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Edited Transcript of SJM earnings conference call or presentation 22-Nov-19 1:30pm GMT

Q2 2020 J M Smucker Co Earnings Call ORRVILLE Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of J M Smucker Co earnings conference call or presentation Friday, November 22, 2019 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Aaron Broholm The J. M. Smucker Company - VP of IR * Mark R. Belgya The J. M. Smucker Company - Vice Chair & CFO * Mark T. Smucker The J. M. Smucker Company - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * Alexia Jane Burland Howard Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst * Andrew Lazar Barclays Bank PLC, Research Division - MD & Senior Research Analyst * Bryan Douglass Spillane BofA Merrill Lynch, Research Division - MD of Equity Research * Kenneth B. Goldman JP Morgan Chase & Co, Research Division - Senior Analyst * Laurent Daniel Grandet Guggenheim Securities, LLC, Research Division - Senior Analyst and MD of the Consumer & Retail Team * Pamela Kaufman Morgan Stanley, Research Division - Senior Analyst * Rebecca Scheuneman Morningstar Inc., Research Division - Equity Analyst * Robert Bain Moskow Crédit Suisse AG, Research Division - Research Analyst * Vivek Srivastava Goldman Sachs Group Inc., Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, and welcome to the J.M. Smucker Company's Fiscal 2020 Second Quarter Earnings Conference Call. This conference is being recorded. (Operator Instructions) I will now turn the conference call over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir. -------------------------------------------------------------------------------- Aaron Broholm, The J. M. Smucker Company - VP of IR [2] -------------------------------------------------------------------------------- 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 Belgya, Vice Chair and CFO, will then provide detailed analysis of the financial results and 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. 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. -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Aaron. 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 Belgya 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 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 7 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 U.S. sales organization. In addition, we have initiated a search for new pet leaders -- 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 Watters, former President and CEO of Ainsworth Pet Nutrition, will serve as a strategic adviser. 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, Sahale Snacks and Jif Power Ups brand. We expect further acceleration for snacking in the third and fourth quarters with the increased production capacity for Uncrustables and expanded distribution for Jif 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 -- excuse me -- 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, 9Lives 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 pet mix 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 Nutrish 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 Nutrish 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 reevaluating 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 of examples from the quarter of how we are leading in the best categories. Snacking remains a key focus area, driven by Smucker's Uncrustables Sandwiches. We expect continued acceleration for Uncrustables and forecast growth to exceed 25% in the second half of the fiscal year. We expect the momentum to continue and we remain on track to grow this business to over $500 million in net sales within the next few years. In coffee, sales trends improved 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. Further, the Dunkin' brand continues its momentum and now owns the #3 market share position across the total coffee category in the latest scan data for 4-, 13- and 52-week periods. This, combined with the leading market share position in the mainstream segment for the Folgers brand, positions our coffee portfolio to firmly maintain the #1 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, Smucker's and Café Bustelo brands during the second quarter, and additional brand refreshes are underway. Our new advertising for the Jif and Smucker's 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 Smucker's 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 quarter -- our third growth imperative is to be everywhere. We know that consumers shop and interact with brands on demand and multichannel. 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 continued 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 omnichannel 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 constraints 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. Second, 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. And third, our entire organization has embraced a financial discipline mindset further focusing our resources, supporting earnings growth and generating cash flow. And finally, 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 Belgya. -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [4] -------------------------------------------------------------------------------- Thank you, Mark, and good morning, everyone. Let me begin with some added color on the quarter. Excluding the U.S. baking divestiture and FX, net sales declined 1% in second quarter, reflecting lower net pricing on coffee and peanut butter, partially offset by price increases in pet food and pet snacks. Volume mix was flat as declines for dog food, primarily private label and the Natural Balance brand, were offset by gains for coffee and Smucker's Uncrustables. Adjusted gross profit decreased $18 million from the prior year or 2%, while gross margin improved 30 basis points to 38.5%. Excluding the baking business, gross profit was down 1%, primarily reflecting the net impact of lower pricing not fully offset by lower costs. This was partially offset by favorable volume mix. Adjusted operating income declined $25 million compared to the prior year, a decrease of 6%. A $27 million gain on the sale and $9 million contribution to segment profit from the divested U.S. baking business were the primary difference as the gross profit decline was offset by a reduction in marketing expense. Below operating income, interest expense decreased $5 million, driven by a reduction in debt resulting from repayments made over the past 12 months. Other income and expense was $5.9 million more favorable in the quarter due to litigation costs incurred in the second quarter of last year. Finally, the adjusted effective income tax rate was 24.3%, slightly lower than our previous full year guidance range of 24.5% to 25%. The prior year effective tax rate was high at 30%, reflecting the impact of income tax expense associated with the sale of the baking business. This resulted in second quarter adjusted earnings per share of $2.26 and compared to $2.17 in the prior year, an increase of 4%. Let me now turn to segment results beginning with pet. Net sales declined 2% compared to the prior year. Sales of private label products were a 3% headwind to the quarter, which included the planned discontinuation of certain business. Meow Mix, 9Lives and Nutrish drove captive growth of 4% while Milk-Bone led growth of 4% for pet snacks. These gains were offset by declines for the Natural Balance brand. Pet food segment profit increased 11% compared to the prior year. The increase was driven by favorable net pricing, synergy realization and lower marketing expense being partially offset by increased input costs and a decline from volume mix. Turning to the coffee segment. Net sales were comparable to the prior year. Lower net price realization, reflecting the pass-through of lower green coffee cost by the way of increased trade spend, was mostly offset by favorable volume mix. Growth for the Café Bustelo and Dunkin' brands offset a decline for the Folgers brand. K-Cup sales grew 14% with growth for each brand in the portfolio. The strength in K-Cup shipments more than reversed the decline in the first quarter related to the timing of new distribution. Coffee segment profit increased 5%, mostly reflecting the favorable impact of volume mix. The net impact of lower pricing and lower input cost was neutral to profit. In Consumer Foods, net sales decreased 8%, reflecting the divested U.S. baking business. Comparable net sales decreased 1% driven by lower net sales for the Jif and Crisco brands, offset by an increase of 9% for the Smucker's brand with growth across Uncrustables, toppings and Fruit Spreads. Excluding the prior year profits and the gain on the sale of the divested baking business, Consumer Foods segment profit declined 8% due to the net impact of lower price not fully offset by lower costs on peanut butter, partially offset by favorable volume mix and lower SD&A costs from reduced marketing and selling expenses. Lastly, in the International & Away From Home segment, net sales declined 3% compared to prior year. Volume/mix accounted for a 2 percentage point decline, most notably in the Mexico market as we lap the selloff of inventory in the prior year relating to closing facilities in-country and transitioning to a distributor export model. FX negatively impacted net sales by $2 million. Segment profit decreased 11% due to the impact of lower volume mix in an unfavorable price/cost relationship partially offset by lower SD&A expenses. Second quarter free cash flow was $161 million, which represented a $36 million increase over the prior year, reflecting an increase in cash provided by operating activities and a $14 million reduction in capital expenditures, reflecting the completion of the first phase of the Longmont, Colorado facility. CapEx for the quarter was $63 million or 3.2% of net sales. The company continued its intention of deleveraging by paying down $73 million of net debt in the quarter. We finished the quarter with a total debt balance of just over $5.7 billion. Based on trailing 12-month EBITDA of approximately $1.6 billion, our leverage was 3.6x. Let me now provide information on our revised outlook for fiscal 2020. Reported net sales are anticipated to be down 3% compared to the prior year, which includes $106 million of baking sales in the prior year and the incremental $25 million Ainsworth sales recognized in the first half results. On an organic basis, net sales are expected to be down 2%. Private label pet food remains a headwind, with approximately a $10 million decline expected in the third quarter. Changes from our previous sales guidance primarily reflect the second quarter sales results, which were below our expectations, expected declines in the back half of the year for premium dog food, notably the Nutrish and Natural Balance brands and a general derisk of the back half, recognizing competitive activity and strong fourth quarter comps for coffee and peanut butter. We continue to expect gross profit margins to be approximately 38.5% as overall commodity cost projections remain in line with our previous forecast. We're slightly ahead of our synergy projection and expect to realize full year incremental acquisition synergies just over $30 million by the end of the fiscal year, delivering on our $55 million cumulative target. Adjusted earnings per share is expected to be in the range of $8.10 to $8.30. Key factors that impacted the change to our adjusted EPS guidance range include the estimated earnings impact of reduced sales guidance partially offset by SD&A expenses declining approximately 2% compared to the prior year, reflecting the continuing benefit of the actions taken in the quarter to maintain financial discipline. Interest expense is now projected at the low end of our range of $200 million and finally, an effective tax rate of 24.5%. In looking at the third quarter, we would expect net sales and earnings per share to be down low single digits. Full year free cash flow is projected to be approximately $850 million with CapEx between $300 million and $320 million. The reduction primarily reflects the revised earnings outlook and an expected increase in our inventory balance at year-end. We will continue to prioritize cash for debt reduction and expect to repay an additional $300 million by year-end, taking our leverage down to approximately 3.3x at the end of the fiscal year. In closing, let me reiterate Mark's opening comments that while challenges to sales growth persist in certain categories which drove the revision to our full year guidance, much of our business is performing at expected levels or above. We remain diligent toward delivering our revised earnings while making prudent investments toward future growth. In addition, we continue to make meaningful progress executing on key growth initiatives, which are reflected in the underlying results. Overall, we remain confident in our ability to deliver long-term value to our shareholders. We thank you for your time this morning, and we'll now open the call up to your questions. Operator, if you please queue up the first question? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Andrew Lazar of Barclays. -------------------------------------------------------------------------------- Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- Mark, I guess just a broader question to start us off a little bit. Obviously, Smucker's has revised the full year '20 outlook the last 2 quarters. And I'm just trying to get a sense of maybe how you would characterize the new outlook. In other words, do you see this as now providing the company with sort of the needed flexibility to get the pet trends on the right track and accelerate the organic momentum? Or maybe is there a risk that this is still maybe not enough to fully address some of the root issues aggressively enough, and therefore, it could still be a bit of a drag as we think maybe forward into fiscal '21. I guess, particularly in light of some new team members coming on board that would presumably also want and expect to have some input and such for starting. -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [3] -------------------------------------------------------------------------------- Thanks, Andrew. Well, first of all, let me just start by saying delivering on guidance is a foundational priority that I have as CEO, and it's extremely important. So given the fact that we have missed guidance a couple of times this year, we -- this round, we took a very hard look with a very critical eye and really made sure that as we look forward, we were judging both the opportunities and risks that really exist in the business, and we are giving ourselves the appropriate flexibility, as you put it. So we do believe that the top line guidance is prudent and does reflect adequately both opportunities and risks. And so while there are some challenges to sales growth and isolated really to premium pet, that's more or less what drove our revision. We still look at -- the majority of our business is actually still performing at expected levels or above. -------------------------------------------------------------------------------- Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [4] -------------------------------------------------------------------------------- Great. That's helpful. And then, I know that… -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [5] -------------------------------------------------------------------------------- And then Andrew, if I can just maybe add on to Mark's comments and dollarize a little bit what I had in my prepared comments. So for the benefit of everyone on the call, if you look at the -- basically, the change in our top line guidance, so for everyone, you'll recall, it was 0 to negative 1% before. So if you take the midpoint of that and just call it down 0.5% and basically try to explain the 250 basis points to get to our new minus 3%, there's really 3 components that I called out. First of all, about 50 basis points of that was due to this quarter where we fell short of expectations, okay? The second component, I would suggest, is about 75 basis points of this derisking, and both in -- as it relates to the competitive activity and some of the things that Mark just outlined as it related to pet. But also, we had really strong comps, as you'll recall, in Q4 on peanut butter and coffee. So that's sort of half of it, if you will. And then the other half would be -- the 125 basis points to get us there, would be primarily in the premium pet. So that's how we go about. So based on that, we've got a fair amount of, I think the loose term here, cushion on that 75 basis points of derisking. And then if you just translate that to the earnings side, that derisked portion probably accounts somewhere between $0.10 and $0.15. So just to explain how we get to that $8.10 number at the low end of the guidance, that is taking into account the sort of the derisked portion of that sales number. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from Ken Goldman of JP Morgan. -------------------------------------------------------------------------------- Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [7] -------------------------------------------------------------------------------- Congratulations to both Tucker and Mark Belgya. Mark, thank you for all your help over the years. -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [8] -------------------------------------------------------------------------------- Thanks, Ken. -------------------------------------------------------------------------------- Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [9] -------------------------------------------------------------------------------- I wanted to start off by saying -- or asking really, you are making a change in leadership in pet, but at the same time, at least when I hear you, the finger is being pointed mostly at competition, some channel shifts, things that maybe are described best as exogenous. So I'm just curious to get a better sense of what you think internally Smucker may have done as a company, a little bit -- or maybe should have done a little bit differently and maybe what some of the changes should be made going forward that you can control within the pet side. -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [10] -------------------------------------------------------------------------------- Okay, Ken. This is Mark Smucker. I'll start. So I guess what I would say, first of all, is I would go back to the prior quarter where we acknowledged that we did not adequately anticipate the level of competitive pressure that we would experience from new entrants, not just one entrant, but there are multiple brands in the competitive space, nor did we react fast enough. So I would really point the finger at just the fact that there were a multiple competitive dynamics that were going on that we should have reacted faster to. In terms of the broader leadership challenges -- or changes rather, obviously, Mark's transition has been planned for a long time and we took a very thoughtful approach to the holistic leadership structure. And so this was not a knee-jerk reaction. These were changes that we had got through thoroughly and had decided to sync up some of the broader leadership changes along with the CFO announcement. And then ultimately, at the end of the day, I just go back to my prepared comments, that the intent of the structure outside of any individual change is really intended again to increase agility, make sure that we have the right level of accountability and the right sets of eyes on the business that are going to really drive strategy. -------------------------------------------------------------------------------- Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [11] -------------------------------------------------------------------------------- Great. Okay. And then a quick follow-up. I think you mentioned that the 1850 brand was up in terms of sales. At least in the takeaway data that we see, some of the distribution has maybe shrunk a little bit on that brand. Can you walk us through whether that's an accurate read of what's happening? And if it is, maybe what the plan is to sort of reverse that a little bit? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [12] -------------------------------------------------------------------------------- Yes. We still have seen that 1850, it continues to perform at expectations. As I mentioned again in the prepared comments, we are launching new advertising, which isn't on air yet, but we actually got some nice publicity pre on that in some of the advertising, the industry rags, so that we've had some good feedback there. But ultimately, we continue to remain very focused on 1850, and we do expect to see continued growth in the brand. -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [13] -------------------------------------------------------------------------------- Yes, Ken, I just would add also, Away From Home, we introduced it there and then also at e-commerce, it's showing up well there. So there are some other aspects of growth. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Our next question comes from Bryan Spillane of Bank of America. -------------------------------------------------------------------------------- Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [15] -------------------------------------------------------------------------------- So maybe just the first question, and I think it kind of follows up on what Andrew was asking. I guess what I'm still trying to understand or get a sense for is with new management, new people coming into the organization or plan to have new people come in, how much flexibility is there or potential that the strategy which you laid out for us a year ago would be open to really being materially changed? And not just goals but also just the actual strategy itself, is there a chance that it would be reset maybe meaningfully from what you communicated a year ago? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [16] -------------------------------------------------------------------------------- Bryan, this is Mark Smucker. I don't see a meaningful or significant shift in our total strategy. We continue to view that our 3 growth imperatives are still the right ones. We still believe in the categories in which we play and we still believe in the brands within those. What -- if there are subtle shifts across categories, that could be possible. I think I mentioned in the prepared remarks Natural Balance and that we may take a broader look at that brand to make sure that we are doing the right things for it. And so we will continue to potentially think about all of our categories and how we refine them. But I think the fundamental priorities against the business remains sound, and the existing leadership team is very committed to those as well. -------------------------------------------------------------------------------- Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [17] -------------------------------------------------------------------------------- Okay. So fair to characterize a lot of what's happened is either execution or needing to make some adaptations to some competitive activity -- competitor activity? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [18] -------------------------------------------------------------------------------- That's fair. -------------------------------------------------------------------------------- Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [19] -------------------------------------------------------------------------------- Okay. And then second one for me, just for Mark Belgya. In the -- the protein market is pretty dynamic right now and especially with potentially more product being exported to China. And particularly like within chicken, where maybe some parts that were sort of directed towards the pet food industry could actually be exported. So what we're sort of trying to get a sense for is your thought on how you're monitoring protein inputs for the pet food business. And is there a potential or a likelihood that you'll start to see some inflation there? -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [20] -------------------------------------------------------------------------------- Bryan, what I would probably say to that is that I would just push back to the comment I had, I think it was in my script, just around our commodity outlook in general, and we would take those kind of considerations into our expectations. But right now, we don't see a significant change in any of our categories as it relates to commodities including what you just described. Obviously, if that were to play out more significant, we -- as I'm sure the other competitors in the mix, would look at that from a pricing perspective. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question comes from Pamela Kaufman of Morgan Stanley. -------------------------------------------------------------------------------- Pamela Kaufman, Morgan Stanley, Research Division - Senior Analyst [22] -------------------------------------------------------------------------------- Can you elaborate on the competitive dynamics that you're seeing in the premium pet category and the proliferation in premium dog food products that you mentioned in the prepared comments? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [23] -------------------------------------------------------------------------------- There really is no elaboration from what we've previously communicated. I would just characterize it as -- this is Mark Smucker, by the way -- just characterize it as a continued, pretty consistent level of intensity. If I can just -- I can give you some specific color on our actions in terms of what we communicated previously. As you know, we have taken very specific actions as it relates to customer support, both in-store, some of that is pricing as we've discussed previously. Obviously, we actually ramped up our on-air presence for Nutrish. We actually are shooting new advertising for Nutrish in the coming weeks, which won't show up in market probably until sometime in the third quarter. And so all of those things remain -- we remain very committed to. I think the only change from prior quarter is that the implementation of those has taken a little bit longer, particularly at the customer level, than we would expect. And so although we have now, just as of even this week, starting to reflect at the customer level, it isn't across the entire market. But through this Q3, we would expect to see all of those actions really come to fruition. -------------------------------------------------------------------------------- Pamela Kaufman, Morgan Stanley, Research Division - Senior Analyst [24] -------------------------------------------------------------------------------- Got it. And then what was the contribution from innovation in the quarter? Do you still expect $100 million contribution from products launched this year? And I guess, generally, how happy are you with the performance of innovation for this year? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [25] -------------------------------------------------------------------------------- In general, I would say broadly, in aggregate, we feel that our innovation is actually meeting expectations. There are obviously puts and takes in that. I think our Milk-Bone, for example, innovation is going well, and you think about snacking, and I've already spoken to 1850. Those are broadly meeting expectations. -------------------------------------------------------------------------------- Pamela Kaufman, Morgan Stanley, Research Division - Senior Analyst [26] -------------------------------------------------------------------------------- And then just on the contribution from innovation in the quarter and for the full year? -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [27] -------------------------------------------------------------------------------- Yes. Pamela, this is Mark Belgya. We're really trying to step away from that. I mean I think to Mark's point, we're pleased with the performance. But I think as time passes, particularly in that $100 million, we've talked in the past how that's going to be stretched out a little bit more time. So we'll periodically update that, but that's not something we'll look to do each quarter. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Our next question comes from Jason English of Goldman Sachs. -------------------------------------------------------------------------------- Vivek Srivastava, Goldman Sachs Group Inc., Research Division - Research Analyst [29] -------------------------------------------------------------------------------- This is Vivek Srivastava speaking for Jason English. My question is on the impact of DCM on grain-free pet food sales. We are witnessing grain-free sales trends worsening in many of the dog food brands due to building concerns around DCM, including Rachael Ray, where grain-free sales has declined 7% in track channels since the FDA announcement in June. What risk do you see from this in the months ahead? How have trends been in pet specialty and what steps you're taking to address this? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [30] -------------------------------------------------------------------------------- Yes. So if you look across some of the FDA comments that came out, I don't know, a couple of months ago, there has been a modest impact to all brands that were named in that, and that does not include -- that includes our brands but it also includes all of the competitive brands as well. It is difficult, very difficult to quantify what that is. And we continue to make sure that we are offering a wide variety of products to our consumers, that they have the ability to choose between grain-free or limited ingredient or what have you. And so we continue to believe a broad portfolio is the right thing to do. And we will continue to support those brands and across the entire portfolio. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question comes from Robert Moskow of Crédit Suisse. -------------------------------------------------------------------------------- Robert Bain Moskow, Crédit Suisse AG, Research Division - Research Analyst [32] -------------------------------------------------------------------------------- Two actually. Can you just give me a little more color on the coffee division, sales being flat? Nielsen retail tracking data indicates down 3%. Mark Belgya, I think you mentioned e-commerce being a benefit. But are there other channels that are benefiting this? Or is there a risk that there's some inventory kind of loading up in the channel, like what happened last year? And then secondly, I think you made a comment, Mark, about inventory balances being higher at the end of the year. Can you give us a little more clarity on that? -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [33] -------------------------------------------------------------------------------- Yes. So Rob, this is Mark Belgya. So in terms of coffee, so I did mention that e-commerce was up. Actually, e-commerce, I think in our scripted comments, is about 5% of our total company sales and coffee actually saw a nice increase this quarter. So that could be part of what you're seeing. There probably is a little bit of shipment ahead of takeaway. You'll recall last quarter, our commentary was coming out of Q4 that coffee had a strong Q4, a softer Q1. And we really laid out all the reasons, the new distribution and some other things. And so we delivered on all of that, particularly in K-Cups. So that could explain a little bit what you're seeing as it relates to takeaway. On the inventory, right now our balance -- our inventory balances are running a little higher. Some of that is where we are with sales. I know the teams are working to work those numbers down now. But as we're looking at our free cash flow, as I said, with the takedown in earnings and where at least inventories stand right now, although I think the numbers will come down some, we just added a little bit of softness or a little bit of increase, I should say, in inventory balances and thus a reduction in the cash generation. -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [34] -------------------------------------------------------------------------------- Rob, this is Mark Smucker. I might just elaborate on -- give some clarity on stuff that might not come through in the scan data that's positive. So broadly across the coffee portfolio, we were -- we had a very good quarter and we were pleased across every brand. And so if you look at growing Dunkin', growing all of our K-Cups, Bustelo did very well, Dunkin', for example, not only is it the #3, but it is the fastest-growing premium brand. And the reason that that's not showing up in the scan data is because canister, the Dunkin' canister, which is doing very well, falls in the mainstream segment. And so if you take Dunkin' in aggregate, it is growing faster than Starbucks in both -- in all of the 4-, 12- and 52-week periods. And then Folgers specifically, as you know, both in peanut butter and coffee, we have -- we've experienced significant deflation. But that said, Folgers is playing the role that we want it to. The volume was up in the quarter. And so despite the fact that we have that deflation, we've seen both volume growth and we've been able to actually maintain our profitability on the business. So coffee overall is a very nice success story for us in the quarter. -------------------------------------------------------------------------------- Robert Bain Moskow, Crédit Suisse AG, Research Division - Research Analyst [35] -------------------------------------------------------------------------------- Okay. Maybe I could sneak one more in. Marketing as a percent of sales, I think the guidance was to be 6.5% to 7% this year. Do you think you'll be below that because of more, just cuts to discretionary projects? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [36] -------------------------------------------------------------------------------- No. -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [37] -------------------------------------------------------------------------------- No. I would even maybe go one step further, Rob, is that -- because I know that we've been asked, and I guess this goes back to one of the earlier questions sort of around strategy and investing in our brands. We would really like to sort of draw a line in the sand now for our marketing dollars. So we will end in that 6.5% to 7% range. And in the event, in the unlikely event that sales were to change from our guidance, we would still look to hold the dollar spend on marketing for the rest of the year. -------------------------------------------------------------------------------- Robert Bain Moskow, Crédit Suisse AG, Research Division - Research Analyst [38] -------------------------------------------------------------------------------- Okay. So judging from the giggles, I think I'll raise my marketing spending in the back half, but I'll -- maybe I'll get back to you on that. Mark Belgya, thank you so much for your help over the years. I appreciate it. -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [39] -------------------------------------------------------------------------------- You bet you. -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [40] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Our next question comes from Alexia Howard of Bernstein. -------------------------------------------------------------------------------- Alexia Jane Burland Howard, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [42] -------------------------------------------------------------------------------- Congratulations to Tucker, and thank you so much to Mark. So the first question that I have is around the free cash flow guidance. It looks as though free cash flow guidance was brought down a little bit more than the sales guidance and the earnings per share guidance. I was just wondering around the mechanics of that, or what's causing that revision downwards. And then my second question is really about the visibility into earnings growth from here. Obviously, there's been a couple of guide-downs in the past couple of quarters. I guess I'm wondering is the visibility deteriorating at this point and what does that mean for the validity of a long-term earnings growth algorithm? And also, what are the major factors that are now harder to predict than they were previously? -------------------------------------------------------------------------------- Mark R. Belgya, The J. M. Smucker Company - Vice Chair & CFO [43] -------------------------------------------------------------------------------- Okay. Alexia, this is Mark Belgya. So in terms of the free cash flow, I think it's -- there's only certain components of that. And I would say it's predominantly the 2 that I called out, on the earnings and on the inventory. There's probably maybe just a little bit more working capital. But as you know, that ultimate number won't be figured out until April 30 when all the balance sheet items are finalized. But there's nothing dramatically in any other areas or components of that calculation that would be off. In terms of just your second question -- and let me just take a step back and, Mark, please jump in here. So in terms of just forecasting generally, I think that with some of the derisking, if you will, of our guidance for the rest of the fiscal, we feel that we have taken a prudent approach to consider the competitive activity, particularly in premium pet, have thought through where we had some strong finishes last year there might be a bit more of a challenge to get through, and do feel that we have appropriately recognized that we would expect earnings growth, albeit not as fast as we originally expected at the beginning of the year, but we would expect that to be in Q4, as I commented on Q3 being down slightly. And I don't think there's anything dramatically different in our ability to do so. I think that as we've said the last quarter, almost 2 quarters now, our intent is to continue our cost management program to help alleviate some of the softness that we have incurred and help sort of protect that ability to hit the guidance. And where we stand as of right now, we feel pretty good about our estimate on top line and how that parlays into our earnings guidance. -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [44] -------------------------------------------------------------------------------- Yes, I guess, I would just add one comment on forecasting, which is although we're not pleased with the guide-down, I would comment that this is a reflection of better visibility into our forecasting and making sure that we're taking the prudent steps in terms of derisking, as Mark spoke to earlier, but making sure that we're reconciling operational and financial forecasts in the appropriate manner and providing not only us, the senior leaders, but also the individual businesses with the appropriate level of visibility. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Our next question comes from Laurent Grandet of Guggenheim. -------------------------------------------------------------------------------- Laurent Daniel Grandet, Guggenheim Securities, LLC, Research Division - Senior Analyst and MD of the Consumer & Retail Team [46] -------------------------------------------------------------------------------- I'd like to focus my first question on the new organization. So could you please comment on the reason why you appointed a COO? And what will be the exact role and yours in that new power split, please? Also, I mean, where are you thinking -- where are you in the process? And when are you thinking you can fill this role as well as the new U.S. sales and pet food leaders? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [47] -------------------------------------------------------------------------------- Sure Laurent, thank you for the question. So I did answer this in the prepared remarks, but my focus needs to remain on, obviously, delivering results and really making the right strategic decisions for the business. A Chief Operating Officer will help in terms of making choices across all of the businesses and will really help to operate the businesses on a day-to-day basis, which I do today. But I also feel that I need to spend a little more time just on strategic matters as well and, obviously, building the organization for success, obviously, for the long term. I feel very good about the team that we have in place today. I think that everybody is very much aligned on the strategic priorities. And I think a COO, will, quite frankly, just help specific decision-making and execution at the business level. -------------------------------------------------------------------------------- Laurent Daniel Grandet, Guggenheim Securities, LLC, Research Division - Senior Analyst and MD of the Consumer & Retail Team [48] -------------------------------------------------------------------------------- And in terms of the process in terms of timing for this role and as well as the 2 other roles? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [49] -------------------------------------------------------------------------------- Well, we're in a search. We've begun the search for those roles, and those are underway. It's hard to say when we will actually fill them. Those things can take time. We are moving as fast as we can, but we want to make sure that we find the right individual that has both the right level of operating experience, but also the appropriate level of leadership experience in terms of developing people and culture. So I won't commit to a time frame, but suffice it to say, we're on it, and we're moving as quickly as we can. -------------------------------------------------------------------------------- Laurent Daniel Grandet, Guggenheim Securities, LLC, Research Division - Senior Analyst and MD of the Consumer & Retail Team [50] -------------------------------------------------------------------------------- One more question and it's more on the pet food. So in your prepared remarks, you mentioned you lost about $20 million in private label sales. And just during the call, I mean you also mentioned, it will be about $10 million, I mean, loss in the third quarter. How should we think more of this private label business going forward? I mean is it a business that you're planning to move away from? And how big is that? -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [51] -------------------------------------------------------------------------------- So generally, as a company, philosophically, we only engage in private label businesses where it makes strategic sense or where we know we can generate growth and profitability. And so where we have exited, those were -- in most cases, those were conscious decisions to exit parts of the business that were not generating the appropriate return. So we do remain engaged in some of our private label pet businesses. It is specific to those areas where there's a strategic benefit, partnership with customers. And so we will not abandon it, but we will be prudent in terms of how we -- how and where we engage strategically on private label. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Our next question comes from Rebecca Scheuneman of Morningstar. -------------------------------------------------------------------------------- Rebecca Scheuneman, Morningstar Inc., Research Division - Equity Analyst [53] -------------------------------------------------------------------------------- So I'd like to start with the leadership changes as well. And if you could just kind of talk about the process and how you work through that. Did you look at best practices across the industry? Or was it more of an internal analysis? I'd just like to kind of hear about the process. -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [54] -------------------------------------------------------------------------------- Yes. Sure. We did look at best practices across the industry to be sure. We have an ongoing relationship with the search firm that we are using. Even for the CFO search, I would tell you, we did do a thorough search externally. And Tucker actually went through a very rigorous process, external evaluation process with a couple outside partners, one being a search firm. And so even -- in every case, we are taking a prudent approach in terms of how we are looking at filling those roles and just wanting to make sure that we're looking both at best practices but also making sure that we're taking the appropriate time and necessary steps to put the right talent in each role. -------------------------------------------------------------------------------- Rebecca Scheuneman, Morningstar Inc., Research Division - Equity Analyst [55] -------------------------------------------------------------------------------- Okay. And then my last question is you had mentioned in the prepared comments about some possible changes you're considering for the Natural Balance strategy. And I was just wondering if you could elaborate about some of the changes you're considering. For example, are you looking at possibly entering into food, drug and mass? That would seem to align with your Be Everywhere strategy. And I'm just wondering if that's something that you're considering. -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [56] -------------------------------------------------------------------------------- Sure. I can't give you much more color, so I'm not sure you'll be that pleased with the answer, but I do -- what I would say is we previously talked about a restage. We continue to move forward with the restage. That includes a whole host of things including packaging alignment, consumer communication, I mean it really is -- it is very broad and it does take time because it is a relatively deep exercise. I think what we have said previously is that restage would be toward the end of the -- the very end of the fiscal year. But beyond that, we will consider a more -- a broader strategic review of the brand that could include things like you're suggesting. But we want to hold off on communicating anything until we really have gone through our own internal process. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- I will now turn the conference call back to management to conclude. -------------------------------------------------------------------------------- Mark T. Smucker, The J. M. Smucker Company - CEO, President & Director [58] -------------------------------------------------------------------------------- Thank you all for listening. We appreciate the questions. I guess I would hope that everyone takes away that there are many areas of our business that are performing very well because where we focus, we are winning. The softness is isolated to premium dog. And obviously, we've seen some deflation in a couple of our categories. But hopefully, you all take away that we have taken very specific and decisive actions, whether it be in the marketplace, financial discipline, investing in our business, the leadership changes that ultimately are really starting to yield results. And so we do have a commitment to you all that we will continue to work. And the goal, of course, is to grow our business in aggregate. And just want to thank our fantastic employees for their commitment to the company and wish everybody on the call a very happy Thanksgiving. Thank you. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.