The J.M. Smucker Company

Good morning and welcome to the J.M. Smucker Company's Fiscal 2020 Third Quarter Earnings Conference Call. This conference is being recorded and all participants are in 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 yourselves to two questions during the Q&A session and re-queue if you have additional questions. I will now turn the conference over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us for our fiscal 2020 third 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 Belger, vice chair and CFO, will then provide detailed analysis of the financial results and our fiscal 2020 outlook. Also joining us for a Q&A session following the prepared remarks is Tucker Marshall, and Deputy CFO. 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.

Good morning, everyone, and thank you for joining us. It was great to see many of you last week at CAGNI. We appreciated the opportunity to provide an update on our vision and strategy, the progress being made on our growth imperatives, our purpose, and related ESG efforts. We continue to take decisive actions to improve performance and remain focused on executing against a clear set of priorities. We will deliver earnings growth and long-term shareholder value by prioritizing resources toward our key growth platforms, continuing increased investments to reinvigorate our brands, enhancing category leadership, and executing focused operational and financial discipline. Overall, our third quarter financial results were in line with our expectations. As our anticipated decline in net sales was offset by the benefits of our targeted actions to deliver adjusted EPS growth of 4%. These actions include an increased focus on consumer-facing marketing, prioritization of resources, and a reduction in discretionary spending. Net sales declined 2% compared to the prior year, Reflecting softness in our dog food business, particularly related to our private label products and the Natural Balance brand. Net sales for the balance of our portfolio were essentially flat, with the deflationary commodity costs being passed on to consumers through lower pricing in coffee and peanut butter, mostly offset by volume growth. Highlights from the quarter included strong performance for key brands within our focus categories of pet food and pet snacks, coffee, and snacking. Starting with pet food, our cat food business achieved low single-digit growth, which marked the ninth consecutive quarter of year-over-year sales growth for our cat portfolio. While dog snacks declined slightly overall, primarily due to the shift of a large retailer promotional event in the third quarter of the prior year to the fourth quarter of this year, we were pleased with the performance of our category-leading milk bone brand, which achieved low single-digit growth and benefited from innovation, which is expanding the brand into new treat segments. including Rawhide Alternatives. As anticipated, Nutrish pet food net sales declined due to the impact of retailer inventory build related to new distribution in the prior year and competitive activity in the premium dog food category. As we discussed on last quarter's call, the team is executing a set of targeted actions To improve the Nutrish brand's consumer value proposition and reinvigorate performance. During the quarter, we saw positive consumer response to these actions as household penetration for the brand improved and consumer takeaway across all channels grew by 5% sequentially from the second quarter, including online and the pet specialty channel. Looking forward, further actions will be implemented in the fourth quarter, including the new marketing campaign that leverages the equities of Rachael Ray and Real Food Ingredients. While consumption trends are improving, we expect shipments to decline in the fourth quarter as we lap significant distribution expansion in the prior year. We remain on track to return the brand to growth in fiscal 2021. In coffee, segment profit grew even though net sales were comparable to the prior year, as lower green coffee costs are being passed through to consumers. Volume in the segment grew for the sixth consecutive quarter, and the Folgers brand achieved its highest volume quarter in over three years. Duncan and Café Bustelo continued their growth trends, up 4% and 13% respectively, benefiting from expanded distribution, increased household penetration, and the impact of new marketing campaigns. K-Cup sales also increased 7% with growth for each brand in the portfolio. In snacking, The Smuckers Uncrustables brand accelerated to 23% growth in the quarter, and we expect similar growth in the fourth quarter. As we shared at Cagney last week, we are excited about the potential of the Uncrustables brand, its continued trajectory for growth, and the upcoming innovation that will expand the platform beyond peanut butter and jelly into convenient meat and cheese snacks. As we announced last week, we made the difficult decision to discontinue JIF power-ups early next fiscal year. Our principles of financial discipline guided this decision to reallocate resources to areas of the portfolio we believe will generate faster and greater financial returns, such as upcoming JIF innovation and the Incrustables platform. While Power-Ups was successful in attracting new consumers to the JIF brand and will contribute approximately $20 million to net sales this year, the long-term profit projections in the competitive bar category were below our expectations and we believe this is the right long-term decision. I will now turn to the progress made against our consumer-centric growth imperatives to lead in the best categories, build brands consumers love, and be everywhere. Let me start with leading in the best categories. In coffee, this was the first quarter in five years that the category experienced retail sales contraction due to deflation. With the number one and number three brands in the category, we grew volume share across all formats, including canister, premium bags, and K-cups. The Duncan and Cafe Bustela brands continue to perform well with increased household penetration and market share gains this quarter. In snacking, Smucker's Uncrustables is the fastest growing brand in the frozen snacks category. With the new production facility online and Phase 2 expansion underway, we will have ample capacity to support demand and achieve our goal to grow net sales for the Uncrustables brand to over $500 million annually in fiscal year 2023 and further expand our leadership in this category. Turning to our strategic imperative of building brands consumers love. We are excited about our new advertising as we have now launched new campaigns for 10 of our largest brands this fiscal year. Our new advertising campaigns have received accolades across the advertising industry. Commercials for the GIF and 1850 brands received recognition as the top 100 global ads in 2019. While it is too early to measure the full impact of the new campaigns, indications from the launches earlier in the fiscal year are strong and correlate with recent market share gains for the JIF and Smucker's brands. Marketing spend for the quarter was 6.1% of net sales and 6.6% of net sales through the first nine months of the fiscal year. We remain committed to our investments in consumer-facing marketing and continue to 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 across multiple channels. 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 third quarter, our sales to pure play e-commerce retailers continue to grow double digits, accounting for 5% of total U.S. retail sales, including click and collect through traditional retailers Our e-commerce sales account for nearly 8% of our U.S. retail sales. The 1850 brand is performing excellent online with sales quadrupling over the past year. We have also extended the brand into the Canadian and away from home channels. In closing, we remain confident in our strategy and are making progress against our growth imperatives. We will continue taking decisive actions to improve performance and remain focused on a clear set of priorities, including prioritizing resources to focus on key growth opportunities, including premium pet food, pet snacks, premium coffee, and uncrustables. Continuing investments to reinvigorate our brands. Enhancing category leadership by strengthening key consumer and customer-facing activities to build competitive advantage. And finally, practicing strict financial discipline. This is all in addition to the leadership searches we have underway. We are actively evaluating candidates for the positions announced in mid-November. We are pleased with the quality of candidates and are confident we will fill these critical positions with leaders who will strengthen our organization. Execution on all of these actions is creating momentum for growth and increasing shareholder value. Finally, I would like to thank all of our dedicated employees for their continued efforts, which firmly position the company for a bright future. I will now turn the call over to Mark Belja.