Good morning and welcome to The J. M. Smucker Company's Fiscal 2021 First 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 question and answers after the prepared remarks. Please limit yourself to two questions during the Q&A session and re-queue if you have additional questions. I will now turn the conference over to Aaron Broholm, Vice President, Investor Relations. Aaron, please go ahead sir.

Good morning and thank you for joining us for our fiscal 2021 first quarter earnings conference call. After this brief introduction, Mark Smucker, President and CEO will give an overview of the quarter's results and an update on our strategic initiatives and fiscal year priorities. Tucker Marshall, CFO, will then provide detailed analysis of the financial results and our updated fiscal 2021 outlook. 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. 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. Our nation, families, and colleagues have experienced unprecedented events and challenges over the past six months. The COVID-19 pandemic has upended our way of life and societal awareness about racial injustice has been magnified. Companies, like ours, as corporate citizens have a responsibility to lead and act to help overcome these challenges. I am proud of our employees who have served our constituents, produced record volumes, while maintaining high quality and safety standards and delivered exceptional results, all amidst many personal sacrifices. I am incredibly thankful for their dedication and continued commitment to each other and our shared values. At Smucker, we pride ourselves on living and applying our basic beliefs, which include people and ethics, as guide posts for everything we do. We advocate for the mutual respect of every individual while remaining steadfast in our commitment to a positive and inclusive work environment for everyone. With our shared values and history as a foundation, we know more needs to be done, which is why we have accelerated our inclusion and diversity efforts with several new initiatives including, signing the CEO Action for Diversity & Inclusion pledge to show our support for marginalized groups, introducing unconscious bias training for our employees, committing $500,000 to organizations that advocate for inclusion, racial Justice, and the advancement of underrepresented people, participating in the stop hate for profit social media advertising movement, and designating June 10 as a company paid holiday beginning next year. We are committed to building on these initiatives to become a more inclusive and diverse organization while supporting efforts to ensure our communities become more equitable and just. The global COVID-19 pandemic has made the operating environment, dynamic and challenging to predict. We have built an organization…

Thank you, Mark. Good morning, everyone. Let me begin by giving an overview of first quarter results. Before providing an update on our financial outlook for fiscal 2021. Net sales increased 11%, driven by the favorable volume mix due to elevated at home consumer demand and associated retailer inventory replenishment, partially offset by a decline in away from home channels. We estimated that the continued implications of COVID-19 contributed approximately two-thirds of the sales growth this quarter, including both increased at-home consumption and retailer inventory replenishment. Adjusted gross profit increased $89 million or 13% from the prior year, driven by the positive contribution from volume mix and a slight reduction of costs related to pet manufacturing. Adjusted operating income grew $114 million or 39%, reflecting the increased gross profit and reduced SD&A expenses. Within SD&A, general and administrative expense declined $15 million and marketing expense decreased $11 million, reflecting a shift in timing for certain initiatives and a benefit for media efficiencies and not working expense reduction. These reductions more than offset increased distribution expense of $6 million attributable to increased volume and expenses related to the consolidation of distribution centers within the pet business. Below operating income, interest expense decreased $3 million. The adjusted effective income tax rate was 24.4% compared to 25.2% in the prior year. Factoring all this in, first quarter adjusted earnings per share was $2.37 compared to $1.58 in 2020, increase of 50%. Let me now turn to segment results, beginning with pet foods. Net sales increased 3%. Cat achieved 13% growth, led by the 9Lives and Meow Mix brands. And dog snacks grew 9%, led by growth for Milk-Bone and Pup-Peroni. While still relatively small, cat snacks increased over 20% driven by the Nutrish brand. Dog food sales decreased mid-single digits, driven by declines…

[Operator Instructions] Our first question today comes from Andrew Lazar from Barclays. Your line is now live.

I wanted to start, you're expecting continued momentum into fiscal 2Q on the topline and I'm just trying to get a sense if that's now primarily going to be due to elevated consumption levels or if there is some impact from ongoing retailer inventory fill as well? I guess I'm trying to get a sense of whether you would expect sort of consumption or scanner data to better approximate what 2Q sales would look like?

Thanks, Andrew. It's Mark. I would say, largely the bulk of the inventory restock is behind us. There will probably be some potentially moderating, but we are seeing the trends in consumption continue. We commented in the prepared remarks, specifically about peanut butter and the latest four, we're seeing our share come back. So for the vast majority of our - of our brands, we are seeing some pretty decent consumption take away. Our focus is just going to remain largely on supporting our customers and our consumers. As long as we continue in this environment, that's really our number one priority to make sure that we're getting our products, our brands and large assortment of them to the shelves.

Thanks for that. And then thinking out a little bit, you have a bunch of package food companies that are now really just admittedly beginning to talk a little bit about taking some of the learnings from the pandemic and sort of making some longer-term structural changes as a result of it. Some have clearly stated that they're not going back to a sort of pre-pandemic cost structure. And I realize it's still early and you're all still managing through this crisis, but I guess Smucker had the opportunity to - to take a bit of a fresh look maybe at its cost structure, and if so, maybe even if it's just kind of thinking through what maybe some of the bigger potential buckets of opportunity might be that you could, sort of target as a result of maybe some of the learnings that you're getting out of sort of going through all of this. Maybe it's too early, but to dimensionalize, maybe the magnitude of some of those potential opportunities. Thank you.

Yes Andrew, it's Mark again. Clearly, we have maintained a really good cadence of cost discipline throughout this and I think one of the things that the pandemic has taught us is that we can and will be agile and very focused on those things that are really going to drive the business. So just our ability to adapt the partnerships that we've strengthened with our customers, the ways in which we are targeting and reaching our consumers, I think we've learned that we can do those things and remain extremely focused on where we are going to find growth. As it relates specifically to our cost structure, you know we have exercised a high degree of cost discipline, but I would stop short of going any further than that and we may potentially discuss that a bit at our Investor Day in October.

Our next question today is coming from Faiza Alwy from Deutsche Bank. Your line is now live.

I wanted to talk about of the pet business. First of all, I know you had talked about potential destocking in this quarter and I wanted to see if one that happened this quarter or if you're still expecting any destocking the rest of the year? And then I was also curious on channel dynamics around pet food. So you mentioned that overall e-commerce was 12% of sales, I'm wondering how much of that was pet and how those sales trended versus the specialty channel?

Faiza this is Tucker. I will start as it relates to your question around destock and then Mark will take some of the channel dynamic portion of the question. As it relates to the first quarter, we did anticipate that there would be some destocking within pet. The answer to the question is, yes. However, it came later in the quarter. The month of May was a particularly strong month for us as it relates to our pet food business across both cat snack and dog. It began to moderate across all three as the quarter went on. And will continue to moderate into the second quarter, but big picture the destock did occur.

Yes, and this is Mark. Just to comment a little bit on the channel dynamics. What we have seen is the pet specialty channel continues to exhibit some softness, but there continues to be a general shift consumers going to e-commerce. One thing that was unique, just to build on Tucker's comment is the total dog category was actually down in the quarter largely because of the destock. That's the first time in a very long time that you would see the dog food category having been down. As I said in my last comments, we do view that has - we're largely through much of that, but I think the important point to note is that our total pet business is up and we've seen great growth in both cat and pet snacks. And so that has clearly been a positive as well as performance for our innovation.

Can you, sorry, did you give, I'm just curious how much of the - like what percentage of your sales in pet are now e-commerce?

Roughly - it depends on the cat - on the segment of the category, it's about 15% to 20%. We can get the more accurate number and give that to you offline.

Our next question today is coming from Ken Goldman from JPMorgan. Your line is now live.

Just to clarify, I think you said COVID contributed two-thirds of the sales growth this quarter, and that included consumer demand and the retailer replenishment. I may have missed it, but did you break down what that two-thirds was between heightened demand from the consumer and what the retail load might have been?

Ken, good morning. This is Tucker. We did not isolate the breakdown of the two-thirds component between consumption and retailer inventory replenishment. I think that's pretty hard for us at this point to sort of isolate. But what we do see is, is obviously continued momentum due to COVID, but we also see underlying momentum in the business as well.

Okay. I'll follow up offline on that one. And then just for my follow up, any implications in your guidance from school closures, excuse me, on any particular part of your business, just thinking Uncrustables, maybe some other areas, just trying to figure out what you're factoring in your guidance versus maybe some of the risks out there from some demand being a little bit less than what you might have expected a year ago at this time?

Ken, I would respond in saying that we have not factored anything into our guidance due to school closures. Obviously back-to-school is a component of our fiscal year, we feel very comfortable with the way we've approached back-to-school both at plan and where we stand today. In the away from home business, as you may recall, it has an Uncrustables component and that Uncrustables component does service schools. And we continue to provide product to those schools because they are feeding America despite the fact that those school districts may be closed.

Your next question today is coming from David Driscoll from DD Research. Your line is now live.

Wanted to start off back with the top line sales numbers, the sales growth. Ken asked it, but like it was - he was asking about the two-thirds of the COVID, can you just simply say what the retail inventory replenishment contributed to the top line in the quarter? I mean is it like half the number, because the differential between the scanner data and today's results really large. So, I know there is an e-commerce piece in here that's not measured, there's other unmeasured channels. But my guess is that the retail inventory replenishments, like half the difference between consensus expectations and what happened. Tucker, can you comment on that?

David, again, we have quantified that we believe two-thirds of the over delivery is associated with COVID. Again, a portion is consumption. A portion of it is inventory rebuilds at retailers. We do see continued positive scans across our coffee and consumer business. There's elements within pet that continue to perform. There is some softness, as Mark talked about, in dog. But I think what we would guide you to is to make your own estimation as it relates to what our performance is and then what you're seeing both and consumption as well. It's our best look, but we just don't feel comfortable quantifying that impact at this time.

On the guidance, first quarter beats by like $0.70 versus consensus. Full years raised $0.30. Why doesn't the full year go up by the magnitude of the beat? And Mark, it sounds like you're more optimistic on the year, but yet, just mathematically, the final three quarters are a little bit less than what we all previously had because of the nature of the magnitude of the 1Q beat. So just hoping you guys could just talk a little bit about that. I mean, I feel like there's an element of conservatism. It's just a really hard environment. I respect that, but would appreciate your comments.

David, as it relates to the approximately $0.79 over delivery from the prior year about $0.15 of that was anticipated or planned. The balance, half of it is due to the increased at-home consumption, the retailer replenishment, better performance in our Away From Home business in the quarter. And so we are taking that portion, which is about $0.30 to $0.35, and feeling comfortable to put that into our guidance range. The remainder, which is about $0.30 or so, really reflects favorable SD&A expenses across the company, consistent in most all businesses that we are anticipating to come back into the second quarter and beyond, and that's largely driven by timing. An example would be marketing that we did not spend in the first quarter that we anticipate in the second quarter and then, additionally, some promotional activity and other reinvestment considerations. So that's really where the breakdown of the $0.79 year-over-year or roughly $0.70, as you asked. The last comment, I would make as it relates to guidance is, is that we are very focused and making sure that we are providing visibility and transparency about our results, which were quite strong for the quarter, again, what we're seeing for the second quarter and again, the back half remains uncertain for the obvious reasons of just living through a pandemic. And so as a result of that, we will just continue to provide updates as we get through each subsequent quarter and come through the totality of the fiscal year.

Our next question today is coming from Chris Growe from Stifel. Your line is now live.

I just had a question, a bit of a follow-on to earlier questions in relation to your sales growth outlook for the year. I think about your outperformance or, I should say, the growth in revenue in the first quarter, it largely equals that $185 million headwind you've outlined from the prior year comp. And I'm just curious, therefore, that you're looking there for - it seems like a more modest sales growth in Q2 and Q3. I want to make sure, I was looking at the proper way and then also to understand kind of what's behind that or what you see happening as we progress through the quarters in terms of at-home food consumption. And then, of course, we've talked a lot about inventory, any further inventory changes?

So Chris, big picture. I think the perspective that you've taken is correct. We are beginning to see a moderation of growth, particularly into the second quarter within our coffee and consumer business. We're also experiencing that within our pet business. And I would also remind you that even at - even though we did perform better than anticipated on our Away From Home business in the first quarter. We do anticipate significant and extended declines in that business for Q2, Q3, and Q4. And then as you noted, we do have that comp in the fourth quarter that we do need to lap. And then further as - back to the comment I provided to David, is that we're still working through what the back half truly looks like and we'll have a better visibility to that as the months and the quarters go by. But I think big picture, you've framed it in correctly.

And then just a question on your - with your debt level now moving below your target, I'm just trying to think about the cash priorities for the year. You have very strong free cash flow outline for the year. Maybe you could just give a quick thought on like the M&A environment and kind of how that pipeline looks or it has been affected by COVID, I guess? And then to think about other areas of cash use, obviously, debt reduction, but also share repurchase activity. Thank you.

Chris, I'll address the capital deployment aspect, and then I'll ask Mark to comment on the broader M&A market. As it relates to our capital deployment or cash deployment for the fiscal year, we remain committed to generating that approximate $925 million to $975 million worth of free cash flow. We are prioritizing continuing to pay quarterly dividends. We did just increase the quarterly dividend in the month of July. We also are prioritizing continuing to pay down our term loan that continues to position us for strength across the balance sheet. And then we do need to keep our eyes open opportunistically as it relates to how and where and when we bring back share repurchases to support shareholder value and then also how we consider the deployment of cash into M&A opportunities, and I'll hand it to Mark to talk a little bit about the M&A front.

Yes. Chris, just on the M&A front, as you know, we always are - have lines in the water, if you will, and just making sure that we are seeing and have access to some of the opportunities that may be out there. I would say, generally speaking, it has been relatively light. But as Tucker pointed out, we are getting ourselves into a position where we could participate in the M&A market if the right opportunity came. But at this point, there really is no new news to report and we will just continue to monitor.

Our next question today is coming from Rob Dickerson from Jefferies. Your line is now live.

Look, I think I heard you say, Mark, a number of times the term financial discipline, right? It sounds like there was a little in there around optimized pricing, margin management. So, maybe if you could just provide a little bit additional color on that, just around kind of the bigger brand focus, right, better margin mix and the potential - it sounds like there's some potential for strategic pricing. Although I also heard you say the marketing will reemerge as we kind of probably get throughout the year and then also there could be some increased promotional activity. So, just trying to kind of right-size kind of that margin trajectory for the year and ongoing around pricing, margin mix inclusive of promotional activity and marketing. Thanks.

Rob thanks for the question. You're right. Financial discipline is one of our foundational priorities, particularly for this year, as it would be for any year, but we really are focused on it this year. Tucker already spoke to, obviously, debt and just our cash generation. But we are very focused on our margin profile, making sure that we can we are very maintain and ultimately improve our margins. And that really comes from a continuous improvement mindset, which we have done a great job, just in terms of our margin management from a cost - internal cost standpoint. But we will continue to be very focused on strategic pricing, and our recent actions in peanut butter support that. We mentioned briefly in the script that we have - we did - we have seen some cost increases on peanuts, largely because of crop quality, but we were able to partner very closely with our retail customers in order to manage that in a very judicious way, making sure that we are able to pass along our cost in an appropriate way, of course. So those will all be components of how we continue to manage our profitability going forward.

And then, I guess, secondly, just on Pet. I think in the prepared remarks, in the release, you say there is potentially some increased trade spend in Pet Food and then you also stated there's improving competitive positioning maybe in some of your premium brands. So maybe if you could just, kind of, dimensionalize, kind of, what that increased trade spend was for and then why you see the comparative positioning within premium improving. That's it. Thanks.

Right. So in our pet business, I would say, from a macro perspective, Rob, we are seeing the pet category perform largely as it normally does. Pets, I've said this before, pets always eat at home. So the increase from stay-at-home consumption is largely focused on humans. So the Pet category itself, I would just - I would say, is largely continues to - the dynamics are very similar to what they normally would be pre or post-COVID. It's a competitive environment. On Nutrish, specifically, our net pricing is down from a year ago, which was part of our targeted actions to improve the performance of that brand. But increased trade in general, I think, is - we're not seeing that largely across the entire pet portfolio.

Our next question today is coming from Jason English from Goldman Sachs. Your line is now live.

Thank you for slotting me in. I want to come back at two topics that have already been discussed. First is decoding the scanner data and trying to bridge it to your sales. You gave us the e-com growth figure of 70%. A quick back-of-the-envelope math suggested, it's adding around 500 basis points to sales growth. If we assume that, that 70% is not already captured in Nielsen, at least in part. So question one, is that the case? Can we actually look at that 70% and say all of that's incremental to what we're seeing in the Nielsen data or IRI data?

Jason, this is Tucker. I think it's fair to say that the e-commerce channel is predominantly benefiting our Pet business. And so, therefore, when you look at the measured channels and then think of e-commerce as sort of an unmeasured channel, you can go ahead and make your estimation there. And then, as you want to extrapolate it across the rest of the portfolio, you can. But, obviously, the magnitude comes through pet.

That obviously implies that the restock was fairly substantial on the coffee and the consumer side. Switching gears to the promotional environment. You guys finished last year with trade and merch spend, I think, at a record high, 39% of net sales. How is it tracking so far since we're now kind of two quarters into COVID-19? Has that figure come in a substantial amount? And is there opportunity to have this prove to be a more permanent reset? In other words, really sort of ratchet that trade spend back down to the low to mid-30s you were at just a couple of years ago?

Jason, I think as it relates to the promotional environment, we continue to work through that on a couple of dimensions. One, promotional activity did change as we came into COVID. Promoting was reduced as it relates to pretty much coffee and consumer. And so, now we need to think about how we're bringing those promotional activities and when we do it back across both coffee and consumer and then a recognition that we also, because of either input costs or otherwise, just making sure that we have the right price reflected on shelf as well across our entire portfolio. So, I think there's maybe a little bit to what you're sharing and asking, but I think we're still working through what pricing and promotion mean, both coming into the environment of COVID-19 and coming out of it as well.

Jason, its Mark. I would just reinforce a comment I made earlier, just to respond to your comment about the restock. The restock was clearly - largely fell in our first quarter and it was more specific, of course to consumer and coffee. And as I said earlier, we are largely through that and in the most recent share information, you would see our share, particularly in consumer, coming back and seeing some share growth. Coffee has been pretty much strong throughout the quarter.

Yes, shares improved, but the absolute level of measured growth a massively sales in comparison to the type of sales you put up. So if most of the unmeasured channel growth is coming in pet, my conclusion is we should probably look to have the measured sales growth mean revert kind of closer to net sales growth for the rest of the year, which would suggest sharp deceleration. Tell me if I'm off base on any of that.

Yes. First of all, there's been significant e-commerce growth in coffee. So there has been a market shift for coffee being purchased in the e-commerce channel. So, from an unmeasured standpoint, you definitely wouldn't be seeing the coffee growth there either.

Our next question today is coming from Robert Moskow from Credit Suisse. Your line is now live.

Two questions. Just to clarify, first of all, on e-commerce growth, that 70%, does that measure direct-to-consumer shipments? Or does it also include any click and collect at the grocery stores?

That would be both.

So it includes the click and collect at the grocery stores, it's quite possible that it's showing up in the retail Nielsen data maybe?

I would say some of it probably. It's hard to know if all of it would be, but yes.

Second question is more broader about product innovation and SKU rationalization. Mark, I think you've rationalized the peanut butter lineup dramatically. So I was hoping you could tell us like how many SKUs are you now producing for peanut butter? What were you producing before? And this is really a broader question for innovation philosophy. But how many of these do you want to bring back? What will your innovation strategy be? Do you want to be less aggressive than you were in the past, merely because you have productivity benefits from having a streamlined lineup, maybe the consumer is reverting back to trusted brands, maybe not experimenting as much? So, I'm focusing on peanut butter, but I was wondering if you could kind of make a broader statement about innovation overall, when there's been so much rationalization? Thanks.

Absolutely, Rob. Thanks for the question. On peanut butter, there hasn't been any significant rationalization of SKUs. So, as we're trying to point out a little bit in the script, when we - when COVID was really at its peak, and we were asked by our customers to focus on the most important SKUs, we did just that. And so some of the share shifting that we saw in three or four months ago was really a result of the fact that we were selling everything we could make. We were selling more peanut butter than anyone else out there, but it was a limited assortment. Now that we are able to - we're still running essentially full out in our two key peanut butter plants. We have actually been able to restock the more full assortment. And so that fuller assortment is actually now getting on shelf, and that is why in the latest four, you would start to see our share starting to grow back towards where it was before. So significant SKU rationalization as a result of COVID, not a lot. But I will tell you on innovation, we still are committed to innovation. As I spoke to, I think, in a quarter, maybe a quarter two ago, innovation is going to remain very important. It's a balance between platform innovation and more common things like line extensions. In the quarter, innovation was - new products were 5% of our sales and roughly $100. So, we’ve been very pleased with our innovation. I know there's been a lot of focus on Jif Power Ups and discontinuing that was the right decision. But even on something like 1850, we recently gained quite a few new points of distribution, well in the thousands of new points of distribution and that brand online continues to grow very, very well. So, innovation is going to continue to be very important. We feel like we've had some success there and we will continue to drive innovation as a one component of our top line growth.

Next question is coming from Pamela Kaufman from Morgan Stanley. Your line is now live.

I was hoping that you can talk about your pricing strategy in coffee. Just based on the retail takeaway data, it suggests that you're being more competitive on price relative to competition. So how should we think about pricing and go-forward margins in coffee, given the inflationary coffee input cost environment?

Yes. Pamela thanks for the question. I would say our coffee pricing strategy, we are extremely disciplined. The underlying green coffee costs have been somewhat volatile, but still at historical lows. There has been some uptick in the last few weeks, particularly on Arabica, and so we would expect to see some cost increase into the second quarter. That said, we have multiple levers that we use to manage our retail prices. Sometimes it’s trade more recently, it's been more trade-related than it has, specifically pricing, but we will remain extremely disciplined on the pricing front and ensure that our margins, particularly on coffee and as well as across our business, but on coffee, we've said before, we're really maintaining those margins in the low 30-ish percent, is doable.

And then I just wanted to ask about the improved gross margin guidance for 2021 and the drivers behind that. I guess digging into the details, you previously cited headwinds from fixed cost deleverage in the foodservice business, which you initially expected to decline by about 30%. So I guess, what are your updated expectations for this business? Have you seen any improvement? And then, I guess, more broadly, what is your outlook for commodity input prices as it relates to the updated gross margin guidance?

Pam, thank you. At a total company level, we feel that the gross profit margin, again, will range from 37.5% to 38% throughout the fiscal year. It's largely driven by continued growth in the top line across our business. It's also supported by better than expected commodity costs at plan. Commodities will be up year-over-year, though, as a clarification. And then, as we continue to think about the Away From Home business, to the extent that it can continue to outperform the current expectations, that will also support the margin as well.

Okay. And any updated specifics on the foodservice business in terms of your outlook for this year?

Yes. So, as it relates to our Away From Home business, we did see an improvement as it relates to our plan for the first quarter. That was largely due to assumption we made about the timing of basically society reopening and folks leaving their homes and going out to restaurants, and we did see that improvement. However, on a full year basis, we still are pretty cautious about how we're seeing that business. It still is anticipated to be a significant and extended decline. And really, what we're seeing here is that the office coffee portion with folks not returning to the workplace as quickly, is offsetting some of the momentum or positive that we're seeing, for example, in restaurants or other venues like that. But I would note that we continue to see great performance in the handheld aspect of the business. So again, we are remaining cautious, but we're also remaining a bit optimistic that we'll do better in that business as well.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, first of all, thank you all for listening. We appreciate the support. Obviously, we're very pleased with our results this quarter, and our priority is to continue to support our customers and consumers and really make this growth sticky as we've regained a number of new consumers. And then finally, just wanting to acknowledge that all of this is possible because of our fantastic employees, and just a huge shout out to our employees because they're the ones that have really allowed us to deliver, and we look forward to continuing to deliver in the quarters to come. Thank you.

Thank you. That does conclude today's teleconference and webinar. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.