Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

J.M. Smucker Company (NYSE:SJM)
Q4 2018 Earnings Conference Call
June 7, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Aaron Broholm -- Vice President, Investor Relations

Good morning and thank you for joining us on our Fiscal 2018 Fourth Quarter Earnings Conference Call. Mark Smucker, President and CEO, and Mark Belgya, Vice Chair and CFO, will provide our prepared comments. Also participating in the Q&A are Joe Stanziano, Senior Vice President and General Manager, Coffee, Tina Floyd, Senior Vice President and General Manager, Consumer Foods, Barry Dunaway, President, Pet Food and Pet Snacks, and Dave Lemmon, President, Canada, International, and U.S. Away From Home. As previously announced, Dave will be assuming the role of President, Pet Food and Pet Snacks later this month in advance of Barry's retirement from the company in July.

During today's call, we will make forward-looking statements that reflect the company's current expectations about future plans and performance. These statements rely on assumptions and estimates, and actual results may differ materially due to risks and uncertainties. I encourage you to read the full disclosure concerning forward-looking statements in this morning's press release, which is located on our corporate website at jmsmucker.com. Additionally, please note the company uses non-GAAP results to evaluate performance internally, as detailed in the press release. We have posted to our website a supplementary side deck summarizing the quarterly results, our fiscal 2019 outlook, and information about recent new product launches. The slides can be accessed through the link to the webcast of this call and will be archived on our website along with a replay of this call. If you have additional questions after today's call, please contact me. I will now turn the call over to Mark Smucker.

Mark T. Smucker -- President and Chief Executive Officer

Thank you, Aaron. Good morning, everyone, and thank you for joining us. This morning, I'll begin by discussing our fourth-quarter results and then transition to an update on the progress we've made over the past year on our strategic roadmap, which will segue into Mark Belgya's discussion of our fiscal 2019 outlook.

We established our strategic roadmap to define a clear path to delivering on our three key financial priorities: Growing the top line, achieving significant cost savings, and delivering earnings-per-share growth in line with our stated long-term objective. As we reported in our earnings release this morning, both industrywide factors and certain discrete events impacted progress in delivering against these financial priorities in the fourth quarter. While performance underdelivered for the quarter, we remain steadfast that the actions we are taking position us to deliver against each of these priorities and will create long-term shareholder value that outpaces our peers. In fact, we are seeing improved trends in the first quarter.

Fourth-quarter net sales and adjusted earnings per share were below our projections, primarily driven by results in the coffee and pet businesses due to a few factors. First, trade spend in the quarter was higher than planned, most notably for Folgers roast and ground coffee in response to competitive activity. While elevated trade support will continue as a lever to manage price, we are making progress toward aligning our coffee portfolio with the industry by increasing our presence in both premium and one-cup coffee. To this point, sales for both Dunkin' Donuts and Café Bustelo grew 11% this year as the brands crossed the $550 million and $150 million thresholds respectively in annual net sales.

Second, initial customer demand for our 1850 and Dunkin' Donuts canister launches was even stronger than expected. As a result, we incurred greater than forecasted operating and introductory costs in response to a broader than anticipated launch. While these incremental costs were incurred in the fourth quarter, the majority of initial customer shipments are occurring in this quarter, the first quarter of fiscal 2019.

Additional factors that impacted the quarter that were not in our most recent guidance included pet food recall charges and financing costs associated with the Ainsworth acquisition. Also, freight expense -- although anticipated to be higher -- exceeded our projections by approximately $5 million. However, despite these headwinds, we delivered stronger than anticipated free cash flow for the quarter and the full year.

While not reflected in the fourth-quarter financial performance, the recent actions we've taken toward transforming our business are indicative of a new pace of change and sense of urgency within our company. They validate that we are focusing on those areas where we can win, realigning our portfolio to higher-growth areas and on-trend categories. Consider the following recent highlights: We appointed new leadership in all our strategic business areas. We created centers of excellence to ensure a relentless focus on consumer needs and improving our speed to market. We brought to market two of our most important innovations in recent years, 1850 premium coffee and Jif PowerUps snacks.

We bolstered our premium pet food offerings with the acquisition of Ainsworth, which adds the fast-growing Rachael Ray Nutrish brand to the right segment of our portfolio. We moved forward aggressively with plans to explore a divestiture of a non-strategic asset, our U.S. baking business. We recently communicated with employees our intention to consolidate our West Coast pet food offices into our Orrville corporate location to manage our largest business seamlessly with our centers of excellence. We enhanced our partnership with Keurig to be more competitive in the market and open the door to expand distribution. Finally, we launched Right Spend, our zero-based budgeting program, at the beginning of fiscal 2019.

These actions are significant and directly align with our consumer-led strategy to be a food and beverage leader focused on high-growth, on-trend categories. These actions are also proof that we are moving faster in order to deliver growth and strengthen our financial performance. Further, they deliver on the four pillars of our strategic roadmap: Innovation, investments, cost savings, and acquisitions.

Let me briefly touch on each area. I'll start with innovation, where products introduced in the past three years delivered nearly $500 million or 7% of fiscal 2018 net sales. As we begin 2019, initial reads on the introduction of our 1850 premium coffee brand are strong. The product, which was developed through our new approach to innovation, tested well with not only traditional Folgers drinkers but also a younger generation of consumers who prefer bolder coffee blends.

The initial 1850 launch spans 17 SKUs and retailer interest has been strong, with customer acceptance rates and the number of shelf facings exceeding our expectations. To drive consumer awareness, we developed a comprehensive PR and marketing program, which is just getting under way. We are very encouraged with the reaction to the launch, and initial product shipments will continue throughout the first quarter. We expect 1850 to be a growth platform for years to come.

We are similarly optimistic about Jif PowerUps, our new line of snack bars and peanut butter clusters that began shipping in May. This on-trend product extends the power of the Jif brand into the fast-growing snacking category while tapping continued interest in protein-based snacks. Like 1850, we are supporting the launch of Jif PowerUps with significant retailer and consumer investment, including an integrated PR and marketing campaign with a celebrity endorsement. We view these investments as essential to success for a launch of this magnitude.

In Pet, recent product introductions include Pup-Peroni Jerky Bites and new varieties of Milo's Kitchen premium dog treats. With real meat as the No. 1 ingredient, these items expand our presence in the natural meat snacks category, which has grown 15% over the past 52 weeks. Late this fiscal year, we look forward to new launches that will expand the reach of our iconic Milk-Bone brand into key pet snack segments. All of these innovations underscore our commitment to adapting to market trends. We recognize that these efforts will be essential to compete in our dynamic industry.

Turning to the second pillar of the roadmap, which is investment, momentum for the Smucker's Uncrustables brand remains strong, with companywide sales up 15% this year, marking the fourth consecutive year of double-digit growth. In 2018, the brand surpassed the $250 million level in annual net sales as we produced and sold more than 500 million sandwiches over the course of the year. With construction of our new facility in Longmont, Colorado on track for completion in fiscal 2020, this will provide capacity to further accelerate growth as we expect to double net sales for Uncrustables to more than $500 million over the next five years.

We are now more than a year into the grocery and mass channel rollout of our Nature's Recipe premium dog food brand and we continue to see a positive response and good momentum. Net sales for the brand were up 20% in the fourth quarter, even while lapping the prior-year launch, and up 33% on a full-year basis. In addition, consumer takeaway for our mainstream dog food brands continues to significantly outperform the overall dry dog food category. This growth occurred despite increased competitive activity in the mass premium space. We expect Nature's Recipe will serve as a strong complement to the newly acquired Nutrish brand, which I will discuss in a moment. We are also a year into the launch of the Jif brand in Canada, and the brand has quickly gained share in the peanut butter market. This contributed to companywide sales for Jif growing 3% for the year.

Lastly on the topic of investment, e-commerce remains a significant area of strategic focus. While still a small base with just over 2% of 2018 U.S. retail sales coming from the e-commerce channel, sales were up 71% this year, with pet food brands up 64% and coffee sales on the channel more than doubling. We continue to expect 5% of our net sales will come from the Pure Play e-commerce channel by fiscal 2020 and an even greater percentage when factoring in click-and-collect models. As you can see, in addition to supporting innovation, we will also increase investment in several of our core brands. These investments are essential to support growth and the long-term health of our brands.

The third pillar of our strategic roadmap is generating cost savings to provide the fuel for investments in top-line growth and margin protection and expansion. In 2018, we realized our $200 million pet food synergy target while continuing to make progress on our other cost savings programs. This included our new K-Cup agreement, which has led to improved economics, increased distribution, and additional SKUs. As a result, net sales for our U.S. K-Cup portfolio grew 11% for the year, with Dunkin' Donuts and Café Bustelo K-Cups both up over 20%. Due to the improved profitability of K-Cups, margins are now consistent across all of our coffee segments, which is critical given our strategic focus on growing our premium and one-cup segments.

For fiscal 2019, we have implemented Right Spend to strengthen cost discipline throughout the organization and deliver a portion of the overall fiscal 2019 savings. By the end of the fiscal year, we will also relocate our pet food offices in both San Francisco and Burbank to our corporate offices in Orrville, furthering collaboration and enhanced agility while improving cost efficiency.

The final pillar of our strategic roadmap is acquisitions. Last month, we completed the Ainsworth transaction and welcomed a very talented team to the Smucker family. We are extremely excited to add Rachael Ray Nutrish, a high-growth premium brand that has been a catalyst in transforming the dog food category in grocery and mass channels. With distribution expansion opportunities and significant growth prospects in cat food and pet snacks, the addition of Nutrish will accelerate growth in our pet business. While the deal closed less than a month ago, we are already progressing toward a seamless integration of people, processes, and systems into our pet business by the end of the fiscal year.

While growth through acquisitions plays a key role in our strategy, we have also demonstrated a willingness to divest businesses that are no longer consistent with our strategic focus and direction. Given our focus on growing our coffee, pet, and snack food businesses, in April of this year, we announced our intent to explore a divestiture of our U.S. baking brands and business. We are moving forward in the process and anticipate providing future updates in the coming months.

Fiscal 2019 will be a year of continued transformation and growth. As I mentioned, stepped-up investments in our brands and innovation are imperative to adapting to market trends. Although for 2019, a significant portion is in support of our innovation launches, we expect to sustain these increased investments in consumer marketing in future years. Through cost savings programs and the benefit of U.S. tax reform, we have the resources to compete responsibly while at the same time increase fiscal 2019 adjusted earnings per share by 6% to 9%.

In wrapping up, here are a few thoughts we hope you took away from my comments. While we are not satisfied with our fourth-quarter performance, we are positioned for long-term success in some of the best food categories: Coffee, pet food, peanut butter, snacking. We have a strong mix of leading iconic brands and emerging on-trend brands as evidenced by full-year 2018 sales growth for Smucker's, Jif, Milk-Bone, Dunkin' Donuts, Café Bustelo, Smucker's Uncrustables, and Nature's Recipe, which underscores our ability to react to and capitalize on changing consumer needs.

We are taking and will continue to evaluate appropriate actions to align our portfolio to growth, whether through innovation, acquisitions, divestitures, or improving capabilities and execution in key areas. And, finally, our cost savings initiatives, along with benefits of income tax reform, allow us to mitigate headwinds in certain parts of our businesses and provide fuel to invest in our brands and our resources.

Let me close my comments by thanking all of our employees for their efforts this past year and their continued dedication as we move forward. We are confident we have the right team in place to deliver long-term growth and shareholder value. We recognize that there is still more work to do as part of our company's transformation. We also know that we can't stand still and will continue to adapt to changes in our industry and consumer preferences. We look forward to providing future updates at an Investor Day in New York City on October 9th, as our talented leadership team will share more details on the strategic roadmap for their respective businesses. I will now turn the call over to Mark.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Thank you, Mark. Good morning, everyone. I will start with an overview of fourth-quarter results and 2018 cash flow performance, and then shift to providing additional color on our outlook for fiscal 2019. GAAP earnings per share was $1.64 in the quarter compared to $0.96 in the prior year. The increase primarily reflected a favorable change in unallocated derivative gains and losses in the current year, along with the prior year including a $0.34 impairment charge. Excluding these items and reflecting other non-GAAP adjustments summarized in this morning's press release, fourth-quarter adjusted earnings per share was $1.93 compared to $1.80 in 2017, an increase of 7%. Included in this quarter's adjusted EPS were combined costs of approximately $15 million or $0.10 per share associated with pet product recalls and acquisition financing, which were not reflected in our most recent guidance.

Net sales were flat compared to the prior year as higher net price realizations contributing 1 percentage point to net sales growth was offset by lower volume mix. Adjusted gross profit increased $6 million or 1% as the net benefit of higher pricing and lower cost more than offset the profit impact of lower volume mix. Adjusted gross margin was 37.9% in the fourth quarter, up 40 basis points compared to the prior year. However, this was below our projection due to less net price realization than anticipated and higher freight costs. While costs for the 1850 and Dunkin' Donuts canister launches also exceeded our previous forecast, initial volume expectations have increased.

SG&A decreased $7 million in the fourth quarter, or 2% compared to 2017, driven by lower corporate administrative expenses, primarily reflecting a reduction in incentive compensation costs and ongoing budget management. This was partially offset by a charge related to pet food product recalls. For the year, corporate administrative expenses decreased $30 million or 9%. Factoring in all of this, adjusted operating income increased $10 million, or 3% compared to the prior year, which included a $4 million gain on divestiture. Adjusted operating margin increased 60 basis points to 19.6%.

Below operating income, interest expense increased, primarily due to non-capitalized financing costs associated with the Ainsworth acquisition. The higher interest expense and a $3 million unfavorable change in other income were more than offset by a lower tax rate, which decreased from 31.8% last year to 29.6% this quarter. Lastly, the current quarter results benefited from a 1% reduction in weighted average shares outstanding, reflecting shares repurchased in the fourth quarter of fiscal 2017.

Let me turn to the segment-specific results, beginning with Coffee. Net sales were flat for the prior year as a 4% increase from volume mix, reflecting gains across all our coffee brands, was offset by lower net price realization. Sales for the Dunkin' Donuts brand increased 8% on strong K-Cup performance. An increase in promotional spending needed to improve competitive positioning for Folgers roast and ground coffee drove a 2% net sales decline for that brand. Café Bustelo also declined 2% in the quarter, primarily due to the timing of shipments to a large club customer.

Coffee segment profiting increased 4% due to favorable volume mix and lower input costs, which more than offset the reduction in price realization and a significant increase in marketing expense of nearly 20% for the quarter. Segment profit margin of 30.7% represented a 110-basis-point increase over the prior year but was below our expectations for the fourth quarter due to the higher than planned levels of trade spend and product launch cost.

For 2019, we project full-year Coffee segment profit growth in the mid-single digits, which will be heavily weighted toward the first half of the fiscal year. This will be driven by the full-year benefit of lower green coffee costs and our revised K-Cup contract. These cost savings will be partially offset by an estimated $30 million investment to support our 1850 launch and an increase in marketing support behind Dunkin' Donuts and Café Bustelo.

In Consumer Foods, net sales were down 2% to the prior year due to declines in the Oils and Baking categories. Excluding these two categories, net sales were up 1%. An overall volume mix decline of 8% in the segment reflected the impact of higher pricing in several categories, with net price realization up 6%. Sales for the Smucker's brand were up 9%, reflecting growth in both Uncrustables frozen sandwiches and fruit spreads. For the Jif brand, while consumer takeaway was up in the latest 12-week period, net sales declined 3% due to the timing of peanut butter shipments in a strong prior-year comp. Sales for the Crisco and Pillsbury brands also declined in the quarter. As we move into fiscal 2019, we have taken strategic actions to improve the everyday price points for Crisco.

Consumer Food segment profit increased 5% compared to the prior year despite the profit impact associated with a lower volume mix and higher freight cost. Profit growth continues to reflect successful execution of our pricing strategies. For 2019, we project full-year Consumer Foods segment profit to be flat to down slightly prior to any impact of potential divestiture of our baking business. This reflects an estimated $20 million investment to support Jif PowerUps launch and an incremental $7 million of cost associated with our Longmont facility.

Turning to the Pet Food segment, net sales were flat compared to the prior year as slight increase in net price realization was offset by lower volume mix. Sales for our mainstream dog food brands were flat as a 20% growth from Nature's Recipe and 6% growth for Kibbles and Bits were offset by declines in Gravy Train due to the product's recall and planned SKU rationalization. Cat food sales increased 3%, driven by growth for the 9 Lives brand, while pet snacks decreased 1%.

Lastly, within premium pet food, sales for the Natural Balance brand decreased 5%, primarily due to softness in the pet specialty channel. Pet Food segment profit decreased 13% compared with the prior year. Nearly one-half of this decline was attributable to the product recall cost in this quarter. In addition, higher commodity and freight costs were not fully offset by the higher price realization. While we expect this price-to-cost relationship to continue in fiscal 2019, overall Pet Food segment profit is expected to increase approximately 20% compared to the prior year, reflecting the addition of Ainsworth.

Lastly, in the International and Away From Home segment, net sales increased 2% compared to the prior year, driven by foreign currency exchange. Segment profit also increased 2% despite the prior year including a $4 million gain on the sale from a minority interest in Seamild. Excluding this item, segment profit increased 11% with lower input cost, decrease in marketing expense, and foreign currency exchange all contributing.

Let me now turn to an overview of cash and debt. Fourth-quarter free cash flow was $203 million, bringing the full-year total to $896 million, a 3% increase compared to the prior year. This surpassed our fiscal 2018 updated guidance of $825 million as lower than projected working capital more than offset capital expenditures, which came in at $322 million. We ended the year with debt of $4.8 billion. Based on 2018 EBITDA of $1.6 billion, our leverage ratio stood at 3x as of April 30th. On May 14th, we drew $1.5 billion on a new term loan and issued $400 million of commercial paper to fund the closing of the Ainsworth transaction. This increased our leverage to approximately 4x. The company has no required debt maturities coming due this fiscal year, and we expect to focus on reducing leverage closer to 3x over the next couple of years.

Let me now provide additional color on our outlook for fiscal 2019. This guidance includes projected contributions from the recently acquired Ainsworth business but excludes any impact from a potential divestiture of our U.S. baking business. Big picture, we expect net sales to increase approximately 13% to $8.3 billion, driven by the addition of the Ainsworth business. Excluding Ainsworth, sales are expected to be up 2%, reflecting the launch of 1850 and Jif PowerUps. There is a 1% negative impact due to planned SKU rationalizations, most notably in our Pet segment.

From an earnings perspective, we expect to deliver EPS growth of 6% to 9% as the benefits of continued cost savings and incremental tax reform more than offset a significant increase in brand support and cost inflation. Overall commodity costs are projected to be higher, with lower coffee costs expected to be offset by increases across a number of our key commodities and other raw materials, including peanuts, protein, and packaging. The Pet segment will be most impacted, with Consumer Foods also facing a net increase in cost. In addition, the freight headwind that impacted the last six months of fiscal 2018 is expected to continue into this year.

SG&A expenses are expected to increase over 20% compared to the prior year, mostly attributable to the addition of Ainsworth. Excluding the acquisition, SG&A will be up mid- to high single digits, reflecting a substantial increase in marketing, most notably approximately $50 million in support of 1850 and Jif PowerUps launches, and also, costs associated with the construction of our Uncrustables facility in Colorado. With six incremental months of improved K-Cup manufacturing costs and additional cost reduction initiatives, we project an incremental $80 million will be realized in fiscal 2019 related to our $250 million cost management program. Along with the $100 million we achieved in 2018, this would bring our cumulative total to $180 million in annual cost savings, with the remaining expected to be realized in 2020.

Below operating income, we expect interest expense of approximately $220 million, with the year-over-year increase reflecting borrowings to finance the Ainsworth acquisition and an overall higher interest rate environment. We now project an effective tax rate of approximately 24.5%. This compares to our initial 2019 guidance of 23%, primarily reflecting higher state income taxes. Lastly, our guidance reflects weighted average share count of 113.6 million based on current shares outstanding.

As a result of all these factors, we're projecting adjusted EPS to be in the range of $8.40 to $8.65. We project free cash flow will be approximately $800 million to $850 million, with CapEx expected to total somewhere between $350 million and $370 million, including $100 million related to the Uncrustables production facility. Other key assumptions affecting cash flow include depreciation and amortization expenses of approximately $220 million and $250 million respectively, including an estimate for Ainsworth amortizable and tangible assets, share-based compensation expense of $20 million, and lastly, one-time costs of $60 million, which are mostly cash-related, including approximately $30 million of costs associated with the Ainsworth acquisition and the remainder primarily associated with our organization optimization, including the closure of certain offices.

As you can see, the actions we are taking to transform our company are enabling us to deliver against our financial priorities of growing the top line, achieving significant cost savings, and delivering earnings-per-share growth in line with our stated long-term objectives. We're encouraged by the progress being made on our strategic roadmap, but recognize there is still much to be done, and we're proceeding with a sense of urgency to deliver long-term growth and enhance shareholder value. We thank you for your time, and we'll now open the call for your questions. Operator, if you'd please queue up the first question.

Questions and Answers:

Operator

Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press *1 on your touchtone telephone. If you wish to withdraw your question, please press #. For operator assistance, please press *0. As a reminder, please limit yourself to two questions during the Q&A session. Should you have additional questions, you may requeue, and the company will take questions as time allows. Please stand by for the first question. Our first question comes from Andrew Lazar with Barclays. Your line is now open.

Andrew Lazar -- Barclays Capital -- Managing Director

Good morning, everybody. So, two quick things. One would be just first, Mark, you mentioned your expectation for EPS growth in fiscal '19, obviously, given cost saves and the tax benefit and some deal accretion. Given all the activity you've got this year around innovation and some of the big platforms you're bringing to market -- and, I know you're spending more against them, as you've talked about, but is this a year where you feel as though that's enough, or do you feel limited at all by the desire to show EPS growth in a year where maybe even more spending behind some of these platforms is better? I guess I'm trying to get a sense of do you feel like you've got enough behind these innovations, or are you limiting yourself because of a desire to show, obviously, EPS growth? That'd be the first one.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Andrew, I'll start, and Mark Smucker will finish me up. Good morning. Great question, and we appreciate the question. Obviously, there is a lot going on, and I think one of the points that we want -- have made and will continue to make throughout the course of the morning and into the future is that we are very excited about these two particular innovation launches. They're two of the biggest we've had in the company's history. We've learned over the years that if you don't support launches of this size, they will not maximize their potential, and speaking on behalf of the team here, I think we feel comfortable that the dollars we've had behind those launches are adequate to achieve success in Year 1. Again, to reinforce it, this is platform growth, so there'll be more to come behind these particular launches in coming years.

At the same time, we're also comfortable that our growth brands, like Dunkin' and Uncrustables, Bustelo, that we've also stepped up the spend behind those appropriately. And so, feel that what is amounting to an $80 million to $85 million total marketing increase over last year on the business excluding Ainsworth is sufficient. We are fortunate to be a beneficiary of U.S. tax reform and the good work that our teams have done around cost savings that will allow us to do that. So, there's a lot of headwinds out there, a lot of uncertainties, but we feel that we're radically investing, and our guidance range is capturing all our thoughts around where costs are headed, where pricing may be headed, where tariffs might be headed, and the like.

Andrew Lazar -- Barclays Capital -- Managing Director

Got it. Thanks for that.

Mark T. Smucker -- President and Chief Executive Officer

Andrew, if I could, a couple things -- I think I repeated myself a lot in the script, but I wanted to just -- two key points. The first is really want you guys to take away from the discussion today that we've made a lot of progress in terms of realigning our portfolio to the growth segments. As you know, we've got more work to do, and at the end of the day, we are executing our strategy, but as it relates specifically to marketing, if you look at our marketing investment in our consumer marketing over the last decade or so, you will see that we have actually eroded our marketing spend to the tune of about $80 million, and that is simply not acceptable.

And so, as a result of that erosion -- and, yes, some of it did go into trade, but as a result of that erosion, we have made choices in particular years about supporting core brands versus innovation, and we've got to ensure that we are supporting our brands for the long term or we will watch the health of those brands deteriorate. And so, if you think about the launch of Nature's Recipe a year and a half ago, we spent significantly behind that launch.

Similarly, with these two innovations -- and, with any innovation, we've got to knit to the two the support, and then, over time, that significant investment would shift to other innovations, and we would see -- in the second or third year after a launch, we would see support come down for those launches to some maintenance level that would continue to support. But, we've got to make sure that if you look at our marketing as a percent of net sales, we need to be more in line with the rest of the industry in terms of what we're supporting, both our new products, our new brands, as well as our core business. So, that really is a key message going forward.

Andrew Lazar -- Barclays Capital -- Managing Director

Great. I'll leave it there. Thanks very much.

Operator

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

Mark T. Smucker -- President and Chief Executive Officer

Chris?

Operator

If your line is muted, can you please unmute?

Christopher Growe -- Stifel Nicolaus -- Analyst

How about now?

Mark T. Smucker -- President and Chief Executive Officer

Yes, we hear you.

Christopher Growe -- Stifel Nicolaus -- Analyst

Okay, sorry. Thank you. I just wanted to ask you in relation to your guidance you gave -- and, we talked about fiscal '19 being a year in which you'd be able to grow above your long-term growth algorithm -- with all the cost savings coming through, with the tax savings coming through, what is that ultimately led you to a growth rate more in line, if you will, roughly, with your long-term range? Is it the marketing? Is it the trade promotion? You clearly have contemplated some of these incremental launches. I'm just curious what could have led to a little weaker outlook for fiscal '19 EPS.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Let me just try to frame this in for those of you on the phone. So, if you work off of where you guys are at in the streets, generally, I think the first thing is we're obviously starting at a lower base, but beyond that, as I noted, we're taking our tax rate down about a point and a half from original, most of that driven by state taxes. The Ainsworth acquisition and the footprint we have is driving a little bit of that. So, that's about $0.15 of earnings.

And then, if you just flip back to some of the commentary from CAGNY, I think we had called out a market increase somewhere in the mid-teens, which would probably equate to around a mid-$65 million number. As I just said, we're more in the $85 million, so that's another $20 million, if you would. Our savings are -- our cost programs are a little shy. We thought we'd come in closer to $100 million. We're still going to go after it, but for now, our guidance is reflecting around $80 million, so there's another $20 million.

Clearly, we've got some additional costs in our construction of our Longmont facility. As I mentioned, that's about $7 million. And then, we also have some incremental freight costs facing us here, particularly in the first half of the year. So, those four or five items are key drivers to take us down to where the street sits, down to the range that we've just discussed.

Christopher Growe -- Stifel Nicolaus -- Analyst

Okay. Thank you for that, Mark. Just one other follow-up. Ainsworth is accretive in fiscal '19. Have you said how much accretion you expect from that transaction?

Mark R. Belgya -- Vice Chair and Chief Financial Officer

What we've said is when we announced that transaction, we announced about $0.25 of accretion net of interest, and so forth, and basically, we're right on that target.

Christopher Growe -- Stifel Nicolaus -- Analyst

Okay, thank you very much.

Operator

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

David Driscoll -- Citigroup Research -- Managing Director

Hi, guys. Good morning. So, Mark Smucker, this question is for you. It's a little bit of a tough one, but your stock has indicated down quite substantially, so I'm going to be pretty straightforward. In the release, you say you're confident in delivering on the objectives, but you do have a big fourth-quarter miss, and guidance was well off versus the company's CAGNY comments, which were just at the end of February, and this 8% EPS growth. You've made, I think, some very compelling comments about what you've done to reshape the portfolio, but I honestly think the debate today is whether Smucker's and the other CPG companies have the ability to take pricing to offset inflation, and the fourth-quarter results really call this into question. So, directly, Mark -- and, really, you're speaking to all these investors now, given the way the stock is going to act -- why are you confident and can Smucker's take the necessary price actions?

Mark T. Smucker -- President and Chief Executive Officer

Thanks for the question, David. First of all, the first thing I would remind everyone is that as you know, we've been in business for 121 years. We've managed for the long term. Although we haven't done this over the last three years or so, we have over-delivered in terms of shareholder return. But, in order to continue to do that in this environment, as you know and as we've talked over the last year or so, these changes are necessary in order to position ourselves for long-term growth. And so, our confidence is bolstered by the fact that everywhere that we've invested in our portfolio, if you go back to my prepared comments, every brand that we've invested in has grown. Yes, we've had some drag from the Oils and Baking business. Part of that is because we consciously chose to back off on investment.

And so, where we are focused, there's no question that we're actually seeing results. As it relates to pricing, we still feel confident and we've demonstrated that we can get pricing through, particularly where we have leading brands. There are a few areas where we're not the leading brand, where we do tend to follow, but for the vast majority of our categories, we are able to lead. In the case of coffee in the current environment, we've used trade to affect price versus taking a list price decline, so we do use different levers to affect price.

And then, as I've said in previous quarters, as we go to our customers and we have justifiable price movements, we can, and have been successful getting those through. One of the questions you all have asked us is is it more difficult? I would tell you that it is taking a little bit longer. There is more discussion about pricing, particularly increases, but I would say in almost every case, we've continued to be successful in getting that pricing through.

David Driscoll -- Citigroup Research -- Managing Director

Maybe if I could just follow up on Coffee, I'd just like to ask a little bit more about what happened in the quarter. The team had a lot of confidence here that the lower green coffee was going to benefit profitability. Relative to our estimates, this was the biggest miss on the P&L in the fourth quarter versus what we expected, and what I think you guys had expected. So, can you talk a little bit about why it happened? Why did you need more trade promotion and what's happening within the Coffee segment and the industry to drive these prices down?

Joseph Stanziano -- Senior Vice President and General Manager, Coffee

Good morning, David. I'll start there. I reference Mark's comments earlier -- our costs to support the launch of 1850 and Dunkin' canister were up in the fourth quarter along with that increased trade. While we're disappointed with those results and we wish they were better, we did grow both volume and segment profit in the quarter, and we saw continued momentum in strategic areas. So, our K-Cup business was up 11%, we're outperforming the one-cup segment in the 4-, 12-, and 52-week scan data, sales of Dunkin' Donuts and Café Bustelo both grew double digits this year, and our launch of 1850 is off to a fast start. Great retailer acceptance and execution.

As Mark said, we have significant investment behind that platform and our marketing programs which have started will continue to ramp up over the next few weeks. And finally, we've been working to better align our cost/price relationship, and we feel it's in a much better position going into fiscal '19. I think you recall where we were last year at this time, and we've made tremendous improvement, so I would say yes, pricing is still competitive, but where we have made those trade investments, we are seeing results, and we're seeing volume move in the right direction.

David Driscoll -- Citigroup Research -- Managing Director

Thank you.

Operator

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

Ken Goldman -- JPMorgan Chase -- Analyst

Hi. Thank you very much and good morning. Two questions from me. My first question is I wanted to make sure that my back-of-the-envelope math is right. If you're looking for about $800 million from Ainsworth, it seems to imply that organic sales growth to hit your target of $8.3 billion has to be around 2% to 3%, and that's in a year when you're taking prices down in Coffee and you're reducing your SKUs by 1%. It honestly feels to me a little bit aggressive, and I just wanted to make sure A). Is my math right there? And, B). If you could walk us a little bit through -- obviously, there's some innovation and so forth, but maybe that innovation wouldn't be quite enough to get us there. If you could walk us through those drivers in more detail to get there, that'd be great.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Good morning, Ken. Your math is correct. We are expecting about -- depending on how you're rounding -- 2% top-line growth in what I'll call organic, which is ex Ainsworth. Most of that, candidly, is coming from innovation -- in particular, 1850 and PowerUps, along with some pet innovation coming. And then, in terms -- I just want to clarify a little bit on the price decline in coffee. You're correct in the fact that we've got one more quarter to lap the price increase that we offset with trade beginning at the end of Q1, early Q2 last year, so there is that. But, after that, there's really no price decline built in anywhere across the portfolio. So, it is primarily innovation. There is some growth to continue, obviously, in Uncrustables, Bustelo -- all our growth brands are still projecting up. Nature's is expected to grow, even though it had a great year last year. But, the key drivers are innovation.

Ken Goldman -- JPMorgan Chase -- Analyst

Maybe I didn't understand that. There's only one more quarter of Coffee pricing to be down, but your costs have only been down for one quarter. How is that the case that it won't flow through most of the rest of the year?

Mark R. Belgya -- Vice Chair and Chief Financial Officer

I guess what we're saying is that we're going to lap that trade adjustment that we had to take. Remember, we took price up going into January of '17 and then had to take it back down. We still have a quarter of exposure on that.

Ken Goldman -- JPMorgan Chase -- Analyst

Okay. I'll follow up with you offline on that one. My other question is... You're moving your Pet Food offices from some big cities to Orrville, and Orrville is a great town, but I'm just wondering... I harken back to Kashi, and I think back to what happened with that brand. Not to pick on Kellogg, but when a brand that was run very well independently was taken from a big -- not really a big city, but it was on the West Coast in a very attractive area -- to something different. I'm just worried about the potential for losing people, the potential for integrating a business that has had some struggles -- so, maybe this is the right thing to do -- but how are you factoring in some of those risks into your thinking for this year in your guidance?

Mark T. Smucker -- President and Chief Executive Officer

I'll start, Ken. Thanks, actually, for that question. You are absolutely right. The risks that you highlighted are risks that we have very carefully considered, and I want to say that the team -- particularly San Francisco, being the largest of the Pet offices -- we have a fantastic team, and they're great people, they're passionate about the business. I don't think this is similar to Kashi because this is our largest business, it is predominantly a mainstream business that resides in more or less similar channels. Yes, there is Pet Specialty, which are unique channels, but if you think about it being our largest business and the ability for it to fully leverage the capabilities that we've built, co-locating the business with some of those capabilities is really key. As it relates to talent, we are working hard to retain and attract several of our key folks there, and so far, we've had some very nice wins. So, we are keenly aware of the risks, and we are doing everything that we possibly can to ensure that we mitigate them. I don't know if...

David J. Lemmon -- President, Canada and International, U.S. Away From Home

I'd just add, too, that we have strong offers with a number of acceptances to move to date, so that's one positive. The second positive is that we have strong retention programs in place to ensure there's business continuity through the move. I would just say that we're really excited about the opportunity of bringing the Pet business under one roof and being able to harness the excitement of the entire organization against Pet moving forward.

Ken Goldman -- JPMorgan Chase -- Analyst

Okay. Thanks very much.

Operator

Thank you. Our next question comes from Alexia Howard with Bernstein. Your line is now open.

Alexia Howard -- Sanford C. Bernstein -- Analyst

Good morning, everyone. Can we start with the Pet Food business under recall? Are you concerned about any knock-on implications in terms of traction with the retailers and the shelf space allocations given all the channel mix shift? I guess a broader question in there is given that you've got Amazon entering the category with the Wag brand and entry into food, drug, and mass stepping on the toes of some of the larger pet companies, are you worried about pricing pressure in the category as a whole?

Barry C. Dunaway -- President, Pet Food and Pet Snacks

Hi, Alexia. Let me take the questions there. As far as the recall is concerned, a couple comments on that. First, just to clarify, we had made the decision to exit the Gravy Train wet business because of profitability challenges, and we made that decision last summer, so that product line did not meet our profitability hurdles. So, we had communicated that to our customers, and that had actually discontinued production, and then the recall occurred. We fully expect to recover all of those costs associated with that recall from our supplier, who provided us with the ingredient associated with that, and we expect to recover those costs by the middle of this fiscal year. As far as knock-on, Gravy Train dry business continues to perform incredibly well. If we look at consumption just over the last 13-week period, it's actually up 2% despite the fact that that value segment is down about 9 points. Anyhow, we think that brand has tremendous equity, and we have not seen the knock-on effect across the portfolio.

As far as price, let me just talk to Wag. I know there's been a lot of attention on Amazon's launch there. We compete with private label in every channel where we do business. So, it's another private label. Clearly, Amazon has strength with the consumer base, but our Natural Balance brand, our Nature's Recipe brands are incredibly strong, perform very well through the e-commerce channel. We'll continue to invest in those brands holistically and we think we'll be able to continue to compete effectively against Amazon's brand or other private label brands that either currently exist or may appear.

As far as pricing pressures, as Mark alluded earlier, we are seeing cost headwinds, input costs especially, across our entire portfolio, and we'll monitor the market. If and when it's appropriate, we will move price accordingly. So, some thoughts there on your question. Thanks for those.

Alexia Howard -- Sanford C. Bernstein -- Analyst

Thank you. I'll pass it on.

Operator

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

Pablo Zuanic -- Susquehanna Investment Group -- Analyst

Yes, thank you. I guess one question for Mark Smucker -- Mark, I would say -- you said you appointed new people in most of your divisions. You gave a positive spin on that. I could turn that and say that you had some senior departures -- Steve Oakland, Barry Dunaway -- is that a concern? Why are people leaving at this junction, some very strong assets for the company? That's the first question.

The second one, I guess for Mark Belgya -- I know that we've gone back and forth on the guidance. In very simplistic terms, if I take your $7.96 EPS for fiscal year '18, that's with a 28% tax rate. If I use your 24% tax rate, that's a $0.44 benefit for next year plus the $0.25 over Ainsworth. That's going to get me to $8.65, and your guidance is $8.40 to $8.65, so maybe it's a comment more than a question, but in terms -- you know the business, but at the end of the day, despite 2% organic growth, despite talk about better margins in Coffee in the first half, at the end of the day, your guidance is implying that ex Ainsworth and ex the tax rate, EPS is going to be flat to down next year for the core. So, if you can comment on that.

And, the last one -- I'm sorry, I know it's only two, but the third one, just very briefly for the new chief of the Pet division -- your comment in terms of $800 million in sales for Ainsworth -- what does that reflect in terms of underlying sales growth for that business? This kind of implies a slowing. What's the room for growth there in FDM? Can you do more in Specialty with that brand, or e-commerce? If you can give some color in those terms, it would help. And also, whether there's room to expand the private label business that you have there. You are balanced with Walmart, but can that also be expanded? So, some color in terms of how Ainsworth can grow from that $800 million base would help. Thanks.

Mark T. Smucker -- President and Chief Executive Officer

Okay, Pablo, I'll start, and then we'll just go around the table here. Thank you for the question on leadership because we were expecting that, and it gives us the opportunity to speak to it a little bit more. So, first of all, you mentioned Steve and Barry, both of whom are very seasoned leaders and managers with the company. Similarly, I would tell you that Dave on Pet, Joe on Coffee, and Tina on Food are, quite frankly, some of our best leaders in the company. They are very seasoned, they all have 20-plus years with the company, they have worked in various functions and businesses. In some cases -- actually, I think, in every case -- they've all been mentored by Mr. Oakland, and all, to some degree, Barry.

And so, there's a tremendous amount of depth of knowledge, understanding of the consumer, and clear leadership capabilities both in managing people and businesses, and all of them have delivered results and growth in their various roles at the company. Dave in Pet is probably the newest, and although he's been on these calls in the past in his current or former role, you all will get an opportunity to get to know him a little bit better. He obviously comes from Canada and has spent a tremendous amount of time managing an extremely complex business in a very concentrated customer environment, and I think that positions him well to manage Pet, which one could argue is probably our most complex business as well, and also is a very concentrated customer environment. So, those are some of the reasons why I just feel tremendously confident in this team and I have very high hopes for them. So, thank you for the question.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

I'll go after your second question. So, what you said is right to a degree. So, simply adding the benefit of tax and Ainsworth gives you the middle part of our guidance range. I think this just underscores -- if you look at our cost savings programs and you look at our increase in marketing, those basically are a wash. We're saving $80 million plus in initiatives and we increased our marketing on legacy Smucker by about the same amount. And then, if you add to it the cost of inflation and the Longmont cost, that's going to draw down.

What I would say is that as we've talked about pricing, we still think that there is a pricing opportunity to address some of these costs, so I'd say it's more negative-weighted because we're getting the full 12-month impact of cost and we still have pricing opportunity to go forward. Candidly, we'll see the volume impact of that, but we expect to cover off of that. So, you're right in the simplest math, but I think you really need to break it down to the next level and double-click on the components, and again, to go back to Mark's earlier comments, we just feel that because of the opportunities with tax savings and cost savings that we need to spend appropriately behind the brands, and thus, we get to the math that you suggested.

David J. Lemmon -- President, Canada and International, U.S. Away From Home

Pablo, just to touch on some of your questions with Ainsworth, I'd say the brand is doing extremely well. We've seen it growing at 27%, both on a 13- and 52-week basis, and as we look to the future on that business, we see huge upside on snacks and cat through innovation targeted behind those businesses and those segments. And then, really, the juggernaut of the business is on dog food, and there's continued growth through white space on distribution and through innovation planned against the brand. So, we feel very confident that the brand will continue to grow at the pace it's currently growing.

Pablo Zuanic -- Susquehanna Investment Group -- Analyst

Is there room to grow that private-label business? Within Ainsworth, is there room to grow the private-label business, or are you going to exit that? It's a big part of the total sales number anyway, right?

David J. Lemmon -- President, Canada and International, U.S. Away From Home

No. We're still committed to the private-label business that we're packing, and from a growth perspective, we expect it to grow at category levels.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

But, Pablo, just one more point on Ainsworth because we've been honed in on the near term, but one of the things -- to your point -- is while we're comfortable with the private-label business, and as Dave suggested, we'll grow it as the category grows, our expectation is that Nutrish is the brand that will grow, and so, over time, that proportion will be very positive across its P&L as we see improvement across the segment profit, gross profit, et cetera. So, maintaining the private label and growing Nutrish is really the driver strategically.

Mark T. Smucker -- President and Chief Executive Officer

Pablo, just one final point on Ainsworth: One of the reasons that we're so excited about it is that the growth potential, the growth that that team has achieved -- and, we believe that there is room to grow. There's plenty of opportunity on that brand, and we think that there's definitely upsides. I will also say that that team, which is primarily located in Pittsburgh, is a fantastic team, also. They are incredibly passionate and their leader, Jeff Watters, who is a seasoned pet expert or pet -- he's got a tremendous amount of years of experience in pet -- has agreed to stay on and continue to drive that growth. So, we're very pleased that we still have a great team there as well, and very confident in that group of people.

Pablo Zuanic -- Susquehanna Investment Group -- Analyst

Thank you. That's all very helpful. Mark Belgya, can I ask you a quick follow-up? The dilution from the Baking business -- I estimate that at $0.25 to $0.30. Does that sound right to you?

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Maximized, yeah, that's probably right. While the question has been addressed, I think one of the things we have to take into consideration is that are already thinking about -- in the event that that business is divested -- how we would try to shore up at least some of the dilution in the current year. We obviously will have proceeds that we might be able to do things with. We're looking at cost savings opportunities to help offset some of the absolute dilution. But, gross, you're in the ballpark.

Pablo Zuanic -- Susquehanna Investment Group -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Scott Mushkin with Wolfe Research. Your line is now open.

Scott Mushkin -- Wolfe Research -- Managing Director

Hey, guys. Thanks for taking my question. So, I wanted to talk about the long-term model here a little bit. I know we talked about pricing in the short run, but I was just down in Bentonville, spending some time with the folks at Target, and they talk openly about the investments they're making in their business and the cost of doing business that they're seeing going up, and they also talk openly about their CPG partners having much higher margins just generally. I guess I'm looking over my model over a 10-year period and saying, "Can we sustain EBIT margins with your partners under so much pressure?" I guess I just wanted to get your comments on that.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

I'll start, and then, obviously, anyone who wants to jump in... So, it's a very fair question. I think it's a near-term question and it's clearly a longer-term strategic question. A couple thoughts: I think that we have talked to you folks for years about the importance of No. 1 brands, and that continues, and we have a great portfolio of that that we do believe will allow us to price. As we move forward, we need to make sure that we're making the proper investments to generate the returns and keep those products and categories that are desirable to the retailer. We don't want to be a marginalized category, so I think that's a focus.

But, candidly, I think we have to continue as an industry to look at opportunity to manage cost in other places than just COGS, and we want to hold onto that operating profit that we've been accustomed to as an industry, and so, I think while it started by some of our peers, maybe, as short-term ways to drive shareholder value, I think longer-term, that is the strategic approach. And so, we're going to be very thoughtful as we add cost going forward, and we're going to continue to work with our suppliers to make sure that we're in a good place from a cost perspective on incoming raw materials and services. So, it's fair. I think it is a reasonable challenge, as an industry, that we're facing, but again, I think we fall back on two things. One is we have incredibly good relationships with our retail partners, and we also have great brands to offer up to them.

Mark T. Smucker -- President and Chief Executive Officer

I would just add that we have seen this type of pressure in the past. We've been in the business a long time, and there are moments in our history and in the industry's history where our retail partners push harder than others, and this happened to be one of those times. As Mark said, we have incredibly strong relationships with our customers which have helped us, clearly, but I would just go back to one of the very first questions that Andrew asked.

We have an obligation to strengthen the bond between our brands and our consumers, and in the classic sense of a push versus a pull strategy, to the extent that we are successful in strengthening the emotional bond between consumers and our brands -- and, consumers are demanding our brands, whether they be large or small brands -- that also allows us to continue to grow our business. So, it's not just about selling in our brands with our customers, it is about engaging with our consumers actively and investing in those efforts.

Scott Mushkin -- Wolfe Research -- Managing Director

So, two follow-ups. First, to what you just said, again, it suggests maybe a little downward pressure on margins long-term in the new environment with e-commerce and other things going on, to really engage with customers. That's follow-up No. 1. My follow-up No. 2 is about cannibalization on the Dunkin' Donuts brand with 1850. Have you guys planned for that? What's the early scene? Thank you very much for taking my questions.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

I think your first question was basically around -- a little bit honed in on e-commerce and margin pressures that that will push, and some of the near-term. So, we've had conversations several times over the last couple of years as we've looked at e-commerce, and the growth of it, and the expectation of it, and for those who have been around the industry a little while, it takes us back in time to as the business got out of the traditional grocery retail, and club and mass became stronger, and had similar issues in terms of margin pressures because it was just not an established channel and so forth.

We recognize right now that growth in that area is going to put some margin pressure, but we're working actively across the company in ways to identify how best to improve that margin as more of the business shifts to the internet and e-commerce. So, we think that's an addressable situation moving forward because we understand that we have to do that. And then, just broader, I think we pretty much covered -- there might be some margin pressures as we work through this time period that Mark suggested from the retailer standpoint that, again, not to continue to repeat ourselves, but just the relationship and the brands we offer -- we think that'll get us through that as well.

Joseph Stanziano -- Senior Vice President and General Manager, Coffee

I'll take your 1850 question. We're excited about 1850. It is a very different positioning than the Dunkin' brand. It will slide into that entry-level premium segment, and the work we've done prior to launch shows that it is highly incremental. The positioning, the way we talk to the consumer, the product is very different, and I think when you start to see some of our consumer communication, you'll see the differences there. So, we're not concerned on cannibalization there with the Dunkin' Donuts brand.

Scott Mushkin -- Wolfe Research -- Managing Director

All right. Thanks, guys.

Operator

Thank you. Our next question comes from Farha Aslam with Stevens. Your line is now open.

Farha Aslam -- Stephens, Inc. -- Managing Director

Hi, good morning. Question on Pet Food: You now have three premium dog food brands. You have Nature's Recipe, Nutrish, and Natural Balance. Could you share with us the positioning of each and what growth you expect next year from each of those?

Barry C. Dunaway -- President, Pet Food and Pet Snacks

Let me start there, and Dave, feel free to jump in. As far as Natural Balance is concerned, that is our super premium line of pet food, and we have made the commitment to this point to sell that exclusively through the Pet Specialty channel. We think that's where the nutritionist is shopping, and that's where -- we'll continue to be consumer-led as we think about that brand. As relative to Nature's Recipe and Nutrish, first, just based on the successful launch of Nature's, we continue to believe there's a place for that in the mass channel -- the grocery and mass channel -- again, based on the launch success. It was up 20% in this latest quarter. We have double-digit growth planned for this next year.

Where we've seen that brand perform particularly well is in the grain-free segment of the premium, and so, our innovation and marketing efforts over the next year will be focused on that grain-free area as we think about differentiating it. We were the first mover in bringing that brand over from Pet Specialty, and it has that halo of wholesome, natural ingredients as a Pet Specialty brand. The Nutrish brand also competes in that premium segment, but it's a different consumer, and just the accessible nature of the brand and the culinary focus with the Rachael Ray equity. So, as the team brings those portfolios together, I know a lot of work is going to go into making sure that we continue to differentiate those brands, but we believe they can continue to be highly complementary in each of those channels respectively. Dave, do you have anything to add to that?

David J. Lemmon -- President, Canada and International, U.S. Away From Home

I'd just say Nature's Recipe -- there's a lot of growth through the innovation in the LID segment, the limited-ingredient -- or, Natural Balance, excuse me, in the limited-ingredient diet segment. Nature's Recipe...we're really pushing out on innovation in grain-free in Pet Food and Pet Snacks. And then, on the Nutrish side, they have over ten concepts that they're bringing to market this year in dog, cat, and snacks, and that will really provide fuel for growth, so we feel very confident about that.

Farha Aslam -- Stephens, Inc. -- Managing Director

Double-digit growth for Nutrish as well?

Barry C. Dunaway -- President, Pet Food and Pet Snacks

Yes.

Farha Aslam -- Stephens, Inc. -- Managing Director

And then, just a broader question on pricing: Mark, you highlighted that you are successfully taking pricing. Are competitors following, and what private-label pressure are you seeing? So, how much of that pricing are you able to retain? In Coffee, you had to spend back this quarter with higher trade spend.

Mark T. Smucker -- President and Chief Executive Officer

We haven't taken a lot of price -- I might turn it to Tina, but we haven't taken a lot of price up in the last year-ish because commodities have been lower. We would expect competitors to follow, but I think that's a question, probably, for the future, and I think Tina might have a couple comments.

Tina Floyd -- Senior Vice President and General Manager, Consumer Foods

Good morning, Farha. From a foods perspective, we took price on peanut butter about a year ago. We'll be lapping that in June. And, we took our Uncrustables price up in May of last year as well. And, again, it did take competition some time to follow, but they did follow, and if you take a look at even the most recent IRI data, you can see that the business is strong and we are up versus prior year, so the execution of pricing has been successful within those two brands.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

I think the other thing to keep in mind -- and, we didn't go through the litany, necessarily, of all the areas of cost that are going up -- these are costs that are going up in several categories, so, whether you're a brand manufacturer or a private-label manufacturer, you're going to be incurring costs. We're in the world of inflation, and inflation means rising prices over time. Now, the timing of that may alter a little bit, but that a little bit bodes to why we feel this way. Just to clarify my earlier comment, what I said is we've reflected all the inflation in our plan, and so, we will look for opportunities for pricing that hopefully help mitigate those and actually be net positive, but we've assumed basically all the inflation across a 12-month window.

Barry C. Dunaway -- President, Pet Food and Pet Snacks

Farha, one thing I would add is we did just take pricing on selective snacks -- again, where we lead in the category and where we felt it was appropriate, again, based on certain thresholds. So, that pricing has been taken to our retailers and will be effective at the end of July.

Farha Aslam -- Stephens, Inc. -- Managing Director

That's helpful. And so, net that 2% to 3% on core growth, how much of that is pricing for next year?

Mark R. Belgya -- Vice Chair and Chief Financial Officer

None, or very little, other than what Barry mentioned in Pet Snacks.

Farha Aslam -- Stephens, Inc. -- Managing Director

Okay, great. Thank you.

Operator

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

Akshay Jagdale -- Jefferies, Inc. -- Analyst

Good morning. Thanks for taking the questions. I wanted to ask about Pet. So, just to clarify, the Nutrish brand, obviously, is growing well into the 20s. Can you remind us what the mix is? I believe private label is around 17% or 18%, but I'm wondering how much of the growth is going to be driven by Nutrish and how much Nutrish is as a portion of the $800 million. That's the first question.

And then, more importantly, what are your expectations and how much visibility do you have on the innovation pipeline as part of the M&A process? And then, competition -- there's obviously some other competing brands that are entering channels. You've entered a new channel as well with -- Nutrish has entered a new channel. So, there are some concerns about competition and about channel fill, so, if you could address those in the context of your top-line growth guidance for that segment for that business, that would be really helpful.

Barry C. Dunaway -- President, Pet Food and Pet Snacks

I think Dave and I can tag-team this. As far as the growth, the numbers that Dave quoted earlier -- the 27% -- that has all been the Rachael Ray Nutrish brand. So, by far, the majority of the business is the branded side of the business, and that double-digit growth will all be driven through that brand. A lot of that growth is resulting from expanded distribution in the Pet Specialty channel, seeing significant growth in the e-commerce channel as well, and continued growth in food, drug, and mass.

So, just to the earlier point, private label will continue to grow more in line with the category, but that significant growth will really come from the Rachael Ray Nutrish brand. As far as innovation is concerned, we did have a view into that pipeline -- somewhat limited through the diligence process, but now that it's part of our company, much greater visibility and a high degree of confidence in the success that will come from that innovation pipeline.

David J. Lemmon -- President, Canada and International, U.S. Away From Home

I don't have much to add. Innovation is clear in the pipeline across both businesses, obviously. We feel as though there's room for growth across all portfolios of our business, and we have the most robust pipeline since we've owned the business, so we feel very confident, moving forward, that there won't be anything taken off of the list, there will only be things added to the list.

Barry C. Dunaway -- President, Pet Food and Pet Snacks

And then, just from a competitive point, even with the incremental competition, the Nutrish brand has continued to grow its share in the last four consecutive periods. They have record share now at about 8.5% of dry dog, and then, significant growth across premium cat, dry cat, wet cat, snacks, and so forth. So, that brand has tremendous strength, and yes, there's more competition, but velocities continue to be strong and market share continues to grow.

Akshay Jagdale -- Jefferies, Inc. -- Analyst

So, just to summarize, roughly two-thirds of the business seems to be Nutrish, and if all of the growth is coming from there, you're talking low 20% growth. If I'm understanding what you said correctly, most of that growth is just from distribution, and the innovation would be on top of that, correct? I'm guessing you hadn't planned for innovation gains in your $800 million number. So, am I understanding that correctly? And then, I just have a follow-up on margins for that business.

Aaron Broholm -- Vice President, Investor Relations

Barry, why don't you try and add? We're going to have to keep moving on, Akshay. I'm sorry, we have others on the call.

Barry C. Dunaway -- President, Pet Food and Pet Snacks

Most of the growth this year for this fiscal year was based on the incremental distribution gains that the business had secured across all channels, so that's where the majority of that growth is coming from. For instance, there's significant gains in premium cat distribution that isn't in place that will be effective and go on-shelf in August. So, the majority -- and, as we've said also, incremental distribution in Pet Specialty. The innovation will be more so in future years, and that was built into more of the deal model growth, but this year is primarily based on continued velocities as well as incremental distribution.

Akshay Jagdale -- Jefferies, Inc. -- Analyst

Thank you.

Operator

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

Jason English -- Goldman Sachs -- Managing Director

Hey, good morning, folks. Thank you for allowing me to ask the question. I know we're running a little bit late. I'll try to keep this rapid and on point. I'm walking your guidance back from EPS up to sales, and I'm getting to a gross margin number of a little bit shy of 35% at the midpoint. Is that roughly correct?

Mark R. Belgya -- Vice Chair and Chief Financial Officer

That sounds low.

Mark T. Smucker -- President and Chief Executive Officer

Yeah, that's pretty significantly low, Jason. I think we'd be more aligned where FY '18 came in.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Maybe it's the way you're handling the cost savings. I don't know. But, our gross margin is going to be much more in line with the 38% that we achieved in '18.

Jason English -- Goldman Sachs -- Managing Director

Cool. That's a less alarming number. I'll follow up with you guys afterwards to figure out where my walk is a little bit off. We were expecting next year for you to have to absorb maybe 100-plus basis points of negative margin mix from Ainsworth at gross margin. Clearly, we don't have P&L visibility. Is that roughly the magnitude of mix headwind that you're facing next year?

Mark R. Belgya -- Vice Chair and Chief Financial Officer

That's probably ballpark close, yeah. I have this feeling that it's where the synergies and the cost savings are playing out on the base business. That might be what's skewing you a little bit.

Jason English -- Goldman Sachs -- Managing Director

Probably, and I'll follow up with you guys after that. One last question on Pet: How much EBIT do you expect Ainsworth to add to Pet next year, and what is your assumption of underlying profit growth ex Ainsworth in Pet?

Mark T. Smucker -- President and Chief Executive Officer

In the spirit of what we've disclosed, if you go with the commentary off of our interest -- in fact, most of the interest increase is due to Ainsworth, and you're going to get $90 million to $100 million of EBIT on the business.

Jason English -- Goldman Sachs -- Managing Director

Okay. I'll leave it there and pass it on. I know we're running long. Thanks, guys.

Operator

Thank you. Our next question comes from John Baumgartner with Wells Fargo. Your line is now open.

John Baumgartner -- Wells Fargo -- Director

Good morning. Thanks for the question. I wanted to come back to Rachael Ray for a moment. Looking at the dog food category, obviously, you see quite a bit of momentum accelerating from premium mix accreted innovation, and when I look at Rachael Ray, it's also gone down that path with the Just 6, the Dish, the Zero Grain, but it feels like the traction on that front has been pretty limited. So, when you're going through the diligence for this deal, how are you thinking about the ability to segment up in dog food outside of the opportunities in pet and cat?

Barry C. Dunaway -- President, Pet Food and Pet Snacks

We just think there is tremendous brand equity there. As the Ainsworth team has thought about further segmentation in premium, we continue to believe there are opportunities for additional segmentation there. The velocities will probably be somewhat slower, but again, back to Dave's point, where we built tremendous growth and where we see exceptional growth is in the premium cat and in snacks. So, dog is going to continue to grow, but we've moderated that growth based on how fast the brand has grown, incremental competition within dry dog, so where we have really focused and where we believe the growth for that brand is going to come from is in premium cat and snacks.

John Baumgartner -- Wells Fargo -- Director

Okay. And then, just a follow-up, briefly, when you include the Ainsworth assets into the base Pet business, how are you thinking about the long-term revenue growth target there? Any upsides to that number going forward?

Mark R. Belgya -- Vice Chair and Chief Financial Officer

We'll probably update our growth rates for all our businesses as part of our Investor Day. All things being equal, based on the conversations we've had with what Ainsworth's expectations are in the near term, it'll drive a higher number than what we've said about the base business. But, just in terms of the absolute guidance, I think we're going to hold off on that for a few months and let us get a few months of Ainsworth under our belt.

John Baumgartner -- Wells Fargo -- Director

Great. Thanks, Mark. Thanks for fitting me in.

Operator

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

Rob Dickerson -- Deutsche Bank -- Director

Great, thank you. Very short, quick question, just on free cash flow. I know you said this year it's $800 million, $850 million. You ended '18 around $900 million. Given tax benefits, there's obviously some net income growth flowing through, and I know CapEx is up a bit, but I'm just wondering what else is the offset such that free cash flow would be down year over year. That's all.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

So, you're right, there is some incremental tax benefit that's a plus to that number. The back-off number would be CapEx is up about $40 million if you take the middle of the range, and then, the other big component is the increase in what we'll call one-time costs. Those are split between merger integration and some of the costs from what we call our Organization Up program, which is costs associated with some of the office closings and so forth that we talked about. And then, there's a little bit of a conservative assumption around working capital use, but most of it is CapEx and the one-time costs.

Rob Dickerson -- Deutsche Bank -- Director

So, you would really view it as more of a -- there's the CapEx piece, but that's somewhat one-time, and the other roll-off is a one-time as well, so, just that '20, hopefully, should be growing again.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Yeah. I think that that's a great point. We've spoken to that a couple times. Once we get over the Longmont investment in the last couple of years, we should see a little bit more of a return to our 3% or 3.5% of sales number.

Rob Dickerson -- Deutsche Bank -- Director

Okay, super. Thank you.

Operator

Thank you. Our next question comes from Pamela Kaufman with Morgan Stanley. Your line is now open.

Pamela Kaufman -- Morgan Stanley -- Vice President

Hi, good morning. I just wanted to get a sense for your outlook on the competitive landscape in Coffee for next year. Do you expect any changes in the environment, given the Nestlé/Starbucks JV and continued evidence of private-label competition in the category?

Joseph Stanziano -- Senior Vice President and General Manager, Coffee

Good morning, Pamela. I'll take that. Obviously, there's a lot of activity in the coffee space. The Nestlé/Starbucks deal -- two well-respected organizations -- private-label growth... We are always what I would say competitively vigilant, and we'll continue to monitor that, but we are very focused on what we have to do to execute our strategy and drive growth, and really, whether it's private-label or branded competitive, we know we've got to do three things: Invest in innovation, continue to engage with our consumers, and ensure we're executing the right price and trade strategy. If we can do those things, we feel like we'll be in a good place.

Pamela Kaufman -- Morgan Stanley -- Vice President

Thank you. And also, I just wanted to follow up on Jif and what drove the weakness in the quarter, just given that the retail takeaway data seems like it was still positive more recently.

Tina Floyd -- Senior Vice President and General Manager, Consumer Foods

Hi, Pamela. Thanks for the question. It's very interesting -- we came off of a really strong third quarter if you look back on Jif, and really, we were posting high comps versus the prior year. But, if you look at the full year for Jif, it's really strong. We ended up flat to slightly up from a net sales perspective, and as you mentioned, our comps look really good, so we're really confident and look forward to a good first quarter.

Mark T. Smucker -- President and Chief Executive Officer

I think some of it was just timing.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Although, I would add that the launch in Canada has helped our Jif business tremendously. The fourth quarter, we picked up a significant piece of distribution, which really pushed the brand, and we have overachieved our share targets in Year 1. So, really strong support from Canada as well.

Pamela Kaufman -- Morgan Stanley -- Vice President

Thanks. That's helpful.

Operator

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

Robert Moskow -- Credit Suisse -- Analyst

Hi, thanks. One of your prepared remarks, Mark, was that the first quarter is off to a strong start. I looked at the Nielsen data for May, and it indicated down 2% for Smucker overall. It looked like a deceleration. I was wondering if your data is showing something different. The second part is gross margin -- I think what you're implying is gross margin expansion for your core business. What's driving that? It sounded like you've got more competitive pressure in coffee, and so, what gives you comfort that gross margin could go higher on core business in '19?

Mark T. Smucker -- President and Chief Executive Officer

I know you guys are looking at Nielsen data, and we get IRI for our categories as well. I'm just reconciling that to shipments and consumption. We are seeing -- it's early in the quarter. We're not quite halfway through the first quarter, but we've seen some pretty positive trends -- of note, Coffee -- so we're seeing some of that turnaround, and just looking at some of the... Obviously, the new products as well, we're off to a good start there. But, even in base coffee, we're seeing a little bit of pick-up as well, so I think that's why. Hopefully, you'll see some of that translate into the consumption numbers in the next four weeks or so. I don't know if you guys have anything to add. You good?

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Hey, Rob. I guess the way I'd answer your gross margin or gross profit question is that it's coming from the base. We are getting gross margin expansion out of just the innovation. Although it's at a loss when a segment profit becomes a marketing spend, there's obviously gross profit dollars being generated. And then, in my scripted comments, we talked about we still had incremental cost benefits coming through with lower green, and also, with the first half of the year getting the KGM savings that we started in October a year ago. So, that adds a little bit of mix in there, as well. And then, cost savings program -- certainly, some of those are affecting the COGS line.

Robert Moskow -- Credit Suisse -- Analyst

Okay, thanks.

Operator

Thank you. And, our final question comes from Brian Holland with Consumer Edge Research. Your line is now open.

Brian Holland -- Consumer Edge Research -- Analyst

Yeah, thanks for letting me in there. Just quickly on Coffee, thinking about the competitive landscape here, I guess first, on the innovation side, if there's any way you can give us a sense of what would define success for the rollout of 1850? If I do quick math, one share of bagged, one share of pods would sort of equal out or net out to about $50 million, so I'm just trying to understand what would define success in Year 1 on the innovation front for 1850? And then, secondly, on the bag side -- or, just across all of coffee -- you have Nestlé partnering with Starbucks on that licensing deal for CPG, Keurig talked about at their Investor Day stepping up their efforts on the bagged business. So, just wondering how you think about your efforts to drive 1850 and bolster your portfolio against a more competitive -- or, what we'd figure to be a more competitive backdrop over the next 12 months. Thanks.

Mark R. Belgya -- Vice Chair and Chief Financial Officer

I'm going to start and then throw it to Joe. So, just in terms -- we're not going to give specific dollar expectations on 1850 right now, but I will say it's the larger of the two components, and obviously, I said that a good portion of the 2% top-line growth -- so, just to do the math for you, it's $150 million in total, and those two innovations are a good portion of that. So, that's where that number is coming from. The one interesting comment is that in today's world in CPG, a $50 million to $75 million launch is an incredibly successful first year in sales. It's a Top 10 item, and we think this has the potential, certainly, of being there.

Joseph Stanziano -- Senior Vice President and General Manager, Coffee

Thanks, Mark. Brian, just to follow up, I would say first and foremost, the measure of success would be distribution and acceptance, and I think we're well on our way. Our goal of full distribution -- we should be there by August. So, from a standpoint of success in retail acceptance and out in the marketplace, we feel like we're well on our way there. From a bagged perspective, again, like you said, very competitive space. Obviously, we have a very strong partnership with Dunkin' Donuts. We continue to see opportunity there. The launch of 1850, as I said earlier, a very different positioning, a very different consumer. Dunkin' leveraging on that shop equity. We feel like there's opportunity with both of those great brands in the premium bag space, and we'll continue to support both of those as we go through the year.

Brian Holland -- Consumer Edge Research -- Analyst

Great, thank you.

Operator

I'll now turn the call back over to management to conclude.

Mark T. Smucker -- President and Chief Executive Officer

Okay, thank you all. I know this was a long call. I really appreciate you guys hanging in there. Obviously, very important call, given the quarter and what we're doing, but I really do hope that you all came away with the same level of confidence that we have in the actions we're taking to realign our portfolio, focusing on the growth segments, and again, just encouraged by our efforts paying off wherever we focus. So, still work to do, we acknowledge that, but again, I think, as always, we want to thank our employees. They're awesome, and they are really what allows us to succeed, and they will continue to help us drive success going forward. So, thank you for all your support, and have a good weekend.

Operator

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

Duration: 96 minutes

Call participants:

Aaron Broholm -- Vice President, Investor Relations

Mark T. Smucker -- President and Chief Executive Officer

Mark R. Belgya -- Vice Chair and Chief Financial Officer

Joseph Stanziano -- Senior Vice President and General Manager, Coffee

Tina Floyd -- Senior Vice President and General Manager, Consumer Foods

Barry C. Dunaway -- President, Pet Food and Pet Snacks

David J. Lemmon -- President, Canada and International, U.S. Away From Home

Andrew Lazar -- Barclays Capital -- Managing Director

Christopher Growe -- Stifel Nicolaus -- Analyst

David Driscoll -- Citigroup Research -- Managing Director

Ken Goldman -- JPMorgan Chase -- Analyst

Alexia Howard -- Sanford C. Bernstein -- Analyst

Pablo Zuanic -- Susquehanna Investment Group -- Analyst

Scott Mushkin -- Wolfe Research -- Managing Director

Farha Aslam -- Stephens, Inc. -- Managing Director

Akshay Jagdale -- Jefferies, Inc. -- Analyst

Jason English -- Goldman Sachs -- Managing Director

John Baumgartner -- Wells Fargo -- Director

Rob Dickerson -- Deutsche Bank -- Director

Pamela Kaufman -- Morgan Stanley -- Vice President

Robert Moskow -- Credit Suisse -- Analyst

Brian Holland -- Consumer Edge Research -- Analyst

More SJM analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than J.M. Smucker
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and J.M. Smucker wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.