The J.M. Smucker Company

Good morning and welcome to the J.M. Smucker Company's Fiscal 2020 Fourth Quarter Earnings Conference Call. This conference is being recorded and all participants are in a listen-only mode. 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. Mr. Broholm, please go ahead.

Good morning and thank you for joining us for our fiscal 2020 fourth 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 initiatives. Tucker Marshall, CFO, will then provide detailed analysis of the financial results and our fiscal 2021 outlook. During today's call, Thank you for joining us. 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, including additional information regarding net sales by segment and cost of products sold for fiscal 2020. 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, Aaron. Good morning, everyone, and thank you for joining us. I would like to begin by acknowledging the challenging times we all continue to live through as a result of the COVID-19 pandemic. At Smucker, we are united in our commitment to support those most impacted. We are focused on maintaining employee wellness and supporting our communities, retaining our high quality and safety manufacturing standards and partnering closely with our suppliers and retailers to ensure we can deliver food for consumers and their pets. I am extremely proud and thankful for our employees who have fully embraced our thriving together philosophy which defines success as driving business growth while also helping those associated with our company thrive. This approach means we take an active role in helping our consumers, supply chains, communities, and the planet. Our teams adapted to a rapidly changing environment by drawing on the strength of our production capabilities, and responding quickly to customer and consumer needs. Our fourth quarter results, including record net sales and adjusted earnings per share performance are a direct reflection of the dedication and agility of our teams. The quarter's net sales increased by 10% versus the prior year, driven by the change in consumption patterns Due to COVID-19, adjusted earnings per share was $2.57, an increase of 24%, benefiting from increased sales, improved profit margins related to mix and operating leverage, and reduced marketing expense partially offset by increased costs related to COVID-19. For the full year, net sales were flat to the prior year at $7.8 billion, which, on an organic basis, was an increase of 1%. Adjusted earnings per share was $8.76, an increase of 6%, and free cash flow was $986 million, an increase of 26%. Through February, fourth quarter results were tracking in line with our previous guidance, which called for full-year net sales to decrease 3% or 2% on an organic basis compared to the prior year, and full-year adjusted EPS of $8.10 to $8.30. In March, the COVID-19 pandemic led to stay-at-home orders across the world, which resulted in unprecedented demand as consumers loaded their pantries and consumed more food and beverages at home. To maximize product availability and achieve greater operational efficiency, we produced limited SKUs within the coffee and consumer food segments and allocated shipments across our customer base as demand began to outpace production for certain products, notably for Jif peanut butter and Uncrustables frozen sandwiches. Consumer takeaway in measured channels increased 40% across our portfolio in March, with growth of 72% for consumer foods, 37% for coffee and 20% for pet. In April, elevated demand continued in the coffee and consumer food segments. For pet food, consumer takeaway reversed in April as pet parents began depleting the initial March stock-up purchases. Consumption for pets generally did not increase. With the exception of some additional treating as pet parents spent more time at home. While stay-at-home orders drove significant growth for all our retail businesses, these orders severely reduced demand for the away-from-home business as restaurants, lodging, schools, and many offices closed. The away from home business experienced a sales decline of 15% for the quarter and nearly 50% in April. Our ability to deliver a fourth quarter sales increase of 10% for the total company reinforces the strength of our execution capabilities in a challenging environment. More broadly, the work we have done to transform the company over the last few years and our commitment to our strategic growth imperatives to lead in the best categories, build brands consumers love, and be everywhere supported these exceptional results. I'll share a few examples of the accomplishments that highlight our strong execution in the fourth quarter. Let me begin with lead in the best categories. Our portfolio is tailored toward growing and attractive categories where our brands have leadership positions. Over 90% of the growth for consumer products in March and April was driven by established or leading brands. Those not only recognizable by consumers, but also with the ability to quickly scale production to support the surge in demand. In the pet food category, our market-leading dog snacks and cat food businesses continue to deliver strong net sales growth. Sales for dog snacks led by the Milk Bone brand grew 12% and cat food led by the Meow Mix brand grew 19%. With our cat food market share improving over a half point in the 13-week period, and 2.5 points in April. In dog food, strong growth for our mainstream and value brands was more than offset by the anticipated declines for the Natural Balance and Rachel Ray Nutrish brands. The declines for Natural Balance were primarily attributable to the Pet Specialty Channel, which experienced declines in foot traffic, As consumers made fewer stops during their shopping trips and shifted purchases to the grocery and e-commerce channels. For Nutrish dog food, volume mix, consumer takeaway, and household penetration all grew during the quarter. As anticipated, net sales declined following over 20% growth in the prior year fourth quarter. primarily related to sell-in from distribution expansion and higher pricing. Despite an uncertain economic recovery, our pet portfolio is uniquely positioned to perform well with a breadth of options to meet consumer needs across the full spectrum of value, mainstream, premium, and super-premium offerings. Turning to our coffee business, As the market leader in the at-home coffee category, we benefited from increased at-home consumption. We gained dollar and volume share during the quarter for all brands across the mainstream, one-cup, and instant formats. Over one million new households tried the Folgers, Dunkin', or Café Bustelo brands in the quarter, with 75% of those households Purchasing Folgers for the first time during the last 12 months. We have tailored our marketing strategies to engage these new users and increase loyalty to our brands. In snacking, our Smucker's Uncrustables business continued to deliver exceptional growth. Full year sales for the brand increased 26% and accelerated to a 50% increase in the fourth quarter. The brand benefited from increased capacity provided by the new Longmont, Colorado manufacturing facility. We anticipate being able to further increase capacity in early calendar year 2021. Demand for the number one lunch sandwich in the U.S., peanut butter and jelly, extended beyond Uncrustables. As total net sales in retail channels increased double digits for both the category-leading Jif peanut butter and Smucker's fruit spreads core products. As consumer takeaway for peanut butter continues to outpace our available production, we have temporarily suspended all promotions. Further, we project higher peanut costs in fiscal year 2021 Driven by reduced peanut crop yields and increased consumer demand. Shifting to our growth imperative to build brands consumers love. Last year, we reinvigorated our largest brands with breakthrough advertising across multiple media and social platforms to support long-term growth. Stepped up investments in marketing, included projected spend of approximately 6.5% to 7% of net sales. For the quarter, marketing was 5.7% of net sales and 6.4% of net sales for the full year, just below prior estimates due to the higher than projected sales in the fourth quarter and reduced spend due to COVID-19. In fiscal 2020, We launched new advertising campaigns for 10 of our largest brands. We are continuing this momentum with prioritized marketing investments for our key growth platforms of premium pet food and pet snacks and coffee and are planning to run the first national marketing campaign for Smuckers Uncrustables in the second half of the fiscal year. Increased data provided by shifts in consumer behavior during the quarter allows us to further refine our marketing efforts, with a focus on developing strategies to retain consumers who are new to our brands. Our third growth imperative is to be everywhere, ensuring our brands are available whenever and wherever consumers shop. and that our interactions with consumers and products are available on demand and across more channels than ever before. Research has indicated that during these turbulent times, one out of five shoppers switched their primary grocery store, choosing retailers with availability of their preferred products and enhanced online capabilities, which further underscores the importance of this imperative. In the quarter, our PurePlay e-commerce sales grew 66%, led by pet food with over 60% growth and coffee with more than 90% growth. PurePlay sales accounted for nearly 7% of total U.S. retail and beat our goal of 5% for the full year. When accounting for total online sales inclusive of omnichannel retailers, over 10% of our U.S. retail sales were through e-commerce in the quarter, with the largest driver of growth coming from click-and-collect purchases. We anticipate continued strong e-commerce growth as 65% of consumers expect to use digital shopping channels more frequently in the future. I want to highlight one final accomplishment before shifting focus to fiscal year 2021 priorities. We completed the evolution of our senior leadership team. John Brazzi joined the company as Chief Operating Officer and Corey O'Nell joined us as the head of U.S. retail sales. Tucker Marshall transitioned into the role of CFO as of May 1st and Rob Ferguson was promoted to the position of Senior Vice President and General Manager, U.S. Retail Pet Food and Snacks this week. All of these individuals bring tremendous experience in CPG to our team. and I am confident that with the strength of our leadership team, we are well positioned to execute our strategy and deliver through this dynamic period. I would now like to shift attention to fiscal year 2021. The unprecedented environment caused by COVID-19 has drastically shifted assumptions across the industry, including the preliminary direction we provided for fiscal year 2021. Thank you for joining us. and year-over-year declines for both sales and adjusted earnings per share. Excluding the COVID-19 related benefits in fiscal 2020 and the anticipated impact in fiscal 2021, we expect both top and bottom line growth driven by the positive momentum for our key categories and brands, along with incremental benefits We will continue to focus on executing our long-term consumer-centric growth strategy while strengthening financial discipline. In the near term, this means focusing on executing four key priorities this fiscal year that are critical to ensuring we continue the underlying momentum and we achieve our financial goals for this year and beyond. These include, first, continued progress toward driving consistent net sales growth. This means capitalizing on increased demand within our consumer foods, coffee, and international retail businesses, improving the growth trajectory of our pet business, and adapting our brand building activities to win in a period of economic contraction. Second, and increased focus on financial discipline to maintain or improve our strong profit margins and cash flow generation. This includes a total company commitment to productivity, a new margin management program, and collaboration and transparency with our retail partners to provide value to consumers consistent with pricing that reflects cost changes where appropriate. Thank you for joining us. and Wynn across all channels. Fourth and finally is the continued commitment to our purpose by feeding and fortifying connections. Now more than ever, it is important to strengthen connections with all our stakeholders, including our consumers, customers, suppliers, employees, communities and our shareholders. I look forward to our team providing detailed insights into these priorities and our long-term strategy when we hold an Investor Day on October 13th. More details on the logistics will be shared in the coming months. In closing, I want to reiterate my appreciation and admiration of our employees for their efforts this past year and their continued commitment as we move ahead. We recognize there is still more work to do But we will continue to adapt as the company has successfully done for more than 120 years. I would like to also once again acknowledge Mark Belja, who has been instrumental in the transformation of our company over the last 35 years, including 15 years as the CFO. Also, I would like to welcome Tucker Marshall, who assumed the CFO role on May 1st and I look forward to working with him in the years to come. I will now turn the call over to him.