidly growing oats category. We're excited about partnering with this successful family-run business. Additionally, we continue to invest in our key productivity initiatives. Significant progress was made on the new state-of-the-art food manufacturing facility being built in Orville, Ohio and the expansion of our 2 coffee facilities in New Orleans. Lastly, we further demonstrated our commitment to enhancing shareholder value by repurchasing over 4 million shares of common stock, representing approximately 4% of the shares outstanding. And we increased our annual dividends by 15%. As we close the book on 2012 and turn our attention to fiscal 2013, we are encouraged about the future of our industry, our business and the strength of our brands. Softening commodity cost should help moderate retail pricing and bring back some of the volume declines that the retail food industry experienced this past year. Consumers continue to find their way through difficult times, and we must continue to listen to them, be flexible and adapt along with them.

To accomplish this, our focus for fiscal 2013 includes the following key initiatives: First, we are investing heavily in our portfolio of leading brands with a significant planned increase in marketing and innovation. Building on the success achieved in 2012, we have a robust new product pipeline across brands and expect to launch approximately 100 new items in 2013. Additionally, we continue to expand our use of digital marketing and social media as consumers' needs are evolving rapidly in this space. Secondly, we expect to further capitalize and build upon our recent acquisitions while exploring additional brand portfolio expansion opportunities in both North America and China. Third, we are committed to better managing key day-to-day and promotional price points to meet our consumer needs and address competition, including an increased focus on narrowing price gaps. Fourth, we are achieving a more efficient supply chain through our restructuring initiatives in coffee, food spreads and pickles. In 2012, these projects delivered cost savings that exceeded our annual expectations, and we expect an additional step-up in savings in 2013. Fifth, we're making great progress on our sustainability efforts, and we'll share many of these successes in our 2012 corporate responsibility report being published later this summer. And finally, our ability to generate significant free cash flow allows us to continue our track record of enhancing shareholder value as share repurchases and dividends will remain a key use of cash.

As we have consistently stated, we take a long-term view of our business, and we continue to be well positioned for long-term growth. Our 5-year compounded annual growth rates are 21% for sales and 10% for earnings per share, exceeding our long-term growth targets of 6% and 8%-plus, respectively. This performance is a result of the hard work and commitment of our dedicated team in executing our strategy. We thank them for their contributions and look forward to continued growth this year and beyond.

With that, I'll now turn the call over to Vince, who will share more details on our business segments.

Vincent C. Byrd

Thank you, Richard. Good morning, everyone. As expected, fourth quarter volume trends improved sequentially from the third quarter, yet higher prices, aggressive competitive actions and cautious consumer behavior continues. Although we do not expect these dynamics to reverse overnight, we remain confident in our ability to manage through this environment. While much ultimately depends on consumer and competitive behavior, we anticipate volume trends will improve this fiscal year.

As Richard indicated, our 2013 key initiatives will focus on brand-building investments, innovation, capitalizing on recent acquisitions, realized savings from our supply chain projects and better managing price points. Specific to pricing, this includes narrowing our everyday and promotional price gaps with branded and private label competitors and in certain price-sensitive categories, taking a more aggressive stance on pricing. With the exception of oils, our price gaps compare to our #1 competitor and private label began improving during the fourth quarter, and we'll continue to focus on this going forward. We will also increase our emphasis on the value-conscious consumer and provide lower price offerings through, first, expanding the availability of our opening price point products, and secondly, downsizing selected items.

Let me elaborate on these initiatives as we discuss our segments. Beginning with the U.S. Retail Coffee, we have a strong lineup of planned marketing actions and innovation for 2013. The relaunch of Folgers Gourmet Selection bag coffee repositions the brand as an entry level price point into the premium coffee segment. This provides a three-tier pricing strategy across the gourmet section with our Folgers Gourmet Selections, Dunkin' Donuts and Millstone brands. Building on the success of our K-Cup offering, we will soon launch 2 new varieties. We expect our business to realize double-digit growth in 2013 on top of the nearly $180 million of sales achieved in 2012. Additionally, our brands will participate in the test rollout of the Keurig new View [ph] coffee system during the upcoming year.

We are also excited to announce the launch of our new Folgers FRESH BREAKS, a premium single-serve instant coffee with a more roast and ground-like experience. To support these new products and other brand-building initiatives, significant marketing investments are planned for coffee in 2013 including a number of new TV commercials. Second, we remain excited about the Rowland Coffee acquisition growth opportunities. We anticipate above-average growth rates from the Cafe Bustelo brand as we continue to expand into other key Hispanic markets in the United States. In 2012, the Rowland brands delivered $100 million in net sales for the U.S. Retail Coffee segment. And we expect to double their sales over the next 5 years. Third, green coffee costs are expected be lower in 2013, providing relief from the record highs we experienced in 2012. This, in turn, will allow lower prices on shelf which we expect will help improve our coffee volume in 2013. In May, we announced an average 6% price decrease on the majority of our U.S. retail packaged coffee products. Retailers are now beginning to reflect this decrease on the shelf. As Mark will discuss, we expect Coffee segment's profit to decline in the first quarter compared to last year's record first quarter, but anticipate segment profit growth for the full fiscal year. Finally, we expect to complete the last major milestone of the coffee supply chain restructuring project later this year. Our Kansas City coffee plant was recently closed, and the expansion of our New Orleans facility is on track to be completed this summer. In addition to improving our cost structure, the expanded plants allow us to capitalize on upcoming initiatives including future consolidation of the roast and ground production related to recent acquisitions and continued product innovation.

Turning now to Consumer Foods, we expect overall volume will continue to be pressured in 2013, primarily in the first half of the year due to many of the same factors that impacted it this past year, including higher price points and competitive activities. To help address these challenges and provide growth opportunities, we have a number of new initiatives planned for Consumer Foods. First, we have several new products including the recently launched Jif Hazelnut spreads, which allows us to participate in the fast-growing specialty nuts category. Retailer acceptance of this offering has been very positive. We will also launch new varieties of Pillsbury baking mixes, frosting and seasonal items. Our innovation efforts have led to the launch of a downsized cake mix offering. This new size provides consumers with the same full-sized great tasting cake but is expected to improve profitability in what was currently a low margin category for our business. This profit improvement is expected to begin in 2014, as the coming year will be one of transition. Several new television ads are planned to support the launch of new products as well as building on the equities of our Smucker's, Jif and Pillsbury brands. Secondly, applying our learnings from this past year, we will increase focus on getting the price right in the price-sensitive categories such as oils and milk. We expect to achieve this by improving efficiency of our trade spend and better utilizing our pricing strategy. In the spreads category, we will reinstate our support of the back-to-school promotional period, following last year, when many of the promotional activities were pulled in the first quarter to manage the peanut crop availability. Peanut butter items, which had been temporarily discontinued in 2012, are also now back in the market. Lastly, in terms of the supply chain, we continue to make significant progress on the Orville manufacturing facility and will begin initial production in July and continue to ramp up activities over the next 12 months. The overall cost savings and construction cost related to this project remain on track. In addition, we have made significant investments to expand the capacity of our Smucker Uncrustable sandwich manufacturing facility in Scottsville, Kentucky. As such, we are better positioned to capitalize on continued strong consumer demand for this product, and we anticipate solid volume growth in 2013. Additionally, our capital expenditure plan for this year includes significant investments to further expand the bakery operations in this facility.

As you can see, despite the economic and competitive environment, we believe our plans for 2013 will help improve our volume and share of market trends.

Let me conclude with a few comments on our Sara Lee food service beverage acquisition, which doubled our existing Food Service business. We have accomplished a great deal since closing the transaction in January. As of May 1, nearly all major systems and processes have been transitioned. The integration was a tremendous achievement by our teams and was done in record time over the past 4 months. And the transition was seamless through our customers. In addition, we redesigned our food service sales organization and go-to-market approach. With a direct sales team now in place, our touch points with customers has expanded significantly, and we look forward to the growth opportunities this provides our overall food service business. Subsequent to the closing, we made 2 strategic decisions that will delay the transaction's expected EPS accretion from what was originally announced. First, we slowed the roast and ground supply chain integration activities, allowing our teams to prioritize other key initiatives underway in our U.S. Retail Coffee business. Secondly, in order to ensure we are meeting the needs of our customers, we initially absorbed additional lower margin Roast and Ground business that was not included in our long-term projections. We have begun to exit some of these businesses, however, at a slower pace than originally anticipated. While these decisions are expected to delay the majority of the EPS benefit for an additional 12 to 18 months, we remain confident in ultimately achieving the anticipated earnings contribution from this business.

In closing, while we remain cautious as we enter the new fiscal year, we are encouraged about the proactive measures we are taking to address these challenges head-on, and by the opportunities that lay ahead. I will now turn the call over to Mark to discuss our consolidated results for the fourth quarter and to provide details on our outlook for 2013.

Mark T. Smucker

Thank you, Vince. Let me begin with a few comments on the fourth quarter. Net sales increased $168 million or 14%, reflecting a 10% impact of net price realization, offset somewhat by a 7% volume decline. Acquisition gathered $126 million or another 11%, and the impact of mix was favorable. While the overall volume decline was generally in line with expectations, earnings per share exceeded the midpoint of our implied fourth quarter guidance range by approximately $0.10, reflecting a reduction in marketing expense, lower administrative cost and the impact of fourth quarter share repurchases. These factors were partially offset by a higher effective tax rate and an impairment charge. Operating income, excluding restructuring and merger integration cost, increased $60 million for the quarter, primarily due to an increase in gross profit. SD&A expenses declined 4% for the quarter as higher selling expenses, which were primarily associated with the businesses acquired during the year, were more than offset by lower marketing and a decrease in incentive compensation cost in the current year. The effective income tax rate was 36.5% in the fourth quarter compared to 36.7% in the prior year. For the full year, the effective tax rate increased from 33.1% in 2011 to 34.4% this year, slightly above our most current guidance. An increase in state and local taxes caused the higher rate.

Turning to cash. We ended the year with $230 million and no borrowings outstanding under our $1 billion revolving credit facility. Anticipating normal billing inventory during the first half of 2013, we expect to draw on the revolver beginning late this quarter, but anticipate paying down all revolver borrowings by the end of fiscal year. Free cash flow for the year totaled $457 million, slightly above our most recent guidance. Strong cash generation in the fourth quarter resulted in cash from operations exceeding $730 million for the year. Capital expenditures were $274 million in 2012, coming in at the high end of our guidance range and included approximately $135 million related to our restructuring project. During the quarter, we completed our 10b5-1 program, repurchasing 3 million common shares using approximately $225 million of cash. This leaves 3.9 million shares available for future repurchase.

Let me conclude our formal remarks by providing our sales, earnings and cash flow outlook for 2013. As noted in this morning's press release, we expect non-GAAP income per diluted share in the range of $5 to $5.10 based upon approximately 110.5 million shares outstanding. Excluding amortization expense of nearly $100 million or $0.60 per share, the guidance would be $5.60 to $5.70 per share. For the reasons Vince indicated, the fiscal 2013 EPS contribution, related to the acquired Sara Lee business, is now anticipated to be below our original expectations but is still expected to be achieved over the long-term. In addition to our standard exclusion of restructuring and merger integration cost, the 2013 non-GAAP earnings range also excludes approximately $20 million of settlement charges related to the company's decision to settle certain pension liabilities through lump sum payouts. Net sales for 2013 are expected to increase approximately 7% over the prior year. The incremental impact of the Sara Lee food service acquisition is expected to contribute approximately 2/3 of the increase, with the remainder primarily due to mix. We project overall volumes to come in at levels slightly below this past year, primarily driven by declines in the first half of the year with trends improving in the last 6 months. Declines for the full year partially reflect planned rationalizations of certain lower margin flour business.

Going into the year, we anticipate the impact of commodity cost changes within our basket of goods to be relatively neutral year-over-year. Lower cost for coffee and milk are expected to offset the full-year impact of higher peanut cost, along with increases in costs for sugar, certain fruits and other raw materials. Incremental savings associated with our supply chain initiatives are also expected. With 2012 savings coming in higher than originally anticipated, at just over $30 million, additional savings in 2013 are now expected to approximate $10 million. The projects remain on track to deliver nearly $40 million in annual run rate savings by the end of the fiscal year.

SD&A expenses are expected to increase 10% to 11%, primarily reflecting a nearly 20% increase in marketing, and the full-year impact from the Sara Lee food service business acquired in January. Ongoing pension expense, along with incentive compensation cost, will also increase and are expected to have a high-single digit EPS impact. Net interest expense of approximately $95 million is projected, including interest associated with the anticipated borrowings on our revolving credit facility. This represents a nearly 20% increase over the prior year, reflecting a full year of interest related to last October's public debt issuance. The estimate also includes the partial recognition of a net deferred gain resulting from interest rate swaps terminated in 2012. And finally, we anticipate an effective tax rate in the range of 34% to 34.5%.

Free cash flow is expected to be $500 million to $550 million, which would represent an increase of 15% over the prior year, using the midpoint of the range. As we continue to progress through our supply chain initiatives, we anticipate a reduction in CapEx from 2012 levels to a range of $210 million to $220 million in 2013, of which approximately $40 million relate to restructuring projects. Excluding the pension settlement charges noted earlier, we anticipate a year-over-year reduction in special project cost, which are expected to approximate $65 million, 3/4 of which are cash related. The remaining non-cash charges primarily represent accelerated depreciation. Other factors affecting cash flow include depreciation and amortization which, excluding special project cost, are expected to increase to approximately $255 million, primarily reflecting the Sara Lee transaction, dividends of nearly $215 million based on current rates and shares outstanding, and a scheduled debt repayment of $50 million in April of 2013.

Finally, it is important to note that certain factors will cause an abnormal cadence to our year-over-year quarterly performance, particularly in the first quarter. Like many of our peers, we expect the second half of the fiscal year to be much stronger in terms of year-over-year earnings growth. However, we see our first quarter EPS falling short of the same period last year. This is primarily the result of the Coffee segment, where we expect a significant decline in first quarter 2013 Coffee segment profit from the record level in Q1 of the prior year. However, we do expect the Coffee segment to realize profit growth for the year, which -- much of it coming in the third and fourth quarters.

In closing, let me reiterate our optimism in the future of the industry, our business and the strength of our brand. This year, we added to our portfolio to enhance our offerings and appeal to the ever-changing consumer. As we continue to integrate these products into the Smucker family of brands, we will remain dedicated to the operational excellence that the marketplace and consumer have come to expect from Smucker.

This concludes our formal comments. We would now like to open up the call to questions. Operator, if you would please queue up the first question.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Eric Katzman with Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

And that sounds like maybe the amount of people that are walking through the center of the store these days. On that note, I guess, Richard and Vince, what are the conversations you're having with the retailers about, really in all seriousness, the lack of movement into the center of the store. And we're hearing reports that maybe it's the perishable stuff upfront that's moving. So maybe, I don't know, do the retailers not like care as much because their higher margin perishable stuff is going and kind of how are the conversations going to rejuvenate center of the store traffic?

Richard K. Smucker

Well, Eric, this is Richard. I'll start and Vince can certainly add probably more specifics than I can. But still, the center of the store is the most profitable section for the retailer. And no one is giving up on the center of the store. Obviously, with the prices that we've seen this past year, everyone in our industry, and the consumer foods industry, has suffered a little bit from that. But I think we're seeing a turnaround. Prices are coming down, and commodity costs are coming down. And we're starting to see more movement than we certainly did the third quarter, and we're seeing that trend into the coming year. Although, there's still a very cautious consumer out there. And they're not stocking their inventory shelves at home. And so we think that trend will continue somewhat. We're seeing the trends improve a little bit. And Vince, you might want to add to that.

Vincent C. Byrd

Yes. Eric, I guess I would say, I think it's fair to say that categories are not growing, they're declining. And retailers, if they're growing, they're probably stealing share from their competitors. And that's been fairly targeted. Net-net, the majority -- the feedback that we get, despite maybe our results not being where we would like them, we're getting positive feedback that we're doing better than most. So again, as Richard mentioned, we think, with some of the softening of the commodity costs, hopefully we'll do better, and we're going to sharpen our pricing going forward. But the center of the store is still very, very important to all retailers.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. And then to Mark. Mark, can you quantify a little bit more, like how much you think pension expense is going to be up in fiscal '13 as well as the compensation recovery? And then, just remind me, how much Sara Lee was supposed to be accretive and where you think it comes in now? I mean, is it going to be dilutive this year or is it just less accretive than you originally thought?

Mark R. Belgya

Sure. Well, in terms of the pension and the compensation cost, in total it's high-single digits, Eric. So $0.08, $0.09 per share. And it splits fairly evenly between the 2. One thing, just to clarify, while I'm thinking of it, on the pension, we did talk about this settlement charge, and that is above and beyond the normal pension. So for everyone's sake, just to kind of keep those 2 topics separate. In terms of the Sara Lee, last -- when we announced the transaction, we said that we thought that it would contribute about $0.10 in earnings per share. So that was the profit from the business as well as the applied interest charges to that. What we're seeing now, in 2013, that will basically be about breakeven at an EPS level. Clearly, the business will contribute at a segment profit, but net-net, it'll basically be breakeven.

Richard K. Smucker

This is Richard, Eric, and I would like to have Steve comment more on the Sara Lee business because we're excited about that. We've actually found more things that are positive than we anticipated. It's a complicated business. It's taken us a little longer to integrate it. But, Steve, you might want to share some of those thoughts.

Steven T. Oakland

Eric, it's Steve. If you think about the business we bought, and the Sara Lee company we bought it from, they were saddled through a series of acquisitions with a number of roast and ground facilities. And so they sold a lot of roast and ground product, mostly non-branded product, to cover those overheads, right? And that was the goal of a lot of it. And so as we got into these things, we didn't buy those businesses. But when we took a closer look at them, those are key businesses for key food service customers. So we wanted to make sure we exited those gracefully. We also see that some of those contracts are intertwined with some businesses that we would like to be in the long term, things like cocoa and cappuccino and other things, for some of those outlets. So as we looked at those 2 things, we said, let's take pause, let's serve those customers because we either sell them things today or we could sell them other Smucker products. Let's try to determine what little nuggets in there do we want long-term. And also, quite frankly, on the supply chain piece, there were some better -- as Vince mentioned in his comments, there were some better things we could spend that team's time on that are going to have even better long-term returns. So if we took pause and didn't force a fast integration of that Roast and Ground business, we could focus on things like Rowland and other projects, our other supply chain projects, which, candidly, are more important. So those variables, combined, offset -- are going to push the earnings back. But the core business, the Liquid Coffee business, the branded Roast and Ground business are delivering what we modeled or better margin. And to Richard's point, we've had our first several meetings with the new Sara Lee company in Europe, and we're excited about the innovation opportunities between the 2 companies.

Operator

And our next question comes from Andrew Lazar of Barclays.

Andrew Lazar - Barclays Capital, Research Division

I guess, first up, is -- certainly part of, as you talked about, next year will be a step-up in innovation and marketing and sharpening some price points. Yet volume's still perhaps down a bit for the year, primarily in the first half. So I want to get a sense of, with those sharper price points and all the innovation and such, perhaps why we still don't see volume for the year perhaps up a bit. Is it just because we'll see how we start the year out and it's still, as you said, kind of rough out there? Second would be, with organic sales for next year, 2/3 of it is the acquisition, the other 1/3 is mix. Is that basically saying that kind of, between the organic piece of volume and pricing they essentially, more or less, offset each other and it's pretty even on that front?

Vincent C. Byrd

This is Vince, I'll take the question. I'll set it up and then we'll turn to the presidents. But as we looked at 2013, as mentioned in our formal remarks, we believe our first half, we're still facing a lot of the same dynamics we faced in the last 6 months of our fiscal year. And as you look at things like our peanut butter pricing and some other things, we don't want to anticipate that those are going to change significantly in the first half of the year. Secondly, as already noted, the economic climate is still a bit challenging. And so, I think, us, like most CPG companies have a little more of a -- feel there's more of an upside on the last half of the year versus the first half of the year. We can get into specifics and we can turn it to Mark and Paul and Steve to talk about their respective businesses. But net-net, we have more new products in the pipeline than we've ever had, we'll lap the 50 new items that we launched last year. And so, again, we're very, very positive, although we do have some planned decreases in some items that Paul will speak to in the baking category. So...

Paul Smucker Wagstaff

Sure. Andrew, this is Paul. When we look at some of the volume declines, some of that is managed declines on our low margin Flour business. We actually exited a regional flour business here this year. And they're just hemp products, so it's pretty meaningful volume. And also, on the Pillsbury side, we did what we call a kick downside, which -- downsize, which is similar to what both Betty and Duncan have done. And the units should remain the same, but the volume is down because we've reformulated those products.

Mark T. Smucker

And this is Mark, Andrew. On coffee, just generally speaking, I think Vince said it very well. I think that as you look at the full year of '13, we do expect modest volume growth in coffee. We have, still, experienced the hourglass effect that we've talked about, where you see some shifting of volume out of the mainstream coffee category and into sort of the premium and the opening price point areas. Having said that though, I think we said last time, our volume decline has moderated in mainstream, and actually, we were down less in the fourth quarter than the third. And quite frankly, the fact that we play in all of those segments, I think we're in a very good position. So between all of our offerings in the premium segment, all of our new products and all of our -- and some of the expansion that we've seen in distribution on our opening price point items, should help stem the tide in volume as we go forward.

Andrew Lazar - Barclays Capital, Research Division

And then, just, Richard, one quick one, broadly. I think the last call you talked about, hopefully, not expecting this environment to be sort of a race to the bottom, right? From a pricing perspective, given the industry. Hopefully, you learned some lessons from the last time around when we saw some deflation. Any change or update to that thinking now that we're a quarter later and how does it reconcile with some of your guys' comments around sharpening price points and sort of narrowing some price gaps and things of that nature?

Richard K. Smucker

Yes, no, I think we have, as an industry, have to do it responsibly. We certainly will. We have the advantage, as a couple of the team mentioned here, of doing things like -- where our competitors have already done it before, in reducing sizes. We've got several categories where we can reduce our size and therefore offer a better value to the consumer without impacting our margins. We're going to take those types of steps. We will sharpen our pencil around the holiday period to make sure that we're offering the right price points to our consumers and our customers. And last holiday period, for example on back-to-school, we weren't even in the business in peanut butter because we had to withdraw from the market. So we have some specific areas where we can, I think -- you might call it sharpen your pencil or offer better value to the consumer without really affecting the bottom line. Now I don't see, out there, a change in strategy, at least by the big responsible consumer food companies of a race to the bottom. I don't think that is the case. I think we all learned our lesson a few years ago and recognize that, although volume's important, margins are just as important. And we want to make sure that the price is right for, not only the consumer but for our shareholders.

Operator

Our next question comes from Farha Aslam with Stephens.

Eric Gottlieb - Stephens Inc., Research Division

This is Eric Gottlieb for Farha. I have one question, on the volume decline in coffee going into the price decline, can you quantify how much volume loss there was and have you been able to recoup that in the first quarter?

Vincent C. Byrd

I'm not sure I understand the question.

Eric Gottlieb - Stephens Inc., Research Division

In your press release, you say that there was some inventory management in anticipation of a price decline in coffee.

Vincent C. Byrd

Yes.

Eric Gottlieb - Stephens Inc., Research Division

I'm curious how much volume shifted into the first quarter and have you recouped all that?

Vincent C. Byrd

Yes. I'm not sure we actually know the exact number. I mean, I think, if you look at our fourth quarter from a volume perspective, we were down 2%, but then 8% excluding the acquisition. And really, it was just some anticipation of the coming price decline and thinking about the weight. When we take that price decline, we are really setting ourselves up for the next few quarters and are able to get our pricing more in line in almost all of the segments that we have. So I think that we would just say that we're cautious going through the first quarter, but we're optimistic going through the second and third quarters.

Mark R. Belgya

Eric, this is Mark Belgya, I guess what I'd add to that too, in fairness that while that's a little tough to quantify it's probably more prudent for us to take a look and comment on that when we get through the first quarter so we can see the full effect of it between the 2 quarters.

Eric Gottlieb - Stephens Inc., Research Division

Got it. Okay, that's fair. And then moving over to fruit spreads. Can you describe the competitive activity that caused the 11% volume decline? And what kind of actions are you guys doing to counter that going forward?

Paul Smucker Wagstaff

Sure, Eric, this is Paul. We did have a new entry of a new product into the fruit spreads category by one of our key branded players that did impact our volume. I think when we look at what happened, total year for us in fruit spreads, we had to pull back on promotions based on the fact that, last back-to-school, we took some of our peanut butter promotions out of the marketplace to manage the peanut crop issue. So we'd expect that to come back this year. So that would be one of the things we're doing differently. And then, I think we're also looking at some new opportunities for new products on fruit spreads coming up.

Operator

And our next question comes from David Driscoll of Citi.

David Driscoll - Citigroup Inc, Research Division

I'd like to ask you a couple of questions on marketing and incentive compensation. So you discussed in your fiscal '13 outlook that you have large planned increases in marketing. What was marketing in fiscal '12? Or what was the year-over-year change in fiscal '12 marketing?

Richard K. Smucker

Well, the marketing dollars themselves were down about 3% in total. But as we've talked about in the last couple of quarters, part of that spend was a redeployment into trade spend. But if you just look at it year-over-year, net, it's about a 3% decline in dollars.

David Driscoll - Citigroup Inc, Research Division

And then the fourth quarter was down 18%. So I mean, is it not at least somewhat fair to say that F '13 is really catching up because of the declines in F '12?

Mark R. Belgya

Yes. I think, if you look at 20%, I think the way I would think about it is probably 3 pieces of it. One is they're re-establishing the marketing that was previously transferred to deploy trade. I think two is, of course, some of the dollar increase is due to a full year Sara Lee. And then third is truly the support marketing initiatives for 2013, above and beyond.

David Driscoll - Citigroup Inc, Research Division

And then, Mark, on the incentive compensation, can you just explain that a little bit in terms of what the nature of the headwind is for F '13? And how much lower was incentive comp in F '12? And then, usually, it's like a mathematical effect where if it's down a lot in F'12 and there's a percentage rebound in the next fiscal year, that's usually what most management teams are talking about. But I don't think I fully grasp the mathematics of what was impacting you in F '13.

Mark R. Belgya

Sure. It's basically what you're suggesting, David. It's in 2012, clearly we fell short of our guidance and our plan for the year. So just the compensation that's tied to the earnings per share and the margins for the business unit have resulted in lower spends this year. For 2013, the way we approach that is we basically assume a plan amount. So all you're seeing, this increase, is basically where we ended 2012 back up to the expectation at 2013, assuming the guidance that we have outlined this morning.

David Driscoll - Citigroup Inc, Research Division

And what's the percentage hit to operating profits? I mean, can you quantify it like it's a 6 or 7 point hit to operating profits?

Mark R. Belgya

Well, you have the dollar right. I said earlier, the incentive compensation cost, the pension, are about $0.08 to $0.09. About half of that is pension, so that's roughly $7 million. So you can kind of do the math from there.

David Driscoll - Citigroup Inc, Research Division

Okay. So in your comments on incentive comp, you are also including the pension changes?

Mark R. Belgya

The high-single digit includes the pension. But when you take that high-single digit, it's basically half of it is incentive compensation cost and half of it is incentive -- or, I'm sorry, pension cost.

David Driscoll - Citigroup Inc, Research Division

Okay. Final question from me just goes back to Sara Lee. So when you originally thought that this was going be a $0.10 accretive acquisition -- in your prepared comments, I got a little confused because I think you guys exactly said that there was some lower margin business that was negatively affecting the accretion calculation. I wish to translate this, if I may, and see if I'm doing it correctly, but lower margin -- I mean, most people usually think it means positive, but I don't think that, mathematically, is right. I think this has to be negative margin business that you've decided to keep until you can do this evaluation process that you outlined. Am I stating it correctly?

Steven T. Oakland

Yes, David, it's Steve Oakland. Yes, maybe the depths are slower [ph], it is negative. Some of those businesses, although they have some overhead coverage, they're not positive at most of the margin lines. They are negative. Hence, we'll be on them.

David Driscoll - Citigroup Inc, Research Division

Okay. So, originally, when you're buying it, you thought you'd exit them immediately. But now you're saying, well, wait a minute, let's take our time and look to see how we might somehow benefit from some of the aspects of these businesses and then you get this negative impact in F '13. And then, presumably, in F '14, when they go away, you've exited these negative margin businesses, and all of a sudden, the accretion that you previously thought possible suddenly comes back again.

Steven T. Oakland

That's obviously better said than I did.

Operator

Our next question comes from Ed Aaron of RBC Capital Market.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Just off on the marketing increase, I was wondering if you could maybe talk, just at a high level, as to kind of how that splits by segment. Is it disproportionately weighted toward either coffee or retail consumer?

Mark R. Belgya

This is Mark Belgya. No, it's fairly distributed between the 2 segments. And then, in Canada, I believe they're also increasing their market spend.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Great. And then just as a follow-up on coffee. You kind of mentioned the hourglass effect, where the low end's doing well and the premium end is doing well. The Dunkin' volumes were a little bit weak in the quarter and I think you actually had an easier comparison. So is there anything that we should think about, just competitively, with the Dunkin' brand relative to your, generally, kind of positive comments about the premium segment of the market?

Mark T. Smucker

Sure, this is Mark Smucker, on coffee. First of all on Dunkin', I would say that we still feel great about the brand. It's been a fantastic brand for us. And we actually did see, over that very brief Easter period, during the quarter, we did see modest growth on Dunkin'. But it ultimately comes back to, number one, the positioning of the brand as a strong brand. But secondly, making sure that we manage our price gap to the key competitor. And that means, generally speaking, that we need to be at parity or below that competitor, and given the pricing action that we recently took on that brand, we think that we're well positioned going forward over the next couple of quarters in the right spot. So I guess, I would just close by saying, we do expect to see some modest growth continuing to grow that brand over the year. But we do have, essentially, full distribution. So that growth would be organic.

Vincent C. Byrd

And new products and seasonals.

Mark T. Smucker

And there will be -- thank you, Vince, there will be new products as well. As we've done each year in the key periods, we will be introducing new flavors on the seasonals.

Operator

We'll take our next question from Jason English with Goldman Sachs.

Jason English - Goldman Sachs Group Inc., Research Division

I'm sorry if I missed this, I was a little bit distracted on that last Dunkin' Donut question. Can you specify what the Dunkin' Donuts volume growth or decline was this quarter?

Mark T. Smucker

13% negative.

Jason English - Goldman Sachs Group Inc., Research Division

Wow, okay. And you were cycling a low-double digit decline from the prior year. That's a pretty big decline. Do you think that's just price gap related?

Mark R. Belgya

Yes.

Vincent C. Byrd

This is Vince, I would add a couple of things. I guess, it's clearly price gap and just the amount of investment that key competitors are making in that segment right now. And so you have some things going on at the top end and the bottom end of that segment. And why we feel very good about going forward is, as Mark articulated, we know where we need to be pricing-wise, but we're also repositioning the Folgers Gourmet Selection brand. And so we believe we're well positioned as we move forward into fiscal '13.

Jason English - Goldman Sachs Group Inc., Research Division

How much do you think Gevalia is cannibalizing Dunkin'?

Mark T. Smucker

Well, I think there's very, very minimum cannibalization from Gevalia, if any. I think, from what we've seen so far, Gevalia has not had a significant impact, and it has not started off as strongly as we might have expected.

Jason English - Goldman Sachs Group Inc., Research Division

You're also going to have some new competition coming into K-Cups soon. We've got private label and perhaps some other brands entering the format. Maybe, maybe not. In your guidance, what sort of impact have you contemplated on your K-Cup business from that?

Mark T. Smucker

Yes, let me start with just generally speaking, we're still very happy with that, the K-Cup business, and we do expect to see low-double digit growth continue. As new entrants have come in, it has actually grown the system and the category. And, generally speaking, when we look at volumes, we see that the volume is largely incremental to our other businesses and our mainstream business. And so, there are some new users coming into the category still, and we recently have seen some data that shows that once consumers buy our brands, there is a fair amount of loyalty there. And so, if you think about private label coming into that category, we think that, number one, that is going to continue to grow the Keurig system and the category. And as you know, we coexist in most of our categories of private label, and we will just continue to focus on maintaining our leadership through marketing support, new products and our go-to-market strategy.

Jason English - Goldman Sachs Group Inc., Research Division

Low-double digits sounds like a pretty substantial deceleration. Is that because your -- is that what's embedded in your guidance and assumption? Are you really expecting the category to sort of decelerate so rapidly?

Mark T. Smucker

I don't think we're expecting the category to decelerate in the very near term. I think that, over time, and we don't know when, there will be some time when the category probably does plateau. But recall that it has been the most successful product launch in our company's history. We're maintaining our fair share of that category. And so I think we're actually pretty happy with double-digit growth going forward. And I think that you'll see, quarter-over-quarter, we should be up in each of the next several quarters.

Operator

Our next question comes from Mitch Pinheiro of Janney Capital Markets.

Mitchell B. Pinheiro - Janney Montgomery Scott LLC, Research Division

So just staying on coffee and on K-Cups. Are you going to be launching the View [ph] Cups at grocery near term or will you merely be like participating on websites in the near term?

Mark T. Smucker

We will actually be going forward with a test, which will be in the mass channel, in the fall time frame. We haven't actually locked down the exact timing, but it is coming soon. Obviously, we're very excited about the View [ph] system. We think Keurig has done a great job with the K-Cup system, and we're optimistic that they can do the same with the View [ph] system. So yes, we will be testing it, and that will likely lead to a more broader distribution base. But I think that you'll see in the year the impact of that from a volume and sales perspective will be minimal. But we're optimistic.

Mitchell B. Pinheiro - Janney Montgomery Scott LLC, Research Division

Okay. And then, as it relates to like coffee, typically, coffee is relatively inelastic. And the volume declines -- so you're seeing the barbell effect where there's probably -- your premium coffee drinkers are staying with premium. But there is a trade down from the middle going lower and you're repositioning, I guess, your Folgers Gourmet Select at the low end. Did I understand that correctly?

Vincent C. Byrd

Yes. The Folgers Gourmet Selection has a completely new packaging, positioning and it will be an entry price point to the premium segment.

Mitchell B. Pinheiro - Janney Montgomery Scott LLC, Research Division

So I mean, are people drinking less coffee? Are you seeing a -- is there a channel shift where you may be underrepresented? Is there any -- and how does -- from your angle, on the food service business, how do volumes look on food service?

Vincent C. Byrd

Okay. Well, let me start on retail and then I'll pass it over to Steve. I think people are generally not drinking less coffee. Obviously, there is some shifting to K-Cup, and that's a single-serve, that's a lower volume item. Just in terms of absolute weight. Part of the dumbbell effect or the hourglass effect has been driven by this shifting down to an opening price point. Given where we're going on our pricing and that we've already seen some of the reflection on shelf, we would expect that some of those consumers would shift back into the core mainstream items. And on the premium side, some of that shifting is natural, but some of the shifting is driven by a lot of competitive activity in that segment. So we think that we're positioning ourself very well by playing in all tiers of the premium segment as well.

Steven T. Oakland

And then let me speak briefly, the food service. Food service, by channel, the volumes are very, very different. In fact, our core Food Service business volumes last year were up. When you look at a segment -- if you look at total food service, you would think it would be down. But we participate in some of the segments like health care, lodging, some of the segments that, frankly, are doing pretty well in the food service arena. We don't participate in a lot of quick-service coffee, those kinds of things. And those are probably the segments that are interacting with the consumer brewing a K-Cup at home. So we think our particular food service volumes will be fine next year because in health care, gaming, lodging, all of those things, where both Sara Lee were strong and where our core business is strong, we see those growing. But the macro food service segment, as you know, is flat to down just a little bit, but that includes all those other segments.

Mitchell B. Pinheiro - Janney Montgomery Scott LLC, Research Division

Okay. And will pricing be down in food service coffee this year?

Steven T. Oakland

Sure, yes. And food service coffee pricing. Now, what the big guys do, on the per cup -- through the drive-through, obviously they'll make those decisions. But typically, our food service relationships are even more transparent than our retail relationships because we don't merchandise around holiday periods or any of those things. So food service coffee pricing tends to move probably more frequently and quicker than it does in retail.

Operator

Our next question comes from Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

You mentioned that you're not necessarily expecting an irrational shift toward the pursuit of volumes versus profit in coffee, but you also were talking about managing price gaps a little more efficiently based on some of your competitors' actions. And that, maybe, tells us that your competitors have taken down prices more than what might have been expected. So historically, coffee's been the category where everyone sort of played nicely together in the sandbox. It's been a bit less so lately. So why isn't it fair for us to, at least, maybe be a bit more focused on pricing concerns and some lack of rationality than usual?

Richard K. Smucker

I think, in our case, I have to speak to Smucker's case. Number one, we did not downsize in a lot of our categories. We're taking the opportunity to do that now. So we have a little bit more flexibility to move and we're doing in several categories. And that's going to help us. We had some commodity issues last year where we didn't have commodities, such as peanut butter, to promote during the right time. So we can do that, which we weren't able to do last year. So we might be a little better positioned than some of our competitors to get to our price gaps quicker than they will be able to. And that is a disadvantage we had this past 12 months, which I think is reversing itself in the next 12 months. It's a competitive market out there, and people can set their prices where they want to set them. But I think, in general, most of the large consumer food companies are pretty responsible in what they do, and we recognize that giving a value to the consumer is more important. Still buying U.S. food products in the U.S. is still one of the best values for the consumer around the world. So we only spend 17% of our consumer earnings on food. So it's still a good value.

Vincent C. Byrd

Richard, I would add, Ken, a couple of things. First of all, as Richard mentioned earlier, we will always, as price leader, take a responsible position for the category. That's sort of job #1. We do know, as we have stated before, we need to balance our volume, our share of market and our profitability. Becoming sharper on price points does not necessarily mean, in all instances, it will affect our profit. It might be a situation where we're -- have learnings on our trade spend about merchandising or depth or frequency that we're taking more efficient approach as we enter into key holiday periods. But then lastly, I would add and reinforce what Mark Smucker said, is that we have some clear elasticity learnings about where our prices need to be, vis-à-vis certain competitors. And that may or may not affect profitability on some selected items but we know, in order to maintain our share volume, those are the actions that we are going to need to take.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

That's helpful. And I do worry less about you guys than your competitors though. Second question, on your commodities. A few articles have been published lately, suggesting that the peanut crop will be much better this fall than last year. And I know it's too early to tell, but is this your expectation as well? And when will we have a better idea of the crop size and quality? And then on coffee. I know you don't want to talk too much about this, but can we discuss a bit, the longer term prospects for coffee cost? I'm curious what you're seeing out there in terms of crop sizes and yields, because we're seeing some conflicting reports on whether this year's crop is unusually large in certain key regions or whether it's more of a sustainable improvement.

Paul Smucker Wagstaff

Yes, Ken, this is Paul. Regarding the peanut crop, yes, we're hearing the same thing that you are. We would anticipate the crop to be a strong crop. We have plantings up about 20% to 25%. The moisture in the ground right now is very good. Even West Texas is planted and looks pretty good. When we anticipate to really understand what the crop's going to be, that's not going to happen until closer to fall, when we get closer to harvest. But all indications that we see right now is that the crop should be a good year.

Vincent C. Byrd

And then, Ken, on coffee. Just, if you think broadly, first of all, about Arabica and Robusta, obviously Arabicas have come down, Robusta's gone up. Some of that is driven by -- first of all, we are expecting a larger Arabica crop in Brazil. And there is continued tightening on Robusta. I think we talked, last time, about -- in the Robusta world, some of the farmers and some of the holders or warehouses had been holding some of that Robusta. That had been one of the factors driving prices up. And then in Columbia, as you know, the rains have not ceased and so we are expecting another low, poor crop in Columbia, which obviously is not great. But again, I think the markets are not driven, anymore, purely by fundamentals. And so there is some speculation there that will continue to drive some of the volatility. And then I think another thing that's unique right now is that there are other factors that influence some of those costs or that are components, it's not strictly the futures price. But that clearly has an impact. So I think your comments are generally correct. So there are put and takes out there and we're just trying to manage through it.

Operator

Our next question comes from Alexia Howard with Sanford Bernstein.

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

Can I ask a bit about the China business? Because I think this is the first time we've managed to catch up since that acquisition or that joint venture was closed. You put in $36 million to get that stake. I wondered if you could tell us a little bit more about that business. How large is it? What kind of stake have you picked up? What's its market share position? Is it very thinly spread nationally or is it very focused in one region? And then maybe just a bit about your financial strategy with respect to China going forward. Might there be more bolt-on acquisitions or are you really -- is this is it for now and you're going to see how this one goes? And do you have plans to expand your stake in that particular company?

Mark R. Belgya

Alexia, it's Mark Belgya. I'll just start with a response to the ownership and I'll turn it over to Steve for more of the detail. As you said, we invested about $35 million and that will get us a 25% equity interest. So clearly, in the coming year, as a minority interest, it will not contribute to sales, it'll just be a net profit contribution and it'll basically be fairly insignificant. In terms of the size, and with respect to our partners, we're not disclosing that at this time. We'll just say that it is clearly one of the leading oatmeal businesses in China.

Steven T. Oakland

Sure. And, Alexia, Steve Oakland. I commented a little bit about them. I think we've talked that for several years we've been doing specific research in China on categories and companies within those categories that we think provide us the opportunity to implement our strategy there. We think Seamild is a wonderful business. A couple of things. We all know, hot cereal, great category. But if you think about China and you think about the challenges as you market outside of just Shanghai, Beijing, Guanzhou, this is grain-based hot cereal that's made in boiling water. The Chinese consumer eats congee, grain-based, rice-based, hot cereal that they make in boiling water. So we don't have to change a lot of habits here to provide what they perceive is a more healthful, more Western -- and even though it is a premium to congee, it's still a grain-based, relatively low-cost alternative. So all of those things, we think, are wonderful. But better than that, unique to this size company, these folks are marketers. They understand brand. They use sachi [ph], they do things and they look at their business a lot like we do. And they do it in the tier 2 and tier 3 cities. Things that are typically tough to do for especially start-up Western companies. I mean, selling to Carrefour in Beijing is something we understand, but marketing in those smaller cities is something we can learn a lot from these folks. So we're starting to put a team in place. We have an office open in Shanghai. We'll have an office open soon in Beijing. We're doing those things. We would expect this to evolve. We think there are other positions that we would love to be involved with, either in another minority stake, or frankly, operating a smaller business there. We're not taking that off the table. So those are our goals, but we think this is a unique business, it gives us a chance to learn a lot. And whether we go forward and own more or the whole thing over time, I think quite frankly, we have tremendous respect for them. Our cultures are very similar and we'll work that out together.

Operator

Our next question comes from Akshay Jagdale with KeyBanc Capital Markets.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

I wanted to ask about your commodity cost guidance. I was surprised that coffee costs are going to be offset by peanut and sugar. Can you give us some color into what you're expecting there? I mean, the futures market is telling us roughly 20% to 25% decline in coffee costs. So if that was flowing through your guidance, it would be a net positive, I would think, relative to your guidance. But can you just help me? What's going on? I mean, I know there's a lot of hedging and stuff that goes on that caused those timing issues, but I was surprised that lower coffee cost would not offset the higher peanut and sugar cost.

Mark R. Belgya

Akshay, it's Mark Belgya. It's a good question, a fair question. I think, traditionally, most of the discussion around coffee prices is based on futures. But as Mark made the reference to, there clearly are other costs, logistic cost, quality cost, country, things like that, that factor in and quite honestly, those have gone sort of contrary to what you've seen in the Arabica market. So it's those costs that are negating a bit, which you'd expect just looking solely at the futures market.

Mark T. Smucker

And I would add, Akshay, this is Mark Smucker, if you think back over the past 4 to 6 months, the tapering off on the futures markets, as you've seen in Arabica, has been fairly steady. And so if you think about -- that would play into when we take delivery on those as well. Going forward, as you -- obviously, there has been a significant decline in Arabicas. But keep in mind the comments that Mark Belgya said and then just the strength of Robustas as well. So I think that there's a number of factors, it's not just the futures market that we have to make sure that we're taking into consideration.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

That's helpful. Just a follow-up on that, as it relates to pricing relative to some of your competition, there's been a large retailer, I think on private label, that has been gaining some share. And I think you had mentioned that last quarter and you still mentioned promotional activity this quarter as being somewhat of a headwind. Our research is telling us that, that was happening because private label was playing with blends on Robusta and Arabica that were helping them sort of beat you on pricing, I mean, and it looks like that gap has narrowed. I mean, am I reading that correctly? I mean, I find that hard to believe that the #1 branded coffee company is getting beat by a private label manufacturer on pricing. So am I reading that correctly? I mean, why are there price gaps in coffee when you're the category captain?

Vincent C. Byrd

You are right, Akshay. I think you stated it very well. There was a major customer who had decided, consciously, that we believe anyway, to take a lower margin on private label. You're also correct that we are narrowing that gap and you're also correct, again, that private label coffee tends to be 100% Robusta. So that obviously does have an impact. I would just conclude by saying that, again, we're closing those gaps and we feel comfortable that, both from a mainstream Red Can standpoint, as well as an opening price point, that we should be well positioned in the next couple of quarters.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And just one last one. In terms of your sort of base business growth, obviously, your EPS growth is -- guidance midpoint is like 7%. I don't think you're assuming any share repurchases. So from a segment operating income standpoint, can you help us, directionally at least? I would assume coffee is going to be double digits because of acquisitions and lower cost. But you did talk about a transition year and I don't know if you were referring to the whole consumer segment or if you were just referring to a part of it. Is that segment just going to be down in terms of profit year-over-year?

Unknown Executive

Well, the transition was specific to the downsizing of the cake [ph] that was mentioned earlier. The segment profit -- I mean, we expect to see segment profit growth across our segments. Clearly, from a dollar perspective, International Foodservice, National Foods will be impacted by the increment of Sara Lee, but we see growth across -- and again, as we've said, more back-end of the year.

Operator

Our next question comes from Rob Dickerson of Consumer Edge Research.

Robert Dickerson - Consumer Edge Research, LLC

So I feel like I kind of ask this question kind of farther back in the queue every quarter. But it always, all of this at the end of the day, goes back to free cash flow. And like you said before, your free cash flow's going up 15% year-over-year, fully adjusted EPS with the onetime loss in Q2 and the impairment in Q3 is about 5%. So if I'm thinking 5% adjusted EPS growth year-over-year and the 15% in free cash flow, I guess, one, could you remind me where you expect CapEx to be kind of at the tail end of the restructuring planned in '14? And then, two, is, with the incremental free cash flow this year, I know you referenced the debt maturity, but is the probability of increased free cash flow this year and next year higher now to go into the further buyback of the $3.9 million you have still on your authorization? Or should we kind of be sitting tight right now because you want to be careful with cash if volumes are still down?

Mark R. Belgya

Sure. Rob, this is Mark Belgya. Let me address the 2 of those. Let me just start with free cash flow. We have said that we think that we can grow free cash flow, basically double it over 5 years. So clearly, our 15% is the right step in year one. Our CapEx, we've dropped it, from this past year, about $275 million. Next year, we said we're going to be -- or next year, I'm sorry, being '13, between $210 million and $220 million. Ultimately, we still want to get down to, basically, what we call the industry average, with sort of 3% to 3.5% of net sales. We feel that's the right run rate. So you're getting somewhere in that $180 million to $210 million level on a go-forward basis. Seems right to us. In terms of the use of the cash. I mean, I guess I would just fall back on sort of what we have consistently said in terms of our free cash flow. We want to invest basically about half of it, over time, in the business, whether that's acquisitions and capital expenditures and the other half returned to shareholders, be it dividend and buyback. And I don't see us being, necessarily, any more aggressive in terms of buyback. As of right now, our guidance does not reflect any. Last year, we bought over 4 million shares. We'll continue to look opportunistically. We've got 4 million shares, roughly, available and we'll sort of see how the year is. The good thing is, is we've got strong cash generation, we've got a lot of liquidity. And even through the tough times, we're well positioned from that perspective.

Operator

And we'll now go again to Eric Katzman of Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

Just real quickly, so I understand, Mark, the top line. So you said, of the 7% growth, 2/3 is acquisition, the rest is mix, roughly, and volume. Like I assume, pricing is going to be, over the year, net, down. So aren't you -- doesn't that then equate to volumes being up over the year? Even if it's second half weighted? Am I thinking about that incorrectly?

Mark R. Belgya

It's very marginally close to what we accomplished this year. It's really that close, albeit down.

Eric R. Katzman - Deutsche Bank AG, Research Division

Which?

Mark R. Belgya

The volume.

Richard K. Smucker

Eric, this is Richard. One comment on volume, which I always like to make is that we also look at units. And when we sell a K-Cup, it's a lot of units, but it's not a lot of volume. When we sell a lot of flour, it's a lot of volume, but it's not a lot of units. And if you would measure our performance just in units and not volume all the time, we actually look better by a couple of percentage points. And we keep track of those, and usually those units carry a higher value. So I just don't want to get overly hung up on volume, all the time, versus units. And maybe at some point in time we'll be able to share those in an intelligent manner, but the numbers look better, internally, than they do externally.

Mark R. Belgya

Yes, Eric, it's Mark. Just to close that off. The perfect example we share is obviously the K-Cups. Low volume item, very high dollar. And then finally, just again, on volume, if you take the commentary that Paul had earlier on the items that were rationalized, being on the flour and then the downsizing impact, it actually throws this slightly positive. So those clearly are what's driving the overall negative volume. But again, it's around 0.

Operator

Our next question comes from Chris Growe of Stifel, Nicolaus.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

I wanted to ask you, first off, a bit of a follow-up on a point you were just making there. In the coffee segment, in this quarter you had a pretty significant mix benefit from K-Cups. And just simple math, taking that away from the level of pricing that we've calculated for that division, it suggests that underlying pricing was down quite a bit sequentially. And I just want to understand the nature of that sort of decline sequentially, you've talked about incremental promotion in your business in the fourth quarter. And really, I'm more interested in kind of what that means going forward. How should we look at kind of early '13 and the degree of promotional spending behind that, behind the coffee business.

Mark R. Belgya

Chris, this is Mark Belgya. Just to make sure that we're understanding -- you're saying it's down, but you're saying sequentially.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Sequentially, correct. So good pricing year-over-year. It's just that there was a pretty significant contribution from K-Cups from a mix standpoint. And when I look at price and mix together, it suggested that the price component, in rough terms, was up modestly. Less than I expected, I guess, is what I'm saying.

Mark R. Belgya

Yes. I think, the reason, clearly, is just the passage of time. We took an 11% price increase of February a year ago. So we lapped that, obviously, during the quarter and then we had a 10% increase at the beginning of last fiscal, and then of course, the 6% decline last late summer, early fall. So it's just that all of that heavy increase, the price increase has just been lapped.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

And I understand that. I think you've also indicated there was an increase or step-up in promotion that occurred in the fourth quarter. Was that, you're telling me, a pretty modest increase?

Mark R. Belgya

Yes.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then my final question for you is on just the comments you've made about narrowing price gaps. All I'd like to understand, if I could, would be -- we still like to have our coffee and some narrowing you have to do there. But what segments, or what businesses really where you see most of that activity occurring? And then -- all of them?

Mark R. Belgya

Primarily, all of them. I mean, again, we're going be very responsible as we look at those opportunities but it would be the majority of our key categories of coffee, peanut butter, spreads, oil, milk, et cetera, baking.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Would you anticipate using trade spending to do the majority of that? I also want to understand, you've talked about some new products and opening price point products you could use as well. I'm just trying to understand the balance between those 2.

Mark R. Belgya

Well, it's all of the above. It's all of those actions. So again, as Mark Smucker and Paul indicated, it's focusing on some of the lower end items, but it also -- it is about getting a little sharper on our pricing, as we've mentioned, on both promotional and everyday shelf price.

Richard K. Smucker

I think the other comment, we should -- this is Rick -- I think the comment we should make is, as you know, in almost every category that we participate in, we're the leader in the category. And so we have the ability to price what I would call right, not lower but right. And some of the commodity cost have moderated, which allows us to be transparent with our customers and to gain that credibility which we've had for many years. But it doesn't necessarily mean just lower pricing. It means the right price point and at the right time. And so, as I said, it's a blend of making sure we maintain our margins. And I think we can do that because we've had some lower commodity cost, and we can pass those on where appropriate. And it's also at the right time. So we want to make sure, during the key promotional periods, that we're priced right during the promotional periods. We're not talking about cutting prices across-the-board in any manner. We're just making sure that at the right point in time, we have the right price on the shelf. And I think we think that maybe we missed a couple of opportunities last year, which we think we can gain this coming year with some better timing and merchandising.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's helpful. You would, therefore, expect -- you've talked about some trade promotion efficiency. Would your trade spending be up for the year? Is that the expectation even though you have some efficiencies coming through?

Mark R. Belgya

Not necessarily. Again, we did some shifting last year. So I don't know that we'd anticipate it being up, but a lot will have to do where the commodities rest for the balance of the year and what competitive activity that we see. But we're not anticipating a significant increase as we sit here today.

Operator

We'll now go again to Ken Goldman of JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Very quickly, I think if I heard you correctly, your cash EPS next year, guidance range, is $5.60 to $5.70. Is that a wider gap between cash and reported EPS than you had talked about in the past?

Mark R. Belgya

It would be wider a little bit, Ken, because that's primarily the add-back of depreciation amortization. Amortization went up because of Sara Lee. And depreciation is, obviously, up a little -- well, I'm sorry, that is just amortization, so that would be just that. So the amortization has increased from prior year.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

By how much exactly?

Mark R. Belgya

$10 million to $15 million -- $15 million.

Operator

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

Richard K. Smucker

We want to thank everybody for being on the call today. And as we said, we're optimistic about the coming year and look forward to next opportunity to speak with you. Thank you.

Operator

Ladies and gentlemen, if you wish to access the rebroadcast after this live call, you may do so by dialing 1 (888) 203-1112 or 1 (719) 457-0820 with the passcode of 4728592. This concludes our conference call for today. Thank you for participating and have a nice day. All parties may now disconnect.

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