The J.M. Smucker Company

Good morning, and welcome to the J.M. Smucker Company's Fiscal 2020 Second 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 call over to Aaron Broham, Vice President, Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us for our fiscal 2020 second 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 Belga, Vice Chair and CFO, will then provide detailed analysis of the financial results in our updated 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. 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. Before we get into our detailed results, I will begin with the changes to our leadership structure that we announced last week. First, after nearly 35 years at Smucker and 15 years as our Chief Financial Officer, Mark Belja announced he will retire on September 1, 2020. Mark will be succeeded by Tucker Marshall, our current Vice President of Finance. The transition will begin on Monday as Tucker will become Senior Vice President and Deputy CFO. He will succeed Mark as CFO on May 1, 2020, following the completion of our current fiscal year. Mark has agreed to stay on as Vice Chair until his retirement, ensuring a seamless transition. Since joining Smucker seven years ago, Tucker has become an integral part of the Smucker organization. He brings significant financial management experience and a deep understanding of the company. He has the respect and confidence of his colleagues and the board, and I am looking forward to partnering with him in the years to come. The second announcement was the evolution of our executive leadership structure. This new structure is designed to improve the execution of our strategy, enhance accountability, and streamline decision-making to ensure we move with speed and agility to deliver on our strategic and financial priorities. The change in structure includes the creation of a Chief Operating Officer role. We have initiated a search for an executive who will provide strategic and operational oversight of our business units, as well as our operations and supply chain. We also started the process to identify a new leader of our US sales organization. In addition, we have initiated a search for new leadership of our pet food business, which in the interim will be led by Rob Ferguson, an officer of the company who has 14 years of management experience in the pet category. Prior to joining Smucker, Rob served as a member of the executive leadership team of Big Heart Pet Brands. Rob has demonstrated a strong track record of leading change and driving results for our company, including being instrumental to the integration of both pet business acquisitions and the delivery of over $250 million of synergies. Further supporting the pet business, Jeff Waters, former president and CEO of Ainsworth Pet Nutrition, will serve as a strategic advisor. I am confident these changes ensure the alignment of a team that has deep knowledge of the Smucker businesses and our industry. The new executive leadership team will continue to refine our strategy and evaluate our portfolio of brands. Ensuring we remain focused on delivering growth and creating value for our shareholders. Let me now discuss our second quarter results. We were able to offset softness in sales of certain brands to generate adjusted earnings per share above our projection, reflecting benefits of the targeted actions we are taking to prioritize financial discipline across the business. At a high level, these actions include increasing focus on investments in consumer-facing marketing, reprioritizing company-wide resources and initiatives to increase focus on key growth platforms such as Uncrustables and premium pet food, and reducing discretionary spending. Through these diligent actions, we delivered adjusted EPS of $2.26 compared to $2.17 in the prior year, representing growth of 4%. While pleased with our earnings results, our aggregate net sales performance does not reflect the potential of our brands or the progress we are making toward our strategic growth imperatives. We are committed to improving top line performance and taking decisive, corrective actions where necessary. Net sales declined 1% compared to the prior year, excluding prior year sales related to the divested U.S. baking business and foreign exchange. While total sales were slightly below our projection, There were many highlights during the quarter, including strong performance for key brands within snacking, coffee, and pet food. Beginning with snacking, sales grew 18%, including double-digit growth for the Smucker's Uncrustables, Sahali Snacks, and Jif Power-Ups brands. We expect further acceleration for snacking in the third and fourth quarters, with the increased production capacity for Uncrustables and expanded distribution for GIF power-ups. In coffee, we continued to increase household penetration in the quarter as sales for the Dunkin', Café Bustelo, and 1850 brands all grew. Also, we grew volume in all formats, including mainstream, premium, K-cup, and instant, While net sales were comparable to the prior year due to increased trade spend as lower green coffee costs are being passed through to consumers. In pet food, we delivered growth for our largest brands in the portfolio, including Nutrish, Meow Mix, and Milk Bone, despite total segment growth being impacted by planned declines for private label products. In addition to declines for the Natural Balance brand, in our pet snacks and cat food businesses, we achieved mid-single-digit growth, which marked the eighth consecutive quarter of year-over-year sales growth for our cat portfolio. Meow Mix, Nine Lives, and Nutrish Cat Food each grew household penetration. In the latest 52-week period, Meow Mix now has the highest household penetration of any brand in the dry cat food segment. We remain excited about the prospects for both short and long-term growth for our portfolio of pet food and Pets Next brands. Recent softness for the portfolio is isolated to premium dog food. There has been an increase in competitive activity from a proliferation of brands entering the category, which are investing significantly to generate consumer trial. While the nutritious brand sales increased 3% in the quarter, this was less than we had projected, and we anticipate the competitive headwinds in premium dog food to continue. We expect the brand to decline in the back half of the year due to competitive activity and a reduction in forecasted performance for both new distribution and innovation launches. Also, the targeted actions we are taking to improve nutrition performance have begun to be reflected on shelf and we expect further reflection throughout the third quarter. These actions include incremental investments aimed at improving the consumer value proposition to drive increased trial and loyalty and launching new advertising later this fiscal year. For Natural Balance, sales in the quarter decreased over 25%. The brand has been impacted by increased competitive offerings, continued growth of premium dog food in the grocery, mass and e-commerce channels and continued weakness in the pet specialty channel. Given the recent performance, we are re-evaluating our plans, which may go beyond the previously communicated actions to restage the brand late this fiscal year. We remain confident in growth opportunities for the total pet business, and with new leadership in place, we expect further refinements to our overall pet strategy, which we will share over the coming quarters. I'll turn now to the progress made against our 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 driven by Smucker's Uncrustable Sandwiches. We expect continued acceleration for Uncrustables and forecast growth to exceed 25% In coffee, sales trends improve throughout the quarter, led by double-digit growth for all K-Cup brands, including Folgers. Consumer takeaway for our portfolio of K-Cups continues to perform well, Ahead of total segment growth. positions our coffee portfolio to firmly maintain the number one dollar and volume market share across the total coffee category by a wide margin. Turning to our strategic imperative of building brands consumers love, we are excited about the recently launched creative for the Jif, Smuckers, and Cafe Bustelo brands during the second quarter, and additional brand refreshes are underway. Our new advertising for the Jif and Smuckers brands has been on air since September, and we are pleased with the initial feedback on the campaigns, which align with recent share gains for Smuckers fruit spreads and improved volume trends for Jif. We also saw strong sales momentum for Café Bustelo, up 14% in the quarter, supported by its first national advertising campaign, which highlights its heritage and Authenticity. The new campaigns strengthen our brand's positioning in today's culture with breakthrough advertising across multiple media and social platforms to support long-term growth. We remain on track to deploy new campaigns for 10 brands this fiscal year. Our latest brand refreshes are underway as the Meow Mix Remix campaign launched in early November and new Folgers advertising will begin airing next week and new support for the 1850 and Dunkin' brands are debuting in December. Marketing spend for the quarter was 6.3% of net sales and 6.9% of net sales through the first half of the fiscal year. We are realizing the benefits of our new marketing operating model as expenses in the quarter declined compared to the prior year, while increasing the effectiveness and reach of our media spend. We remain committed to our investments in consumer-facing marketing and project marketing spend of 6.5 to 7% of net sales for the full year. Our third growth imperative is to be everywhere. We know that consumers 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 continue to deliver solid growth, particularly in the pet food and coffee categories. In the second quarter, our sales to pure play e-commerce retailers continue to grow double digits, accounting for nearly 5% of total U.S. retail sales. Factoring in the fast-growing online sales for brick-and-mortar retailers, approximately 8% of our U.S. retail sales are through e-commerce. We will continue to prioritize investments and initiatives to capitalize on the momentum in both pure play and omni-channel e-commerce, as the channel still has significant runway and is expected to be a catalyst for growth over the next several years. The focus of our away-from-home business has always been on our branded products that consumers desire while outside of the home. With increased production capacity for Uncrustables, we are excited about the growth potential of the platform in additional away-from-home outlets as capacity constrains previously limited meaningful expansion beyond K-12 schools. Also, within our away from home business, we are very pleased with our expansion into premium coffee through our 1850 brand and have plans to further expand this platform next fiscal year. Before turning it over to Mark, here are a few thoughts we hope you take away from my comments. First, we are committed to taking decisive, corrective actions to improve top line performance. 2. The recent leadership changes are designed to improve the execution of our strategy, enhance accountability, and streamline decision-making to ensure that we move with speed and agility to deliver on our strategic and financial priorities. 3. Our entire organization has embraced a financial discipline mindset, further focusing our resources, supporting earnings growth, and generating cash flow. 4. Key parts of our portfolio are responding to the investments we are making against our strategic growth imperatives, which over time will deliver long-term financial growth and increase shareholder value. Finally, I want to acknowledge our dedicated employees. Thank you for all you have done and all you will do to drive our business forward. I will now turn the call over to Mark Belja.