Aaron Broholm - Vice President, Investor Relations Mark Smucker - President and Chief Executive Officer Mark Belgya - Vice Chair and Chief Financial Officer Steven Oakland - Vice Chair and President, U.S. Food and Beverage Barry Dunaway - President, Pet Food and Pet Snacks

Ken Goldman - JPMorgan Andrew Lazar - Barclays Capital David Driscoll - Citigroup Robert Moskow - Credit Suisse Mario Contreras - Deutsche Bank Alexia Howard - Sanford C. Bernstein & Co., LLC John Baumgartner - Wells Fargo Securities, LLC Farha Aslam - Stephens Inc. Akshay Jagdale - Jefferies & Co. Aatish Shah - SIG

Good morning, and welcome to The J.M. Smucker Company’s Fiscal 2017 First Quarter Earnings Conference Call. This conference is being recorded and all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. Please limit yourself to two initial questions during the question-and-answer session and re-queue if you then have additional questions. I will now turn the conference over to Aaron Broholm, Vice President, Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining us on our first quarter earnings conference call. With me today and presenting our prepared comments are Mark Smucker, Chief Executive Officer; and Mark Belgya, Vice Chair and Chief Financial Officer. Also joining us for the Q&A portion of the call are Steve Oakland, Vice Chair and President, U.S. Food and Beverage; and Barry Dunaway, President, Pet Food and Pet Snacks. During this call, we will make forward-looking statements that reflect the company’s current expectations about future plans and performance. These statements rely on a number of 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 for the purpose of evaluating performance internally as detailed in the press release. We have also posted to our website a supplementary slide deck summarizing first quarter results, which can be accessed through the link to the webcast of this call. These slides and a replay of this call will be archived on our website. On July 25, we issued a Form 8-K, regarding our new definition of segment profit and non-GAAP operating income, income and earnings per share all of which now exclude intangible amortization expense. Modified prior year results that reflect this new definition were included in the Form 8-K. Please note, we now refer to our non-GAAP profit measures as adjusted gross profit operating income, income and earnings per share. If you have any 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. This is truly an exciting time at Smucker. As we look to continue the momentum from an historic fiscal 2016, we are pleased to have delivered a strong first quarter earnings performance. These results reflect our team’s ability to execute and deliver our 2017 financial plan, while building for the future. This balance is critical since delivering the core business and achieving our targets for synergies, cost savings and working capital supports our development of new capabilities and the continued growth of key brands and on trend platforms. Ultimately, this will allow us to meet our long-term objectives for top and bottom line growth and deliver against our consumer-centric corporate vision, as we look to further engage, delight, and inspire our consumers. With that background, let me provide a brief overview of first quarter results. Excluding the impact of divestitures and foreign exchange, net sales decreased 5% compared to 2016. This decline was largely planned due to a cumulative 12% list price decrease for coffee across most of the quarter and lapping the prior-year roll out of Dunkin’ Donuts K-Cups. Lower Pet Foods sale also contributed. Adjusted operating income was up 2% as the lower net sales were more than offset by a decrease in commodity costs and incremental synergies. Aided by a more normalized tax rate as compared to the previous year and a decrease in shares, adjusted earnings per share grew 16% to $1.86. Free cash flow was $189 million, a portion of which was used during the quarter to further reduce our net borrowed position. In addition, last month, we announced a 12% increase in our quarterly dividend rate. While net sales fell slightly short of our projection for the quarter, earnings per share exceeded our expectations. This was mostly attributable to higher than anticipated segment profit for coffee and lower than anticipated spending in a number of areas. As a portion of the over delivery is expected to be timing related, including projected year-over-year increases in marketing spend shifting to the remaining three quarters, we remain on track to achieve our previously stated full-year guidance for adjusted earnings per share. That said, we expect softness in Pet Food sales to continue in the near-term, leading us to adjust our full-year sales guidance as Mark will discuss in a moment. Let me now provide additional comments on our U.S. retail businesses. We were pleased with the start of the fiscal year for our coffee business. Profitability was in line with the strong first quarter of 2016, despite the anticipated top line impact of price declines and lapping the prior-year launch of Dunkin’ Donuts K-Cups. Volume gains for Folgers roast and ground coffee continued in the first quarter, reflecting consumer response to lower price points. Tonnage for our mainstream brands was up 3%, while units shipped were up even more, given the prior-year canister downsize was not fully lapped until late in the quarter. Folgers K-Cup volume trends improved in the quarter, responding favorably to planned price investments. In addition, we are currently rolling out new K-Cup packaging that leverages the iconic Folgers Red Can brand equity, providing additional support for the product line. For the Dunkin’ Donuts brand, we are pleased with the continued consumption growth for our K-Cup offerings, with over $230 million in retail sales for the latest 52-week scan period. While shipments were down significantly in the first quarter, as expected due to the prior year sell in, we project volume growth for the remaining nine months, including contributions from new varieties. In addition, volume for Dunkin’ bagged coffee was up 4% in the first quarter, and we expect positive trends to continue as lower prices supported by favorable input costs have improved the competitive positioning of the brand. Turning to Consumer Foods, first quarter net sales were consistent with our expectations. Across many of our key brands and categories, volume was in line or in several cases up compared to the prior year. In addition, our brands maintained or grew, both volume and dollar share in the latest 12-week scan period for most of the food categories in which we participate. For the first time in five years, volume for Smucker’s Uncrustables frozen sandwiches experienced a quarterly decline. However, this was related to timing of customer shipments that have already rebounded in August. Overall consumption trends remain strong and we continue to expect double-digit growth for the full-year. In addition, Uncrustables remain a key growth driver for our food service business, where volume for the brand was up 40% during the first quarter. For the Pet Foods segment, first quarter sales performance was below our projection. We have revised our full-year outlook, as we expect this softness to continue in the near-term. Our teams are focused on the key factors impacting current performance and are already executing on opportunities to provide future growth. Specifically, improving the performance of our mainstream dog and cat brands remains a key area of focus. We have introduced bonus bags for Kibbles ‘n Bits supported by lower input costs, which entered the market in late June. We expect this will help moderate declines for the brand. We also have plans to introduce new packaging later this fiscal year and enhanced brand support consistent with its heritage around taste and fun to further improve the competitive positioning of Kibbles ‘n Bits. In the cat segment, we remain encouraged by the strong equity of the Meow Mix brand. With recent innovation, a new television advertising campaign that began this month and upcoming pricing support, we are confident in our ability to reverse recent softness in this business. In addition to these areas, we continue to progress on whitespace opportunities in mainstream pet food, driven by consumer preference for additional protein and natural ingredient options. Looking at the rest of the Pet Food business, sales for Pet Snacks were up 2% in the quarter, on top of a 9% increase in the prior year and were a key driver of overall category growth. Our category leadership in Pet Snacks and innovation, particularly for the Milk-Bone and Meow Mix brands continues to be an important component of results. Within premium Pet Food, sales for the Natural Balance brand were down, as we lapped the pipeline sale associated with distribution gains in last year’s first quarter. While consumer takeaway for the brand remains strong, we are tempering our near-term growth expectations for our premium brands, given the recent softness in the overall pet superstore channel. Lastly, as it relates to our Pet Food business and broader organization, let me provide a brief update on our synergy and cost savings activities, which remain on track. In the first quarter, we realized $32 million incremental synergies, approximately 25% of which benefited gross profit with the rest related to SG&A savings. We continue to anticipate $100 million of incremental synergies for the full fiscal year, which would bring our total to nearly $140 million of the $200 million targeted by the end of fiscal 2018. In addition, we continue to target $50 million of annual cost savings to be fully realized over the next few years related to our organizational redesign program and the previously announced plant closures. As we have indicated, we expect to initially invest much of these incremental savings in several identified areas to support top and bottom line growth. In closing, I would like to thank our employees for their continued efforts towards delivering the core business, building on our product innovation activities, and marketing support, expanding our capabilities to enhance future growth and achieving our synergy and cost savings goals. This strong execution continues to position the company well for 2017 and beyond. I will now turn the call over to Mark Belgya.

Thank you, Mark, and good morning, everyone. I will begin by providing additional color on our first quarter results and then conclude with our outlook for the full-year. Net sales decreased by $136 million, or 7% in the quarter. The prior year divestiture of the canned milk business detracted 2 percentage points, while lower net price realization, which was mostly attributable to coffee had a 4 point impact. Volume and mix combined to subtract 1 percentage point, reflecting declines in Pet Food. The impact of foreign exchange was immaterial to consolidated results. GAAP earnings per share were $1.46 this quarter, 28% above the prior year. Including GAAP earnings were $8 million of unallocated derivative gains compared to a loss of $10 million last year. In addition, GAAP earnings for both the current and prior years included $26 million of special project cost, related to merger and integration and restructuring activities, along with just over $50 million of amortization expense related to intangible assets. Excluding all of these items, adjusted EPS was $1.86 for an increase of 16%. Adjusted gross profit declined at a slower rate than sales resulting in a 160 basis point improvement in gross margin at 39.6%, representing the highest quarterly gross margin percentage since 2011. Year-over-year gross margin expansion was realized by all of our reportable segments, most notably for coffee. Overall commodity costs were lower in the quarter, driven by green coffee and mostly offset the lower net pricing. In addition, $8 million of the incremental synergies in the first quarter contributed to gross margin growth. For the full-year, we now anticipate gross margin to be approximately 50 basis points higher than our previous guidance of 39%. SG&A decreased $32 million in the first quarter, or 8% compared to 2016, mostly attributable to synergies. Lower royalties associated with the Dunkin’ Donuts business also contributed to reduce selling costs. Excluding the benefits of synergy, marketing spend was in line with the prior year, but 13% lower than forecasted for the quarter. Factoring all of this in, adjusted operating income was up $8 million, or 2% compared to the prior year with operating margin increasing 180 basis points to 20%. Below the line, lower income tax expense and a decrease in number of shares outstanding were key drivers of the earnings per share growth. As a reminder, the effective tax rate for the prior year first quarter was unusually high due to deferred state tax adjustments. In addition, the current year first quarter rate was slightly lower than anticipated. As a result, we now expect the full-year rate to approximate 33.5% compared to our previous guidance of 34%. Let me provide a brief overview of segment results, beginning with coffee. First quarter net sales decreased 9% due to lower net price realization, as the net impact of volume and mix was neutral in the quarter. Lower pricing reflected the full quarter impact of the 6% price decline taken in July 2015, along with the additional 6% decrease taken in mid-May of this year. Incremental price support of Folgers K-Cup and Dunkin’ Donuts bagged coffee also contributed. Net sales for the Folgers brand declined 8%, as the lower net price realization was partially offset by mainstream roast and ground volume growth. For the Dunkin’ Donuts brand, sales were down 14%, reflecting both lower pricing and the impact of lapping the prior year launch of Dunkin’ K-Cups. Lastly, Cafe Bustelo sales were up 5% and double-digit growth in volume mix more than offset the lower net pricing. Segment profit was flat with the prior year, but exceeded expectations. Segment margin increased 310 basis points to 33.9%. The net impact of lower pricing as compared to the recognition of lower cost was unfavorable to segment profit in the quarter, however, to a lesser degree than originally anticipated due to timing. The price to cost impact was mostly offset by profit contributions from favorable volume mix. An increase in marketing spend was offset by lower royalty expense associated with the Dunkin’ Donuts brand. Turning to Consumer Foods, net sales were down 2%, excluding the impact of the canned milk divesture. The decline reflected lower net price realization, which was impacted by the timing of certain trade program expenses compared to prior year. Volume mix was flat with the prior year. Looking at key brand, sales for Jif and Smucker’s were down, generally in line with the overall segment. In the baked isle, sales for both the Crisco and Pillsbury brands decreased 5%, as lower net pricing was partially offset by volume gain. Lastly, Sahale Snacks brands achieved strong double-digit sales growth in the quarter benefiting from distribution gains. Segment profit declined 7% mostly attributable to lapping $6 million of prior year earnings related to the divested milk business.. In addition, favorable input costs did not fully offset lower net price realization. Net sales for our Pet Foods segment decreased 6%, reflecting unfavorable volume mix. The lower sales were mostly driven by double-digit declines for our Natural Balance in Kibbles ‘n Bits brands, mid single-digit declines from Meow Mix and 9Lives cat food also contributed. Sales for our pet snacks portfolio were up low single-digits with gains across all our key snacking brands, including Milk-Bone, Pup-Peroni, Milo’s Kitchen and Canine Carry Outs. Segment profit increased 5%, as the impact of unfavorable volume mix was offset by incremental synergy realization and lower input cost. In addition, marketing spend was down double-digits in the first quarter. A significant portion of the market impact is timing related due to a shift of certain key marketing activities into the second quarter. We now anticipate full-year Pet Food segment profits to be up low single-digits, which is less than previously projected. Net sales for international and food service decreased 3% in the quarter. However, excluding the impact of the canned milk divestiture and FX, net sales were in line with the prior year. Segment profit was up 9%, reflecting the net benefit of lower coffee cost and pricing along with favorable volume mix. Partially offsetting these factors with lapping $2 million of prior year profit related to the divested milk business and unfavorable impact of foreign exchange in Canada. Turning to cash flow, cash provided by operations was $239 million for the quarter. This compares to $307 million in the prior year, which included a $50 million benefit related to the timing of tax payments and refunds. Factoring in capital expenditures of $50 million in the current year, free cash flow was $189 million in the quarter. We continue to project full-year free cash flow of $1 billion assuming CapEx of $240 million. We paid down an additional $100 million on our term loan in May, ended the quarter with total debt of $5.35 billion. Based on trailing 12-month EBITDA of $1.6 billion, leverage currently stands at just over 3.3 times. Let me now conclude with an update on our full-year sales and earnings outlook. Excluding the 2 percentage point impact of the divested milk business, we now expect net sales to be in the range of flat to down 1% compared to the prior year. The reduction from our previous guidance of plus 1% is primarily attributable to lower expectations for our Pet Foods segment at projections for the remaining businesses remained relatively unchanged. With input costs lower than originally expected in our Consumer Foods segment, along with a lower effective tax rate, we expect to offset the margin impact of the net sales shortfall. As a result, we continue to project adjusted earnings per share to be in the range of $7.60 to $7.75 with a bias towards the middle to high-end of the range. Reflecting the timing impact, which benefited first quarter results, most notably the shift and timing of marketing spend for Pet Foods segments, we now project our second quarter EPS will be comparable to the prior year. In closing, we anticipate the challenges to revenue growth in certain categories will persist in the near-term, as reflected in our revived sales guidance. However, our long-term expectations remain intact. As Mark indicated, we’re executing on plans and initiatives to improve top line trends, while investing in our capabilities to enhance future growth. At the same time, we’re pleased with the earnings and cash flow performance of the company. Overall, we remain confident in achieving solid earnings growth this fiscal year and beyond. We thank you for your time, and we will now open the call up to your questions. Operator, if you would please queue up the first question.

Thank you. The question-and-answer session will begin at this time. [Operator Instructions] And your first question comes from Ken Goldman at JPMorgan. Your line is now open.

Hi. Good morning, everyone.

Hey, Ken.

Good morning, Ken.

I have a question for Steven and then one for Barry, if I can, even maybe this is more for Mark Belgya also. But I got the sense last quarter you had priced some higher beans into your outlook, but prices for beans have risen since then. So I kind of wanted to get a sense of how much, if at all, those costs have risen above your expectation? And I guess, maybe the more direct question is, do you see any risk to guidance if beans futures really stay where they are right now, or do they have to kind of revert a little bit to get you more comfortable in that range?

Hi, Ken, it’s Steven Oakland. I think if we look at where we are today and where we were then, we would – we wouldn’t change our thoughts on the near-term. Our coverage allow us – we felt very comfortable with the pricing changes that we made, given the coverage that we have. Mark and Mark talked a lot about the pricing laps and the effect on net sales in coffee for the first quarter. But as we get into the key selling season, I think, we’ve got the sharpest price points we’ve had in quite a while. So the merchandising is strong. The price points are good, and obviously the coverage supports that or we wouldn’t have done those things. So if we had to look at pricing changes, if that happened it would be much later in the year. And frankly, I think, we have a bias that over the next few months, we’re going to get a good look at what coffee is going to end up at. I think there’s a lot of coffee in the farmer’s field in Brazil. And typically, the next few months will let us know where that’s going to settle out. So we’re in good shape until then. And given the fact that we’ve gone down twice over the last 12 months, I think, we’ve got room if we had to absorb some of that even if we had to do pricing.

Okay, that is helpful. And then my next question for Barry or Mark Smucker, I realize turning around dry dog food is not easy and you guys cautioned us at CAGNY it would take some time. But it does seem some of the challenges here are maybe a little bit bigger than expected. You did talk about some tactics, bonus bags, new packaging. But frankly just might opinion, they seem a little more like Band-Aids than real sustainable fixes to the product and its positioning. So I’m just curious, in the face of these tough trends, what gives you the confidence that the issues are still only temporary? Is the strategy around dry dog still the right one, or do you have to make more dramatic changes if things don’t get fixed in the next couple quarters?

Good morning, Ken. This is Barry. And, Mark, you can add additional comments to this. As you know, the Kibbles ‘n Bits brand, its struggle is not just recent, that brand has been struggling over the past year or so. As we stepped into the business with a new team, we felt fundamentals had to be right, especially around pricing. So, we felt that was the first thing we needed to do to fix the price on shelf. What we’re seeing with the bonus bags is, it is decelerating the losses that we’re seeing previously. So, we do think it’s working. That was fundamental to fixing the business. We still think the brand is relevant. We’ve shared our marketing plans with our key retail partners. And they also believe the brand still has a relevance in that segment of dry dog food. They support our plans behind the brand and are willing to continue to work with us in that segment. So we’re not going to turn it around in a quarter or two, but we still think the Kibbles ‘n Bits brand has relevance to the consumer in that segment. And then, the mass premium segment, which as you know, we do not have a place in that segment currently. We continue to evaluate acquisitions licensing or launching one of our existing brands in that segment. That is front-end center for our team, and we will continue to focus on a solution for that segment based on what’s right long-term for us to participate in that category. So we’re still committed to the brand. We think it has a place. And we think just getting the fundamentals are just foundational.

I think, this is Mark Smucker, Ken. I think, Barry said it. I mean, at the end of the day, it’s really about blocking and tackling, getting the fundamentals right as Barry said and making sure that we have the right plans over the next few quarters to address the mass premium segment. And I feel better certainly now with Barry’s support and his leadership it will get there in the relatively near future.

Great. Thank you, everyone.

Thank you. And our next question will come from the line of Andrew Lazar of Barclays. Your line is now open.

Good morning, everybody.

Hi, good morning.

Good morning.

Yes, two quick things, one quick one first. With the earnings guidance for fiscal 2Q, I just want to make sure I’m using the correct base from last year’s 2Q from what you expect, I think, earnings to be comparable, because I didn’t know if you were using before amortization – before excluding amortization or not?

Andrew, this is Mark Belgya. It would be the restated number if you will that would have been in the 8-K that we issued last month.

Got it.

I think $1.91, if I recall.

Perfect, that’s helpful. Thank you. And then I guess a little bit broader, I think, in terms of the – some of the Natural Balance commentary, you had mentioned the pet superstore channel having slowed a bit. And that was I think the reason you pointed to maybe thinking growth there would be a little bit less robust, at least, in the near to intermediate-term on that brand, and we have seen some of that in the data to be sure. But I guess, the – maybe the depth of the decline in the quarter itself, I know some of that was the year-over-year lap. But I guess I’m just trying to get a sense of whether it was – do you think it’s purely just the superstore channel that’s impacting your outlook, or perhaps maybe you can comment on where you are around sort of shelf space and whether you’ve held on to share, and I guess share of shelf, given all the space that you were able to commandeer over the last year with a lot of the launches into PetSmart and Tractor Supply, things like that. Just trying to get a sense of where I guess how the shelf productivity is and how that repeat purchase has been in some of these channels where you’ve stepped up your presence?

Hi, Andrew, it’s Barry.

Hi, there.

Let me just add some commentary on Natural Balance. I would say overall, we are – we pulled back our expectations similar to our competitors, where we’ve just seen slowing in the pet specialty channel. Relative to the health of the Natural Balance brand for our shelf space and performance, we’re still encouraged by it. We think, where we expect it to be. We have not lost any shelf space. Both of the – our key retailers in the pet specialty channel are supporting the brand and working with us, taking incremental skews. Actually – we’ve actually added some additional items that we recently presented to those retailers. So overall, we’re still pleased with the performance of their brand based on the expanded distribution last year. But I think that channel is just seeing some overall slowdown in traffic.

Great. Thanks for your help.

Just one other comment I would add is….

Sure.

…around that brand is, we are seeing some nice growth in e-commerce. And that that channel is growing double-digits – high double-digit small base. But we’re really seeing some nice growth with that brand in that specific channel, and we’ll continue to look how we can further accelerate that growth as well.

Great. Thank you.

Thank you. And our next question will come from David Driscoll of Citi. Please state your question.

Great. Hi, good morning.

Good morning, David.

Good morning.

Wanted to ask a question about the synergies. So can you, it’s a $100 million for the year, $32 million in the quarter. Can you just explain a little bit here why you annualize that number, obviously, I get to well more than $100 million? Is there upside potential for the synergies on the year? And kind of maybe why not if given the performance in the quarter?

This is Mark Belgya. We put out $100 million and that will bring us up to about $140 million in total. There’s some upside, somewhat, which is the timing, we had a lot of activities tiding around the end of the fiscal year. So some of that came through. But we would expect that to continue to pace through. And again, we feel pretty confident or very confident on the $200 million by the end of next year. It might pick up a little bit in the pace during the year. We’ll have a little bit more color on that as we move through the next quarter probably. But we’re very pleased, I think, if I recall, at the end of fourth quarter, I think we were $50 million or $60 million recognized and picked up $32 million. So nice jump and we will see if we can keep that pace going.

I wanted to add one more on this Pet Food topic. Barry, I’d really like to understand kind of, you knew many of the problems that were going on a few months ago when you gave the original forecast. To see the sales reduction guidance again, I mean, we’ve kind of been hit with multiple revisions to your all’s guidance on Pet Food, and it seems to keep happening. Number one, what’s the confidence on this forecast? And number two, what changed during the quarter? Was it the slowdown on the superstore growth that really causes the revision, or is it just an ongoing worsening issue within Kibbles? Because we already knew that one was a problem. I guess, what I’m really trying to get after is, what changed just within the last several months that has caused the latest of the guide downs on revenues? Thank you.

I just think it’s just going to take us a little longer to stabilize the business. We – it’s just – I think just a little more time to get that stabilization. And once we stabilize the business then we can get it growing again. I just think our performance the first quarter was not what we expected. And based on a combination of both Kibbles and Meow Mix and the softness in the first quarter is what really drove us to be more conservative on the back-half of the year.

And remember, David, this is Mark Smucker, that we got the pricing in the fundamentals and the bonus bags right in, basically in June. So we’re just now starting to see those products in markets. So to various points, we do feel confident that we should see some leveling off here in the next quarter or so, and start to shore up that business. And then again, going back to a slightly longer-term view is making sure we have the right actions, right in the mass premium segment, and as we think about how we address that. We certainly want to think about going into the market and getting it right the first time. So we’re incredibly focused on the execution and making sure that as we do roll out plans in that segment, we’re prepared and we’re going to do it right.

And just one quick follow up. Did you guys say what your expectation was for the premium Pet Food growth this year? I know the expectation has moderated, but – and I apologize if I missed it, but did you say to what? What level of growth do you think premium grows for the year? Thank you.

The growth would be low single-digits on the premium brands.

Okay. Thank you. I will pass it along.

Thank you. And our next question comes from Robert Moskow with Credit Suisse. Please state your question.

Hi, thanks. This question is for Mark Belgya. Mark, I think in your prepared remarks you said that this was a quarter where your pricing lagged or I guess your pricing was down more than deflation helped you. And I want to know is that a trend that we should expect to continue for the rest of the year? Your gross profit dollars were down in the first quarter and just want to get a sense of how you were thinking about the rest of the year too?

Thanks, Rob, for the question. No, it’s not something that we would necessarily expect. We continue to be favorable and in input cost, I think in my comments in Consumer Foods, in particular.

Yes.

But in terms of the current quarter what we saw a little bit of, and I think we mentioned this on call in June and then touched on today as well is that, in addition to the price declines we took, we also had some additional trade – came through sort of from a change in timing. So that too is considered price. So the combination of those two exceeded the net commodity cost reduction. But we wouldn’t expect that to continue throughout the year. So, obviously, the biggest pricing impact in general versus a year ago hit in Q1 because of the coffee. So just the pricing impact overall will be less as we move through. We will obviously still feel the 6% we took on coffee this year, but as you know, we lapped it otherwise. So a little bit of an anomaly. And I guess just if I can while I’m thinking of pricing and just sales in general, I think it’s – I would like to just lay this out there, and again, I respect everyone’s modeling. But if we do look at the combination of the milk and the impact of pricing the coffee had. And I guess, I’m just turning back to coffee a couple of months, those two pieces in total were probably about $90 million to $100 million of first quarter sales impact. So, we – I think in Mark’s script, the comments we talked about our sales being just slightly below plan. So we had factored a good portion of that And but certainly I can understand sort of the reaction when you see the negative seven year-over-year. So I just want to call that out as an additional data point for everybody.

Okay, that might be a good segue for a question on revenue management. Mark Smucker, I believe you have a new functional head in revenue management internally. Can you give us a little bit of an update on what he is working on for you? And when do you expect to see the results of that?

Thanks for the question, Rob. Yes, we do actually have a new head of revenue management. In fact, one of the things that we spoke about, I think on the last call was that some of the incremental savings that we’ve targeted are going to be invested in capabilities like that, that is one of several. I would describe some of the capabilities as we’ve sort of taken a step back and reorganized ourselves to make sure that we’re building the right capabilities that relate to the consumer and that could be things like insights and data to ensure a robust innovation pipeline, as well as the customer in terms of how we do business with them and how we ensure that we’re giving them the absolute best content. So revenue management would be one piece of that. And we’re at a stage now where we’ve done a nice job building the organization and we’re in the process of ensuring that those new organizations and functions are wired properly. And so that takes a little bit of time as we get through a full-year of planning and so forth. But at this point, we’re very very pleased with the leadership we have across many of our functions. And as it relates to the revenue management, our goal over the next year or two are to begin to become increasingly more efficient in our trade spend. So that we can truly drive incremental sales, that’s ultimately the goal.

Okay, great. Thank you.

Thank you. And our next question will come from Mario Contreras of Deutsche Bank. Please state your question.

Hi, good morning.

Good morning, Mario.

So I believe last quarter you mentioned that your cat food brands had seen some growth. It looks like the trend reversed a little bit this quarter and I believe you mentioned those were down. Can you talk a little bit about the trends in that category? Is this anything specific to worsening competitive conditions or something specific to your brands? Thanks.

Hi, Mario, this is Barry. I would say what we experienced especially this last quarter, was some competitive pricing activity with our major competitor in that category, which puts some pressure on the brand. So we’ve taken some programs back to our retail partners and are working with them to get again, the price right relative to our competition. That combined with our advertising campaign. We just are on TV effective August 1 with the new advertising campaign behind the Meow Mix brand, which we think will provide great support for the business. So between those two activities, we think we’ll address some of the short-term pressure that that brand has experienced. But no other fundamental concerns with the brand, more short-term versus longer-term.

Okay, that’s helpful. And then just one quick one on the Dunkin’ K-Cup, so obviously you’re lapping the pipeline fill, can you talk about some of the share trends that you’re seeing, especially in the last few weeks here? Are you still pretty confident that you are holding share or gaining share, and how do you feel about that trending over the next few quarters? Thanks.

Hi Mario, it’s Steve. I think we’re very encouraged by total K-Cup. I don’t think it was in the prepared comments but we saw what we’ll call legacy or Folgers K-Cups increase in volume for the quarter, and that’s a nice turnaround given everything going on in the K-Cup category and all of the noise there and the deflation there. We saw strong K-Cup volume in our legacy brands. We continue to see strong takeaway for Dunkin’. We literally had trucks lined up at the door at midnight on May 1 a year-ago when we launched this. So given the strength of that we did not expect the same results obviously a year later, but we have more distribution today than we did a year ago. The turns remain very, very strong, and the Dunkin’ original K-Cup is the number one K-Cup in most of the channels and most of the customers we sell it to. So that franchise continues to be alive and growing. So we’re really pleased with that, but more pleased I would say that the legacy business is up over a year ago. So that’s a great trend to reverse.

Okay. And then I guess just to clarify, so would you expect the Dunkin’ Brand to return to growth here in the second quarter?

Yes. Yes, we would expect the Dunkin’ brand in total. Our bagged Coffee business is up for the quarter in the first quarter, which again is a nice trend reversal. Although we had a fantastic year last year, that was driven mostly by core Folgers Red Can. It’s nice to see our red can momentum continue in the first quarter, but also our legacy K-Cup and our Dunkin’ bag business improved, so both of those things have improved in the first quarter.

Okay. Thanks, everyone.

Thank you. And our next question will come from Alexia Howard of Bernstein. Please state your question.

Good morning everyone.

Hi, Alexia.

Can I focus in on the U.S. Retail business for a moment? The 2% organic sales growth decline, I understand that it was largely price investment. But it sounds as though that was broadly in line with your expectations. Is that – should we think about that as the continued run rate for the business given the challenges that are going on in that retailer environment? And as you think about the bits that are growing nicely like Sahale and Knudsen, does that shrink and how you think about your bolt-on acquisition strategy going forward? I know you’re probably not in a position to do acquisitions yet, but might you have to shore up that business with some more faster growing health and wellness type brands? Thank you and I’ll pass it on.

Alexia, it’s Mark Smucker. The second part of your question, yes. I think we’re really pleased with our natural and organic, not only the smaller businesses like our beverage business and Sahale both we’re very pleased with right now. And so as we think about other segment or categories that would be one area that we would look in terms of bolt-on. But we just also remain focused as well even in our mainstream businesses, in some cases where we have businesses where you have simple ingredients, more natural offerings, cleaner ingredient deck, those businesses are areas that we will continue to focus on. And I think quite frankly, you’re hearing that pretty broadly from our entire industry. So I don’t think – I think most of us are saying a lot of the same things based on a lot of the same trends. So, yes in the first part of your question did I answer?

Kind of did – the 2% decline in organic sales growth with the price investments, is that kind of a run rate for now in terms of how we should think of that business?

Hi Alexia, this is Mark Belgya. What I would do – if I would say that our Consumer Foods business and it gets muddied a little bit, because of milk. But if you take the milk out we would still – we would expect that business to be up modestly. And then Coffee, it is going to get drug down a little bit in the continuing quarters just because of the 6% price decline we took here in July or – I’m sorry, May of this year. But short of that we will see some volume growth from that, which will offset a little bit of that price impact. So the math probably works out to somewhere kind of flattish I would guess if you just look at it – the Consumer Foods and the Coffee together is what you are calling U.S. Retail. And as we’ve mentioned, obviously, pets is going to be down some. So that would pull the overall average of those three reportable segments down below flat, probably negative 1 to 2 I guess.

Okay.

But at the same time, we are in a very deflationary environment, as we’ve seen several of our customers have reported top line good comp sales growth, but some still top line challenges, and I think that’s a systemic at the moment. But we should – with commodities moving, we’re probably going to see some change there over time.

Thank you very much. I’ll pass it on.

Thank you.

Thank you. And our next question will come from John Baumgartner of Wells Fargo. Please state your question.

Hi, good morning. Thanks for the question.

Hey, John.

Barry, I’d like to ask in terms of mainstream pet, a few of your larger competitors have adopted natural or grain free offshoots of their core brands. When you think about it, I mean how much of an incremental headwind is that proving to be for you in mainstream maybe relative to your view of the landscape at the time of the acquisition?

Yes, that’s clearly a trend in mainstream. And as we look at entering the mass premium segment that has to be front and – center for us as we look at what an entry strategy would be. So again as we look at what the consumer is interested in and what their preferences are. So that will be a part of our thinking as we think about an entry strategy.

When we think about the – as a follow-up, when we think about the premium space, the next phase of distribution for Natural Balance or even Nature’s Recipe – I think a few months ago there was some commentary pertaining to runway independence as an example. What is the phasing for that stand and at what point does incremental distribution began to kick in? And then just maybe lastly, how are you seeing the interplay between Nature’s Recipe and Natural Balance in terms of incrementality versus some cannibalization impact there?

They each have their own position in the Pet Specialty segment where Nature’s Recipe is more of an entry brand into Pet Specialty. The Natural Balance is a much more premium segment with a focus on a limited ingredient diet. So they each have a unique positioning in that channel. As far as the independent channel being incremental, we focus on that channel just like we do the other main retailers in Pet Specialty. But – that the independent trade is not going to drive the growth of those brands. Most of our growth is going to come from the lead retailers in that channel.

Great, thank you.

Thank you. And our next question will come from Farha Aslam of Stephens. Please state your question.

Hi, good morning.

Good morning, Farha.

Hi, Farha.

First question is on Dunkin’, a couple of times, we heard kind of lower payments to Dunkin’ brands. Is that simply a function of the lower volume in K-Cups or is there anything structural in terms of renegotiations of rates?

Hey, Farha, it’s Mark. It’s just a function of – it’s just a variable cost to the sale. So it’s just a – it’s a lower royalty total dollar, not dollar, not a change in the rate.

That’s helpful. And then the second one is back on Pet Food. You are about to cycle into some very low and very favorable input costs in both corn and soybeans and a lot of your other inputs. How are you thinking about managing pricing versus margin in that mainstream brands given that you’re getting such a great commodity tailwind?

As far as pricing begins, we have to front and center competitive with our – the other two primary competitors that we compete with. So as a third player in that category we’ll continue just to be competitive with the other two primary competitors. So that will be our focus. We’ll manage our commodities in our Pet business just like we do in our other businesses, and that will be part of our pricing strategy.

Hey, Farha, to that what I might just add is that I guess to the – very later point, I think we’ve made pretty consistently over the years that we’ve owned first of all with the Crisco business and then in Coffee that there is always going to be timing as you the cost of that commodity with the pricing. But we’ve done a very good job both as price has gone up and price has come down and generally to maintain the margin dollars and grow those dollars over time. So I think we would – as Barry suggested, what we’re going to have to move is price being number three in the category, but focus on the fact that we have been able to grow those margin dollars over time.

Well, and Farah – hi, Steve Oakland. One thing that when Barry talked earlier about getting the fundamentals right, one of things that that the Big Heart business coming into Smucker. One of the capabilities that they got is our commodity buying team, our hedging team. We have a much more sophisticated driven by the fact that we’re in the Coffee business as we are and we’re in the other grains businesses we’re in. So a number of the commodities that are input cost for that that are all run through those same systems. So I think we have more sophisticated system and we have capabilities that allow Barry and the team to know what their costs are going out further, to be able to participate in downside projecting from the upside. So it’s a much more robust set of capabilities applied against that business. Now it takes time for those to impact it and we’re in the process of that now. But those commodity tailwinds, as you call them that that you spoke about Barry and the team will have the same capabilities to achieve those that we have in the other businesses now.

That’s helpful, thank you.

Thank you. And our next question will come from Akshay Jagdale of Jefferies. Please state your question.

Hi, good morning.

Good morning, Akshay.

Good morning.

Hey, first question is for Mark Belgya. So on the marketing spending and timing, thanks for calling that out first of all. But can you give us a sense of what the plan is now on total dollar spending relative to what it was? And where that – so give us some sense of where those funds are shifting to, like what quarter, and if there is any particular reason why they may have shifted even relative to your plan. Thank you.

Okay. Thanks Akshay for the question. In terms of total marketing spend for the total company, for the total year, we expect to be basically on our plan as expected. What you are going to see is you’re going to see a little bit of a shift in that. There is a likelihood – although the first quarter there was timing on Pet, most the 13% decline, I think we spoke to with Pet related. That’s going to shift, a good portion that’s going to shift in Q2. They’re probably still be a little bit less than plan for the whole year. However, in our other businesses, we’re seeing a little bit uptick in market. So net-net will be exactly where we thought we were going to be at the start the year, which is – I think around 6.2%, 6.3% sales.

Okay. And then just a couple more sort of high level. First one is on coffee related to revenue management and perhaps your hedging strategy. And I know Mark, you’ve managed the cost of business as well. So in terms – as you look at the next three to five years, I mean, when do you – previous to your ownership, Folgers had a pretty open public policy hedging which won’t put [Technical Difficulty] uncertainty to the market on where sort of prices are going to go. And from talking to people in the industry, since you’ve gone away from that over the last four or five years, there has been a little bit more disruption competitively as a result, that’s one argument. Have you considered maybe just making a broader change there, where not only would it have [Technical Difficulty] but one would argue maybe it makes the competitive environment a little bit more rational? That’s one question. And I have a follow up on Pet.

Sure. Akshay, it’s Steven Oakland. I think the four smart provider under P&G might have been a little more formulary, right? And I think it might have been a little more transparent. But if you think about how different the coffee category is today than it was then, that was pre-K-Cups, that was when blue can was a material piece of this category. And then that was when we had different owners of our competitive brands that had different strategies and different behavior. So I think if you look at the momentum last year, you look at the first quarter in coffee, we feel really good about our balance of cost and our balance of coverage. I think – we think we’re uniquely different in that we tie our commodity team to our business team. And that our commodity not only understands how to buy the right prices, they understand when we need those prices in the marketplace. So it maybe more difficult for the outside world to understand. But I think we’re really happy with how it’s – what is delivering for us from a business unit standpoint. I think we will stick – we will probably stay with where we are.

Okay. And just one on Pet, again a similar long-term focus question. I mean I understand there are some competitive issues on the dry side and you are sharpening your price points and that seems like – more like surgical moves. But the broader trend is the pet population seems to have started growing in the recent past, so that’s a good trend, and there’s a broader trend of premiumization. Your portfolio should be better suited to that than your competitors. I mean, are we entering a stage like we were like maybe four years ago on coffee, where there is a shift from mainstream to premium, a broader shift that we should be maybe thinking of in light of your exposure to the mainstream side? Is that what we are seeing broadly as people are premiumizing maybe the mainstream category is just over skewed and that’s why we are seeing as much competitive activity as we are seeing? Thank you.

Akshay, it’s Barry. Let me just provide some commentary on that. To your point is, we’re seeing a more humanization of pets and consumers looking at more premium products. But I think we would stay consistent with our strategy of making sure we participate in every segment of the category. We’re still in place for our value brands like Kibbles ‘n Bits and Gravy Train in that segment. We have some great brands in pet specialty. Our snack brands cut across all the segments as well and our great brands. We’ve been driving category growth in the snack category, and our retailers attribute that to our innovation efforts. So I think our strategy in pet is going to be like it is in every other segment is just every other category we participate in is just make sure, we meet the consumer needs what – however, they define value and that will be a consistent strategy we will apply in Pet. So we – it’s a great category, great brands. We think for long-term, it’s definitely the right business for us to be in. So we’re going to leverage the scale and capabilities of broader $8 billion company that continue to grow the pet business.

Thank you. I’ll pass it on.

Thank you. And our next question will come from Pablo Zuanic at SIG. Your line is now open.

Hi, this is actually Aatish Shah in for Pablo. Just a couple of questions. Starting with Pet Food, if you could give us a sense of what percentage of your sales comes through the specialty channel and within that channel what portion is coming from the superstores versus the other outlets? Start with that.

Sure. I think we gave some color on that last quarter. But we have about 20% of our sales are through pet specialty. And of that the majority of that is through the large retailers.

Okay, great. Then switching to snacks, just regarding the slowdown, would you say that’s all in line with overall market, and in terms of market share, is that something you are losing share, or is it in line with the market overall?

Our snack share has remained strong. So overall, we’re not losing share. There may have been a little bit of softness over four weeks. But if you look at our 12 and 52-week share, we are still the dominant player in gaining share.

Okay, great. And just one last follow-up going back to Pet Food. For Big Heart, just in terms of opportunity, if you can give me a sense of total market in terms of mass premium versus specialty premium in dollar share, I mean in total dollars, if you could get – give me an idea of what that is? And also for Big Heart itself, there is no exposure to mass premium. And we are assuming a small portion in specialty premium around 5%, does that sound about right?

We’re having a little difficulty in framing the question. So maybe we’ll tell you what we think you’re asking.

Sure.

So in terms of the mass premium, the size of that within dry dog is about between 5% and 10%, probably lower to the – closer to the 5% to 7%. And so that – I think there was an earlier question asked, how it’s been affecting our dry dog business, so that’s the portion that we’re not participating, if you will. So I’m not exactly sure if that’s what was asked. So if not please maybe reframe the question?

Sure. Yes, just I think just for the main part, I think the overall market, if you could give me an idea of like the total dollars in mass premium versus specialty premium, if that makes sense.

Again, we’ll try to track that number down. We don’t have that handy. If we can get it back before the call is over, we’ll communicate that, otherwise we’ll circle back direct.

Okay, great. Thank you

Thank you. And I will now turn the conference call back over to management to conclude.

All right. This is Mark Smucker. Just a couple of closing comments I have. Obviously, there’s – there have been a few – obviously a lot of questions on Pet. Just want to reiterate our confidence in the business, we believe in the business, Barry just mentioned a few minutes ago just the brands are fantastic. And although we’ve talked quite a bit about mainstream dog today, we feel very good about where we are at. In our premium segment, our ability to address and we started to do that on the mainstream side. And very importantly, our snacks business, pet snacks is going very well. Our shares are very healthy there. And so as with all of the other categories that we’re in, we’re very comfortable and confident in competing with our peers and we’re competing against many of the same players in some of the other categories and we’ve got a proven ability to grow brands in mature categories. So I wanted to leave you with that thought. And then again, we didn’t talk much today about the Olympics, but the Olympics has been very good for our brands. We’re going to probably see some halo effect from a consumer perspective. And then we’re going to continue to focus on what we’re good at, executing, blocking and tackling, making sure that we have the best consumer engagement possible by supporting our products that we have in market, and then, of course, delivering against or exceeding our synergy and our working capital target. So, once again, just want to thank our talented team of employees, they are fantastic. We would not have been able to deliver the fantastic results this quarter without them. And so many, many thanks to our dedicated employees and thank you to all of you for joining us today. Have a great week.

Ladies and gentlemen, if you wish to access this rebroadcast after this live call, you may do so by dialing, 855-859-2056 or 404-537-3406 with a passcode of 54479942. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.