The J.M. Smucker Company

Good morning and welcome to the J.M. Smucker Company's Fiscal 3 2020 First 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 re-queue if you have additional questions. I will now turn the conference over to Mr. Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us for our fiscal 2020 first quarter earnings conference call. After this brief introduction, Mark Smucker, President and CEO, will give an overview of the quarter's results and an update on our strategic priorities. Mark Belja, Vice Chair and CFO, will then provide detailed analysis of the financial results and our fiscal 2020 outlook. A Q&A session will follow the prepared remarks. 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 a supplementary slide deck summarizing the quarterly results and fiscal 2020 full-year outlook. The slides can be accessed on our website and will be archived there 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.

Thank you, Erin. Good morning, everyone, and thank you for joining us. Let me begin by providing comments on our first quarter results, which were below our expectations. Given the momentum we generated in the past two quarters, the miss relative to our expectations in this first quarter is unacceptable, particularly as it relates to our top-line sales. Our team is already executing on plans to address recent performance which include improving the consumer value proposition at shelf, the continued launch of new advertising across multiple brands, and driving awareness and trial in premium dog food. Underpinning all of these actions is a focus on accelerating the execution of our strategic growth imperatives, which is the key to unlocking the growth potential of all our brands. We are also taking decisive near-term actions to ensure we maintain financial discipline, deliver on our commitments, and increase shareholder value, including One, reprioritization of company-wide initiatives. Two, a reduction or elimination of certain discretionary expenses. And thirdly, the evaluation of planned marketing programs with an increased focus on maximizing return on investment. Let me provide additional details on first quarter results. Organic net sales decreased 4% compared to the prior year, which was below our expectations, primarily as a result of three factors. First, the timing of shipments, primarily in coffee and peanut butter. Second, the deflation in the coffee and peanut butter categories. And thirdly, increased competitive activity in the premium dog food category. Our adjusted EPS declined 11% compared to the prior year. The reduction was driven by lower net sales and resulting SDNA deleverage, which was only partially offset by gross margin expansion with improved mix in pet food resulting from the decline of private label sales. With respect to the shortfall in US retail coffee, we are confident that this was a temporary dynamic. While we expected a sales deceleration from the fourth quarter, the decline was greater than anticipated. This was partially due to timing of distribution gains across all formats that have shifted to the second quarter. As part of this change, We gained incremental shelf space going forward across all formats. We are already seeing momentum build in the second quarter and continue to expect top and bottom line growth for the coffee segment this fiscal year. Our category leadership position remains strong. Along with the number one Folgers brand, Dunkin' became the number three brand in retail sales during the quarter. and continues to outpace category growth. In addition, we own four of the top five brands growing household penetration in the coffee category and our K-Cup portfolio is outpacing category growth by approximately two times in the latest four, 12 and 52 week periods. We also recently launched innovation with Dunkin' Signature Series 1850 Single Origins, and Folgers Noir products that will contribute to top-line growth as the year progresses, since retailer acceptance is consistent with our projections. In consumer foods, a net sales decline in peanut butter was primarily attributable to a list price decline taken in the fourth quarter. Certain retailers also reduced inventory following a 15% increase in the company's peanut butter shipments in the prior quarter, and a key promotion was shifted to the second quarter. While we did see a volume benefit since taking a price decline, it was lower than anticipated. We maintained a nearly 50 volume and dollar market share for the category and consumer takeaway for our peanut butter offerings performed better than other branded competitors and the overall category during the quarter as our velocities have increased following our pricing actions. In pet food, while we anticipated comparable sales to be down slightly, sales were below expectations, down 4%. Momentum for the majority of our pet brands continues to be masked by the declines in our private label business and the natural balance brand in the pet specialty channel. The shortfall to expectations resulted from underperformance of nutritious dog food as a result of greater than anticipated impact from premium competitors' aggressive pricing actions. We are taking targeted actions to re-accelerate Nutrish dog food growth, which include improving the consumer value proposition at shelf to drive increased trial and loyalty and launching new advertising to increase awareness. While we anticipate continued softness for the Nutrish brand in the second quarter, we We remain confident in the strength of the brand as a key growth driver for the balance of the fiscal year, including the launch of new innovation platforms. For the remainder of the fiscal year, we expect Nutrish to grow mid to high single digits. We are actively defending our position and remain confident in the long-term growth potential of our pet business. There were areas where we made solid progress this quarter, with key brands delivering growth in both shipments and consumption. Cat food continued to deliver strong sales growth, driven by an 8% increase for Meow Mix, as well as growth for Nine Lives and Nutrish. Our dog snacks platform also grew, led by sales increases for the Pepperoni, Nutrish, and Milk Bone Brands. Pet Innovation delivered over $20 million in net sales during the quarter, and we also continue to project $100 million in annualized sales from new products launched by the end of the year. Turning to the progress made against our long-term growth imperatives, We continue to execute and build momentum with our three consumer-centric growth imperatives to lead in the best categories, build brands consumers love, and be everywhere. I'll share a couple examples from the quarter of how we are leading in the best categories. Snacking remains a key focus area, with our total snacking portfolio generating net sales growth of 7% during the quarter. Mostly driven by Uncrustables sandwiches, which grew 11%. We are now shipping Uncrustables products produced at the recently completed Longmont facility. The volume shipping from this plant is currently small as we execute the startup process. As planned, we will expand capacity throughout the year to support a significant increase in sales during the second half of the year. We remain on track to grow this business to over $500 million in net sales within the next few years compared to approximately $300 million in fiscal 2019. In addition, the JIF PowerUps platform has helped increase household penetration for the JIF brand by over 2 million households over the past year as a result of our new on-trend snack offerings. While growth slowed this quarter with lapping of initial sell-in last year, we remain confident in the growth opportunities for the JIF snacking platform. We recently launched new line extensions and expect to expand distribution as the year progresses. Turning to our strategic imperative of building brands consumers love, Last fiscal year, we began implementing our new Power of One marketing model, which includes a new structure within our marketing teams in addition to consolidating work with a new agency. Although we are at the very beginning of this new brand support hitting the market, we are excited about the brand refresh underway and recently launched new advertising for the Jif and Smucker's brands. We will continue to launch new campaigns across nine of our key brands in the upcoming months. These new breakthrough campaigns are bold, strengthen our brand's relevance in today's culture, and set a new bar for CPG creative effectiveness, which we fully expect to support top-line growth. We remain committed to our investments in marketing and innovation, and we continue to project marketing spend to be in the range of 6.5% to 7% of net sales for the year. This commitment to support our brands and new products is critical to accomplishing our financial goals and increasing shareholder value. Our third growth imperative is to be everywhere. We understand the consumer shop and interact with brands on demand and multi-channel. Therefore, we need to be wherever consumers shop and available anytime. Within the e-commerce channel, we compete in categories that are well-suited to a subscription model, particularly pet food and coffee. In the first quarter, our sales to pure play e-commerce retailers were up over 30%, while enforcing price discipline to protect pricing architecture and the equity of our brands. The e-commerce channel now accounts for nearly 5% of total U.S. retail sales, which is pacing in line with our goal to reach 5% by the end of the fiscal year. The focus of our away-from-home business has always been on offering branded products that consumers desire while outside of the home. During the first quarter of We increased our market share in three of our four strategic categories, liquid coffee, fruit spreads portion control offerings, and peanut butter portion control offerings. Our share of market in each of these categories is well over 50% and more than twice the number two competitor. In the roast and ground coffee category, we will further strengthen our position by launching 1850 coffee, which complements the retail 1850 business which was the number one launch in the coffee category last year. In the frozen handheld category, we are excited about being able to expand our Uncrustables business within additional away-from-home outlets. Before turning it over to Mark, here are a few thoughts we hope you take away from my comments. We are quickly adapting to competitive and market dynamics to deliver results that represent the strength of our organization. We operate in strong categories that are aligned with current consumer trends. We are making good progress on our consumer focus framework and three growth imperatives designed to deliver on our long-term financial growth priorities and increase shareholder value. We remain confident in our strategy Our strong portfolio of brands and the new brand support that will together drive results. And we firmly believe we are moving forward with the right approach and are taking decisive actions to provide improved results for the remainder of the fiscal year. Finally, as always, I want to acknowledge our dedicated employees. We thank them for what they have done and what they will do to drive the business moving forward. I will now turn the call over to Mark Belcha.